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Organization Theory and Design


Organization Theory and Design, Tenth Edition

Richard L. Daft

With the Assistance of Patricia G. Lane

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Richard L. Daft, Ph.D., is the Brownlee O. Currey, Jr., Professor of Management in the Owen Graduate School of Management at Vanderbilt University. Professor Daft specializes in the study of organization theory and leadership. Professor Daft is a Fellow of the Academy of Management and has served on the editorial boards of Academy of Management Journal, Administrative Science Quarterly, and Journal of Management Education. He was the Associate Editor-in-Chief of Organization Science and served for three years as associate editor of Administrative Science Quarterly.

Professor Daft has authored or co-authored twelve books, including Management (Cengage/South-Western, 2010), The Leadership Experience (Cengage/South- Western, 2008), and What to Study: Generating and Developing Research Questions (Sage, 1982). He also published Fusion Leadership: Unlocking the Subtle Forces That Change People and Organizations (Berrett-Koehler, 2000, with Robert Lengel). He has authored dozens of scholarly articles, papers, and chapters. His work has been published in Administrative Science Quarterly, Academy of Management Journal, Academy of Management Review, Organizational Dynamics, Strategic Management Journal, Journal of Management, Accounting Organizations and Society, Management Science, MIS Quarterly, California Management Review, and Organizational Behavior Teaching Review. Professor Daft has been awarded several government research grants to pursue studies of organization design, orga- nizational innovation and change, strategy implementation, and organizational information processing.

Professor Daft is also an active teacher and consultant. He has taught man- agement, leadership, organizational change, organizational theory, and organiza- tional behavior. He has been involved in management development and consulting for many companies and government organizations, including Allstate Insurance, American Banking Association, Bell Canada, Bridgestone, National Transportation Research Board, NL Baroid, Nortel, TVA, Pratt & Whitney, State Farm Insurance, Tenneco, Tennessee Emergency Pediatric Services, the United States Air Force, the United States Army, J. C. Bradford & Co., Central Parking System, USAA, United Methodist Church, Entergy Sales and Service, Bristol-Myers Squibb, First American National Bank, and the Vanderbilt University Medical Center.

About the Author

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Part 1: Introduction to Organizations 1 1. Organizations and Organization Theory 2

Part 2: Organizational Purpose and Structural Design 55 2. Strategy, Organization Design, and Effectiveness 56 3. Fundamentals of Organization Structure 88

Part 3: Open System Design Elements 137 4. The External Environment 138 5. Interorganizational Relationships 174 6. Designing Organizations for the International Environment 208

Part 4: Internal Design Elements 251 7. Manufacturing and Service Technologies 252 8. Using IT for Coordination and Control 294 9. Organization Size, Life Cycle, and Decline 332

Part 5: Managing Dynamic Processes 371 10. Organizational Culture and Ethical Values 372 11. Innovation and Change 410 12. Decision-Making Processes 450 13. Conflict, Power, and Politics 371

Integrative Cases 529 1.0 Rondell Data Corporation 531 2.0 It Isn’t So Simple: Infrastructure Change at Royce Consulting 539 3.0 Custom Chip, Inc. 544 4.0 “Ramrod” Stockwell 551 5.0 W. L. Gore & Associates, Inc. Entering 1998 554 6.0 Dick Spencer 569 7.0 The Plaza Inn 574 8.0 Dowling Flexible Metals 578 9.0 The Donor Services Department 582 10.0 Empire Plastics 586

Brief Contents

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vi Brief Contents

11.1 Littleton Manufacturing (A) 589 11.2 Littleton Manufacturing (B) 601 12.0 Hartland Memorial Hospital (A): An Inbox Exercise 603

Glossary 613 Name Index 623 Corporate Name Index 634 Subject Index 639



Chapter 1: Organizations and Organization Theory 2 Organization Theory in Action 6

Topics, 6 • Current Challenges, 7 • Purpose of This Chapter, 10

What is an Organization? 10

Definition, 11 • From Multinationals to Nonprofits, 11 • Importance of Organizations, 12

BookMark 1.0: The Company: A Short History of a Revolutionary Idea 13

Dimensions of Organization Design 14

Structural Dimensions, 15 • Contextual Dimensions, 17

In Practice: Ternary Software Inc. 18

Performance and Effectiveness Outcomes, 20

In Practice: Federal Bureau of Investigation 22

The Evolution of Organization Theory and Design 22

Historical Perspectives, 23

How Do You Fit the Design? Evolution of Style 24

Don’t Forget the Environment, 26

Organizational Configuration 26

Mintzberg’s Organizational Types, 26 • Contemporary Design Ideas, 30

Efficient Performance versus the Learning Organization 30

From Vertical to Horizontal Structure, 31 • From Routine Tasks to Empowered Roles, 31 • From Formal Control Systems to Shared Information, 33 • From Competitive to Collaborative Strategy, 33 • From Rigid to Adaptive Culture, 33

In Practice: Cementos Mexicanos 34

Framework for the Book 35

Levels of Analysis, 35 • Plan of the Book, 37 • Plan of Each Chapter, 37

Design Essentials 39

Chapter 1 Workbook: Measuring Dimensions of Organizations 40

Case for Analysis: Perdue Farms Inc.: Responding to 21st Century Challenges 41

Part 1: Introduction to Organizations 1

Part 2: Organizational Purpose and Structural Design 55

Chapter 2: Strategy, Organization Design, and Effectiveness 56

Purpose of This Chapter, 57

The Role of Strategic Direction in Organization Design 58

Organizational Purpose 60

Strategic Intent, 60

In Practice: Walgreens 61

Operative Goals, 62 • The Importance of Goals, 64B

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A Framework for Selecting Strategy and Design 65

Porter’s Competitive Forces and Strategies, 65

How Do You Fit the Design? Your Strategy/ Performance Strength 66

In Practice: Apple 68

Miles and Snow’s Strategy Typology, 70

BookMark 2.0: The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It) 71

How Strategies Affect Organization Design, 72 • Other Factors Affecting Organization Design, 73

Assessing Organizational Effectiveness 74

Traditional Effectiveness Approaches 75

Goal Indicators, 75 • Resource-based Indicators, 76 • Internal Process Indicators, 77

The Balanced Scorecard Approach to Effectiveness 77

Design Essentials 79

Chapter 2 Workbook: Identifying Company Strategies and Effectiveness Criteria 81

Case for Analysis: The University Art Museum 81 Case for Analysis: Airstar Inc. 84 Chapter 2 Workshop: The Balanced Scorecard

and Organizational Effectiveness 85

Chapter 3: Fundamentals of Organization Structure 88

Purpose of This Chapter, 90

Organization Structure 90

BookMark 3.0: The Future of Management 92

Information-Sharing Perspective on Structure 92

In Practice: Textron Inc. 94

Vertical Information Sharing, 94 • Horizontal Information Sharing, 95

How Do You Fit the Design? The Pleasure/Pain of Working on a Team 100

Organization Design Alternatives 101

Required Work Activities, 101 • Reporting Relationships, 102 • Departmental Grouping Options, 102

Functional, Divisional, and Geographic Designs 104

Functional Structure, 104

In Practice: Blue Bell Creameries, Inc. 105

Functional Structure with Horizontal Linkages, 105 • Divisional Structure, 106 • Geographic Structure, 109

Matrix Structure 110

Conditions for the Matrix, 110 • Strengths and Weaknesses, 112

In Practice: Englander Steel 113

Horizontal Structure 115

Characteristics, 116

In Practice: GE Salisbury 117

Strengths and Weaknesses, 118

Virtual Networks and Outsourcing 119

How the Structure Works, 120

In Practice: TiVo Inc. 120

Strengths and Weaknesses, 121

Hybrid Structure 122

Applications of Structural Design 123

Structural Alignment, 125 • Symptoms of Structural Deficiency, 125

Design Essentials 127

Chapter 3 Workbook: You and Organization Structure 128

Case for Analysis: C & C Grocery Stores Inc. 129 Case for Analysis: Aquarius Advertising Agency 132

Part 3: Open System Design Elements 137

Chapter 4: The External Environment 138

Purpose of This Chapter, 140

The Organization’s Environment 140

Task Environment, 140 • General Environment, 142 • International Environment, 143

In Practice: Univision 144

The Changing Environment 144

Simple–Complex Dimension, 145 • Stable–Unstable Dimension, 146

BookMark 4.0: Confronting Reality: Doing What Matters to Get Things Right 146

Framework, 147

Contents ix

Adapting to a Changing Environment 149

Adding Positions and Departments, 149

In Practice: Wal-Mart 149

Building Relationships, 150 • Differentiation and Integration, 152 • Organic versus Mechanistic Management Processes, 153 • Planning, Forecasting, and Responsiveness, 155

How Do You Fit the Design? Mind and Environment 155

Framework for Responses to Environmental Change 156

Dependence on External Resources 158

Influencing External Resources 158

Establishing Formal Relationships, 159

In Practice: AT&T 160

Influencing Key Sectors, 162

In Practice: eBay 163

Organization–Environment Integrative Framework, 164

Design Essentials 165

Chapter 4 Workbook: Organizations You Rely On 167 Case for Analysis: The Paradoxical Twins: Acme

and Omega Electronics 168

Chapter 5: Interorganizational Relationships 174

Purpose of This Chapter, 176

Organizational Ecosystems 176

Is Competition Dead?, 177

In Practice: Sony Corporation and Samsung Electronics Company 177

The Changing Role of Management, 179 • Interorganizational Framework, 180

Resource Dependence 181

Supply Chain Relationships, 181 • Power Implications, 182

In Practice: 183

Collaborative Networks 183

Why Collaboration?, 183

How Do You Fit the Design? Personal Networking 184

From Adversaries to Partners, 185

BookMark 5.0: Managing Strategic Relationships: The Key to Business Success 187

Population Ecology 188

Organizational Form and Niche, 189 • Process of Ecological Change, 189

In Practice: Axiom Global Inc. 190

Strategies for Survival, 191

Institutionalism 192

The Institutional View and Organization Design, 193 • Institutional Similarity, 194

Design Essentials 197

Chapter 5 Workbook: Management Fads 199 Case for Analysis: Oxford Plastics Company 199 Case for Analysis: Hugh Russel, Inc. 200 Chapter 5 Workshop: Ugli Orange Case 203

Chapter 6: Designing Organizations for the International Environment 208

Purpose of This Chapter, 210

Entering the Global Arena 210

Motivations for Global Expansion, 211

BookMark 6.0: The World Is Flat: A Brief History of the Twenty-First Century 211

Stages of International Development, 214 • Global Expansion through International Strategic Alliances, 215

Designing Structure to Fit Global Strategy 216

Model for Global versus Local Opportunities, 216 • International Division, 219 • Global Product Division Structure, 220 • Global Geographic Division Structure, 221

In Practice: Colgate-Palmolive Company 222

Global Matrix Structure, 223

In Practice: Asea Brown Boveri Ltd. (ABB) 224

Building Global Capabilities 225

The Global Organizational Challenge, 226

In Practice: IBM 228

Global Coordination Mechanisms, 230

Cultural Differences in Coordination and Control 233

National Value Systems, 233

How Do You Fit the Design? Are You Ready to Fill an International Role? 234

Three National Approaches to Coordination and Control, 235

The Transnational Model of Organization 237

Design Essentials 240

Chapter 6 Workbook: Made in the U.S.A.? 242 Case for Analysis: TopDog Software 242 Case for Analysis: Rhodes Industries 243 Chapter 6 Workshop: Comparing Cultures 246

x Contents

Part 4: Internal Design Elements 251

Chapter 7: Manufacturing and Service Technologies 252

Purpose of This Chapter, 255

Core Organization Manufacturing Technology 256

Manufacturing Firms, 256 • Strategy, Technology, and Performance, 258

In Practice: Printronix 259

BookMark 7.0: Inviting Disaster: Lessons from the Edge of Technology 260

Contemporary Applications 261

Flexible Manufacturing Systems, 261 • Lean Manufacturing, 263

In Practice: Matsushita Electric Industrial Company 263

Performance and Structural Implications, 264

Core Organization Service Technology 266

Service Firms, 267

How Do You Fit the Design? Manufacturing vs. Service 269

Designing the Service Organization, 270

In Practice: Home Depot Inc. 271

Non-Core Departmental Technology 272

Variety, 272 • Analyzability, 272 • Framework, 273

Department Design 275

Workflow Interdependence Among Departments 277

Types, 277

In Practice: Great Ormond Street Hospital for Children 279

Structural Priority, 280 • Structural Implications, 280

In Practice: Athletic Teams 281

Impact of Technology on Job Design 282

Job Design, 282 • Sociotechnical Systems, 283

Design Essentials 285

Chapter 7 Workbook: Bistro Technology 287 Case for Analysis: Acetate Department 288

Chapter 8: Using IT for Coordination and Control 294

Purpose of This Chapter, 296

Information Technology Evolution 296

Information for Decision Making and Control 298

Organizational Decision-Making Systems, 298 • Feedback Control Model, 299 • Management Control Systems, 300

How Do You Fit the Design? Is Goal-Setting Your Style? 301

In Practice: eBay 302

The Level and Focus of Control Systems 305

Organization Level: The Balanced Scorecard, 305

BookMark 8.0: Five Key Principles of Corporate Performance Management 306

Department Level: Behavior versus Outcome Control, 308

In Practice: Best Buy 310

Adding Strategic Value: Strengthening Internal Coordination 311

Intranets, 311 • Web 2.0 Tools, 312 • Knowledge Management, 312

In Practice: ExactTarget Inc. 314

Enterprise Resource Planning, 314

Adding Strategic Value: Strengthening External Coordination 315

The Integrated Enterprise, 315

In Practice: Corrugated Supplies 316

Customer Relationships, 318

E-Business Organization Design 319

In-House Division, 319 • Spin-Off, 319 • Strategic Partnership, 320

It Impact on Organization Design 321

Design Essentials 323

Chapter 8 Workbook: Balanced Scorecard Exercise 325

Case for Analysis: Century Medical 327 Case for Analysis: Product X 328

Chapter 9: Organization Size, Life Cycle, and Decline 332

Purpose of This Chapter, 334

Organization Size: Is Bigger Better? 334

Pressures for Growth, 334

BookMark 9.0: Small Giants: Companies That Choose to Be Great Instead of Big 335

Dilemmas of Large Size, 336

How Do You Fit the Design? What Size Organization for You? 338

Contents xi

Organizational Life Cycle 340

Stages of Life Cycle Development, 340

In Practice: Amazon 343

Organizational Characteristics during the Life Cycle, 344

Organizational Size, Bureaucracy, and Control 345

What Is Bureaucracy?, 346

In Practice: United Parcel Service (UPS) 347

Size and Structural Control, 348

Bureaucracy in a Changing World 349

Organizing Temporary Systems, 350

In Practice: The Salvation Army 351

Other Approaches to Busting Bureaucracy, 351

Bureaucracy versus other Forms of Control 352

Bureaucratic Control, 353 • Market Control, 354 • Clan Control, 354

In Practice: Southwest Airlines 355

Organizational Decline and Downsizing 356

Definition and Causes, 357 • A Model of Decline Stages, 358

In Practice: Herman Miller 359

Downsizing Implementation, 360

Design Essentials 362

Chapter 9 Workbook: Control Mechanisms 363 Case for Analysis: Sunflower Incorporated 364 Chapter 9 Workshop: Windsock Inc. 365

Part 5: Managing Dynamic Processes 371

Chapter 10: Organizational Culture and Ethical Values 372

Purpose of This Chapter, 374

Organizational Culture 374

What Is Culture?, 374 • Emergence and Purpose of Culture, 376

BookMark 10.0: Good to Great: Why Some Companies Make the Leap . . . And Others Don’t 376

Interpreting Culture, 377

Organization Design and Culture 381

The Adaptability Culture, 382

In Practice: Google 382

The Mission Culture, 383 • The Clan Culture, 384 • The Bureaucratic Culture, 384

How Do You Fit the Design? Corporate Culture Preference 385

Culture Strength and Organizational Subcultures, 385

In Practice: Pitney Bowes Credit Corporation 386

Organizational Culture, Learning, and Performance 387

In Practice: Genentech 388

Ethical Values and Social Responsibility 389

Sources of Individual Ethical Principles, 389 • Managerial Ethics, 390 • Corporate Social Responsibility, 392 • Does It Pay to Be Good?, 392

How Leaders Shape Culture and Ethics 393

Values-Based Leadership, 394 • Formal Structure and Systems, 395

Corporate Culture and Ethics in a Global Environment 398

Design Essentials 399

Chapter 10 Workbook: Shop ’til You Drop: Corporate Culture in the Retail World 401

Case for Analysis: Implementing Change at National Industrial Products 402

Case for Analysis: Does This Milkshake Taste Funny? 404 Chapter 10 Workshop: The Power of Ethics 406

Chapter 11: Innovation and Change 410 Purpose of This Chapter, 411

The Strategic Role of Change 412

Innovate or Perish, 412 • Strategic Types of Change, 413

Elements for Successful Change 415

Technology Change 417

How Do You Fit the Design? Are You Innovative? 418

The Ambidextrous Approach, 418 • Techniques for Encouraging Technology Change, 419

BookMark 11.0: Innovation: The Five Disciplines for Creating What Customers Want 422

New Products and Services 423

New Product Success Rate, 423 • Reasons for New Product Success, 424 • Horizontal Coordination Model, 424

In Practice: Threadless 426

Achieving Competitive Advantage: The Need for Speed, 427

xii Contents

Strategy and Structure Change 428

The Dual-Core Approach, 428 • Organization Design for Implementing Management Change, 429

In Practice: Hewlett-Packard 430

Culture Change 431

Forces for Culture Change, 431 • Organization Development Culture Change Interventions, 432

Strategies for Implementing Change 433

Leadership for Change, 434

In Practice: Memorial Hospital 434

Barriers to Change, 435 • Techniques for Implementation, 436

Design Essentials 438

Chapter 11 Workbook: Innovation Climate 440 Case for Analysis: Shoe Corporation of Illinois 441 Case for Analysis: Southern Discomfort 445

Chapter 12: Decision-Making Processes 450

Purpose of This Chapter, 452

Definitions 452

Individual Decision Making 454

Rational Approach, 454

In Practice: Saskatchewan Consulting 456

Bounded Rationality Perspective, 457

How Do You Fit the Design? Making Important Decisions 459

BookMark 12.0: Blink: The Power of Thinking without Thinking 461

Organizational Decision Making 461

Management Science Approach, 462

In Practice: United Airlines 463

Carnegie Model, 464 • Incremental Decision Model, 466

In Practice: Gillette Company 469

Organizational Decisions and Change 470

Combining the Incremental Process and Carnegie Models, 470 • Garbage Can Model, 470

In Practice: I ♥ Huckabees 474

Contingency Decision-Making Framework 475

Problem Consensus, 475 • Technical Knowledge about Solutions, 476 • Contingency Framework, 476

Special Decision Circumstances 478

High-Velocity Environments, 479 • Decision Mistakes and Learning, 480 • Cognitive Biases, 481 • Overcoming Personal Biases, 482

Design Essentials 483

Chapter 12 Workbook: Decision Styles 485 Case for Analysis: Cracking the Whip 485 Case for Analysis: The Dilemma of Aliesha State

College: Competence versus Need 486

Chapter 13: Conflict, Power, and Politics 490

Purpose of This Chapter, 492

Intergroup Conflict in Organizations 492

Sources of Conflict, 493

In Practice: The Purpose-Driven Church 495

Rational versus Political Model, 496

Power And Organizations 497

Individual versus Organizational Power, 498 • Power versus Authority, 498 • Vertical Sources of Power, 499 • The Power of Empowerment, 503

In Practice: Semco 504

Horizontal Sources of Power, 504

In Practice: University of Illinois 507

In Practice: Carilion Health System 509

Political Processes in Organizations 509

Definition, 510 • When Is Political Activity Used?, 511

Using Power, Politics, and Collaboration 512

How Do You Fit the Design? Political Skills 512

Tactics for Increasing Power, 513

BookMark 13.0: Influence: Science and Practice 514

Political Tactics for Using Power, 515

In Practice: World Bank 517

Tactics for Enhancing Collaboration, 517

Design Essentials 520

Chapter 13 Workbook: How Do You Handle Conflict? 522 Case for Analysis: The Daily Tribune 523 Case for Analysis: Pierre Dux 524

Contents xiii

Integrative Cases 529

1.0 Rondell Data Corporation 531

2.0 It Isn’t So Simple: Infrastructure Change at Royce Consulting 539

3.0 Custom Chip, Inc. 544

4.0 “Ramrod” Stockwell 551

5.0 W. L. Gore & Associates, Inc. Entering 1998 554

6.0 Dick Spencer 569

7.0 The Plaza Inn 574

8.0 Dowling Flexible Metals 578

9.0 The Donor Services Department 582

10.0 Empire Plastics 586

11.1 Littleton Manufacturing (A) 589

11.2 Littleton Manufacturing (B) 601

12.0 Hartland Memorial Hospital (A): An Inbox Exercise 603

Glossary 613

Name Index 623

Corporate Name Index 634

Subject Index 639

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My vision for the Tenth Edition of Organization Theory and Design is to integrate contemporary problems about organization design with classic ideas and theories in a way that is engaging and enjoyable for students. Significant changes in this edition include two new features—“Managing by Design Questions” and “How Do You Fit the Design?”—along with updates to every chapter that incorporate the most recent ideas, new case examples, new book reviews, and new end-of-book integra- tive cases. The research and theories in the field of organization studies are rich and insightful and will help students and managers understand their organizational world and solve real-life problems. My mission is to combine the concepts and mod- els from organizational theory with changing events in the real world to provide the most up-to-date view of organization design available.


Many students in a typical organization theory course do not have extensive work experience, especially at the middle and upper levels, where organization theory is most applicable. Moreover, word from the field is that many students today often do not read the chapter opening examples or boxed examples, preferring instead to focus on chapter content. To engage students in the world of organizations, the Tenth Edition adds two significant features. First, “Managing by Design Questions” start each chapter to engage students in thinking and expressing their beliefs and opinions about organization design concepts. Second, a new in-chapter feature, “How Do You Fit the Design?” engages students in how their personal style and approach will fit into an organization. Other student experiential activities that engage students in applying chapter concepts are new “Book Marks,” new “In Practice” examples, and new integrative cases for student analysis. The total set of features substantially expands and improves the book’s content and accessibility. These multiple pedagogi- cal devices are used to enhance student involvement in text materials.

How Do You Fit the Design? The “How Do You Fit the Design?” feature presents a short questionnaire in each chapter about the student’s own style and prefer- ences to quickly provide feedback about how they fit particular organizations or situations. For example, questionnaire topics include: “What Size Organization for You?” “Are You Ready to Fill an International Role?” “The Pleasure/Pain of Working on a Team,” “How Innovative Are You?” and “How Do You Make


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xvi Preface

Important Decisions?” These short feedback questionnaires connect the student’s personal preferences to chapter material to heighten interest and show relevance of the concepts.

Managing by Design Questions Each chapter now opens with three short opinion questions that engage students in clarifying their thoughts about upcoming material and concepts. These questions are based on the idea that when students express their opinions first, they are more open to and interested in receiving material rel- evant to the questions. Example questions, which ask students to agree or disagree, include:

The primary role of managers in business organizations is to achieve maximum efficiency.

Managers should use the most objective, rational process possible when making a decision.

If management practices and coordination techniques work well for a company in its home country, they probably will be successful in the company’s international divisions as well.

A certain amount of conflict is good for an organization.

As a follow-up to the three “Managing by Design” questions, each chapter contains three “Assess Your Answer” inserts that allow students to compare their original opinions with the “correct” or most appropriate answers based on chapter concepts. Students learn whether their mental models and beliefs about organiza- tions align with the world of organizations.

Book Marks “Book Marks,” a unique feature of this text, are book reviews that reflect current issues of concern for managers working in real-life organizations. These reviews describe the varied ways companies are dealing with the challenges of today’s changing environment. New “Book Marks” in the Tenth Edition include Five Key Principles of Corporate Performance Management; The World Is Flat: A Brief History of the Twenty-First Century; The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It); The Future of Management; Small Giants: Companies That Choose to Be Great Instead of Big; and Innovation: The Five Disciplines for Creating What Customers Want.

In Practice This edition contains many new “In Practice” examples that illus- trate theoretical concepts in organizational settings. Many examples are interna- tional, and all are based on real organizations. New “In Practice” cases used within chapters include Samsung Electronics, eBay, the Salvation Army, Axiom Global, Univision, Google, Semco, AT&T, the World Bank, Threadless, Carilion Health System, Apple, Matsushita Electric, Herman Miller, and Great Ormand Street Hospital for Children.

Manager’s Briefcase Located in the chapter margins, this feature tells students how to use concepts to analyze cases and manage organizations.

Text Exhibits Frequent exhibits are used to help students visualize organizational relationships, and the artwork has been redone to communicate concepts more clearly.

Preface xvii

Design Essentials This summary and interpretation section tells students how the essential chapter points are important in the broader context of organization theory.

Case for Analysis These cases are tailored to chapter concepts and provide a vehicle for student analysis and discussion.

Integrative Cases The integrative cases at the end of the text have been expanded and positioned to encourage student discussion and involvement. The new cases include Rondell Data Corporation; The Plaza Inn; and Hartland Memorial Hospital (A): An Inbox Exercise. Previous cases that have been retained include Royce Consulting; Custom Chip Inc.; W. L. Gore & Associates; Empire Plastics; and Littleton Manufacturing.


Many concepts have been added or expanded in this edition. New material has been added on organizational configuration and Mintzberg’s organization forms; strategic intent, core competence and competitive advantage; Porter’s competitive forces and strategies; using the balanced scorecard to measure effectiveness; using strategy maps; the trend toward outsourcing; supply chain management; intelligence teams; collaborative versus operations management roles; applying Web 2.0 tools for internal and external coordination; behavior versus outcome control; execu- tive dashboards; interpreting and shaping culture through organization structures, control systems, and power systems; corporate social responsibility; values-based leadership; collaborative teams for innovation; prospect theory; groupthink; over- coming cognitive biases in decision making; and the power of empowerment. Many ideas are aimed at helping students learn to design organizations for an environment characterized by uncertainty; a renewed emphasis on innovation; public demands for stronger ethics and social responsibility; and the need for a speedy response to change, crises, or shifting customer expectations. In addition, coping with the com- plexity of today’s global environment is explored thoroughly in Chapter 6.


Each chapter is highly focused and is organized into a logical framework. Many organization theory textbooks treat material in sequential fashion, such as “Here’s View A, Here’s View B, Here’s View C,” and so on. Organization Theory and Design shows how they apply in organizations. Moreover, each chapter sticks to the essential point. Students are not introduced to extraneous material or confusing methodological squabbles that occur among organizational researchers. The body of research in most areas points to a major trend, which is reported here. Several chapters develop a framework that organizes major ideas into an overall scheme.

This book has been extensively tested on students. Feedback from students and faculty members has been used in the revision. The combination of organization theory concepts, book reviews, examples of leading organizations, self-insight ques- tionnaires, case illustrations, experiential exercises, and other teaching devices is designed to meet student learning needs, and students have responded favorably.

xviii Preface


Instructor’s Resource Guide (ISBN: 0-324-59912-9) The Instructor’s Resource Guide includes an Instructor’s Manual and Test Bank. The Instructor’s Manual contains chap- ter overviews, chapter outlines, lecture enhancements, discussion questions, discussion of workbook activities, discussion of chapter cases, and case notes for integrative cases. The Test Bank consists of multiple choice, true/false, and essay questions.

PowerPoint Lecture Presentation Available on the Instructor’s Resource CD-ROM and the Web site, the PowerPoint Lecture Presentation enables instructors to custom- ize their own multimedia classroom presentations. Prepared in conjunction with the text and instructor’s resource guide, the package contains approximately 150 slides. It includes figures and tables from the text, as well as outside materials to supplement chapter concepts. Material is organized by chapter and can be modified or expanded for individual classroom use. PowerPoint presentations are also easily printed to create customized transparency masters.

ExamView A computerized version of the Test Bank is available on the Instructor’s Resource CD-ROM. ExamView contains all of the questions in the printed test bank. This program is easy-to-use test creation software. Instructors can add or edit questions, instructions, and answers and can select questions (randomly or numeri- cally) by previewing them on the screen. Instructors can also create and administer quizzes online, whether over the Internet, a local area network (LAN), or a wide area network (WAN).

Instructor’s Resource CD-ROM (ISBN: 0-324-59905-6) Key instructor ancillaries (Instructor’s Manual, Test Bank, ExamView, and PowerPoint slides) are provided on CD-ROM, giving instructors the ultimate tool for customizing lectures and presentations.

WebTutor™ Toolbox WebTutor is an interactive, Web-based student supplement on WebCT and/or BlackBoard that harnesses the power of the Internet to deliver innovative learning aids that actively engage students. The instructor can incorporate WebTutor as an integral part of the course, or the students can use it on their own as a study guide.

Web Site ( The Daft Web site is a comprehensive, resource-rich location for both instructors and students to find pertinent information. The Instructor Resources section contains an Instructor’s Manual download, Test Bank download, and PowerPoint download.

Premium Web Site ( This new optional Premium Web site features text-specific resources that enhance student learning by bringing con- cepts to life. Dynamic interactive learning tools include online quizzes, flashcards, PowerPoint slides, learning games, and more.

Video/DVD (ISBN: 0-324-59906-4) This DVD includes video segments related to organization design concepts. They’re designed to visually reinforce key concepts.

Experiential Exercises in Organization Theory and Design, Second Edition By H. Eugene Baker III and Steven K. Paulson of the University of North Florida.

Preface xix

Tailored to the table of contents in Daft’s Organization Theory and Design, Tenth Edition, the core purpose of Experiential Exercises in Organization Theory and Design is to provide courses in organizational theory with a set of classroom exercises that will help students better understand and internalize the basic princi- ples of the course. The chapters of the book cover the most basic and widely covered concepts in the field. Each chapter focuses on a central topic, such as organizational power, production technology, or organizational culture, and provides all necessary materials to fully participate in three different exercises. Some exercises are intended to be completed by individuals, others in groups, and still others can be used either way. The exercises range from instrumentation-based and assessment question- naires to actual creative production activities.


Textbook writing is a team enterprise. The Tenth Edition has integrated ideas and hard work from many people to whom I am grateful. Reviewers and focus group participants made an especially important contribution. They praised many features, were critical of things that didn’t work well, and offered valuable suggestions.

David Ackerman University of Alaska, Southeast

Michael Bourke Houston Baptist University

Suzanne Clinton Cameron University

Jo Anne Duffy Sam Houston State University

Cheryl Duvall Mercer University

Patricia Feltes Missouri State University

Robert Girling Sonoma State University

John A. Gould University of Maryland

Ralph Hanke Pennsylvania State University

Bruce J. Hanson Pepperdine University

Guiseppe Labianca Tulane University

Jane Lemaster University of Texas–Pan American

Steven Maranville University of Saint Thomas

Rick Martinez Baylor University

Janet Near Indiana University

Julie Newcomer Texas Woman’s University

Asbjorn Osland George Fox University

Laynie Pizzolatto Nicholls State University

Samantha Rice Abilene Christian University

Richard Saaverda University of Michigan

W. Robert Sampson University of Wisconsin, Eau Claire

Amy Sevier University of Southern Mississippi

W. Scott Sherman Pepperdine University

Thomas Terrell Coppin State College

Jack Tucci Southeastern Louisiana University

Judith White Santa Clara University

Jan Zahrly University of North Dakota

xx Preface

Among my professional colleagues, I am grateful to my friends and colleagues at Vanderbilt’s Owen School—Bruce Barry, Ray Friedman, Neta Moye, Rich Oliver, David Owens, Ranga Ramanujam, and Bart Victor—for their intellectual stimula- tion and feedback. I also owe a special debt to Dean Jim Bradford and Associate Deans Bill Christie and Dawn Iocabucci for providing the time and resources for me to stay current on the organization design literature and develop the revisions for the text.

I want to extend special thanks to my editorial associate, Pat Lane. She skill- fully wrote materials on a variety of topics and special features, found resources, and did an outstanding job with the copyedited manuscript and page proofs. Pat’s personal enthusiasm and care for the content of this text enabled the Tenth Edition to continue its high level of excellence.

The team at South-Western also deserves special mention. Joe Sabatino did a great job of designing the project and offering ideas for improvement. Erin Guendelsberger and Emma Guttler were superb to work with during their respective turns as Developmental Editor, keeping the people and project on schedule while solving problems creatively and quickly. Colleen Farmer, Senior Content Project Manager, provided superb project coordination and used her creativity and man- agement skills to facilitate the book’s on-time completion. Clint Kernen, Marketing Manager, provided additional support, creativity, and valuable market expertise.

Finally, I want to acknowledge the love and contributions of my wife, Dorothy Marcic. Dorothy has been very supportive of my textbook projects and has created an environment in which we can grow together. She helped the book take a giant step forward with her creation of the Workbook and Workshop student exercises. I also want to acknowledge the love and support of my daughters, Danielle, Amy, Roxanne, Solange, and Elizabeth, who make my life special during our precious time together.

Richard L. Daft

Nashville, Tennessee

March 2009

Introduction to Organizations

Chapter 1

Organizations and

Organization Theory

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Organizations and Organization


Organization Theory in Action Topics • Current Challenges • Purpose of This Chapter

What Is an Organization? Definition • From Multinationals to Nonprofits • Importance of Organizations

Dimensions of Organization Design Structural Dimensions • Contextual Dimensions • Performance and Effectiveness Outcomes

The Evolution of Organization Theory and Design Historical Perspectives • Don’t Forget the Environment

Organizational Configuration Mintzberg’s Organizational Types • Contemporary Design Ideas

Efficient Performance versus the Learning Organization From Vertical to Horizontal Structure • From Routine Tasks to Empowered Roles • From Formal Control Systems to Shared Information • From Competitive to Collaborative Strategy • From Rigid to Adaptive Culture

Framework for the Book Levels of Analysis • Plan of the Book • Plan of Each Chapter

Design Essentials

Chapter 1


Managing by Design Questions

Before reading this chapter, please circle your opinion below for each of the following statements:

Managing by Design Questions

1 An organization can be understood primarily by understanding the people who make it up. 1 2 3 4 5


2 The primary role of managers in business organizations is to achieve maximum effi ciency. 1 2 3 4 5


3 A CEO’s top priority is to make sure the organization is designed correctly. 1 2 3 4 5



XEROX CORPORATION On the eve of the twenty-first century, Xerox Corporation seemed on top of the world, with fast-rising earnings, a soaring stock price, and a new line of computerized copier-printers that were technologically superior to rival products. Less than two years later, many considered Xerox a has-been, destined to fade into history. Consider the following events:

• Sales and earnings plummeted as rivals caught up with Xerox’s high-end digital machines, offering comparable products at lower prices.

• Xerox’s losses for the opening year of the twenty-first century totaled $384 million, and the company continued to bleed red ink. Debt mounted to $18 billion.

• The stock fell from a high of $64 to less than $4, amid fears that the company would file for federal bankruptcy protection. Over an 18-month period, Xerox lost $38 billion in shareholder wealth.

• Twenty-two thousand Xerox workers lost their jobs, further weakening the morale and loyalty of remaining employees. Major customers were alienated, too, by a restructuring that threw salespeople into unfamiliar territories and tied billing up in knots, leading to mass confusion and billing errors.

• The company was fined a whopping $10 million by the Securities and Exchange Commission (SEC) for accounting irregularities and alleged accounting fraud.

What went wrong at Xerox? The company’s deterioration is a classic story of organizational decline. Although Xerox appeared to fall almost overnight, the organization’s problems were connected to a series of organizational blunders over a period of many years.

BACKGROUND Xerox was founded in 1906 as the Haloid Company, a photographic supply house that developed the world’s first xero- graphic copier, introduced in 1959. Without a doubt, the 914 copier was a money-making machine. By the time it was retired in the early 1970s, the 914 was the best-selling industrial product of all time, and the new name of the company, Xerox, was listed in the dictionary as a synonym for photocopying.

4 Part 1: Introduction to Organizations

A LOOK INSIDE (continued)

Joseph C. Wilson, Haloid’s longtime chairman and president, created a positive, people-oriented culture continued by his successor, David Kearns, who steered Xerox until 1990. The Xerox culture and its dedicated employees (sometimes called “Xeroids”) were the envy of the corporate world. In addition to values of fairness and respect, Xerox’s culture emphasized risk taking and employee involvement. Wilson wrote the following for early recruiting materials: “We seek people who are willing to accept risk, willing to try new ideas and have ideas of their own . . . who are not afraid to change what they are doing from one day to the next, and from one year to the next . . .” Xerox continued to use these words in its recruiting efforts, but the culture the words epitomize had eroded.

“BUROX” TAKES HOLD Like many profitable organizations, Xerox became a victim of its own success. Leaders no doubt knew that the company needed to move beyond copiers to sustain its growth, but they found it difficult to look beyond the 70 percent gross profit margins of the 914 copier.

Xerox’s Palo Alto Research Center (PARC), established in 1970, became known around the world for innovation— many of the most revolutionary technologies in the computer industry, including the personal computer, graphical user interface, Ethernet, and laser printer, were invented at PARC. But the copier bureaucracy, or Burox as it came to be known, blinded Xerox leaders to the enormous potential of these innovations. While Xerox was plodding along selling copy machines, younger, smaller, and hungrier companies were developing PARC technologies into tremendous money- making products and services.

The dangers of Burox became dramatically clear when the company’s xerography patents began expiring. Suddenly, Japanese rivals such as Canon and Ricoh were selling copiers at the cost it took Xerox to make them. Market share declined from 95 percent to 13 percent by 1982. And with no new products to make up the difference, the company had to fight hard to cut costs and reclaim market share by committing to Japanese-style techniques and total quality manage- ment. Through the strength of his leadership, CEO Kearns was able to rally the troops and rejuvenate the company by 1990. However, he also set Xerox on a path to future disaster. Seeing a need to diversify, Kearns moved the company into insurance and financial services on a large scale. When he turned leadership over to Paul Allaire in 1990, Xerox’s balance sheet was crippled by billions of dollars in insurance liabilities.

ENTERING THE DIGITAL AGE Allaire wisely began a methodical, step-by-step plan for extricating Xerox from the insurance and financial services busi- ness. At the same time, he initiated a mixed strategy of cost cutting and new-product introductions to get the stodgy company moving again. Xerox had success with a line of digital presses and new high-speed digital copiers, but it fumbled again by underestimating the threat of the inkjet printer. By the time Xerox introduced its own line of desktop printers, the game was already over.

Desktop printers, combined with increasing use of the Internet and e-mail, cut heavily into Xerox’s sales of copiers. People didn’t need to make as many photocopies, but there was a huge increase in the number of documents being created and shared. Rebranding Xerox as “The Document Company,” Allaire pushed into the digital era, hoping to remake Xerox in the image of the rejuvenated IBM, offering not just “boxes (machines)” but complete document management solutions.

As part of that strategy, Allaire picked Richard Thoman, who was then serving as Louis Gerstner’s right-hand man at IBM, as his successor. Thoman came to Xerox as president, chief operating officer, and eventually CEO, amid high hopes that the company could regain the stature of its glory years. Only 13 months later, as revenues and the stock price continued to slide, he was fired by Allaire, who had remained as Xerox chairman.

PLAYING POLITICS Allaire and Thoman blamed each other for the failure to successfully implement the digital strategy. Outsiders, however, believe the failure had much more to do with Xerox’s dysfunctional culture. The culture was already slow to adapt, and some say that under Allaire it became almost totally paralyzed by politics. Thoman was brought in to shake things up, but when he tried, the old guard rebelled. A management struggle developed, with the outsider Thoman and a few allies on one side lined up against Allaire and his group of insiders who were accustomed to doing things the Xeroid way. Recognized for his knowledge, business experience, and intensity, Thoman was also considered to be somewhat haughty

44 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 5

and unapproachable. He was never able to exert substantial influence with key managers and employees, nor to gain the support of board members, who continued to rally behind Allaire.

The failed CEO succession illustrates the massive challenge of reinventing a century-old company. By the time Thoman arrived, Xerox had been going through various rounds of restructuring, cost cutting, rejuvenating, and reinventing for nearly two decades, but little had really changed. Many believe Thoman tried to do too much too soon. He saw the urgency for change but was unable to convey that urgency to others within the company and inspire them to take the difficult journey real transformation requires.

Others doubted that anyone could fix Xerox, because the culture had become too dysfunctional and politicized. “There was always an in-crowd and an out-crowd,” says one former executive. “They change the branches, but when you look closely, the same old monkeys are sitting in the trees.”

THE INSIDER’S INSIDER Enter Anne Mulcahy, the consummate insider. In August 2001, Allaire turned over the CEO reins to the popular twenty- four-year veteran, who had started at Xerox as a copier saleswoman and worked her way up the hierarchy. Despite her insider status, Mulcahy proved that she was more than willing to challenge the status quo at Xerox. Since she took over, Mulcahy has surprised skeptical analysts, stockholders, and employees by engineering one of the most extraordinary business turnarounds in recent history.

How did she do it? One key success factor was giving people vision and hope. Mulcahy wrote a fictitious Wall Street Journal article describing Xerox five years in the future, outlining the things Xerox wanted to accomplish as if they had already been achieved and presenting the company as a thriving, forward-thinking organization. And although few people thought Mulcahy would take the tough actions Xerox needed to survive, she turned out to be a strong decision maker. She quickly launched a turnaround plan that included massive cost cutting and closing of several money-losing opera- tions, including the division she had previously headed. She was brutally honest about “the good, the bad, and the ugly” of the company’s situation, as one employee put it, but she also showed that she cared about what happened to employees. After major layoffs, she walked the halls to tell people she was sorry and let them vent their anger. She personally negotiated the settlement of a long investigation into fraudulent accounting practices, insisting that her personal involvement was necessary to signal a new commitment to ethical business practices and corporate social responsibility. She appealed directly to creditors begging them not to pull the plug until a new management team could make needed changes.

Mulcahy transferred much of production to outside contractors and refocused Xerox on innovation and service. Two areas she refused to cut were research and development and customer contact. Since 2005, Xerox has introduced more than 100 new products and moved into high-growth areas such as document management services, IT consulting, and digital press technology. A series of acquisitions enabled the company to enter new markets and expand its base of small- and medium-sized business customers. Sales in 2007 rose to more than $17 billion, and in November of that year, Xerox announced its first quarterly cash dividend in six years. Mulcahy has also responded to global stakeholders with a firm commitment to human rights and sustainable business practices. “By doing the right thing for our stakehold- ers and the global community, we’re also doing what is right for our business,” she said.

Mulcahy was belittled in the press when she took over as CEO, but she has proved the pundits wrong and regu- larly shows up on various “best manager” lists. In 2008, she became the first woman CEO selected by her peers to receive Chief Executive magazines’s “CEO of the Year” award, which she promptly declared to “represent the impressive accomplishments of Xerox people around the world.” But Mulcahy knows Xerox can’t afford to rest on its laurels. The technology industry is tough, and she has to keep her management team focused on growth while also maintaining the cost controls that stabilized the company.

Eight years after this American icon almost fell, Xerox is once again admired in the corporate world. Has the “perfect storm” of troubles been replaced with a “perfect dawn”? Mulcahy and her top management team believe Xerox is posi- tioned to be resilient in the face of the current economic slowdown, but in the rapidly changing world of organizations, nothing is ever certain.1

Welcome to the real world of organization theory. The shifting fortunes of Xerox illustrate organization theory in action. Xerox managers were deeply involved in organization theory each day of their working lives—but many never realized it. Company managers didn’t fully understand how the organization related to the environment or how it should function internally. Organization theory concepts have helped Anne Mulcahy and her management team analyze and diagnose what is happening and the changes needed to keep the company competitive. Organization theory gives us the tools to explain the decline of Xerox and understand Mulcahy’s turnaround.

Similar problems have challenged numerous organizations. Consider the dramatic organizational missteps illustrated by the 2008 crises in the mortgage industry and finance sector in the United States. Lehman Brothers Holdings, a pillar in the invest- ment banking industry for more than 150 years, filed for Chapter 11 bankruptcy, unable to weather the storm sweeping through the industry. American International Group (AIG) sought a bailout from the U.S. government. And another icon, Merrill Lynch, was saved by becoming part of Bank of America, which had already snapped up struggling mortgage lender Countrywide Financial Corporation. The Merrill Lynch acquisition gave Bank of America a vast reach into nearly every part of the finance industry, from credit cards and auto loans to stock underwriting, wealth manage- ment, and merger advice. Power in the industry took a decided shift away from huge investment firms back toward the basic business of commercial banking, making companies such as Bank of America and Wells Fargo & Company in the United States, Germany’s Deutsche Bank AG, and Banco Santander SA of Spain key players in a new financial landscape.2 The 2008 crisis in the U.S. financial sector represented change and uncertainty on an unprecedented scale, and it would, to some extent, affect man- agers in all types of organizations and industries around the world.


Organization theory gives us the tools to analyze and understand how a huge, pow- erful firm like Lehman Brothers can die and a company like Bank of America can emerge almost overnight as a giant in the industry. It enables us to comprehend how a band like the Rolling Stones, which operates like a highly sophisticated global busi- ness organization, can enjoy phenomenal success for nearly half a century, while some musical groups with equal or superior talent don’t survive past a couple of hit songs. Organization theory helps us explain what happened in the past, as well as what may happen in the future, so that we can manage organizations more effectively.


Each of the topics to be covered in this book is illustrated in the Xerox case. Indeed, managers at companies such as Xerox, Lehman Brothers, Bank of America, and even the Rolling Stones are continually faced with a number of challenges. For example:

• How can the organization adapt to or control such external elements as com- petitors, customers, government, and creditors in a fast-paced environment?

• What strategic and structural changes are needed to help the organization attain effectiveness?

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Chapter 1: Organizations and Organization Theory 7

• How can the organization avoid management ethical lapses that could threaten its viability?

• How can managers cope with the problems of large size and bureaucracy? • What is the appropriate use of power and politics among managers? • How should internal conflict be managed? • What kind of corporate culture is needed to enhance rather than stifle innova-

tion and change, and how can that culture be shaped by managers?

These are the topics with which organization theory is concerned. Organization theory concepts apply to all types of organizations in all industries. Managers at Burger King revitalized the once-floundering fast-food chain by revising its menu and marketing approach based on customer analysis. Nokia underwent a major reorganization to improve the organization’s flexibility and adaptability. Hewlett- Packard acquired Electronic Data Systems Corporation to move H-P more aggres- sively into the technology services industry.3 All of these companies are using concepts based in organization theory. Organization theory also applies to nonprofit organizations such as the United Way, the American Humane Association, local arts organizations, colleges and universities, and the Make-A-Wish Foundation, which grants wishes to terminally ill children.

Organization theory draws lessons from organizations such as Xerox, Bank of America, and United Way and makes those lessons available to students and manag- ers. As our opening example of Xerox shows, even large, successful organizations are vulnerable, lessons are not learned automatically, and organizations are only as strong as their decision makers. Organizations are not static; they continuously adapt to shifts in the external environment. Today, many companies are facing the need to transform themselves into dramatically different organizations because of new challenges in the environment.

Current Challenges

Research into hundreds of organizations provides the knowledge base to make Xerox and other organizations more effective. For example, challenges facing orga- nizations today are different from those of the past, and thus the concept of orga- nizations and organization theory is evolving. The world is changing more rapidly than ever before, and managers are responsible for positioning their organizations to adapt to new needs. Some specific challenges today’s managers and organizations face are globalization, intense competition, rigorous ethical scrutiny, the need for rapid response, the digital workplace, and increasing diversity.

Globalization. The cliché that the world is getting smaller is dramatically true for today’s organizations. With rapid advances in technology and communications, the time it takes to exert influence around the world from even the most remote locations has been reduced from years to only seconds. Markets, technologies, and organizations are becoming increasingly interconnected.4 Today’s successful organi- zations feel “at home” anywhere in the world. Companies can locate different parts of the organization wherever it makes the most business sense: top leadership in one country, technical brainpower and production in other locales.

Related trends are global outsourcing, or contracting out some functions to organizations in other countries, and strategic partnering with foreign firms to gain a global advantage. In Bain & Company’s 2007 survey of managers, nearly

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

Do not ignore the external environ- ment or protect the organization from it. Because the environ- ment is unpredict- able, do not expect to achieve complete order and rationality within the organiza- tion. Strive for a bal- ance between order and flexibility.

50 percent said they saw cross-border acquisitions as crucial to their future com- petitiveness. Moreover, U.S. managers believe developing relationships in India and China will be vital to business success.5 Already, numerous companies from all over the world, including Home Depot, CNA Life, and Sony, use India’s Wipro Ltd. to develop sophisticated software applications, design semiconductors, and manage back-office solutions.6 Other companies turn to China, which is the world’s largest maker of consumer electronics and is rapidly and expertly moving into biotechnol- ogy, computer manufacturing, and semiconductors.7

Intense Competition. This growing global interdependence creates new advantages, but it also means that the environment for companies is becoming extremely competi- tive. Customers want low prices for goods and services. Outsourcing firms in low-wage countries can often do work for 50 to 60 percent less than companies based in the United States, for instance, so U.S. firms that provide similar services have to search for new ways to compete or go into new lines of business.8 In recent years, though, rising fuel costs cut into the cost advantage many manufacturers enjoyed from what has been called the “China price.”9 The higher cost of shipping goods from China or other low- wage countries counteracted the lower cost of production, leaving U.S. manufacturers searching for ways to make up the difference without exorbitant price increases.

Companies in all industries are feeling pressure to drive down costs and keep prices low, yet at the same time they are compelled to invest in research and devel- opment or get left behind in the global drive for innovation. In the United States, high oil prices, the housing slump, mortgage meltdown, crisis in the financial sec- tor, and the soaring costs of materials and supplies created a tough environment for companies in all industries. Consider McDonald’s. Even as managers were seeking ways to expand the menu and draw in new customers, McDonald’s labs were test- ing how to cut the cost of making basic items on the Dollar Menu. With the price of ingredients such as cheese, beef, and buns going up, McDonald’s had to cut internal costs or lose money on its dollar-menu items.10 Auto insurers searched for new ways to compete as drivers faced with steep gas prices looked for ways to cut their trans- portation costs.11 Casual restaurant chains battled to draw in customers as people cut back on eating out. Grocers, too, felt the sting. Managers at Supervalu, the second largest supermarket company in the United States, quickly learned that they couldn’t just pass on their higher costs to shoppers. Sales and profits plunged in early 2008 before managers adjusted their strategy to promote cheaper store brands, work with manufacturers to design innovative promotions and coupons, and intro- duce new lines of products at lower prices.12

Ethics and Social Responsibility. Today’s managers face tremendous pressure from the government and the public to hold their organizations and employees to high ethical and professional standards. Following widespread moral lapses and corporate financial scandals, organizations are under scrutiny as never before. The pervasiveness of ethical lapses in the early 2000s was astounding. Once-respected firms such as Enron, Arthur Andersen, Tyco, and HealthSouth became synonymous with greed, deceit, and financial chicanery. No wonder a public poll found that 79 percent of respondents in the United States believe questionable business prac- tices are widespread. Fewer than one-third said they think most CEOs are honest.13

The sentiment is echoed in other countries. Recent investigations of dozens of top executives in Germany for tax evasion, bribery, and other forms of corruption have destroyed the high level of public trust business leaders there once enjoyed, with just

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Chapter 1: Organizations and Organization Theory 9

15 percent of respondents in Germany now saying they consider business leaders trustworthy.14

The climate of suspicion has spread to nonprofit organizations and colleges and universities as well. For example, the student loan industry has come under close scru- tiny after an investigation found that Student Loan Xpress paid financial aid directors at three universities a total of $160,000 in consulting fees, personal tuition reimburse- ment, and other payments as a gateway to being placed on the universities’ preferred lenders lists. Investigators are seeking to determine whether lenders are being recom- mended to students because of the hidden payments university officials are receiving rather than the fact that they offer the best lending terms to students.15

Speed and Responsiveness. A third significant challenge for organizations is to respond quickly and decisively to environmental changes, organizational crises, or shifting customer expectations. For much of the twentieth century, organizations operated in a relatively stable environment, so managers could focus on designing structures and systems that kept the organization running smoothly and efficiently. There was little need to search for new ways to cope with increased competition, volatile environmental shifts, or changing customer demands. Today, globalization and advancing technology have accelerated the pace at which organizations in all industries must roll out new products and services to stay competitive. Today’s customers want products and services tailored to their exact needs, and they want them now. Manufacturing firms that relied on mass production and distribution techniques must be prepared with new computer-aided systems that can produce one-of-a-kind variations and streamlined distribution systems that deliver products directly from the manufacturer to the consumer. Service firms, as well, are searching for new ways to provide value. Allstate Insurance, for example, enhanced respon- siveness to customers with its Your Choice Auto program, which gives drivers the opportunity to choose the insurance perks they want. Allstate managers recognize that what appeals to drivers can change quickly as gasoline prices shift.16

Considering the turmoil and flux inherent in today’s world, the mindset needed by organizational leaders is to expect the unexpected and be prepared for rapid change and potential crises. Crisis management has moved to the forefront in light of devastating natural disasters and terrorist attacks all over the world; a tough economy, rocky stock market, growing unemployment, and weakening consumer confidence; widespread ethical scandals; and, in general, an environment that may shift dramatically at a moment’s notice.

The Digital Workplace. Many traditional managers feel particularly awkward in today’s technology-driven workplace. Organizations have been engulfed by informa- tion technology that affects how they are designed and managed. In today’s work- place, many employees perform much of their work on computers and may work in virtual teams, connected electronically to colleagues around the world. In addition, rather than competing as independent entities, organizations are becoming enmeshed in electronic networks. More and more of today’s business takes place by digital processes over a computer network rather than in physical space. Some companies have taken e-business to very high levels to achieve amazing performance. The use of end-to-end digital supply-chain networks to keep in touch with customers, take orders, buy components from suppliers, coordinate with manufacturing partners, and ship customized products directly to consumers has spread to all industries.17

These advances mean that organizational leaders not only need to be technologically

savvy but are also responsible for managing a web of relationships that reaches far beyond the boundaries of the physical organization, building flexible e-links between a company and its employees, suppliers, contract partners, and customers.18

Diversity. As organizations increasingly operate on a global playing field, the workforce—as well as the customer base—grows increasingly diverse. Many of today’s leading organizations have an international face. Look at the makeup of consulting firm McKinsey & Company. In the 1970s, most consultants were American, but by the turn of the century, McKinsey’s chief partner was a foreign national (Rajat Gupta from India), only 40 percent of consultants were American, and the firm’s foreign-born consultants came from forty different countries.19

In addition to coping with global diversity, managers in the United States realize the nation’s domestic population is changing dramatically. The minority popula- tion of the United States is now more than 100 million, making about one in three U.S. residents a minority. Roughly 32 million people speak Spanish at home, and nearly half of these people say they don’t speak English very well.20 Today’s aver- age employee is older, and many more women, people of color, and immigrants are seeking job and advancement opportunities. By 2050, it is estimated that 85 percent of entrants into the workforce will be women and people of color. Already, white males, the majority of workers in the past, represent less than half of the work- force.21 This growing diversity brings a variety of challenges, such as maintaining a strong corporate culture while supporting diversity, balancing work and family concerns, and coping with the conflict brought about by varying cultural styles.

Purpose of This Chapter

The purpose of this chapter is to explore the nature of organizations and organiza- tion theory today. Organization theory has developed from the systematic study of organizations by scholars. Concepts are obtained from living, ongoing organiza- tions. Organization theory has a practical application, as illustrated by the Xerox case. It helps managers understand, diagnose, and respond to emerging organiza- tional needs and problems.

The next section begins with a formal definition of organization and then explores introductory concepts for describing and analyzing organizations. Next, the scope and nature of organization theory are discussed more fully. Succeeding sections examine the history of organization theory and design, a framework for understanding organizational forms, the development of new organizational forms in response to changes in the environment, and how organization theory can help people manage complex organizations in a rapidly changing world. The chapter closes with a brief overview of the themes to be covered in this book.


Organizations are hard to see. We see outcroppings, such as a tall building, a com- puter workstation, or a friendly employee, but the whole organization is vague and abstract and may be scattered among several locations, even around the world. We know organizations are there because they touch us every day. Indeed, they are so common that we take them for granted. We hardly notice that we are born in a

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hospital, have our birth records registered in a government agency, are educated in schools and universities, are raised on food produced on corporate farms, are treated by doctors engaged in a joint practice, buy a house built by a construction company and sold by a real estate agency, borrow money from a bank, turn to police and fire departments when trouble erupts, use moving companies to change residences, and receive an array of benefits from various government agencies.22 Most of us spend many of our waking hours working in an organization of one type or another.


Organizations as diverse as a bank, a corporate farm, a government agency, and Xerox Corporation have characteristics in common. The definition used in this book to describe organizations is as follows: organizations are (1) social entities that (2) are goal-directed, (3) are designed as deliberately structured and coordinated activity systems, and (4) are linked to the external environment.

The key element of an organization is not a building or a set of policies and proce- dures; organizations are made up of people and their relationships with one another. An organization exists when people interact with one another to perform essential functions that help attain goals. Recent trends in management recognize the importance of human resources, with most new approaches designed to empower employees with greater oppor- tunities to learn and contribute as they work together toward common goals.

Managers deliberately structure and coordinate organizational resources to achieve the organization’s purpose. However, even though work may be structured into separate departments or sets of activities, most organizations today are striv- ing for greater horizontal coordination of work activities, often using teams of employees from different functional areas to work together on projects. Boundaries between departments, as well as those between organizations, are becoming more flexible and diffuse as companies face the need to respond to changes in the external environment more rapidly. An organization cannot exist without interacting with customers, suppliers, competitors, and other elements of the external environment. Today, some companies are even cooperating with their competitors, sharing infor- mation and technology to their mutual advantage.

From Multinationals to Nonprofits

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

Another important distinction is between for-profit businesses and nonprofit orga- nizations. All of the topics in this text apply to nonprofit organizations such as the Salvation Army, the World Wildlife Fund, the Save the Children Foundation, and Chicago’s La Rabida Hospital, which is dedicated to serving the poor, just as they do to such businesses as Xerox, Sirius XM Radio, Dunkin’ Donuts, and Nintendo. However, there are some important dissimilarities to keep in mind. The primary difference is that managers in businesses direct their activities toward earning money for the company,

whereas managers in nonprofits direct their efforts toward generating some kind of social impact. The unique characteristics and needs of nonprofit organizations created by this distinction present unique challenges for organizational leaders.23

Financial resources for nonprofits typically come from government appropria- tions, grants, and donations rather than from the sale of products or services to cus- tomers. In businesses, managers focus on improving the organization’s products and services to increase sales revenues. In nonprofits, however, services are typically pro- vided to nonpaying clients, and a major problem for many organizations is securing a steady stream of funds to continue operating. Nonprofit managers, committed to serving clients with limited funds, must focus on keeping organizational costs as low as possible and demonstrating a highly efficient use of resources.24 Another problem is that, since nonprofit organizations do not have a conventional “bottom line,” managers often struggle with the question of what constitutes organizational effectiveness. It is easy to measure dollars and cents, but nonprofits have to measure intangible goals such as “improve public health,” “make a difference in the lives of the disenfranchised,” or “enhance appreciation of the arts.”

Managers in nonprofit organizations also deal with many diverse stakeholders and must market their services to attract not only clients (customers) but also vol- unteers and donors. This can sometimes create conflict and power struggles among organizations, as illustrated by the Make-A-Wish Foundation, which is butting heads with small, local wish-granting groups as it expands to cities across the United States. The more kids a group can count as helping, the easier it is to raise funds. Local groups don’t want Make-A-Wish invading their turf, particularly at a time when charitable donations in general are declining with the slowing economy. Small groups are charging that Make-A-Wish is abusing the power of its national presence to overwhelm or absorb the smaller organizations. “We should not have to compete for children and money,” says the director of the Indiana Children’s Wish Fund. “They [Make-A-Wish] use all their muscle and money to get what they want.”25

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

Importance of Organizations

It may seem hard to believe today, but organizations as we know them are relatively recent in the history of humankind. Even in the late nineteenth century there were few organizations of any size or importance—no labor unions, no trade associations, and few large businesses, nonprofit organizations, or governmental agencies. What a change has occurred since then! The development of large organizations transformed all of society, and, indeed, the modern corporation may be the most significant inno- vation of the past 100 years.26 This chapter’s Book Mark examines the rise of the corporation and its significance in our society.

Organizations are all around us and shape our lives in many ways. But what contributions do organizations make? Why are they important? Exhibit 1.1 lists seven reasons organizations are important to you and to society. First, organi- zations bring together resources to accomplish specific goals. Consider Northrup

Briefcase As an organization manager, keep this guideline in mind:

Consider the needs and interests of all stakeholders when setting goals and designing the orga- nization to achieve effectiveness.

12 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 13

“The limited liability corporation is the greatest single discov- ery of modern times,” is one conclusion of the concise and readable book The Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge. Companies are so ubiquitous today that we take them for granted, so it may come as a surprise that the company as we know it is a relatively recent innovation. Although people have joined together in groups for commercial purposes since ancient Greek and Roman times, the modern company has its roots in the late nineteenth century. The idea of a limited liability com- pany that was legally an “artificial person” began with the Joint Stock Companies Act, enacted by the London Board of Trade in 1856. Today the company is seen as “the most important organization in the world.” Here are a few reasons why:

• The corporation was the first autonomous legal and social institution that was within society yet independent of the central government.

• The concept of a limited liability company unleashed entrepreneurs to raise money because investors could lose only what they invested. Increasing the pool of entrepreneurial capital spurred innovation and generally enriched the societies in which companies operated.

• The company is the most efficient creator of goods and services that the world has ever known. Without a com- pany to harness resources and organize activities, the

cost to consumers for almost any product we know today would be impossible to afford.

• Historically, the corporation has been a force for civilized behavior and provided people with worthwhile activities, identity, and community, as well as a paycheck.

• The Virginia Company, a forerunner of the limited liability corporation, helped introduce the revolutionary concept of democracy to the American colonies.

• The modern multinational corporation began in Britain in the third quarter of the 1800s with the railroads, which built rail networks throughout Europe by shipping into each country the managers, materials, equipment, and labor needed.

During the past few years, it seems that large corporations have been increasingly in conflict with societies’ interests. Yet large companies have been reviled throughout modern history—consider the robber barons at the beginning of the twentieth century—and the authors suggest that recent abuses are relatively mild compared to some incidents from history. Everyone knows that corporations can be scoun- drels, but overall, Micklethwait and Wooldridge argue, their force has been overwhelmingly for the cumulative social and economic good.

The Company: A Short History of a Revolutionary Idea, by John Micklethwait and Adrian Wooldridge, is published by The Modern Library.

The Company: A Short History of a Revolutionary Idea By John Micklethwait and Adrian Wooldridge


Grumman Newport News (formerly Newport News Shipbuilding), which builds nuclear-powered, Nimitz-class aircraft carriers. Putting together an aircraft carrier is an incredibly complex job involving 47,000 tons of precision-welded steel, more than 1 million distinct parts, 900 miles of wire and cable, and more than seven years of hard work by 17,800 employees.27 How could such a job be accomplished without an organization to acquire and coordinate these varied resources?

Organizations also produce goods and services that customers want at competi- tive prices. Bill Gates, who built Microsoft into a global powerhouse, asserts that the modern organization “is one of the most effective means to allocate resources we’ve ever seen. It transforms great ideas into customer benefits on an unimaginably large scale.”28 Companies look for innovative ways to produce and distribute desirable goods and services more efficiently. Two ways are through e-business and through the use of computer-based manufacturing technologies. Redesigning organizational structures and management practices can also contribute to increased efficiency. Organizations create a drive for innovation rather than a reliance on standard prod- ucts and outmoded approaches to management and organization design.

B ix

B ur

kh ar


Organizations adapt to and influence a rapidly changing environment. Consider Google, provider of the Internet’s most popular search engine, which continues to adapt and evolve along with the evolving Internet. Rather than being a rigid service, Google is continually adding technological features that create a better service by accretion. At any time, Google’s site features several technologies in development so that engineers can get ideas and feedback from users.29 Some large businesses have entire departments charged with monitoring the external environment and finding ways to adapt to or influence that environment.

Through all of these activities, organizations create value for their owners, cus- tomers, and employees. Managers analyze which parts of the operation create value and which parts do not; a company can be profitable only when the value it creates is greater than the cost of resources. Vizio Inc., a growing force in the flat-panel television industry, for example, creates value by using existing LCD technology and developing an equity partnership with a contract manufacturer rather than produc- ing televisions in-house. By keeping its costs low, the California-based company has been able to sell flat-panel TVs at about half the cost of those sold by major electronics manufacturers.30

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


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








Bring together resources to achieve desired goals and outcomes

Produce goods and services efficiently

Facilitate innovation

Use modern manufacturing and information technologies

Adapt to and influence a changing environment

Create value for owners, customers, and employees

Accommodate ongoing challenges of diversity, ethics, and the motivation and coordination of employees

Organizations exist to do the following:

EXHIBIT 1.1 Importance of Organizations

14 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 15

Organizational dimensions fall into two types: structural and contextual, as illustrated in Exhibit 1.2. Structural dimensions provide labels to describe the internal characteristics of an organization. They create a basis for measuring and comparing organizations. Contextual dimensions characterize the whole organization, including its size, technology, environment, and goals. They describe the organizational set- ting that influences and shapes the structural dimensions. Contextual dimensions can be confusing because they represent both the organization and the environ- ment. Contextual dimensions can be envisioned as a set of overlapping elements that underlie an organization’s structure and work processes. To understand and evaluate organizations, one must examine both structural and contextual dimen- sions.31 These dimensions of organization design interact with one another and can be adjusted to accomplish the purposes listed earlier in Exhibit 1.1.

Structural Dimensions

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

EXHIBIT 1.2 Interacting Contextual and Structural Dimensions of Organization Design


Goals and Strategy


Culture Technology

The Organization


1. Formalization 2. Specialization 3. Hierarchy of authority 4. Centralization 5. Professionalism 6. Personnel ratios

Level 1

Level 2

Level 3

Level 4

Level 5

Advisory Committees

Director AAA Director CETA

Director Housing

Director Criminal Justice

Assistant Director Finance

Director Finance

Executive Committee

Board of Directors

Secretary Records Clerk

Secretary SecretaryPayroll Clerk

Administrative Assistant

Administrative Assistant

Staff Clerk

IT Specialist

Housing Coordinator

Alcoh. Coordinator

Public Information Coordinator

Accountant Program

Spec. AAA

Program Planner


CETA Intake &


CETA Couns. Devs. Title


CETA Couns. Devs. Youth


CETA Couns. Devs. Title


CETA Planner

Director Economic


Director Regional Planning

Assistant Executive Director for Community Services

Assistant Executive Director for Human Services

Executive Director

Lead Couns.

Lead Couns.

Contract Fiscal Mgr.

EXHIBIT 1.3 Organization Chart Illustrating the Hierarchy of Authority for a Community Job Training Program

1 6


art 1 : Introduction to O


Chapter 1: Organizations and Organization Theory 17

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

3. Hierarchy of authority describes who reports to whom and the span of control for each manager. The hierarchy is depicted by the vertical lines on an organiza- tion chart, as illustrated in Exhibit 1.3. The hierarchy is related to span of con- trol (the number of employees reporting to a supervisor). When spans of control are narrow, the hierarchy tends to be tall. When spans of control are wide, the hierarchy of authority will be shorter.

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

5. Professionalism is the level of formal education and training of employees. Professionalism is considered high when employees require long periods of train- ing to hold jobs in the organization. Professionalism is generally measured as the average number of years of education of employees, which could be as high as twenty in a medical practice and less than ten in a construction company.

6. Personnel ratios refer to the deployment of people to various functions and departments. Personnel ratios include the administrative ratio, the clerical ratio, the professional staff ratio, and the ratio of indirect to direct labor employees. A personnel ratio is measured by dividing the number of employees in a classification by the total number of organizational employees.

Contextual Dimensions

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

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

3. The environment includes all elements outside the boundary of the organization. Key elements include the industry, government, customers, suppliers, and the financial community. The environmental elements that affect an organization the most are often other organizations.

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

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

Think of the organi- zation as an entity distinct from the indi- viduals who work in it. Describe the organiza- tion according to its size, formalization, decentralization, specialization, profes- sionalism, personnel ratios, and the like. Use these character- istics to analyze the organization and to compare it with other organizations.

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

The eleven contextual and structural dimensions discussed here are interde- pendent. For example, large organization size, a routine technology, and a stable environment all tend to create an organization that has greater formalization, spe- cialization, and centralization. More detailed relationships among the dimensions are explored in later chapters of this book.

1 An organization can be understood primarily by understanding the people who make it up. ANSWER: Disagree. An organization has distinct characteristics that are inde- pendent of the nature of the people who make it up. All the people could be replaced over time while an organization’s structural and contextual dimensions would remain similar.

These dimensions provide a basis for measuring and analyzing characteristics that cannot be seen by the casual observer, and they reveal significant information about an organization. Consider, for example, the dimensions of Ternary Software compared with those of Wal-Mart and a governmental agency.

Brian Robertson is one of the founders of Ternary Software and holds the title of CEO. But as for having the power and authority typically granted to a top executive, forget

about it. Consider a recent strategy meeting where a programmer criticized Robertson’s plan to replace the company’s profit sharing program with an ad hoc bonus system based on performance. After much discussion, the CEO’s plan was soundly rejected in favor of keeping the profit sharing program and using monthly bonus incentives.

At Ternary, a company that writes software on contract for other organizations, every- one has a voice in making important decisions. A seven-member policy-setting team that includes two frontline workers elected by their peers consults with other teams throughout the company, ultimately giving every employee a chance to participate in decision making. Meetings are highly informal and people are invited to share feelings as well as business ideas. Any time a new item on the agenda is brought up for discussion, each person is asked for his or her gut reaction. Then, people get to state objections, offer alternative ideas, rework proposals, and perhaps throw out management’s suggestions and plans.

Contrast Ternary’s approach to that of Wal-Mart, which achieves its competitive edge through internal cost efficiency. A standard formula is used to build each store, with uniform displays and merchandise. Wal-Mart’s administrative expenses are the lowest of any chain. The distribution system is a marvel of efficiency. Goods can be delivered to any store in less than two days after an order is placed. Stores are controlled from the top, although store

1 An organization can be understood primarily byunderstanding the people who make it up. ANSWER: Disagree. An organization has distinct characteristics that are inde- pendent of the nature of the people who make it up. All the people could be replaced over time while an organization’s structural and contextual dimensions would remain similar.



Ternary Software Inc.


18 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 19

managers have some freedom to adapt to local conditions. Employees follow standard pro- cedures set by management and have little say in decision making. However, performance is typically high, and most employees consider that the company treats them fairly.

An even greater contrast is seen in many government agencies or nonprofit organiza- tions that rely heavily on public funding. Most state humanities and arts agencies, for example, are staffed by a small number of highly trained employees, but workers are over- whelmed with rules and regulations and swamped by paperwork. Employees who have to implement rule changes often don’t have time to read the continuous stream of memos and still keep up with their daily work. Employees must require extensive reporting from their clients in order to make regular reports to a variety of state and federal funding sources. Agency workers are frustrated and so are the community-based organizations they seek to serve.32 ■

Exhibit 1.4 illustrates several structural and contextual dimensions of Ternary Software, Wal-Mart, and the state arts agency. Ternary is a small organization that ranks very low with respect to formalization and centralization and has a medium degree of specialization. Professionalism is high, with a number of staff assigned to nonworkflow activities to do the R&D needed to stay abreast of changes in the software and information technology industries. Wal-Mart is much more formal- ized, specialized, and centralized. Efficiency is more important than new products, so most activities are guided by standard regulations. Professionalism is low, and the percentage of nonworkflow personnel is kept to a minimum. The arts agency, in contrast to the other organizations, reflects its status as a small part of a large government bureaucracy. The agency is overwhelmed with rules and standard pro- cedures. Rules are dictated from the top. Most employees are assigned to workflow





Standard Score



Ternary Software Wal-Mart State arts agency

Software Development Retailing Government service

25 250,000 53

Formalization Centralization

Specialization Configuration: Percent nonworkflow personnel

EXHIBIT 1.4 Characteristics of Three Organizations

activities, although in normal times a substantial number of people are devoted to administration and clerical support.

Structural and contextual dimensions can thus tell a lot about an organization and about differences among organizations. Organization design dimensions are examined in more detail in later chapters to determine the appropriate level of each dimension needed to perform effectively in each organizational setting.

Performance and Effectiveness Outcomes

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

To be effective, organizations need clear, focused goals and appropriate strate- gies for achieving them. Strategy, goals, and approaches to measuring effective- ness will be discussed in detail in Chapter 2. Many organizations are using new technology to improve efficiency and effectiveness. For example, the health care industry is striving to increase efficiency by using information technology to reduce paperwork and streamline procedures. With new technology, one physician’s office in Philadelphia says it can now handle more patients with three fewer office employ- ees. Information technology also helps the staff locate information more quickly and reduce mistakes, leading to a higher quality of care and better customer service.33

Achieving effectiveness is not always a simple matter because different people want different things from the organization. For customers, the primary concern is high-quality products and services at a reasonable price, whereas employees are mostly concerned with adequate pay, good working conditions, and job satisfac- tion. Managers carefully balance the needs and interests of various stakeholders in setting goals and striving for effectiveness. This is referred to as the stakeholder approach, which integrates diverse organizational activities by looking at various organizational stakeholders and what they want from the organization. A stake- holder is any group within or outside of the organization that has a stake in the organization’s performance. The satisfaction level of each group can be assessed as an indication of the organization’s performance and effectiveness.34

2 The primary role of managers in business organizations is to achieve maximum effi ciency. ANSWER: Disagree. Effi ciency is important, but organizations must respond to a variety of stakeholders, who may want different things from the organization. Managers strive for both effi ciency and effectiveness in trying to meet the needs and interests of stakeholders. Effectiveness is often considered more important than effi ciency.

2 The primary role of managers in business organizations is to achieve maximum effi ciency. ANSWER: Disagree. Effi ciency is important, but organizations must respond to a variety of stakeholders, who may want different things from the organization. Managers strive for both effi ciency and effectiveness in trying to meet the needs and interests of stakeholders. Effectiveness is often considered more important than effi ciency.



20 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 21

Exhibit 1.5 illustrates various stakeholders and what each group wants from the organization. Stakeholder interests sometimes conflict, and organizations often find it difficult to simultaneously satisfy the demands of all groups. A business might have high customer satisfaction, but the organization might have difficulties with creditors or supplier relationships might be poor. Consider Wal-Mart. Customers love its effi- ciency and low prices, but the low-cost emphasis has caused friction with suppliers. Some activist groups argue that Wal-Mart’s tactics are unethical because they force suppliers to lay off workers, close factories, and outsource to manufacturers from low-wage countries. One supplier said clothing is being sold at Wal-Mart so cheaply that many U.S. companies couldn’t compete even if they paid their workers nothing. The challenges of managing such a huge organization have also led to strains in rela- tionships with employees and other stakeholder groups, as evidenced by recent gender discrimination suits and complaints about low wages and poor benefits.35

Research has shown that the assessment of multiple stakeholder groups is an accu- rate reflection of organizational effectiveness, especially with respect to organizational adaptability.36 Moreover, both profit and nonprofit organizations care about their reputations and attempt to shape stakeholders’ perceptions of their performance.37

In reality, it is unreasonable to assume that all stakeholders can be equally satis- fied, but if an organization fails to meet the needs of several stakeholder groups, it is probably not meeting its effectiveness goals. Managers strive to at least minimally satisfy the interests of all stakeholders. When any one group becomes seriously dis- satisfied, it may withdraw its support and hurt future organizational performance. Satisfying multiple stakeholders can be challenging, particularly as goals and priori- ties change, as illustrated by the following example.

EXHIBIT 1.5 Major Stakeholder Groups and What They Expect


• •

Satisfaction Pay




• Satisfactory transactions

Revenue from purchases


Good corporate citizen Contribution to community affairs


• Worker pay



• •

High-quality goods, services Service


CREDITORS • • Creditworthiness Fiscal responsibility


Obedience to laws and regulations

Fair competition


• Efficiency



Few people deny that homeland security should be a top priority for the United States, and since the attacks of September 11, 2001, the Federal Bureau of Investigation

(FBI) has channeled more and more resources into the domestic war on terrorism. Consider the seven-year investigation into the anthrax attacks that occurred weeks after September 11 and killed five people in the United States. The investigation culminated in mid-2008 by identifying the alleged culprit as an Army biological weapons scientist at Fort Detrick in Frederick, Maryland. The suspect committed suicide after being told he would be charged with murder.

Combatting terrorism sounds good, right? The only problem is, the agency’s new priority means hundreds of agents have been pulled off their regular beats, where they investigated everything from drug smuggling to kidnapping to white collar crime. “Just about everyone here is involved in terror cases, one way or another,” says agent Ron Buckley. “Everything else is on the back burner.”

The FBI’s new focus is putting a heavy burden on police departments and other law enforcement agencies around the country. These organizations don’t have the personnel, investigative resources, or know-how to fight the kinds of crime FBI agents once handled. For example, even when local departments have adequate manpower, crimes often go unsolved because of lack of access to the FBI’s high-tech forensic labs. Local communities are also distressed because they fear more drugs in their neighborhoods and more violent crime on their streets. Although the U.S. public is worried about terrorism, they also want their own little piece of the world protected from criminal activity.

Some FBI agents aren’t particularly happy about the change either. An agent who has spent most of his 25-year career poring over financial statements investigating fraud, for example, has to make a huge mental shift to feel comfortable traveling around town in an unmarked car with submachine guns, stun grenades, body armor—and a toothbrush— prepared for the next long stakeout.38 ■

This example provides a glimpse of how difficult it can be for managers to satisfy multiple stakeholders. In all organizations, managers have to evaluate stake- holder concerns and establish goals that can achieve at least minimal satisfaction for major stakeholder groups.


Organization theory is not a collection of facts; it is a way of thinking about orga- nizations. Organization theory is a way to see and analyze organizations more accurately and deeply than one otherwise could. The way to see and think about organizations is based on patterns and regularities in organizational design and behavior. Organization scholars search for these regularities, define them, measure them, and make them available to the rest of us. The facts from the research are not as important as the general patterns and insights into organizational functioning. Insights from organization design research can help managers improve organiza- tional efficiency and effectiveness, as well as strengthen the quality of organizational life.39 One area of insight is how organization design and management practices have varied over time in response to changes in the larger society.

Federal Bureau of Investigation


22 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 23

Historical Perspectives

You may recall from an earlier management course that the modern era of manage- ment theory began with the classical management perspective in the late nineteenth and early twentieth century. The emergence of the factory system during the Industrial Revolution posed problems that earlier organizations had not encountered. As work was performed on a much larger scale by a larger number of workers, people began thinking about how to design and manage work in order to increase productivity and help organizations attain maximum efficiency. The classical perspective, which sought to make organizations run like efficient, well-oiled machines, is associated with the development of hierarchy and bureaucratic organizations and remains the basis of much of modern management theory and practice. In this section, we will examine the classical perspective, with its emphasis on efficiency and organiza- tion, as well as other perspectives that emerged to address new concerns, such as employee needs and the role of the environment. Elements of each perspective are still used in organization design, although they have been adapted and revised to meet changing needs. These different perspectives can also be associated with dif- ferent ways in which managers think about and view the organization, called man- ager frame of reference. Complete the questionnaire in the “How Do You Fit the Design?” box on page 24 to understand your frame of reference.

Efficiency Is Everything. Pioneered by Frederick Winslow Taylor, scientific man- agement emphasizes scientifically determined jobs and management practices as the way to improve efficiency and labor productivity. Taylor proposed that workers “could be retooled like machines, their physical and mental gears recalibrated for better productivity.”40 He insisted that management itself would have to change and emphasized that decisions based on rules of thumb and tradition should be replaced with precise procedures developed after careful study of individual situations.41 To use this approach, managers develop precise, standard procedures for doing each job, select workers with appropriate abilities, train workers in the standard proce- dures, carefully plan work, and provide wage incentives to increase output.

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

The ideas of creating a system for maximum efficiency and organizing work for maximum productivity are deeply embedded in our organizations. A recent Harvard Business Review article discussing innovations that shaped modern management put scientific management at the top of its list of twelve influential innovations.42

How to Get Organized. Another subfield of the classical perspective took a broader look at the organization. Whereas scientific management focused primarily on the technical core—on work performed on the shop floor—administrative principles looked at the design and functioning of the organization as a whole. For example, Henri Fayol proposed fourteen principles of management, such as “each subordinate

24 Part 1: Introduction to Organizations

Evolution of Styleyle How Do You Fit the Design?

© W

in g

Ta ng

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

1. My strongest skills are: ___a. Analytical skills ___b. Interpersonal skills ___c. Political skills ___d. Flair for drama

2. The best way to describe me is: ___a. Technical expert ___b. Good listener ___c. Skilled negotiator ___d. Inspirational leader

3. What has helped me the most to be successful is my ability to: ___a. Make good decisions ___b. Coach and develop people ___c. Build strong alliances and a power base ___d. Inspire and excite others

4. What people are most likely to notice about me is my: ___a. Attention to detail ___b. Concern for people ___c. Ability to succeed in the face of conflict and

opposition ___d. Charisma

5. My most important leadership trait is: ___a. Clear, logical thinking ___b. Caring and support for others ___c. Toughness and aggressiveness ___d. Imagination and creativity

6. I am best described as: ___a. An analyst ___b. A humanist ___c. A politician ___d. A visionary

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

Structure = 1a + 2a + 3a + 4a + 5a + 6a = ________ Human Resource = 1b + 2b + 3b + 4b + 5b + 6b = ________ Political = 1c + 2c + 3c + 4c + 5c + 6c = _________ Symbolic = 1d + 2d + 3d + 4d + 5d + 6d = _________

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

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

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

Chapter 1: Organizations and Organization Theory 25

receives orders from only one superior” (unity of command) and “similar activities in an organization should be grouped together under one manager” (unity of direc- tion). These principles formed the foundation for modern management practice and organization design.

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

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

However, the hierarchical system and bureaucratic approaches that developed dur- ing the Industrial Revolution remained the primary approach to organization design and functioning well into the 1970s and early 1980s. In general, this approach worked well for most organizations until the past few decades. However, during the 1980s, it began to lead to problems. Increased competition, especially on a global scale, changed the playing field.43 North American companies had to find a better way.

Can Bureaucracies Be Flexible? The 1980s produced new corporate cultures that valued lean staff, flexibility and learning, rapid response to the customer, engaged employees, and quality products. Organizations began experimenting with teams, flattened hierarchies, and participative management approaches. For example, in 1983, a DuPont plant in Martinsville, Virginia, cut management layers from eight to four and began using teams of production employees to solve problems and take over routine management tasks. The new design led to improved quality, decreased costs, and enhanced innovation, helping the plant be more competitive in a changed environment.44 Rather than relying on strict rules and hierarchy, managers began looking at the entire organizational system, including the external environment.

Over the past twenty-five years organizations have undergone even more pro- found and far-reaching changes. More flexible approaches to organization design have become prevalent. Recent influences on the shifting of organization design include the Internet and other advances in communications and information tech- nology; globalization and the increasing interconnection of organizations; the rising educational level of employees and their growing quality-of-life expectations; and the growth of knowledge- and information-based work as primary organizational activities.45

Don’t Forget the Environment

Many problems occur when all organizations are treated as similar, which was the case with scientific management and administrative principles that attempted to design all organizations alike. The structures and systems that work in the retail division of a conglomerate will not be appropriate for the manufacturing division. The organization charts and financial procedures that are best for an entrepreneur- ial Internet firm like Google will not work for a large food processing plant at Kraft or Nabisco.

Contingency means that one thing depends on other things, and for organiza- tions to be effective, there must be a “goodness of fit” between their structure and the conditions in their external environment.46 What works in one setting may not work in another setting. There is no “one best way.” Contingency theory means it depends. For example, some organizations experience a certain environment, use a routine technology, and desire efficiency. In this situation, a management approach that uses bureaucratic control procedures, a hierarchical structure, and formal communication would be appropriate. Likewise, free-flowing management processes work best in an uncertain environment with a nonroutine technology. The correct management approach is contingent on the organization’s situation.

Today, almost all organizations operate in highly uncertain environments. Thus, we are involved in a significant period of transition, in which concepts of organiza- tion theory and design are changing as dramatically as they did with the dawning of the Industrial Revolution.


Another important insight from organization design researchers is how organiza- tions are configured—that is, what makes up an organization’s parts and how do the various parts fit together?

Mintzberg’s Organizational Types

One framework proposed by Henry Mintzberg suggests that every organiza- tion has five parts.47 These parts, illustrated in Exhibit 1.6, include the technical core, top management, middle management, technical support, and administrative support.

Technical Core. The technical core includes people who do the basic work of the organization. This part actually produces the product and service outputs of the organization. This is where the primary transformation from inputs to outputs takes place. The technical core is the production department in a manufacturing firm, the teachers and classes in a university, and the medical activities in a hospital.

Technical Support. The technical support function helps the organization adapt to the environment. Technical support employees such as engineers, researchers, and information technology professionals scan the environment for problems, opportu- nities, and technological developments. Technical support is responsible for creating innovations in the technical core, helping the organization change and adapt.

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

Be cautious when applying something that works in one situ- ation to another situa- tion. All organizational systems are not the same. Use organiza- tion theory to identify the correct structure, goals, strategy, and management systems for each organization.

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EXHIBIT 1.6 Five Basic Parts of an Organization

Technical Support


Administrative Support


Top Management

Technical Core

Middle Management

Source: Based on Henry Mintzberg, The Structuring of Organizations (Englewood Cliffs, N.J.: Prentice-Hall, 1979), 215–297; and Henry Mintzberg, “Organization Design: Fashion or Fit?” Harvard Business Review 59 (January-February 1981), 103–116.


Administrative Support. The administrative support function is responsible for the smooth operation and upkeep of the organization, including its physical and human ele- ments. This includes human resource activities such as recruiting and hiring, establishing compensation and benefits, and employee training and development, as well as mainte- nance activities such as cleaning of buildings and service and repair of machines.

Management. Management is a distinct function, responsible for directing and coordinating other parts of the organization. Top management provides direction, planning, strategy, goals, and policies for the entire organization or major divisions. Middle management is responsible for implementation and coordination at the departmental level. In traditional organizations, middle managers are responsible for mediating between top management and the technical core, such as implement- ing rules and passing information up and down the hierarchy.

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

In real-life organizations, the five parts are interrelated and often serve more than one function. For example, managers coordinate and direct parts of the orga- nization, but they may also be involved in administrative and technical support.

Mintzberg proposed that the five parts could fit together in five basic types of organization, as illustrated in Exhibit 1.7. The five configurations are entrepreneur- ial structure, machine bureaucracy, professional bureaucracy, diversified form, and adhocracy. The five organizational parts vary in size and importance in each type.

EXHIBIT 1.7 Mintzberg’s Five Organization Types

a. Entrepreneurial Structure b. Machine Bureaucracy

c. Professional Bureaucracy

d. Diversified Form

e. Adhocracy

Source: Mintzberg, Henry, Structuring of Organizations, 1st, © 1979. Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

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This difference is related to the differences in size, goals, and other characteristics of the organization.

1. Entrepreneurial Structure. The organization with an entrepreneurial structure, as shown in Exhibit 1.7(a), is typically a new, small start-up company. It consists mainly of a top manager and workers in the technical core. The organization is managed and coordinated by direct supervision from the top rather than by middle managers or support departments. Top management is the key part of the structure. Few support staff are needed. The primary goal of the organiza- tion is to survive and become established in its industry. There is little formaliza- tion or specialization. This form is suited to a dynamic environment because the simplicity and flexibility enable it to maneuver quickly and compete successfully with larger, less adaptable organizations.

2. Machine Bureaucracy. The machine bureaucracy in Exhibit 1.7(b) is very large, typically mature, and the technical core is often oriented to mass production. It has fully elaborated technical and administrative departments, including engi- neers, market researchers, and financial analysts who scrutinize, routinize, and formalize work in the high-volume production center. The narrow middle man- agement area reflects the tall hierarchy for control. This form reflects extensive formalization and specialization, with a primary goal of efficiency. This form is suited to a simple, stable environment. It would not do well in a dynamic envi- ronment because the bureaucracy is not adaptable.

3. Professional Bureaucracy. The distinguishing feature of the professional bureau- cracy in Exhibit 1.7(c) is the size and power of the technical core, which is made up of highly skilled professionals, such as in hospitals, universities, law firms, and consulting firms. The technical support staff is small or nonexistent, because professionals make up the bulk of the organization. A large administrative sup- port staff is needed to support the professionals and handle the organization’s routine administrative activities. The primary goals are quality and effectiveness, and although there is some specialization and formalization, professionals in the technical core have autonomy. Professional organizations typically provide services rather than tangible goods, and they exist in complex environments.

4. Diversified Form. Organizations with a diversified form are mature firms that are extremely large and are subdivided into product or market groups, as shown in Exhibit 1.7(d). There is a relatively small top management and a small technical support group for the top level. There is a larger administrative support staff to handle paperwork to and from the divisions. In the exhibit, four independent divisions are shown below the headquarters, and the bulge across the middle indicates that middle management is key. Each of the independent divisions illustrates a machine bureaucracy with its own technical and administrative sup- port staff, but on occasion a division may resemble the entrepreneurial structure, professional bureaucracy, or even adhocracy. The diversified form helps to solve the problem of inflexibility experienced by a too-large machine bureaucracy by dividing it into smaller parts.

5. Adhocracy. The adhocracy develops in a complex, rapidly changing environ- ment. The design goal is frequent innovation and meeting continually changing needs, as in the aerospace and defense industries. Exhibit 1.7(e) shows the vari- ous parts (middle management, technical, and administrative support) merged together into an amorphous mass in the middle. The main structure consists of many overlapping teams rather than a vertical hierarchy. Adhocracies are

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

When designing an organization, consider five basic parts— technical core, technical support, administra- tive support, top man- agement, and middle management—and how they work together for maximum organizational effec- tiveness. Design the organization to fit one of Mintzberg’s five organizational types.

usually young or middle-aged and can grow quite large. The organization has professional employees, and the technical and administrative support staff are part of the mix of ongoing innovation teams and projects rather than being placed in separate departments. Employees are engaged in the administration and support of their own teams. The production center, illustrated with dashed lines, is separate from the fluid and innovative core above it. If standardized production is done within the organization, it would occur in this operating core quite separate from the ongoing innovation in the professional center above it. In the professional center, the adhocracy is decentralized.

Contemporary Design Ideas

Each of the forms outlined by Mintzberg can be found among today’s organizations. To some extent, organizations are still imprinted with the hierarchical, bureaucratic, formalized approach that arose in the nineteenth century. Yet the challenges presented by today’s dynamic environment require greater flexibility and adaptability for most organizations. Thus, organizations and managers may be seen as shifting from a mindset based on rigid mechanical systems to one based on flexible natural systems.

For most of the twentieth century, Newtonian science, which suggests that the world functions as a well-ordered machine, continued to guide managers’ thinking about organizations.48 The environment was perceived as orderly and predictable and the role of managers was to maintain stability. This mindset worked quite well for the Industrial Age.49 Growth was a primary criterion for organizational success.

Organizations became large and complex, and boundaries between functional departments and between organizations were distinct. Internal structures grew more complex, vertical, and bureaucratic. Leadership was based on solid management prin- ciples and tended to be autocratic; communication was primarily through formal memos, letters, and reports. Managers did all the planning and “thought work,” while employees did the manual labor in exchange for wages and other compensation.

The environment for today’s companies, however, is anything but stable. With the turbulence of recent years, managers can no longer maintain an illusion of order and predictability. The science of chaos theory suggests that relationships in complex, adaptive systems—including organizations—are nonlinear and made up of numerous interconnections and divergent choices that create unintended effects and render the whole unpredictable.50 The world is full of uncertainty, characterized by surprise, rapid change, and confusion. Managers can’t measure, predict, or control in tradi- tional ways the unfolding drama inside or outside the organization. However, chaos theory also recognizes that this randomness and disorder occurs within certain larger patterns of order. The ideas of chaos theory suggest that organizations should be viewed more as natural systems than as well-oiled, predictable machines.


The new mindset has spurred many organizations to shift from strict vertical hier- archies to flexible, decentralized structures that emphasize horizontal collaboration, widespread information sharing, and adaptability. This shift can clearly be seen in the U.S. Army, once considered the ultimate example of a rigid, top-down organization.

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Today’s army is fighting a new kind of war that demands a new approach to how it trains, equips, and uses soldiers. Fighting a fluid, fast-moving, and fast-changing terrorist network means that junior officers in the field who are experts on the local situation have to make quick decisions, learning through trial and error and some- times departing from standard Army procedures.51

Although the stakes might not be as high, business and nonprofit organizations today also need greater fluidity and adaptability. Many managers are redesign- ing their companies toward something called the learning organization. The learn- ing organization promotes communication and collaboration so that everyone is engaged in identifying and solving problems, enabling the organization to continu- ously experiment, improve, and increase its capability.

Exhibit 1.8 compares organizations designed for efficient performance with those designed for continuous learning by looking at five elements of organization design: structure, tasks, systems, culture, and strategy. As shown in the exhibit, all of these elements are interconnected and influence one another.

From Vertical to Horizontal Structure

Traditionally, the most common organizational structure has been one in which activities are grouped together by common work from the bottom to the top of the organization. Generally little collaboration occurs across functional departments, and the whole organization is coordinated and controlled through the vertical hier- archy, with decision-making authority residing with upper-level managers. This structure can be quite effective. It promotes efficient production and in-depth skill development, and the hierarchy of authority provides a sensible mechanism for supervision and control in large organizations. However, in a rapidly changing envi- ronment, the hierarchy becomes overloaded. Top executives are not able to respond rapidly enough to problems or opportunities.

In the learning organization, the vertical structure that creates distance between managers at the top of the organization and workers in the technical core is dis- banded. Structure is created around horizontal workflows or processes rather than departmental functions. The vertical hierarchy is dramatically flattened, with per- haps only a few senior executives in traditional support functions such as finance or human resources. Self-directed teams are the fundamental work unit in the learn- ing organization. Boundaries between functions are practically eliminated because teams include members from several functional areas.

From Routine Tasks to Empowered Roles

A task is a narrowly defined piece of work assigned to a person. In traditional orga- nizations, tasks are broken down into specialized, separate parts, as in a machine. Knowledge and control of tasks are centralized at the top of the organization, and employees are expected to do as they are told. A role, in contrast, is a part in a dynamic social system. A role has discretion and responsibility, allowing the person to use his or her discretion and ability to achieve an outcome or meet a goal. In learning organizations, employees play a role in the team or department and roles may be continually redefined or adjusted. There are few rules or procedures, and knowledge and control of tasks are located with workers rather than with supervi- sors or top executives. Employees are encouraged to take care of problems by work- ing with one another and with customers.

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

When designing an organization for learning and adapta- tion in a turbulent environment, include elements such as horizontal structure, shared information, empowered roles, col- laborative strategy, and adaptive culture. In stable environ- ments, organizations can achieve efficient performance with a vertical structure, formal information and control systems, routine tasks, com- petitive strategy, and a stable culture.

EXHIBIT 1.8 Two Organization Design Approaches

Vertical Structure

Rigid Culture

Formal Systems

Competitive Strategy

Routine Tasks

Shared Information

Collaborative Strategy

Empowered Roles

Adaptive Culture

Horizontal Structure

Mechanical System Design

Stable Environment Efficient Performance

Natural System Design

Turbulent Environment Learning Organization

Organizational Change in the Service of


Source: Adapted from David K. Hurst, Crisis and Renewal: Meeting the Challenge of Organizational Change (Boston, Mass.: Harvard Business School Press, 1995).

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From Formal Control Systems to Shared Information

In young, small organizations (Mintzberg’s entrepreneurial structure), communi- cation is generally informal and face-to-face. There are few formal control and information systems because the top leaders of the company usually work directly with employees in the day-to-day operation of the business. However, when orga- nizations grow large and complex, the distance between top leaders and workers in the technical core increases. Formal systems are often implemented to manage the growing amount of complex information and to detect deviations from established standards and goals.52

In learning organizations, information serves a very different purpose. The wide- spread sharing of information keeps the organization functioning at an optimum level. The learning organization strives to return to the condition of a small, entrepre- neurial firm in which all employees have complete information about the company so they can act quickly. Ideas and information are shared throughout the organization. In addition, learning organizations maintain open lines of communication with cus- tomers, suppliers, and even competitors to enhance learning capability.

From Competitive to Collaborative Strategy

In traditional organizations designed for efficient performance, strategy is formu- lated by top managers and imposed on the organization. Top executives think about how the organization can best respond to competition, efficiently use resources, and cope with environmental changes. In the learning organization, in contrast, the accumulated actions of an informed and empowered workforce contribute to strat- egy development. Since all employees are in touch with customers, suppliers, and new technology, they help identify needs and solutions and participate in strategy making. In addition, strategy emerges from partnerships with suppliers, customers, and other firms. Consider IBM, where top managers used to do all the strategic planning. Now the company invites customers as well as people from nonprofit, business, government, and academic organizations to help, then makes the results public through conferences and reports.53 Learning companies are willing to share their best ideas. Organizations become collaborators as well as competitors, experi- menting to find the best way to learn and adapt. Boundaries between organizations become diffuse, with companies often forming partnerships to compete globally, sometimes joining in modular or virtual network organizations that are connected electronically.

From Rigid to Adaptive Culture

A danger for many organizations is that the corporate culture becomes fixed, as if set in concrete. Organizations that were highly successful in stable environments often become victims of their own success when the environment begins to change dramatically, as we saw illustrated in the opening case of Xerox Corporation. The cultural values, ideas, and practices that helped attain success can be detrimental to effective performance in a rapidly changing environment.

In a learning organization, the culture encourages openness, equality, continu- ous improvement, and change. People in the organization are aware of the whole system, how everything fits together, and how the various parts of the organization interact with one another and with the environment. This whole-system mindset

minimizes boundaries within the organization and with other companies. In addi- tion, activities and symbols that create status differences, such as executive dining rooms or reserved parking spaces, are discarded. Each person is a valued contribu- tor and the organization becomes a place for creating a web of relationships that allows people to develop and apply their full potential. Consider QuikTrip, a chain of convenience stores, where most of the top managers started out at the store level, and everyone is considered a vital part of the chain’s success. “The purpose of QuikTrip,” says CEO Chester Cadieux II, “is to give our employees the opportunity to grow and succeed.”54 The emphasis on treating everyone with care and respect creates a climate in which people feel safe to experiment, take risks, and make mis- takes, all of which encourage learning.

No company represents a perfect example of a learning organization, although many of today’s most competitive organizations have shifted toward ideas and forms based on the concept of a living, dynamic system. As illustrated in Exhibit 1.8, today’s managers are involved in a struggle as they attempt to change their compa- nies into learning organizations. The challenge for managers is to maintain some level of stability as they actively promote change toward a new way of thinking, to navigate between order and chaos.

One organization that reflects many of the qualities of a learning organization is Mexico’s Cementos Mexicanos (Cemex).

Cementos Mexicanos (Cemex), based in Monterrey, Mexico, has been making and delivering concrete for nearly a century. But the organization is on the cutting edge of

organization design, a model of what it takes to succeed in the complex environment of the twenty-first century.

Cemex specializes in delivering concrete in developing areas of the world, places where anything can, and usually does, go wrong. Even in Monterrey, Cemex copes with unpredict- able weather and traffic conditions, spontaneous labor disruptions, building permit snafus, and arbitrary government inspections of construction sites. In addition, more than half of all orders are changed or canceled by customers, usually at the last minute. Considering that a load of concrete is never more than ninety minutes from spoiling, those chaotic condi- tions mean high costs, complex scheduling, and frustration for employees, managers, and customers.

To help the organization compete in this environment, managers looked for both techno- logical and organizational innovations. Leaders call their new approach “living with chaos.” Rather than trying to change the customers, Cemex resolved to do business on the customers’ own terms and design a system in which last-minute changes and unexpected problems are routine.

A core element of this approach is a sophisticated information technology system, including a global positioning satellite system and onboard computers in all delivery trucks, which is fed with streams of day-to-day data on customer orders, production schedules, traf- fic problems, weather conditions, and so forth. Now Cemex trucks head out every morning to cruise the streets. When a customer order comes in, an employee checks the customer’s credit status, locates a nearby truck, and relays directions for delivery. If the order is can- celed, computers automatically direct the plant to scale back production.

Cemex also made managerial and organizational changes to support the new approach. The company enrolled all its drivers, who had an average of six years of formal schooling, in

Cementos Mexicanos


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weekly secondary-education classes and began training them in delivering not just cement but quality service. In addition, many strict and demanding work rules were abolished so that workers had more discretion and responsibility for identifying and rapidly responding to problems and customer needs. As a result, each Cemex truck now operates as a self- organizing business unit, run by well-trained employees who think like businesspeople. According to Francisco Perez, operations manager at Cemex in Guadalajara, “They used to think of themselves as drivers. But anyone can deliver concrete. Now our people know that they’re delivering a service that the competition cannot deliver.”55 ■

Like most organizations in the construction industry, Cemex has been devas- tated by the recent housing collapse and credit crisis. Yet the company is poised for adaptation to the changing environment due to the combination of extensive networking technology and a new management approach that taps into the mind- power of everyone in the company. People at Cemex are constantly learning—on the job, in training classes, and through visits to other organizations. As a result, the company has a startling capacity to anticipate customer needs, solve problems, and innovate quickly. In addition, Cemex freely shares what it knows with other organizations, even competitors, believing the widespread sharing of knowledge and information is the best way to keep the organization thriving in a world of complexity and rapid change.


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

Levels of Analysis

Each organization is a system that is composed of subsystems. Organization systems are nested within systems, and one level of analysis has to be chosen as the primary focus. Four levels of analysis normally characterize organizations, as illustrated in Exhibit 1.9. The individual human being is the basic building block of organiza- tions. The human being is to the organization what a cell is to a biological system. The next higher system level is the group or department. These are collections of individuals who work together to perform group tasks. The next level of analysis is the organization itself. An organization is a collection of groups or departments that combine into the total organization.

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

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

Briefcase As an organization manager, keep this guideline in mind:

Make yourself a competent, influential manager by using the frameworks that organization theory provides to interpret and understand the organization around you.

the nature of and relationships among groups and departments that make up the organization, and the collection of organizations that make up the environment.

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

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

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

A new approach to organization studies is called meso theory. Most organiza- tional research and many management courses specialize in either organizational behavior or organization theory. Meso theory (meso means “in between”) concerns the integration of both micro and macro levels of analysis. Individuals and groups affect the organization, and the organization in return influences individuals and groups. To thrive in organizations, managers and employees need to understand multiple levels simultaneously. For example, research may show that employee diversity enhances innovation. To facilitate innovation, managers need to under- stand how structure and context (organization theory) are related to interactions among diverse employees (organizational behavior) to foster innovation, because both macro and micro variables account for innovations.56

For its part, organization theory is directly relevant to top- and middle- management concerns and partly relevant to lower management. Top managers are responsible for the entire organization and must set goals, develop strategy, interpret the external environment, and decide organization structure and design.

EXHIBIT 1.9 Levels of Analysis in Organizations

External environment (interorganizational set, community)

Organization level of analysis

Group level of analysis

Individual level of analysis

Organization A

Department A Department B Department C

Organization B

Organization C

Organization D

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

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Middle management is concerned with major departments, such as marketing or research, and must decide how the department relates to the rest of the organiza- tion. Middle managers must design their departments to fit work-unit technology and deal with issues of power and politics, intergroup conflict, and information and control systems, each of which is part of organization theory. Organization theory is only partly concerned with lower management because this level of supervision is concerned with employees who operate machines, input data, teach classes, and sell goods. Organization theory is concerned with the big picture of the organization and its major departments.

Plan of the Book

The topics within the field of organization theory are interrelated. Chapters are presented so that major ideas unfold in logical sequence. The framework that guides the organization of the book is shown in Exhibit 1.10. Part 1 introduces the basic idea of organizations as social systems and the nature of organization theory. This discussion provides the groundwork for Part 2, which is about strategic manage- ment, goals and effectiveness, and the fundamentals of organization structure. Organizations are open systems that exist for a purpose. This section examines how managers help the organization achieve its purpose, including the design of an appropriate structure, such as a functional, divisional, matrix, or horizontal structure. Part 3 looks at the various open system elements that influence organiza- tion structure and design, including the external environment, interorganizational relationships, and the global environment.

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

Plan of Each Chapter

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

CHAPTER 1 Organizations and Organization Theory



Strategy, Organization Design, and Effectiveness

Fundamentals of Organization Structure




The External Environment

Interorganizational Relationships

Designing Organizations for the International Environment

CHAPTER 7 Manufacturing and Service Technologies



Using IT for Coordination and Control

Organizational Size, Life Cycle, and Decline





Organizational Culture and Ethical Values

Innovation and Change

Decision-Making Processes

Conflict, Power, and Politics

Part 1 Introduction to Organizations

Part 2 Organizational Purpose and Structural Design

Part 3 Open System Design Elements Part 4 Internal Design Elements

Part 5 Managing Dynamic Processes

EXHIBIT 1.10 Framework for the Book

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Chapter 1: Organizations and Organization Theory 39


■ Turbulence and complexity have replaced stability and predictability as defining traits for today’s organizations. Some of the specific challenges managers and orga- nizations face include globalization, intense competition, rigorous ethical scrutiny, the need for rapid response, the digital workplace, and increasing diversity.

■ Organizations are highly important, and managers are responsible for shaping organizations to perform well and meet the needs of society. The structural dimensions of formalization, specialization, hierarchy of authority, centraliza- tion, professionalism, and personnel ratios, and the contextual dimensions of size, organizational technology, environment, goals and strategy, and culture provide labels for measuring and analyzing organizations. These dimensions vary widely from organization to organization. Subsequent chapters provide frameworks for analyzing organizations with these concepts.

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

■ Organization design perspectives have varied over time. Managers can under- stand organizations better by gaining a historical perspective and by understand- ing basic organizational configurations. Five parts of the organization are the technical core, top management, middle management, technical support, and administrative support. Different configurations of these parts result in five basic organization types: entrepreneurial structure, machine bureaucracy, pro- fessional bureaucracy, diversified form, and adhocracy.

■ Challenges in today’s environment are leading to changes in organization design and management practices. The trend is away from highly structured systems based on a mechanical model toward looser, more flexible systems based on a natural, biological model. Many managers are redesigning companies toward the learning organization, which is characterized by a horizontal structure, empowered employees, shared information, collaborative strategy, and an adaptive culture.

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

adhocracy administrative principles bureaucratic organizations chaos theory contextual dimensions contingency diversified form effectiveness efficiency

entrepreneurial structure Hawthorne Studies learning organization level of analysis machine bureaucracy meso theory organization theory organizational behavior organizations

professional bureaucracy role scientific management stakeholder stakeholder approach structural dimensions task

Key ConceptsKey


Many written rules 1 2 3 4 5 6 7 8 9 10 Few rules


Separate tasks and roles 1 2 3 4 5 6 7 8 9 10 Overlapping tasks


Tall hierarchy of authority 1 2 3 4 5 6 7 8 9 10 Flat hierarchy of authority


Product 1 2 3 4 5 6 7 8 9 10 Service

External Environment

Stable 1 2 3 4 5 6 7 8 9 10 Unstable


Clear norms and values 1 2 3 4 5 6 7 8 9 10 Ambiguous norms and values


High professional training 1 2 3 4 5 6 7 8 9 10 Low professional training

1. What is the definition of organization? Briefly explain each part of the definition.

2. Explain how Mintzberg’s five basic parts of the orga- nization (Exhibit 1.6) fit together to perform needed functions. If an organization had to give up one of these five parts, such as during a severe downsizing, which one could it survive the longest without? Discuss.

3. A handful of companies on the Fortune 500 list are more than 100 years old, which is rare. What organizational char- acteristics do you think might explain 100-year longevity?

4. Based on what you know about the following organi- zations, how would you categorize them according to Mintzberg’s Five Organizational Types (Exhibit 1.7): General Electric? Facebook? Toyota Motor Corporation? Your college or university? A local consulting firm?

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

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

7. What are the primary differences between an organiza- tion designed for efficient performance and one designed for learning and change? Which type of organization do you think would be easier to manage? Discuss.

8. Why is shared information so important in a learning organization as compared to an efficient-performance organization? Discuss how an organization’s approach to information sharing might be related to other ele- ments of organization design, such as structure, tasks, strategy, and culture.

9. What are some differences one might expect among stakeholder expectations for a nonprofit organization versus a for-profit business? Do you think nonprofit managers have to pay more attention to stakeholders than do business managers? Discuss.

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

Discussion QuestionsDisc

Chapter 1 Workbook: Measuring Dimensions of Organizations*

Analyze two organizations along the following dimensions. Indicate where you think each organization would fall on each of the scales. Use an X to indicate the first organiza- tion and an * to show the second.

You may choose any two organizations you are familiar with, such as your place of work, the university, a student organization, your church or synagogue, or your family.


40 Part 1: Introduction to Organizations


Well-defined goals 1 2 3 4 5 6 7 8 9 10 Goals not defined


Small 1 2 3 4 5 6 7 8 9 10 Large

Organizational Mindset

Mechanical system 1 2 3 4 5 6 7 8 9 10 Biological system

Chapter 1: Organizations and Organization Theory 41

Case for Analysis: Perdue Farms Inc.: Responding to 21st Century Challenges*

Background and Company History “I have a theory that you can tell the difference between those who have inherited a fortune and those who have made a fortune. Those who have made their own fortune forget not where they came from and are less likely to lose touch with the common man.” (Bill Sterling, Just Browsin’ column in Eastern Shore News, March 2, 1988)

The history of Perdue Farms is dominated by seven themes: quality, growth, geographic expansion, vertical integra- tion, innovation, branding, and service. Arthur W. Perdue, a Railway Express agent and descendent of a French Huguenot family named Perdeaux, founded the company in 1920 when he left his job with Railway Express and entered the egg business full-time near the small town of Salisbury, Maryland. Salisbury is located in a region immortalized in James Michener’s Chesapeake that is alter- nately known as “the Eastern Shore” or “the DelMarVa Peninsula.” It includes parts of Delaware, Maryland and Virginia. Arthur Perdue’s only child, Franklin Parsons Perdue, was born in 1920.

A quick look at Perdue Farms’ mission statement (Exhibit 1.11) reveals the emphasis the company has always put on quality. In the 1920s, “Mr. Arthur,” as he was called, bought leghorn breeding stock from Texas to improve the quality of his flock. He soon expanded his egg market and began shipments to New York. Practicing small economies such as mixing his own chicken feed and using leather from his old shoes to make hinges for his chicken coops, he stayed out of debt and prospered. He tried to add a new chicken coop every year.

By 1940, Perdue Farms was already known for quality products and fair dealing in a tough, highly competitive market. The company began offering chickens for sale when Mr. Arthur realized that the future lay in selling chickens,

not eggs. In 1944, Mr. Arthur made his son Frank a full partner in A.W. Perdue & Son Inc.

In 1950, Frank took over leadership of the company, which employed forty people. By 1952, revenues were $6 million from the sale of 2,600,000 broilers. During this period, the company began to vertically integrate, operating its own hatchery, starting to mix its own feed formulations, and operating its own feed mill. Also, in the 1950s, Perdue Farms began to contract with others to grow chickens for them. By furnishing the growers with peeps (baby chickens) and feed, the company was better able to control quality.

In the 1960s, Perdue Farms continued to vertically integrate by building its first grain receiving and storage facilities and Maryland’s first soybean processing plant. By 1967, annual sales had increased to about $35 million. But, it became clear to Frank that profits lay in processing chickens. Frank recalled in an interview for BusinessWeek (September 15, 1972) “processors were paying us 10¢ a live pound for what cost us 14¢ to produce. Suddenly, processors were making as much as 7¢ a pound.”

A cautious, conservative planner, Arthur Perdue had not been eager for expansion, and Frank Perdue was reluctant to enter poultry processing. But, economics forced his hand and, in 1968, the company bought its first processing plant, a Swift & Company operation in Salisbury.

From the first batch of chickens that it processed, Perdue’s standards were higher than those of the federal government. The state grader on the first batch has often told the story of how he was worried that he had rejected too many chickens as not Grade A. As he finished his inspections for that first day, he saw Frank Perdue headed his way and he could tell that Frank was not happy. Frank started inspecting the birds and never argued over one that was rejected. Next, he saw Frank start to go through the

Questions 1. What are the main differences between the two organiza-

tions you evaluated?

2. Would you recommend that one or both of the orga- nizations have different ratings on any of the scales? Why?

*Copyright 1996 by Dorothy Marcic. All rights reserved.

Stand on Tradition Perdue was built upon a foundation of quality,

a tradition described in our Quality Policy . . .

Our Quality Policy “We shall produce products and provide services at all times which meet or

exceed the expectations of our customers.”

“We shall not be content to be of equal quality to our competitors.”

“Our commitment is to be increasingly superior.”

“Contribution to quality is a responsibility shared by everyone in the Perdue organization.”

Focus on Today Our mission reminds us of the purpose we serve . . .

Our Mission “Enhance the quality of life with great food and agricultural products.”

While striving to fulfill our mission, we use our values to guide our decisions . . .

Our Values • Quality: We value the needs of our customers. Our high standards require us

to work safely, make safe food and uphold the Perdue name. • Integrity: We do the right thing and live up to our commitments. We do not cut

corners or make false promises. • Trust: We trust each other and treat each other with mutual respect. Each

individual’s skill and talent are appreciated. • Teamwork: We value a strong work ethic and ability to make each other

successful. We care what others think and encourage their involvement, creating a sense of pride, loyalty, ownership and family.

Look to the Future Our vision describes what we will become and the qualities

that will enable us to succeed . . .

Our Vision “To be the leading quality food company with $20 billion in sales in 2020.”

Perdue in the Year 2020 • To our customers: We will provide food solutions and indispensable services

to meet anticipated customer needs. • To our consumers: A portfolio of trusted food and agricultural products will be

supported by multiple brands throughout the world. • To our associates: Worldwide, our people and our workplace will reflect our

quality reputation, placing Perdue among the best places to work. • To our communities: We will be known in the community as a strong corporate

citizen, trusted business partner and favorite employer. • To our shareholders: Driven by innovation, our market leadership and our

creative spirit will yield industry-leading profits.

EXHIBIT 1.11 Perdue Mission 2000

42 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 43

ones that the state grader had passed and began to toss some of them over with the rejected birds. Finally, realizing that few met his standards, Frank put all of the birds in the reject pile. Soon, however, the facility was able to process 14,000 Grade A broilers per hour.

From the beginning, Frank Perdue refused to permit his broilers to be frozen for shipping, arguing that it resulted in unappetizing black bones and loss of flavor and moistness when cooked. Instead, Perdue chickens were (and some still are) shipped to market packed in ice, justifying the company’s advertisements at that time that it sold only “fresh, young broilers.” However, this policy also limited the company’s market to those locations that could be serviced overnight from the Eastern Shore of Maryland. Thus, Perdue chose for its primary markets the densely populated towns and cities of the East Coast, particularly New York City, which consumes more Perdue chicken than all other brands combined.

Frank Perdue’s drive for quality became legendary both inside and outside the poultry industry. In 1985, Frank and Perdue Farms were featured in the book, A Passion for Excellence, by Tom Peters and Nancy Austin.

In 1970, Perdue established its primary breeding and genetic research programs. Through selective breeding, Perdue developed a chicken with more white breast meat than the typical chicken. Selective breeding has been so successful that Perdue Farms chickens are desired by other processors. Rumors have even suggested that Perdue chickens have been stolen on occasion in an attempt to improve competitor flocks.

In 1971, Perdue Farms began an extensive marketing campaign featuring Frank Perdue. In his early advertisements, he became famous for saying things like “If you want to eat as good as my chickens, you’ll just have to eat my chickens.” He is often credited with being the first to brand what had been a commodity product. During the 1970s, Perdue Farms also expanded geographically to areas north of New York City such as Massachusetts, Rhode Island, and Connecticut.

In 1977, “Mr. Arthur” died at the age of 91, leaving behind a company with annual sales of nearly $200 million, an average annual growth rate of 17 percent compared to an industry average of 1 percent a year, the potential for process- ing 78 thousand broilers per hour, and annual production of nearly 350 million pounds of poultry per year. Frank Perdue said of his father simply “I learned everything from him.”

In 1981, Frank Perdue was in Boston for his induc- tion into the Babson College Academy of Distinguished Entrepreneurs, an award established in 1978 to recognize the spirit of free enterprise and business leadership. Babson College President Ralph Z. Sorenson inducted Perdue into the academy, which, at that time, numbered eighteen men and women from four continents. Perdue had the follow- ing to say to the college students:

“There are none, nor will there ever be, easy steps for the entrepreneur. Nothing, absolutely nothing, replaces the willingness to work earnestly, intelligently towards a goal. You have to be willing to pay the price. You have to

have an insatiable appetite for detail, have to be willing to accept constructive criticism, to ask questions, to be fis- cally responsible, to surround yourself with good people and, most of all, to listen.” (Frank Perdue, speech at Babson College, April 28, 1981)

The early 1980s saw Perdue Farms expand south- ward into Virginia, North Carolina, and Georgia. It also began to buy out other producers such as Carroll’s Foods, Purvis Farms, Shenandoah Valley Poultry Company, and Shenandoah Farms. The latter two acquisitions diversified the company’s markets to include turkey. New products included value-added items such as “Perdue Done It!,” a line of fully cooked fresh chicken products.

James A. (Jim) Perdue, Frank’s only son, joined the company as a management trainee in 1983 and became a plant manager. The late 1980s tested the mettle of the firm. Following a period of considerable expansion and product diversification, a consulting firm recommended that the com- pany form several strategic business units, responsible for their own operations. In other words, the firm should decentralize. Soon after, the chicken market leveled off and then declined for a period. In 1988, the firm experienced its first year in the red. Unfortunately, the decentralization had created dupli- cation and enormous administrative costs. The firm’s rapid plunge into turkeys and other food processing, where it had little experience, contributed to the losses. Characteristically, the company refocused, concentrating on efficiency of opera- tions, improving communications throughout the company, and paying close attention to detail.

On June 2, 1989, Frank celebrated fifty years with Perdue Farms. At a morning reception in downtown Salisbury, the governor of Maryland proclaimed it “Frank Perdue Day.” The governors of Delaware and Virginia did the same. In 1991, Frank was named chairman of the Executive Committee and Jim Perdue became chairman of the board. Quieter, gentler, and more formally educated, Jim Perdue focused on operations, infusing the company with an even stronger devotion to quality control and a bigger com- mitment to strategic planning. Frank Perdue continued to do advertising and public relations. As Jim Perdue matured as the company leader, he took over the role of company spokesperson and began to appear in advertisements.

Under Jim Perdue’s leadership, the 1990s were domi- nated by market expansion south into Florida and west to Michigan and Missouri. In 1992, the international busi- ness segment was formalized, serving customers in Puerto Rico, South America, Europe, Japan, and China. By fiscal year 1998, international sales were $180 million per year. International markets are beneficial for the firm because U.S. customers prefer white meat, whereas customers in most other countries prefer dark meat.

Food-service sales to commercial customers has also become a major market. New retail product lines focus on value-added items, individually quick-frozen items, home- meal replacement items, and products for the delicatessen.

The “Fit & Easy” label continues as part of a nutrition cam- paign, using skinless, boneless chicken and turkey products.

The 1990s also saw the increased use of technology and the building of distribution centers to better serve the customer. For example, all over-the-road trucks were equipped with sat- ellite two-way communications and geographic positioning, allowing real-time tracking, rerouting if needed, and accurately informing customers when to expect product arrival.

Currently, nearly 20,000 associates have increased revenues to more than $2.5 billion.

Management and Organization “From 1950 until 1991, Frank Perdue was the primary force behind Perdue Farms growth and success. During Frank’s years as the company leader, the industry entered its high growth period. Industry executives had typically developed professionally during the industry’s infancy. Many had little formal education and started their careers in the barnyard, building chicken coops and cleaning them out. They often spent their entire careers with one company, progressing from supervisor of grow-out facilities to management of processing plants to corporate executive positions. Perdue Farms was not unusual in that respect. An entrepreneur through and through, Frank lived up to his marketing image of “it takes a tough man to make a tender chicken.” He mostly used a centralized management style that kept decision-making authority in his own hands or those of a few trusted, senior executives whom he had known for a lifetime. Workers were expected to do their jobs.

In later years, Frank increasingly emphasized employee (or “associates” as they are currently called) involvement in quality issues and operational decisions. This emphasis on employee participation undoubtedly eased the transfer of power in 1991 to his son, Jim, which appears to have been unusually smooth. Although Jim grew up in the family busi- ness, he spent almost fifteen years earning an undergraduate degree in biology from Wake Forest University, a master’s degree in marine biology from the University of Massachusetts at Dartmouth, and a doctorate in fisheries from the University of Washington in Seattle. Returning to Perdue Farms in 1983, he earned an EMBA from Salisbury State University and was assigned positions as plant manager, divisional quality control manager, and vice president of Quality Improvement Process (QIP) prior to becoming chairman.

Jim has a people-first management style. Company goals center on the three Ps: People, Products, and Profitability. He believes that business success rests on satisfying customer needs with quality products. It is important to put associates first, he says, because “If [associates] come first, they will strive to assure superior product quality—and satisfied customers.” This view has had a profound impact on the company culture, which is based on Tom Peters’s view that “Nobody knows a person’s 20 square feet better than the person who works there.” The idea is to gather ideas and information from everyone in the

organization and maximize productivity by transmitting these ideas throughout the organization.

Key to accomplishing this “employees first” policy is workforce stability, a difficult task in an industry that employs a growing number of associates working in physi- cally demanding and sometimes stressful conditions. A significant number of associates are Hispanic immigrants who may have a poor command of the English language, are sometimes undereducated, and often lack basic health care. In order to increase these associates’ opportunity for advancement, Perdue Farms focuses on helping them over- come these disadvantages.

For example, the firm provides English-language classes to help non-English-speaking associates assimilate. Ultimately associates can earn the equivalent of a high- school diploma. To deal with physical stress, the company has an ergonomics committee in each plant that studies job requirements and seeks ways to redesign those jobs that put workers at the greatest risk. The company also has an impressive wellness program that currently includes clinics at ten plants. The clinics are staffed by professional medical people working for medical practice groups under contract to Perdue Farms. Associates have universal access to all Perdue-operated clinics and can visit a doctor for anything from a muscle strain to prenatal care to screening tests for a variety of diseases. Dependent care is available. While benefits to the employees are obvious, the company also benefits through a reduction in lost time for medical office visits, lower turnover, and a happier, healthier, more productive and stable work force.

Marketing In the early days, chicken was sold to butcher shops and neighborhood groceries as a commodity; that is, produc- ers sold it in bulk and butchers cut and wrapped it. The customer had no idea which firm grew or processed the chicken. Frank Perdue was convinced that higher profits could be made if the firm’s products could be sold at a pre- mium price. But, the only reason a product can command a premium price is if customers ask for it by name—and that means the product must be differentiated and “branded.” Hence, the emphasis over the years on superior quality, broader-breasted chickens, and a healthy golden color (actually the result of adding marigold petals in the feed to enhance the natural yellow color that corn provided).

Today, branded chicken is ubiquitous. The new task for Perdue Farms is to create a unified theme to market a wide variety of products (e.g., both fresh meat and fully prepared and frozen products) to a wide variety of custom- ers (e.g., retail, food service, and international). Industry experts believe that the market for fresh poultry has peaked while sales of value-added and frozen products continue to grow at a healthy rate. Although domestic retail sales accounted for about 60 percent of Perdue Farms’ revenues

44 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 45

in the 2000 fiscal year, food service sales now account for 20 percent, international sales account for 5 percent, and grain and oilseed contribute the remaining 15 percent. The company expects food service, international, and grain and oilseed sales to continue to grow as a percentage of total revenues.

Domestic Retail Today’s retail grocery customer is increasingly looking for ease and speed of preparation; that is, value-added prod- ucts. The move toward value-added products has signifi- cantly changed the meat department in the modern grocery store. There are now five distinct meat outlets for poultry:

1. The fresh meat counter—traditional, fresh meat— includes whole chicken and parts

2. The delicatessen—processed turkey, rotisserie chicken 3. The frozen counter—individually quick-frozen items such

as frozen whole chickens, turkeys, and Cornish hens 4. Home meal replacement—fully prepared entrees such as

Perdue brand “Short Cuts” and Deluca brand entrees (the Deluca brand was acquired and is sold under its own name) that are sold along with salads and desserts so that you can assemble your own dinner

5. Shelf stable—canned products

Because Perdue Farms has always used the phrase “fresh young chicken” as the centerpiece of its marketing, value- added products and the retail frozen counter create a possible conflict with past marketing themes. Are these products com- patible with the company’s marketing image, and, if so, how does the company express the notion of quality in this broader product environment? To answer that question, Perdue Farms has been studying what the term “fresh young chicken” means to customers who consistently demand quicker and easier preparation and who admit that they freeze most of their fresh meat purchases once they get home. One view is that the importance of the term “fresh young chicken” comes from the customer’s perception that “quality” and “fresh- ness” are closely associated. Thus, the real issue may be trust; that is, the customer must believe that the product, whether fresh or frozen, is the freshest, highest quality possible, and future marketing themes must develop that concept.

Operations Two words sum up the Perdue approach to operations— quality and efficiency—with emphasis on the first over the latter. Perdue, more than most companies, represents the Total Quality Management (TQM) slogan, “Quality, a journey without end.” Some of the key events in Perdue’s quality improvement process are listed in Exhibit 1.12.

1924 — Arthur Perdue bought leghorn roosters for $25 1950 — Adopted the company logo of a chick under a magnifying glass 1984 — Frank Perdue attended Philip Crosby’s Quality College 1985 — Perdue recognized for its pursuit of quality in A Passion for Excellence — 200 Perdue managers attended Quality College — Adopted the Quality Improvement Process (QIP) 1986 — Established Corrective Action Teams (CAT’s) 1987 — Established Quality Training for all associates — Implemented Error Cause Removal Process (ECR) 1988 — Steering Committee formed 1989 — First Annual Quality Conference held — Implemented Team Management 1990 — Second Annual Quality Conference held — Codified Values and Corporate Mission 1991 — Third Annual Quality Conference held — Customer Satisfaction defined 1992 — Fourth Annual Quality Conference held — How to implement Customer Satisfaction explained to team leaders and

Quality Improvement Teams (QIT) — Created Quality Index — Created Customer Satisfaction Index (CSI) — Created “Farm to Fork” quality program 1999 — Launched Raw Material Quality Index 2000 — Initiated High Performance Team Process

EXHIBIT 1.12 Milestones in the Quality Improvement Process at Perdue Farms

Both quality and efficiency are improved through the management of details. Exhibit 1.13 depicts the structure and product flow of a generic, vertically integrated broiler company. A broiler company can choose which steps in the process it wants to accomplish in-house and which it wants suppliers to provide. For example, the broiler com- pany could purchase all grain, oilseed, meal, and other feed products. Or it could contract with hatcheries to supply primary breeders and hatchery supply flocks.

Perdue Farms chose maximum vertical integration to control every detail. It breeds and hatches its own eggs (19 hatcheries), selects its contract growers, builds Perdue- engineered chicken houses, formulates and manufactures its own feed (12 poultry feedmills, 1 specialty feedmill, 2 ingredient-blending operations), oversees the care and feeding of the chicks, operates its own processing plants (21 processing and further processing plants), distributes via its own trucking fleet, and markets the products (see Exhibit 1.13). Total process control formed the basis for Frank Perdue’s early claims that Perdue Farms poultry is, indeed, higher quality than other poultry. When he stated in his early ads that “A chicken is what it eats . . . I store my own grain and mix my own feed . . . and give my Perdue chickens nothing but well water to drink . . . ,” he knew that his claim was honest and he could back it up.

Total process control also enables Perdue Farms to ensure that nothing goes to waste. Eight measurable items—hatchability, turnover, feed conversion, livability, yield, birds per man-hour, utilization, and grade—are tracked routinely.

Perdue Farms continues to ensure that nothing artificial is fed to or injected into the birds. No shortcuts are taken. A chemical-free and steroid-free diet is fed to the chickens. Young chickens are vaccinated against disease. Selective breeding is used to improve the quality of the chicken stock. Chickens are bred to yield more white breast meat because that is what the consumer wants.

To ensure that Perdue Farms poultry continues to lead the industry in quality, the company buys and ana- lyzes competitors’ products regularly. Inspection associates grade these products and share the information with the highest levels of management. In addition, the company’s Quality Policy is displayed at all locations and taught to all associates in quality training (Exhibit 1.14).

Research and Development Perdue is an acknowledged industry leader in the use of research and technology to provide quality products and service to its customers. The company spends more on research as a percent of revenues than any other poultry processor. This practice goes back to Frank Perdue’s focus on finding ways to differentiate his products based on quality and value. It was research into selective breeding that resulted in the broader breast, an attribute of Perdue

Farms chicken that was the basis of his early advertising. Although other processors have also improved their stock, Perdue Farms believes that it still leads the industry. A list of some of Perdue Farms technological accomplishments is given in Exhibit 1.15.

As with every other aspect of the business, Perdue Farms tries to leave nothing to chance in R&D. The company employs specialists in avian science, microbiology, genet- ics, nutrition, and veterinary science. Because of its R&D capabilities, Perdue Farms is often involved in United States Drug Administration (USDA) field tests with pharmaceutical suppliers. Knowledge and experience gained from these tests can lead to a competitive advantage. For example, Perdue has the most extensive and expensive vaccination program in the industry. Currently, the company is working with and studying the practices of several European producers who use completely different methods.

The company has used research to significantly increase productivity. For example, in the 1950s, it took fourteen weeks to grow a 3 pound chicken. Today, it takes only seven weeks to grow a 5 pound chicken. This gain in effi- ciency is due principally to improvements in the conversion rate of feed to chicken. Feed represents about 65 percent of the cost of growing a chicken. Thus, if additional research can further improve the conversion rate of feed to chicken by just 1 percent, it would represent estimated additional income of $2.5–3 million per week or $130–156 million per year.

Environment Environmental issues present a constant challenge to all poultry processors. Growing, slaughtering, and process- ing poultry is a difficult and tedious process that demands absolute efficiency to keep operating costs at an acceptable level. Inevitably, detractors argue that the process is dan- gerous to workers, inhumane to the poultry, hard on the environment, and results in food that may not be safe. Thus, media headlines such as “Human Cost of Poultry Business Bared,” “Animal Rights Advocates Protest Chicken Coop Conditions,” “Processing Plants Leave Toxic Trail,” or “EPA Mandates Poultry Regulations” are routine.

Perdue Farms tries to be proactive in managing envi- ronmental issues. In April 1993, the company created an Environmental Steering Committee. Its mission is “. . . to provide all Perdue Farms work sites with vision, direction, and leadership so that they can be good corporate citi- zens from an environmental perspective today and in the future.” The committee is responsible for overseeing how the company is doing in such environmentally sensitive areas as waste water, storm water, hazardous waste, solid waste, recycling, bio-solids, and human health and safety.

For example, disposing of dead birds has long been an industry problem. Perdue Farms developed small composters for use on each farm. Using this approach,

46 Part 1: Introduction to Organizations

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Perdue Specialty Feeds

Computer formulation

Feed truck scale

Genetics and selective breeding programs

Primary breeders, grown by Perdue pedigree facilities and contract producers

Breeders, grown by contract producers

Broilers, roasters, cornish, grown by contract producers

Further processing plant (deboning, cooking)

Pet food and animal feed manufacturers

Protein by-product plant

Live haul truck scale

Container ships to international markets

Pellets shipped to nutrient- deficient growing areas in the US and abroad

Primary breeder hatchery

Edible oil sold to food manufacturers

Perdue distribution centers, replenish- ment centers or first receivers, distributors

Processing plant Pellet plant


Commodities trading, grain merchandising and

feed ingredient purchasing









Perdue Farms Integrated Operations











EXHIBIT 1.13 Perdue Farms Integrated Operations

• WE SHALL not be content to be of equal quality to our competitors. • OUR COMMITMENT is to be increasingly superior. • CONTRIBUTION TO QUALITY is a responsibility shared by everyone in the

Perdue organization.

EXHIBIT 1.14 Quality Policy

• Conducts more research than all competitors combined • Breeds chickens with consistently more breast meat than any other bird in the

industry • First to use digital scales to guarantee weights to customers • First to package fully-cooked chicken products in microwaveable trays • First to have a box lab to define quality of boxes from different suppliers • First to test both its chickens and competitors’ chickens on 52 quality factors

every week • Improved on-time deliveries 20% between 1987 and 1993 • Built state of the art analytical and microbiological laboratories for feed and

end product analysis • First to develop best management practices for food safety across all areas

of the company • First to develop commercially viable pelletized poultry litter

EXHIBIT 1.15 Perdue Farms Technological Accomplishments

carcasses are reduced to an end-product that resembles soil in a matter of a few days. The disposal of hatchery waste is another environmental challenge. Historically, manure and unhatched eggs were shipped to a landfill. However, Perdue Farms developed a way to reduce the waste by 50 percent by selling the liquid fraction to a pet-food processor that cooks it for protein. The other 50 percent is recycled through a rendering process. In 1990, Perdue Farms spent $4.2 million to upgrade its existing treatment facility with a state-of-the-art system at its Accomac, Virginia, and Showell, Maryland, plants. These facili- ties use forced hot air heated to 120 degrees to cause the microbes to digest all traces of ammonia, even during the cold winter months.

More than ten years ago, North Carolina’s Occupational Safety and Health Administration cited Perdue Farms for an unacceptable level of repetitive stress injuries at its Lewiston and Robersonville, North Carolina, processing plants. This sparked a major research program in which Perdue Farms worked with Health and Hygiene Inc. of Greensboro, North Carolina, to learn more about ergonomics, the repetitive movements required to accom- plish specific jobs. Results have been dramatic. Launched in 1991 after two years of development, the program vid- eotapes employees at all of Perdue Farms’ plants as they work in order to describe and place stress values on various tasks. Although the cost to Perdue Farms has been signifi-

cant, results have been dramatic with workers’ compen- sation claims down 44 percent, lost-time recordables just 7.7 percent of the industry average, an 80 percent decrease in serious repetitive stress cases, and a 50 percent reduction in lost time for surgery for back injuries (Shelley Reese, “Helping Employees get a Grip,” Business and Health, August 1998).

Despite these advances, serious problems continue to develop. Some experts have called for conservation measures that might limit the density of chicken houses in a given area or even require a percentage of existing chicken houses to be taken out of production periodically. Obviously this would be very hard on the farm families who own existing chicken houses and could result in fewer acres devoted to agriculture. Working with AgriRecycle Inc. of Springfield, Missouri, Perdue Farms has developed a pos- sible solution. The plan envisions the poultry companies pro- cessing excess manure into pellets for use as fertilizer. This would permit sales outside the poultry growing region, better balancing the input of grain. Spokesmen estimate that as much as 120,000 tons, nearly one-third of the sur- plus nutrients from manure produced each year on the DelMarVa Peninsula, could be sold to corn growers in other parts of the country. Prices would be market driven but could be $25 to $30 per ton, suggesting a potential, small profit. Still, almost any attempt to control the prob- lem potentially raises the cost of growing chickens, forcing

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Chapter 1: Organizations and Organization Theory 49

poultry processors to look elsewhere for locations where the chicken population is less dense.

In general, solving industry environmental problems presents at least five major challenges to the poultry processor:

• How to maintain the trust of the poultry consumer • How to ensure that the poultry remain healthy • How to protect the safety of the employees and the

process • How to satisfy legislators who need to show their con-

stituents that they are taking firm action when environ- mental problems occur

• How to keep costs at an acceptable level

Jim Perdue sums up Perdue Farms’ position as follows: “. . . we must not only comply with environmental laws as they exist today, but look to the future to make sure we don’t have any surprises. We must make sure our envi- ronmental policy statement [see Exhibit 1.16] is real, that there’s something behind it and that we do what we say we’re going to do.”

Logistics and Information Systems The explosion of poultry products and increasing num- ber of customers during recent years placed a severe strain on the existing logistics system, which was developed at a time when there were far fewer products, fewer delivery points, and lower volume. Hence, the company had limited ability to improve service levels, could not support further growth, and could not introduce innovative services that might provide a competitive advantage.

In the poultry industry, companies are faced with two significant problems—time and forecasting. Fresh poultry has a limited shelf life—measured in days. Thus forecasts must be extremely accurate and deliveries must be timely. On one hand, estimating requirements too conservatively results in product shortages. Mega-customers such as Wal-Mart will not tolerate product shortages that lead to empty shelves and lost sales. On the other hand, if estimates are overstated, the result is outdated products that cannot be sold and losses for Perdue Farms. A com- mon expression in the poultry industry is “you either sell it or smell it.”

Forecasting has always been extremely difficult in the poultry industry because the processor needs to know approximately eighteen months in advance how many broilers will be needed in order to size hatchery supply flocks and contract with growers to provide live broilers. Most customers (e.g., grocers and food-service buyers) have a much shorter planning window. Additionally, there is no way for Perdue Farms to know when rival poultry processors will put a particular product on special, reduc- ing Perdue Farms sales, or when bad weather and other uncontrollable problems may reduce demand.

In the short run, information technology (IT) has helped by shortening the distance between the customer and Perdue Farms. As far back as 1987, personal com- puters (PCs) were placed directly on each customer-service associate’s desk, allowing the associate to enter customer orders directly. Next, a system was developed to put dis- patchers in direct contact with every truck in the system so that they would have accurate information about product inventory and truck location at all times. Now, IT is mov- ing to further shorten the distance between the customer and the Perdue Farms service representative by putting a PC on the customer’s desk. All of these steps improve com- munication and shorten the time from order to delivery.

To control the entire supply chain management process, Perdue Farms purchased a multi-million-dollar information technology system that represents the biggest nontangible asset expense in the company’s history. This integrated, state-of-the-art information system required total process re-engineering, a project that took eighteen months and required training 1,200 associates. Major goals of the sys- tem were to (1) make it easier and more desirable for the customer to do business with Perdue Farms, (2) make it easier for Perdue Farms associates to get the job done, and (3) take as much cost out of the process as possible.

Industry Trends The poultry industry is affected by consumer, industry, and governmental regulatory trends. Currently, chicken is the number one meat consumed in the United States, with a 40 percent market share. The typical American con- sumes about 81 pounds of chicken, 69 pounds of beef, and 52 pounds of pork annually (USDA data). Additionally, chicken is becoming the most popular meat in the world. In 1997, poultry set an export record of $2.5 billion. Although exports fell 6 percent in 1998, the decrease was attributed to Russia’s and Asia’s financial crisis, and food-industry experts expected this to be only a temporary setback. Hence, the world market is clearly a growth opportunity for the future.

Government agencies whose regulations impact the industry include the Occupational Safety and Health Administration (OSHA) for employee safety and the Immigration and Naturalization Service (INS) for undocu- mented workers. OSHA enforces its regulations via peri- odic inspections, and levies fines when noncompliance is found. For example, a Hudson Foods poultry plant was fined more than a million dollars for alleged willful viola- tions causing ergonomic injury to workers. The INS also uses periodic inspections to find undocumented workers. It estimates that undocumented aliens working in the indus- try vary from 3 to 78 percent of the workforce at indi- vidual plants. Plants that are found to use undocumented workers, especially those that are repeat offenders, can be heavily fined.

Perdue Farms is committed to environmental stewardship and shares that commitment with its farm family partners. We’re proud of the leadership we’re providing our industry in addressing the full range of environmental challenges related to animal agriculture and food processing. We’ve invested—and continue to invest—millions of dollars in research, new technology, equipment upgrades, and awareness and education as part of our ongoing commitment to protecting the environment.

• Perdue Farms was among the first poultry companies with a dedicated Environmental Services department. Our team of environmental managers is responsible for ensuring that every Perdue facility operates within 100 percent compliance of all applicable environmental regulations and permits.

• Through our joint venture, Perdue AgriRecycle, Perdue Farms is investing $12 million to build in Delaware a first-of-its-kind pellet plant that will convert surplus poultry litter into a starter fertilizer that will be marketed internationally to nutrient deficient regions. The facility, which will serve the entire DelMarVa region, is scheduled to begin operation in April, 2001.

• We continue to explore new technologies that will reduce water usage in our processing plants without compromising food safety or quality.

• We invested thousands of man-hours in producer education to assist our family farm partners in managing their independent poultry operations in the most environmentally responsible manner possible. In addition, all our poultry producers are required to have nutrient management plans and dead-bird composters.

• Perdue Farms was one of four poultry companies operating in Delaware to sign an agreement with Delaware officials outlining our companies’ voluntary commitment to help independent poultry producers dispose of surplus chicken litter.

• Our Technical Services department is conducting ongoing research into feed technology as a means of reducing the nutrients in poultry manure. We’ve already achieved phosphorous reductions that far exceed the industry average.

• We recognize that the environmental impact of animal agriculture is more pronounced in areas where development is decreasing the amount of farmland available to produce grain for feed and to accept nutrients. That is why we view independent grain and poultry producers as vital business partners and strive to preserve the economic viability of the family farm.

At Perdue Farms, we believe that it is possible to preserve the family farm; provide a safe, abundant and affordable food supply; and protect the environment. However, we believe that can best happen when there is cooperation and trust between the poultry industry, agriculture, environmental groups and state officials. We hope Delaware’s effort will become a model for other states to follow.

EXHIBIT 1.16 Perdue Farms Environmental Policy Statement

50 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 51

The Future The marketplace for poultry in the twenty-first century will be very different from that of the past. Understanding the wants and needs of generation Xers and echo-boomers will be key to responding successfully to these differences.

Quality will continue to be essential. In the 1970s, quality was the cornerstone of Frank Perdue’s success- ful marketing program to “brand” his poultry. However, in the twenty-first century, quality will not be enough. Today’s customers expect—even demand—all products to be high quality. Thus, Perdue Farms plans to use cus- tomer service to further differentiate the company. The focus will be on learning how to become indispensable to the customer by taking cost out of the product and deliv- ering it exactly the way the customer wants it, where and when the customer wants it. In short, as Jim Perdue says, “Perdue Farms wants to become so easy to do business

with that the customer will have no reason to do business with anyone else.”

Acknowledgements: The authors are indebted to Frank Perdue, Jim Perdue, and the numerous associates at Perdue Farms, who generously shared their time and information about the company. In addition, the authors would like to thank the anonymous librarians at Blackwell Library, Salisbury State University, who routinely review area newspapers and file articles about the poultry industry— the most important industry on the DelMarVa Peninsula. Without their assistance, this case would not be possible.

*Adapted from George C. Rubenson and Frank M. Shipper, Department of Management and Marketing, Franklin P. Perdue School of Business, Salisbury University. Copyright 2001 by the authors.


1. This case is based on Anthony Bianco and Pamela L. Moore, “Downfall: The Inside Story of the Management Fiasco at Xerox,” BusinessWeek (March 5, 2001), 82–92; Robert J. Grossman, “HR Woes at Xerox,” HR Magazine (May 2001), 34–45; Jeremy Kahn, “The Paper Jam from Hell,” Fortune (November 13, 2000), 141–146; Pamela L. Moore, “She’s Here to Fix the Xerox,” BusinessWeek (August 6, 2001), 47–48; Claudia H. Deutsch, “At Xerox, the Chief Earns (Grudging) Respect,” The New York Times (June 2, 2002), section 3, 1, 12; Olga Kharif, “Anne Mulcahy Has Xerox by the Horns,” BusinessWeek Online (May 29, 2003); Amy Yee, “Xerox Comeback Continues to Thrive,” Financial Times (January 26, 2005), 30; “Developing Vision for an Organization,” The Bangkok Post (February 11, 2008), 1; George Anders, “Corporate News; Business: At Xerox, Jettisoning Dividend Helped Company Out of a Crisis,” The Asian Wall Street Journal (November 28, 2007), 6; Andrew Davidson, “Xerox Saviour in the Spotlight,” Sunday Times (June 1, 2008), 6; Betsy Morris, “The Accidental CEO,” Fortune (June 23, 2003), 58–67; Matt Hartley, “Copy That: Xerox Tries Again to Rebound,” The Globe and Mail (January 7, 2008), B1; “Anne Mulcahy Becomes the First Woman CEO to Receive Chief Executive Magazine’s ‘CEO of the Year’ Award,” PR Newswire (June 3, 2008); and “Xerox Marks Human Rights and Environmental Progress in Annual Citizenship Report,” Canada Newswire (November 12, 2007), 1.

2. Matthew Karnitschnig, Carrick Mollenkamp, and Dan Fitzpatrick, “Bank of America Eyes Merrill,” The Wall Street Journal (September 15, 2008), A1; Carrick Mollenkamp and Mark Whitehouse, “Old-School Banks Emerge Atop New World of Finance,” The Wall Street Journal (September 16, 2008), A1, A10.

3. Janet Adamy, “Man Behind Burger King Turnaround,” The Wall Street Journal (April 2, 2008), B1; Phred Dvorak,

“Theory & Practice: Experts Have a Message for Managers: Shake It Up,” The Wall Street Journal (June 16, 2008), B8; Justin Scheck and Ben Worthen, “Hewlett-Packard Takes Aim at IBM,” The Wall Street Journal (May 14, 2008), B1.

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

5. Darrell Rigby and Barbara Bilodeau, “Bain’s Global 2007 Management Tools and Trends Survey,” Strategy & Leadership 35, no. 5 (2007), 9–16.

6. Hammonds, “Smart, Determined, Ambitious, Cheap: The New Face of Global Competition,” Fast Company (February 2003), 91–97.

7. Jason Dean, “Upgrade Plan: Long a Low-Tech Player, China Sets Its Sights on Chip Making,” The Wall Street Journal (February 17, 2004), A1.

8. Hammonds, “Smart, Determined, Ambitious, Cheap”; Pete Engardio, Aaron Bernstein, and Manjeet Kripalani, “Is Your Job Next?” BusinessWeek (February 3, 2003), 50–60.

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

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

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

12. Chris Serres, “As Shoppers Cut Back, Grocers Feel the Squeeze,” Star Tribune (July 23, 2008), D1.

13. Bethany McLean, “Why Enron Went Bust,” Fortune (December 24, 2001), 58–68; survey results reported in Patricia Wallington, “Honestly?!” CIO (March 15, 2003), 41–42.

14. Mike Esterl, “Executive Derision: In Germany, Scandals Tarnish Business Elite,” The Wall Street Journal (March 4, 2008), A1.


15. John Hechinger, “Financial-Aid Directors Received Payments from Preferred Lender; Student Loan Xpress Puts Three Managers on Leave Amid Multiple Inquiries,” The Wall Street Journal (April 10, 2007), A3; and Kathy Chu, “3 Top Financial Aid Chiefs Suspended,” USA Today (April 6, 2007), B1.

16. Kuykendall, “Auto Insurers Paying Up to Compete.” 17. Bernard Wysocki Jr., “Corporate Caveat: Dell or Be Delled,”

The Wall Street Journal (May 10, 1999), A1. 18. Andy Reinhardt, “From Gearhead to Grand High Pooh-

Bah,” BusinessWeek (August 28, 2000), 129–130. 19. G. Pascal Zachary, “Mighty Is the Mongrel,” Fast Company

(July 2000), 270–284. 20. Russ Wiles, “Businesses Encourage Employees to Learn

Spanish,” USA Today, December 7, 2008, http://www. htm?loc=interstitialskip, accessed on March 17, 2008.

21. Steven Greenhouse, N.Y. Times News Service, “Influx of Immigrants Having Profound Impact on Economy,” Johnson City Press (September 4, 2000), 9; Richard W. Judy and Carol D’Amico, Workforce 2020: Work and Workers in the 21st Century (Indianapolis, Ind.: Hudson Institute, 1997); statistics reported in Jason Forsythe, “Diversity Works,” special advertising supplement to The New York Times Magazine (September 14, 2003), 75–100.

22. Howard Aldrich, Organizations and Environments (Englewood Cliffs, N.J.: Prentice-Hall, 1979), 3.

23. This section is based largely on Peter F. Drucker, Managing the Non-Profit Organization: Principles and Practices (New York: HarperBusiness, 1992); and Thomas Wolf, Managing a Nonprofit Organization (New York: Fireside/Simon & Schuster, 1990).

24. Christine W. Letts, William P. Ryan, and Allen Grossman, High Performance Nonprofit Organizations (New York: John Wiley & Sons, Inc., 1999), 30–35.

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

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

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

28. Brent Schlender, “The New Soul of a Wealth Machine,” Fortune (April 5, 2004), 102–110.

29. Schlender, “The New Soul of a Wealth Machine,” and Keith H. Hammonds, “Growth Search,” Fast Company (April 2003), 75–80.

30. Christopher Lawton, Yukari Iwatani Kane, and Jason Dean, “Picture Shift: U.S. Upstart Takes on TV Giants in Price War,” The Wall Street Journal (April 15, 2008), A1.

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

32. Jaclyne Badal, “Can a Company Be Run As a Democracy? The Wall Street Journal (April 23, 2007), B1; John Huey, “Wal-Mart: Will It Take Over the World?” Fortune (January 30, 1989), 52–61;, accessed on August 28, 2002.

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

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

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

36. Tusi, “A Multiple-Constituency Model of Effectiveness.” 37. Fombrun and Shanley, “What’s in a Name?” 38. Gary Fields and John R. Wilke, “The Ex-Files: FBI’s New

Focus Places Big Burden on Local Police,” The Wall Street Journal (June 30, 2003), A1, A12; and Susan Schmidt, Gary Fields, Elizabeth Williamson, and Evan Perez, “FBI Used DNA to Link Anthrax to Suspect,” The Wall Street Journal (August 4, 2008), A1.

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

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

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

42. Gary Hamel, “The Why, What, and How of Management Innovation,” Harvard Business Review (February 2006), 72–84.

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

44. Ralph Sink, “My Unfashionable Legacy,” Strategy + Business (Autumn 2007), enewsarticle/enews122007?pg=0, accessed on August 7, 2008.

52 Part 1: Introduction to Organizations

Chapter 1: Organizations and Organization Theory 53

45. Dunbar and Starbuck, “Learning to Design Organizations.” 46. Johannes M. Pennings, “Structural Contingency Theory:

A Reappraisal,” Research in Organizational Behavior 14 (1992), 267–309.

47. Henry Mintzberg, The Structuring of Organizations: The Synthesis of the Research (Englewood Cliffs, N.J.: Prentice-Hall, 1979), 215–297; Henry Mintzberg, “Organization Design: Fashion or Fit?” Harvard Business Review 59 (January–February 1981), 103–116; and Henry Mintzberg, Mintzberg on Management: Inside Our Strange World of Organizations (New York: The Free Press,1989).

48. This discussion is based in part on Toby J. Tetenbaum, “Shifting Paradigms: From Newton to Chaos,” Organizational Dynamics (Spring 1998), 21–32.

49. William Bergquist, The Postmodern Organization (San Francisco: Jossey-Bass, 1993).

50. Based on Tetenbaum, “Shifting Paradigms: From Newton to Chaos,” and Richard T. Pascale, “Surfing the Edge of Chaos,” Sloan Management Review (Spring 1999), 83–94.

51. Greg Jaffe, “Trial by Fire: On Ground in Iraq, Capt. Ayers Writes His Own Playbook,” The Wall Street Journal (September 22, 2004), A1.

52. David K. Hurst, Crisis and Renewal: Meeting the Challenge of Organizational Change (Boston, Mass.: Harvard Business School Press, 1995), 32–52.

53. Alan Deutschman, “Open Wide; The Traditional Business Organization Meets Democracy,” Fast Company (March 2007), 40–41.

54. Ann Harrington, note on QuikTrip, in Robert Levering and Milton Moskowitz, “100 Best Companies to Work For,” Fortune (January 20, 2003), 127–152.

55. Thomas Petzinger, The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace (New York: Simon & Schuster, 1999), 91–93; idem, “In Search of the New World of Work,” Fast Company (April 1999), 214–220; Peter Katel, “Bordering on Chaos,” Wired (July 1997), 98–107; Oren Harari, “The Concrete Intangibles,” Management Review (May 1999), 30–33; “Mexican Cement Maker on Verge of a Deal,” The New York Times (September 27, 2004), A8 and Joel Millman, “Hard Times for Cement Man,” The Wall Street Journal (December 11, 2008), A1.

56. Robert House, Denise M. Rousseau, and Melissa Thomas-Hunt, “The Meso Paradigm: A Framework for the Integration of Micro and Macro Organizational Behavior,” Research in Organizational Behavior 17 (1995), 71–114.

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Chapter 2

Strategy, Organization

Design, and Effectiveness

Chapter 3

Fundamentals of

Organization Structure

Part 2

Organizational Purpose and Structural Design

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The Role of Strategic Direction in Organization Design

Organizational Purpose Strategic Intent • Operative Goals • The Importance of Goals

A Framework for Selecting Strategy and Design Porter’s Competitive Forces and Strategies • Miles and Snow’s Strategy Typology • How Strategies Affect Organization Design • Other Factors Affecting Organization Design

Assessing Organizational Effectiveness

Traditional Effectiveness Approaches Goal Indicators • Resource-based Indicators • Internal Process Indicators

The Balanced Scorecard Approach to Effectiveness

Design Essentials


B et

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Strategy, Organization Design, and


Chapter 2

One of the primary responsibilities of managers is to position their organizations for success by establishing goals and strategies that can keep the organization competi- tive. Consider MySpace. It started as a social networking site, but managers’ new goal is to make it a “social portal,” of which networking is only a part. MySpace has plenty of users, but revenues haven’t been rolling in as quickly as top executives at parent company Fox Interactive Media (owned by News Corporation) would like. To meet tough revenue goals, the company’s co-founders, CEO Chris DeWolfe and President Tom Anderson, are expanding MySpace into user-generated videos, global marketing partnerships with big-name brands such as McDonald’s, Harley- Davidson, and State Farm Insurance, and a joint venture with major music compa- nies. Other goals include beefing up the company’s mobile business and revamping the website to make it both easier to use and more hospitable to advertising. Yet, even as this text is being written, goals and strategic direction might be changing at MySpace. “We are a company that needs to move fast,” says Anderson.1

Purpose of This Chapter

Top managers give direction to organizations. They set goals and develop the plans for their organization to attain them. The purpose of this chapter is to help you understand the types of goals that organizations pursue and some of the competi- tive strategies managers use to reach those goals. We will provide an overview of strategic management, examine two significant frameworks for determining strate- gic action, and look at how strategies affect organization design. The chapter also describes the most popular approaches to measuring the effectiveness of organiza- tional efforts. To manage organizations well, managers need a clear sense of how to measure effectiveness.

Managing by Design Questions

1 A company’s strategic intent or direction refl ects managers’ systematic analysis of organizational and environmental factors. 1 2 3 4 5


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

1 2 3 4 5


3 The best measures of business performance are fi nancial. 1 2 3 4 5



Before reading this chapter, please circle your opinion below for each of the following statements:

58 Part 2: Organizational Purpose and Structural Design


An organizational goal is a desired state of affairs that the organization attempts to reach.2 A goal represents a result or end point toward which organizational efforts are directed. The choice of goals and strategy influences how the organiza- tion should be designed.

Top executives decide the end purpose the organization will strive for and deter- mine the direction it will take to accomplish it. It is this purpose and direction that shapes how the organization is designed and managed. Indeed, the primary responsibility of top management is to determine an organization’s goals, strategy, and design, therein adapting the organization to a changing environment.3 Middle managers do much the same thing for major departments within the guidelines pro- vided by top management. Exhibit 2.1 illustrates the relationships through which top managers provide direction and then design.

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

1 A company’s strategic intent or direction refl ects managers’ systematic analysis of organizational and environmental factors. ANSWER: Agree. The best strategies come from systematic analysis of organi- zational strengths and weaknesses combined with analysis of opportunities and threats in the environment. Careful study combined with experience enable top managers to decide on specifi c goals and strategies.

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

Organization design is the administration and execution of the strategic plan. Organization direction is implemented through decisions about structural form, including whether the organization will be designed for a learning or an efficiency orientation, as discussed in Chapter 1, as well as choices about information and control systems, the type of production technology, human resource policies, cul- ture, and linkages to other organizations. Changes in structure, technology, human resource policies, culture, and interorganizational linkages will be discussed in sub- sequent chapters. Also note the arrow in Exhibit 2.1 running from organization design back to strategic intent. This means that strategies are often made within the

1 A company’s strategic intent or direction refl ects managers’systematic analysis of organizational and environmental factors. ANSWER: Agree. The best strategies come from systematic analysis of organi- zational strengths and weaknesses combined with analysis of opportunities and threats in the environment. Careful study combined with experience enable top managers to decide on specifi c goals and strategies.



Chapter 2: Strategy, Organization Design, and Effectiveness 59

current structure of the organization, so that current design constrains, or puts limits on, goals and strategy. More often than not, however, the new goals and strategy are selected based on environmental needs, and then top management attempts to redesign the organization to achieve those ends.

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

The role of top management is important because managers can interpret the environment differently and develop different goals. For example, a new CEO at Borders Group believed the book retailer was missing an opportunity by emphasiz- ing its bricks and mortar stores while paying little attention to the online world of book retailing. When George Jones took over as CEO, he quickly saw e-commerce as “a necessary component of our business.” Borders ended its alliance with Amazon. com and reopened its own branded website. This gave Borders Rewards members the chance to earn benefits online, which they weren’t able to do through Amazon. Aiming to become a force in online bookselling, Borders abandoned its strategy of

Strategic Intent

Balanced scorecard

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

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

60 Part 2: Organizational Purpose and Structural Design

expanding the book superstore concept, selling off most of its overseas stores and closing numerous stores in the United States.5

The choices top managers make about goals, strategies, and organization design have a tremendous impact on organizational effectiveness. Remember that goals and strategy are not fixed or taken for granted. Top managers and middle manag- ers must select goals for their respective units, and the ability to make good choices largely determines firm success. Organization design is used to implement goals and strategy and also determines organization success.


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

Strategic Intent

Many types of goals exist in organizations, and each type performs a different func- tion. However, to achieve success, organizational goals and strategies are focused with strategic intent. Strategic intent means that all the organization’s energies and resources are directed toward a focused, unifying, and compelling overall goal.6

Examples of ambitious goals that demonstrate strategic intent are Komatsu’s vision to “Encircle Caterpillar,” Canon’s to “Beat Xerox,” and Coca-Cola’s “To put a Coke within ‘arm’s reach’ of every consumer in the world.”7 Strategic intent pro- vides a focus for management action. Three aspects related to strategic intent are the mission, core competence, and competitive advantage.

Mission. The overall goal for an organization is often called the mission—the orga- nization’s reason for existence. The mission describes the organization’s shared values and beliefs and its reason for being. The mission is sometimes called the official goals, which refers to the formally stated definition of business scope and outcomes the organization is trying to achieve. Official goal statements typically define busi- ness operations and may focus on values, markets, and customers that distinguish the organization. Whether called a mission statement or official goals, the organiza- tion’s general statement of its purpose and philosophy is often written down in a policy manual or the annual report. The mission statement for State Farm is shown in Exhibit 2.2 Note how the overall mission, values, and vision are all defined.

One of the primary purposes of a mission statement is to serve as a communication tool.8 The mission statement communicates to current and prospective employees, customers, investors, suppliers, and competitors what the organization stands for and what it is trying to achieve. A mission statement communicates legitimacy to internal and external stakeholders, who may join and be committed to the organiza- tion because they identify with its stated purpose and vision. Most top leaders want employees, customers, competitors, suppliers, investors, and the local community to look on them in a favorable light, and the concept of legitimacy plays a critical role.9 In today’s corporate world of weakened trust, increasing regulation, and con- cern for the natural environment, many organizations face the need to redefine their

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

Establish and commu- nicate organizational mission and goals. Communicate official goals to provide a statement of the orga- nization’s mission to external constituents. Communicate opera- tional goals to provide internal direction, guidelines, and stan- dards of performance for employees.

Chapter 2: Strategy, Organization Design, and Effectiveness 61

mission to emphasize the firm’s purpose in more than financial terms.10 Companies where managers are sincerely guided by mission statements that focus on a larger social purpose, such as Medtronic’s “To restore people to full life and health” or Liberty Mutual’s “Helping people live safer, more secure lives,” typically attract bet- ter employees, have better relationships with external parties, and perform better in the marketplace over the long term.11

Competitive Advantage. The overall aim of strategic intent is to help the organiza- tion achieve a sustainable competitive advantage. Competitive advantage refers to what sets the organization apart from others and provides it with a distinctive edge for meeting customer or client needs in the marketplace. Strategy necessarily changes over time to fit environmental conditions, and good managers pay close attention to trends that might require changes in how the company operates. Managers analyze competitors and the internal and external environments to find potential competitive openings and learn what new capabilities the organization needs to gain the upper hand against other companies in the industry.12 Consider how managers at Walgreens are shifting their goals and strategy to maintain a competitive advantage.

For decades, Walgreens has succeeded with strategic goals of opening conveniently located stores faster than competitors and filling more prescriptions than any other drugstore chain. Recently, though, faced with the increased competitiveness of rivals and a weakened U.S. economy, the chain’s managers began looking for competitive openings that could keep the company growing.

Rather than just selling prescriptions, Walgreens is redefining its strategic intent to become a broad health care provider. It began by opening pharmacies in hospitals and

STATE FARM INSURANCE Our Mission, Our Vision, and Our Shared Values

State Farm’s mission is to help people manage the risks of everyday life, recover from the unexpected, and realize their dreams.

We are people who make it our business to be like a good neighbor; who built a premier company by selling and keeping promises through our marketing partnerships; who bring diverse talents and experiences to our work of serving the State Farm customer.

Our success is built on a foundation of shared values—quality service and relationships, mutual trust, integrity, and financial strength.

Our vision for the future is to be the customer’s first and best choice in the products and services we provide. We will continue to be the leader in the insurance industry and we will become a leader in the financial services arena. Our customers’ needs will determine our path. Our values will guide us.




EXHIBIT 2.2 State Farm’s Mission Statement

EXHIBIT 2.2 State Farm’s Mission Statement

Source: “News and Notes from State Farm,” Public Affairs Department, 2500 Memorial Boulevard, Murfreesboro, TN 37131.

62 Part 2: Organizational Purpose and Structural Design

assisted living facilities and by offering flu shots and other immunizations in its stores. Then, the company established Take Care Health Clinics to provide basic health services inside 136 Walgreens stores. Now, managers are moving aggressively into the health care industry by buying firms that operate health care centers at large corporations. These cen- ters provide everything from treating simple illnesses to counseling employees on managing chronic diseases. Walgreens’ managers see a tremendous opportunity. “In the U.S., there are more than 7,600 office sites with 1,000 or more employees that could support a health- care center,” CEO Jeffrey Rein said.

Rein envisions Walgreens bringing together its various operations—basic prescription services, in-store clinics, specialty pharmaceuticals, and workplace health care centers— using electronic prescriptions and medical records, so that the company will meet a broad range of customers’ health care needs.13 ■

Strong customer service and top-notch pharmacist knowledge have always been key strengths for Walgreens. Now these competencies are being applied on a broader scale as the company moves into the larger health care industry. As at Walgreens, managers strive to develop strategies that focus on their core competencies in order to attain a competitive advantage.

Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency, or exceptional customer service.14 At VF, a large apparel company that owns Vanity Fair, Nautica, Wrangler, and The North Face, strategy focuses on the company’s core competencies of operational efficiency and merchandising know-how. When VF bought The North Face, for example, its distribution systems were so poor that stores were getting ski apparel at the end of winter and camping gear at the end of summer. The company’s operating profit margin was minus 35 percent. Managers at VF revamped The North Face’s sourcing, distribution, and financial systems and within five years doubled sales to $500 million and improved profit margins to a healthy 13 percent.15 Gaylord Hotels, which has large hotel and conference centers in several states as well as the Opryland complex near Nashville, Tennessee, thrives based on a core competence of providing exceptional service for large group meetings.16 Robinson Helicopter succeeds through superior technologi- cal know-how for building small, two-seater helicopters used for everything from police patrols in Los Angeles to herding cattle in Australia.17 In each case, leaders identified what their company does especially well and built the strategy around it.

Operative Goals

The organization’s mission and overall goals provide a basis for developing more specific operative goals. Operative goals designate the ends sought through the actual operating procedures of the organization and explain what the organization is actu- ally trying to do.18 Operative goals describe specific measurable outcomes and are often concerned with the short run. Operative goals typically pertain to the primary tasks an organization must perform.19 Specific goals for each primary task provide direction for the day-to-day decisions and activities within departments. Typical operative goals include performance goals, resource goals, market goals, employee development goals, productivity goals, and goals for innovation and change.

Chapter 2: Strategy, Organization Design, and Effectiveness 63

Overall Performance. Profitability reflects the overall performance of for-profit organizations. Profitability may be expressed in terms of net income, earnings per share, or return on investment. Other overall performance goals are growth and output volume. Growth pertains to increases in sales or profits over time. Volume pertains to total sales or the amount of products or services delivered. For example, Jelly Belly Candy Company, which practically created the market for gourmet jelly beans, has a goal of increasing sales by 25 percent to $200 million by 2010. Related goals include introducing new lines of candies as well as getting Jelly Belly beans into more retail outlets.20

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

Resources. Resource goals pertain to the acquisition of needed material and finan- cial resources from the environment. They may involve obtaining financing for the construction of new plants, finding less expensive sources for raw materials, or hiring top-quality technology graduates. Resource goals for Stanford University include attracting top-notch professors and students. Auto manufacturers such as Honda Motor Company and Toyota Motor Corporation have resource goals of obtaining high-quality auto parts at low cost. For nonprofit organizations, resource goals might include recruiting dedicated volunteers and expanding the organiza- tion’s funding base.

Market. Market goals relate to the market share or market standing desired by the organization. Market goals are largely the responsibility of marketing, sales, and advertising departments. In the toy industry, Canada’s Mega Bloks Inc. achieved its market goal of doubling its share of the toy building block market to 30 percent. The giant of the industry, Denmark’s LEGO Group, is reevaluating strategies to try to regain the market share it has lost.21 Market goals can also apply to nonprofit organizations. Cincinnati Children’s Hospital Medical Center, not content with a limited regional role in health care, has gained a growing share of the national market by developing expertise in the niche of treating rare and complex conditions and relentlessly focusing on quality.22

Employee Development. Employee development pertains to the training, promotion, safety, and growth of employees. It includes both managers and workers. Strong employee development goals are one of the characteristics common to organizations that regularly show up on Fortune magazine’s list of “100 Best Companies to Work For.” For example, family-owned Wegmans Food Markets, which has appeared on the list every year since its inception and was voted the nation’s top supermarket chain by the Food Network in 2007, has a motto of “Employees First, Customers Second,” reflecting the company’s emphasis on employee development goals.23

Productivity. Productivity goals concern the amount of output achieved from avail- able resources. They typically describe the amount of resource inputs required to

64 Part 2: Organizational Purpose and Structural Design

reach desired outputs and are thus stated in terms of “cost for a unit of produc- tion,” “units produced per employee,” or “resource cost per employee.” Managers at Akamai Technologies, which sells Web content delivery services, keep a close eye on sales per employee to see if the company is meeting productivity goals. Akamai’s chief financial officer, Timothy Weller, sees this statistic as “the single easiest mea- sure of employee productivity.24

Innovation and Change. Innovation goals pertain to internal flexibility and readi- ness to adapt to unexpected changes in the environment. Innovation goals are often defined with respect to the development of specific new services, products, or pro- duction processes. Procter & Gamble is taking a new approach to innovation that brings in ideas from outside entrepreneurs and researchers. Managers set a goal of getting 50 percent of the company’s innovation from outside the organization by 2010, up from about 35 percent in 2004 and only 10 percent in 2000.25

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

The Importance of Goals

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

Operative goals serve several specific purposes, as outlined in Exhibit 2.3. For one thing, goals provide employees with a sense of direction, so that they know what they are working toward. This can help to motivate employees toward specific targets and important outcomes. Numerous studies have shown that specific high goals can significantly increase employee performance.26 People like having a focus for their activities and efforts. Consider Guitar Center, a fast-growing retailer in the United States. Managers establish specific goals for sales teams at every Guitar Center store each morning, and employees do whatever they need to, short of los- ing the company money, to meet the targets. Guitar Center’s unwritten mantra of “Take the deal” means that salespeople are trained to take any profitable deal, even at razor-thin margins, to meet daily sales goals.27

EXHIBIT 2.3 Goal Type and Purpose

Type of Goals Purpose of Goals

Official goals, mission: Legitimacy Operative goals: Employee direction and motivation Decision guidelines Standard of performance

Chapter 2: Strategy, Organization Design, and Effectiveness 65

Another important purpose of goals is to act as guidelines for employee behavior and decision making. Appropriate goals can act as a set of constraints on individual behavior and actions so that employees behave within boundaries that are accept- able to the organization and larger society.28 They help to define the appropri- ate decisions concerning organization structure, innovation, employee welfare, or growth. Finally, goals provide a standard for assessment. The level of organizational performance, whether in terms of profits, units produced, degree of employee sat- isfaction, level of innovation, or number of customer complaints, needs a basis for evaluation. Operative goals provide this standard for measurement.


To support and accomplish the organization’s strategic intent and keep people focused in the direction determined by organizational mission, vision, and operative goals, managers have to select specific strategy and design options that can help the organization achieve its purpose and goals within its competitive environment. In this section, we examine a couple of practical approaches to selecting strategy and design. The questionnaire in this chapter’s “How Do You Fit the Design?” box on page 66 will give you some insight into your own strategic management competencies.

A strategy is a plan for interacting with the competitive environment to achieve organizational goals. Some managers think of goals and strategies as interchange- able, but for our purposes, goals define where the organization wants to go and strategies define how it will get there. For example, a goal might be to achieve 15 percent annual sales growth; strategies to reach that goal might include aggres- sive advertising to attract new customers, motivating salespeople to increase the average size of customer purchases, and acquiring other businesses that produce similar products. Strategies can include any number of techniques to achieve the goal. The essence of formulating strategies is choosing whether the organization will perform different activities than its competitors or will execute similar activities more efficiently than its competitors do.29

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

Porter’s Competitive Forces and Strategies

One popular and effective model for formulating strategy is Porter’s competitive forces and strategies. Michael E. Porter studied a number of business organizations and proposed that managers can formulate a strategy that makes the organization more profitable and less vulnerable if they understand five forces in the industry environment.30 Porter found the following forces determine a company’s position vis-à-vis competitors in the industry:

• The Threat of New Entrants. The threat of new entrants to an industry can create pressure for established organizations, which might need to hold down prices or increase their level of investment. For example, when managers at Nike

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

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

66 Part 2: Organizational Purpose and Structural Design

learned that fast-growing athletic apparel company Under Armour planned to get into the business of selling athletic footwear, they quickly invested in reviv- ing their company’s long-dead cross-training category by designing the new SPARQ trainer.31

Text not available due to copyright restrictions

Chapter 2: Strategy, Organization Design, and Effectiveness 67

The threat of entry in an industry depends largely on the amount and extent of potential barriers, such as cost. It is far more costly to enter the auto manufac- turing industry, for instance, than to start a specialty coffee shop.

• The Power of Suppliers. Large, powerful suppliers can charge higher prices, limit services or quality, and shift costs to their customers, keeping more of the value for themselves. The concentration of suppliers and the availability of substitute suppliers are significant factors in determining supplier power. The sole supplier of materials or information to a company will have great power, for example. The Nielsen Company has wielded tremendous power with televi- sion networks because it has until recently been the sole source of ratings data that network executives use to make advertising and programming decisions. Nielsen’s power has recently waned due to quality control problems, as well as the threat presented by TiVo, a provider of digital video recorders, which has begun offering its own detailed audience and ratings data to the networks.32

• The Power of Buyers. Powerful customers, the flip side of powerful suppliers, can force down prices, demand better quality or service, and drive up costs for the supplying organization. Wal-Mart, for example, is so powerful that it can easily put the screws to manufacturers who supply goods for sale at its stores.

• The Threat of Substitutes. The power of alternatives and substitutes for a com- pany’s product or service may be affected by changes in cost, new technologies, social trends that will deflect buyer loyalty, and other environmental changes. Large pharmaceutical companies are under intense pressure from generic com- petition as patents on numerous popular drugs have expired in recent years.33

Providers of conventional long-distance telephone services have suffered from the introduction of inexpensive Internet-based phone services.

• Rivalry among Existing Competitors. Rivalry among competitors is influenced by the preceding four forces, as well as by cost and product differentiation. Porter has referred to the “advertising slugfest” when describing the scrambling and jockeying for position that occurs among fierce rivals within an industry. The rivalry between Coke and Pepsi is a famous example. Recently, Coke scored big with its sponsorship of the Beijing Olympics, but Pepsi’s creative marketing had many Chinese consumers thinking it was an official sponsor too.34

In finding its competitive edge within these five forces, Porter suggests that a company can adopt one of three strategies: differentiation, low-cost leadership, or focus.35 The focus strategy, in which the organization concentrates on a spe- cific market or buyer group, is further divided into focused low cost and focused differentiation. This yields four basic strategies, as illustrated in Exhibit 2.4. To use this model, managers evaluate two factors, competitive advantage and com- petitive scope. With respect to advantage, managers determine whether to compete through lower costs or through the ability to offer unique or distinctive products and services that can command a premium price. Managers then determine whether the organization will compete on a broad scope (competing in many customer segments) or a narrow scope (competing in a selected customer segment or group of segments). These choices determine the selection of strategies, as illustrated in Exhibit 2.4.

Differentiation. In a differentiation strategy, organizations attempt to distinguish their products or services from others in the industry. An organization may use advertising, distinctive product features, exceptional service, or new technology to achieve a product perceived as unique. This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable.

68 Part 2: Organizational Purpose and Structural Design






Low-cost leadership

Focused low-cost leadership


Example: Ryanair

Example: Puma

Example: Edward Jones


Example: Apple



A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand. However, companies must remember that successful differentiation strate- gies require a number of costly activities, such as product research and design and extensive advertising. Companies that pursue a differentiation strategy need strong marketing abilities and creative employees who are given the time and resources to seek innovations. One good illustration of a company that benefits from a differen- tiation strategy is Apple. Apple has never tried to compete on price and likes being perceived as an “elite” brand. Its personal computers, for example, can command significantly higher prices than other PCs because of their distinctiveness. The com- pany has built a loyal customer base by providing innovative, stylish products and creating a prestigious image. Consider the launch of the iPhone.

Sure, you can buy a cell phone for next to nothing these days. But when Apple launched the iPhone at a price of more than $599, long lines of shoppers were eager to

buy them. Everyone who was anyone had to have an iPhone. That’s a bit of an exaggeration, of course, but demand for the pricey phone was strong

even before Apple cut the price to expand sales to a wider group of consumers. Referred to as “perhaps the most-hyped gadget in history,” the iPhone quickly became a status sym- bol. The less-expensive, faster iPhone 3G experienced even stronger demand when it was released in mid-2008. AT&T sold 2.4 million iPhones in the third quarter of that year.

EXHIBIT 2.4 Porter’s Competitive Strategies



Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1988 by Michael E. Porter.

Chapter 2: Strategy, Organization Design, and Effectiveness 69


Although Apple is still a small player in the broader cell phone market, the innova- tive technology of the iPhone, combined with creative marketing and the cachet of Apple, convinced many consumers that they needed a phone that gives them easy access to the Internet, digital music and video, and mobile social networks. So-called “smartphones” have been used for years by business professionals, with Research in Motion’s BlackBerry being the leader. But it took Apple to build a strong consumer market for them.

Apple is now aiming directly at the BlackBerry, opening the door to third-party software applications that can make the iPhone more compatible with the needs of business users. The BlackBerry has a huge head start in this market, but as one IT professional said, “The iPhone is the coolest thing you’ll touch.”36 ■

Service firms can use a differentiation strategy as well. Umpqua Bank, based in Portland, Oregon, for instance, wants to become a “lifestyle brand,” rather than just a financial institution. Many branches have free wi-fi access, spacious seat- ing areas with big-screen televisions, and Umpqua branded coffee. The company recently released its first CD—not a “certificate of deposit,” but the kind with music on it. The bank worked with music marketing firm Rumblefish to put together a collection of songs by new or undiscovered artists in the markets where Umpqua operates. Over the past dozen or so years, Umpqua’s differentiation strategy has helped it grow from about $150 million in deposits to more than $7 billion.37

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

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

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

70 Part 2: Organizational Purpose and Structural Design

Focus. With Porter’s third strategy, the focus strategy, the organization concentrates on a specific regional market or buyer group. The company will try to achieve either a low-cost advantage or a differentiation advantage within a narrowly defined market. One good example of a focused low-cost strategy is Edward Jones, a St. Louis–based brokerage house. The firm has succeeded by building its business in rural and small-town America and providing investors with conservative, long- term investments.39 An example of a focused differentiation strategy is Puma, the German athletic-wear manufacturer. In the mid-1990s, Puma was on the brink of bankruptcy. CEO Jochen Zeitz, then only 30 years old, revived the brand by tar- geting selected customer groups, especially armchair athletes, and creating stylish shoes and clothes that are setting design trends. Puma is “going out of its way to be different,” says analyst Roland Könen.40

Porter found that companies that did not consciously adopt a low-cost, differen- tiation, or focus strategy achieved below-average profits compared to those that used one of the three strategies. Many Internet companies have failed because managers did not develop competitive strategies that would distinguish them in the marketplace.41

On the other hand, Google became highly successful with a coherent differentiation strategy that distinguished it from other search engines. The ability of managers to devise and maintain a clear competitive strategy is considered one of the defining fac- tors in an organization’s success. However, in today’s tumultuous environment, some scholars and consultants emphasize that managers also need to maintain flexibility in their strategic thinking, as further discussed in this chapter’s Book Mark.

Miles and Snow’s Strategy Typology

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

Prospector. The prospector strategy is to innovate, take risks, seek out new oppor- tunities, and grow. This strategy is suited to a dynamic, growing environment, where creativity is more important than efficiency. Nike, which innovates in both products and internal processes, exemplifies the prospector strategy. Nike’s new Air Jordan XX3, for example, is the first in a program of shoes based on designs that can be produced using recycled materials and limited amounts of toxic chemical- based glues. CEO Mark Parker says Nike’s growth strategy is based on both out- ward expansion and inward redesign of operations.43 Online companies such as Facebook, Google, and MySpace also reflect a prospector strategy.

Defender. The defender strategy is almost the opposite of the prospector. Rather than taking risks and seeking out new opportunities, the defender strategy is concerned with stability or even retrenchment. This strategy seeks to hold on to current custom- ers, but it neither innovates nor seeks to grow. The defender is concerned primarily with internal efficiency and control to produce reliable, high-quality products for steady customers. This strategy can be successful when the organization exists in a declining industry or a stable environment. Paramount Pictures has been using a defender strategy for several years.44 Paramount turns out a steady stream of reliable

Chapter 2: Strategy, Organization Design, and Effectiveness 71

Strategies that have the greatest chance of success, says author, professor, and Deloitte consultant Michael Raynor, also have the highest probability of failure. Why? Because key uncertainties in the environment can break either for or against managers’ best-laid plans. In his book, The Strategy Paradox, Raynor says the strategic choices of differentiation or low-cost enable companies to become highly successful when environmental circumstances favor the strategy, but they can lead to failure when market conditions shift in an unpredictable way.

RESOLVING THE PARADOX So is business just a crapshoot? Despite uncertainty, Raynor says managers can implement strategies that deliver supe- rior results while minimizing exposure to the vagaries of fate. He offers a set of tools based on a framework used by Johnson & Johnson:

• Anticipate the Future and Formulate Strategic Options. First managers anticipate the future by building as many different scenarios of the future as they can imagine. Each scenario describes possible future shifts in criti- cal environmental forces affecting the company, which might include a radical change in the price of oil, a game- changing technology shift, or an economic recession. Next, they develop long-range strategic options for each of the scenarios. For example, managers at Alliant Energy, a $3 billion Wisconsin-based energy-utility holding com- pany, were considering whether to invest in nonregulated generating assets. Rather than committing heavily to a

particular strategy, they considered a series of scenarios that captured the full range of possible futures over a ten-year period and devised strategic options targeted to each set of competitive conditions.

• Decide on Strategic Actions and Manage Chosen Options. The next step is to translate analysis into action. Once senior managers have defined a range of alternative strategic options, they can determine which actions are appropriate as the future unfolds. Managing the options is the job of line managers once senior executives iden- tify and commit to strategic options. The cycle contin- ues as senior managers focus on the future while lower level managers implement strategic commitments for the short-term.

A RECIPE FOR AVOIDING DISASTER? Raynor developed his ideas of the strategy paradox after studying winning companies and conducting postmortems on losing ones. He suggests that what separates the two is often poor timing or unforeseen changes in the environment rather than inferior strategies or flawed execution. Instead of a traditional strategic planning approach that treats environ- mental uncertainty as an afterthought, this approach puts uncertainty at the center of the strategic decision-making process, helping managers maintain strategic flexibility as the future unfolds.

The Strategy Paradox, by Michael E. Raynor, is published by Currency Doubleday, a division of Random House Inc.

The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It) By Michael E. Raynor


hits but few blockbusters. Managers shun risk and sometimes turn down potentially high-profile films to keep a lid on costs. This has enabled the company to remain highly profitable while other studios have low returns or actually lose money.

Analyzer. The analyzer tries to maintain a stable business while innovating on the periphery. It seems to lie midway between the prospector and the defender. Some products will be targeted toward stable environments in which an efficiency strategy designed to keep current customers is used. Others will be targeted toward new, more dynamic environments, where growth is possible. The analyzer attempts to balance efficient production for current product or service lines with the creative development of new product lines. provides an example. The compa- ny’s current strategy is to defend its core business of selling books and other physi- cal goods over the Internet, but also to build a business in digital media, including

72 Part 2: Organizational Purpose and Structural Design

initiatives such as a digital book service, an online DVD rental business, and a digital music store to compete with Apple’s iTunes.45

Reactor. The reactor strategy is not really a strategy at all. Rather, reactors respond to environmental threats and opportunities in an ad hoc fashion. In a reactor strat- egy, top management has not defined a long-range plan or given the organization an explicit mission or goal, so the organization takes whatever actions seem to meet immediate needs. Although the reactor strategy can sometimes be successful, it can also lead to failed companies. Some large, once highly successful companies are struggling because managers failed to adopt a strategy consistent with consumer trends. In recent years, managers at Dell, long one of the most successful and profit- able makers of personal computers in the world, have been floundering to find the appropriate strategy. Dell had a string of disappointing quarterly profits as the com- pany reached the limits of its “make PCs cheap and build them to order” strategy. Competitors caught up, and Dell had failed to identify new strategic directions that could provide a new edge.46

The Miles and Snow typology has been widely used, and researchers have tested its validity in a variety of organizations, including hospitals, colleges, banking insti- tutions, industrial products companies, and life insurance firms. In general, research- ers have found strong support for the effectiveness of this typology for organization managers in real-world situations.47

How Strategies Affect Organization Design

Choice of strategy affects internal organization characteristics. Organization design characteristics need to support the firm’s competitive approach. For example, a company wanting to grow and invent new products looks and “feels” different from a company that is focused on maintaining market share for long-established prod- ucts in a stable industry. Exhibit 2.5 summarizes organization design characteristics associated with the Porter and Miles and Snow strategies.

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

The prospector strategy requires characteristics similar to a differentiation strat- egy, and the defender strategy takes an efficiency approach similar to low-cost leadership. Because the analyzer strategy attempts to balance efficiency for stable product lines with flexibility and learning for new products, it is associated with a mix of characteristics, as listed in Exhibit 2.5. With a reactor strategy, managers have left the organization with no direction and no clear approach to design.

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

Design the organiza- tion to support the firm’s competitive strategy. With a low- cost leadership or defender strategy, select design charac- teristics associated with an efficiency orientation. For a differentiation or prospector strategy, on the other hand, choose characteristics that encourage learn- ing, innovation, and adaptation. Use a balanced mixture of characteristics for an analyzer strategy.

Chapter 2: Strategy, Organization Design, and Effectiveness 73

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

Strategy: Differentiation Organization Design: • Learning orientation; acts in a flexible,

loosely knit way, with strong horizontal coordination

• Strong capability in research • Values and builds in mechanisms for

customer intimacy • Rewards employee creativity, risk

taking, and innovation

Strategy: Low-Cost Leadership Organization Design:. • Efficiency orientation; strong central

authority; tight cost control, with frequent, detailed control reports

• Standard operating procedures • Highly efficient procurement and

distribution systems • Close supervision; routine tasks;

limited employee empowerment

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

Strategy: Prospector Organization Design: • Learning orientation; flexible, fluid,

decentralized structure • Strong capability in research

Strategy: Defender Organization Des.ign: • Efficiency orientation; centralized

authority and tight cost control • Emphasis on production efficiency;

low overhead • Close supervision; little employee


Strategy: Analyzer Organization Design: • Balances efficiency and learning;

tight cost control with flexibility and adaptability

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

Strategy: Reactor Organization Design: • No clear organizational approach;

design characteristics may shift abruptly, depending on current needs

EXHIBIT 2.5 Organization Design Outcomes of Strategy

Other Factors Affecting Organization Design

Strategy is one important factor that affects organization design. Ultimately, how- ever, organization design is a result of numerous contingencies, which will be dis- cussed throughout this book. The emphasis given to efficiency and control versus learning and flexibility is determined by the contingencies of strategy, environ- ment, size and life cycle, technology, and organizational culture. The organization is designed to “fit” the contingency factors, as illustrated in Exhibit 2.6.

For example, in a stable environment, the organization can have a traditional structure that emphasizes vertical control, efficiency, specialization, standard proce- dures, and centralized decision making. However, a rapidly changing environment

74 Part 2: Organizational Purpose and Structural Design

Strategy Environment

Technology Size/Life Cycle


Organizational Structure and Design

The Right Mix of Design Characteristics Fits the Contingency Factors

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

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

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


Understanding organizational goals and strategies, as well as the concept of fitting design to various contingencies, is a first step toward understanding organiza- tional effectiveness. Organizational goals represent the reason for an organiza- tion’s existence and the outcomes it seeks to achieve. The next few sections of the chapter explore the topic of effectiveness and how effectiveness is measured in organizations.

EXHIBIT 2.6 Contingency Factors Affecting Organization Design

Chapter 2: Strategy, Organization Design, and Effectiveness 75

Recall from Chapter 1 that organizational effectiveness is the degree to which an organization realizes its goals.48 Effectiveness is a broad concept. It implicitly takes into consideration a range of variables at both the organizational and departmental levels. Effectiveness evaluates the extent to which multiple goals—whether official or operative—are attained.

Efficiency is a more limited concept that pertains to the internal workings of the organization. Organizational efficiency is the amount of resources used to pro- duce a unit of output.49 It can be measured as the ratio of inputs to outputs. If one organization can achieve a given production level with fewer resources than another organization, it would be described as more efficient.50

Sometimes efficiency leads to effectiveness, but in other organizations, efficiency and effectiveness are not related. An organization may be highly efficient but fail to achieve its goals because it makes a product for which there is no demand. Likewise, an organization may achieve its profit goals but be inefficient. Efforts to increase efficiency, particularly through severe cost cutting, can also sometimes make the organization less effective. One regional fast food chain wanting to cut costs decided to reduce food waste by not cooking any food until it was ordered. The move reduced the chain’s costs, but it also led to delayed service, irritated customers, and lower sales.51

Overall effectiveness is difficult to measure in organizations. Organizations are large, diverse, and fragmented. They perform many activities simultaneously, pursue multiple goals, and generate many outcomes, some intended and some unintended.52 Managers determine what indicators to measure in order to gauge the effectiveness of their organizations. Studies and surveys have found that many managers have a difficult time with the concept of evaluating effectiveness based on characteristics that are not subject to hard, quantitative measurement.53 However, top executives at some of today’s leading companies are finding new ways to measure effective- ness, including the use of such “soft” indications as customer loyalty and employee engagement.

First, we will discuss several traditional approaches to measuring effective- ness that focus on which indicators managers consider most important to track. Later, we will examine an approach that integrates concern for various parts of the organization.


Organizations bring resources in from the environment, and those resources are transformed into outputs delivered back into the environment, as shown in Exhibit 2.7 Traditional approaches to measuring effectiveness look at different parts of the organization and measure indicators connected with outputs, inputs, or internal activities.

Goal Indicators

The goal approach to effectiveness consists of identifying an organization’s output goals and assessing how well the organization has attained those goals.54 This is a logical approach because organizations do try to attain certain levels of out- put, profit, or client satisfaction. The goal approach measures progress toward

76 Part 2: Organizational Purpose and Structural Design

attainment of those goals. For example, an important measure for the Women’s National Basketball Association is number of tickets sold per game. During the league’s first season, President Val Ackerman set a goal of 4,000 to 5,000 tickets per game. The organization actually averaged nearly 9,700 tickets per game, indi- cating that the WNBA was highly effective in meeting its goal for attendance.55

The important goals to consider are operative goals, because official goals (mis- sion) tend to be abstract and difficult to measure. 56 Indicators tracked with the goal approach include:

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

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

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

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

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

Resource-based Indicators

The resource-based approach looks at the input side of the transformation process shown in Exhibit 2.7. It assumes organizations must be successful in obtaining and managing valued resources in order to be effective. From a resource-based perspec- tive, organizational effectiveness is defined as the ability of the organization, in either absolute or relative terms, to obtain scarce and valued resources and success- fully integrate and manage them.57 The resource-based approach is valuable when other indicators of performance are difficult to obtain. In many nonprofit and social welfare organizations, for example, it is hard to measure output goals or internal efficiency.

External Environment


Internal activities

and processes

Resource-based approach

Internal process approach

Goal approach

Product and

Service Outputs

Resource Inputs

EXHIBIT 2.7 Traditional Approaches to Measuring Organizational Effectiveness

Chapter 2: Strategy, Organization Design, and Effectiveness 77

In a broad sense, resource indicators of effectiveness encompass the following dimensions:

• Bargaining position—the ability of the organization to obtain from its environ- ment scarce and valued resources, including financial resources, raw materials, human resources, knowledge, and technology

• The abilities of the organization’s decision makers to perceive and correctly interpret the real properties of the external environment

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

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

Internal Process Indicators

In the internal process approach, effectiveness is measured as internal organizational health and efficiency. An effective organization has a smooth, well-oiled internal process. Employees are happy and satisfied. Department activities mesh with one another to ensure high productivity. This approach does not consider the exter- nal environment. The important element in effectiveness is what the organization does with the resources it has, as reflected in internal health and efficiency. The best-known proponents of an internal process model are from the human relations approach to organizations. Such writers as Chris Argyris, Warren G. Bennis, Rensis Likert, and Richard Beckhard have all worked extensively with human resources in organizations and emphasize the connection between human resources and effec- tiveness.58 Results from a study of nearly 200 secondary schools showed that both human resources and employee-oriented processes were important in explaining and promoting effectiveness in those organizations.59

Internal process indicators include:60

• A strong, adaptive corporate culture and positive work climate • Operational efficiency, such as using minimal resources to achieve outcomes • Undistorted horizontal and vertical communication • Growth and development of employees


Business organizations have typically focused on financial measures such as profit and return on investment to assess performance. Nonprofit organizations also have to assess budgets, spending, and fund-raising income, and each of these measures is concerned with finances. Traditional approaches based on goal, resource-based, or internal process indicators all have something to offer, but each one, just like sole reliance on financial numbers, tells only part of the story. In recent years, a new approach that balances a concern for various parts of the organization rather than focusing on one aspect has become popular. The balanced scorecard combines sev- eral indicators of effectiveness into a single framework, balancing traditional finan- cial measures with operational measures relating to a company’s critical success factors.61

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

Use the goal approach, internal process approach, and resource-based approach to obtain specific pictures of organizational effec- tiveness. Assess the four components of the balanced scorecard to obtain a broader, more balanced picture of effectiveness.

78 Part 2: Organizational Purpose and Structural Design

Exhibit 2.8 illustrates the four effectiveness categories considered by the bal- anced scorecard. Within each area of effectiveness—financial performance, cus- tomer service, internal business processes, and the organization’s capacity for learning and growth—managers identify key performance indicators the organiza- tion will track. The financial perspective reflects a concern that the organization’s activities contribute to improving short- and long-term financial performance. It includes traditional measures such as net income and return on investment. Customer service indicators measure such things as how customers view the organization, as well as customer retention and satisfaction. Business process

Overall Mission Strategy


Internal Business ProcessesCustomers


Learning and Growth

Effectiveness Criterion: How well do our actions contribute to better financial performance?

Example of measures: profit, return on investment

Effectiveness Criterion: How well do our work processes add value for customers and shareholders?

Examples of measures: order rate fulfillment, cost-per-order

Effectiveness Criterion: How well are we learning, changing, and improving?

Examples of measures: continuous process improve- ment, employee retention

Effectiveness Criterion: How well do we serve our customers?

Examples of measures: customer satisfaction, customer loyalty

Source: Based on Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January–February 1996), 75–85; Chee W. Chow, Kamal M. Haddad, and James E. Williamson, “Applying the Balanced Scorecard to Small Companies,” Management Accounting 79, no. 2 (August 1997), 21–27; and Cathy Lazere, “All Together Now,” CFO (February 1998), 28–36.

EXHIBIT 2.8 Balanced Scorecard Effectiveness Criteria

Chapter 2: Strategy, Organization Design, and Effectiveness 79


indicators focus on production and operating statistics, such as speed of order fulfillment and cost per order. The final component looks at the organization’s potential for learning and growth, focusing on how well resources and hu man capital are being managed for the company’s future. Measurements include such things as employee satisfaction and retention, amount of training people receive, business process improvements, and the introduction of new products. The com- ponents of the scorecard are designed in an integrative manner so that they rein- force one another and link short-term actions with long-term strategic goals, as illustrated in Exhibit 2.8.

3 The best measures of business performance are fi nancial. ANSWER: Disagree. If you can have only one type of measure of business perfor- mance, it might have to be fi nancial. But diverse views of performance, such as using the balanced scorecard, have proven to be more effective than fi nancials alone, because managers can understand and control the actions that cause business effectiveness. Financial numbers alone provide narrow and limited information.

The balanced scorecard helps managers assess the organization from many per- spectives so they have a better understanding of total effectiveness. Successful man- agers keep the organization focused on data in all four components rather than relying on just one, such as finances, which tells only part of the story. Companies such as Best Buy, Wells Fargo, and Hilton Corporation, for instance, are striving to understand how they perform on all four components of effectiveness and look- ing at the relationships among the components. For example, how does internal efficiency relate to customer satisfaction or financial outcomes? How do measures of employee engagement, customer satisfaction, sales performance, and profitabil- ity interconnect and contribute to overall effectiveness? Hilton found that a boost in customer retention rates led to an increase in revenues. Best Buy has connected employee engagement to better store performance.62

Thus, the balanced scorecard has evolved into a system that helps managers see how organizational effectiveness results from accomplishing outcomes in four con- sistent and mutually supportive areas. Overall effectiveness is a result of how well these interdependent elements are aligned, so that individuals, teams, departments, and so forth are working in concert to attain specific goals that ultimately help the organization achieve high performance and fulfill its mission.63


■ Organizations exist for a purpose. Top managers decide the organization’s strategic intent, including a specific mission to be accomplished. The mission statement, or official goals, makes explicit the purpose and direction of an orga- nization. Operative goals designate specific ends sought through actual operat- ing procedures. Official and operative goals are a key element in organizations because they meet these needs—establishing legitimacy with external groups,

80 Part 2: Organizational Purpose and Structural Design

providing employees with a sense of direction and motivation, and setting stan- dards of performance.

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

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

■ Assessing organizational effectiveness reflects the complexity of organizations as a topic of study. No easy, simple, guaranteed measure will provide an unequivo- cal assessment of performance. Organizations must perform diverse activities well—from obtaining resource inputs to delivering outputs—to be successful. Traditional approaches use output goals, resource acquisition, or internal health and efficiency as the indicators of effectiveness.

■ No approach is suitable for every organization, but each offers some advantages that the others may lack. In addition, a more recent approach to measuring effectiveness is the balanced scorecard approach, which takes into consideration financial performance, customer service, internal business processes, and the organization’s capacity for learning and growth. Managers track and analyze key metrics in these four areas to see how they are interconnected and contribute to overall effectiveness.

analyzer balanced scorecard competitive advantage core competence defender differentiation strategy focus strategy

goal approach internal process approach low-cost leadership strategy mission official goals operative goals organizational goal

prospector reactor resource-based approach strategic intent strategy

Key ConceptsKey

1. Discuss the role of top management in setting organiza- tional direction.

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

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

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

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

6. Do you believe mission statements and official goal statements provide an organization with genuine legiti- macy in the external environment? Discuss.

Discussion QuestionsDisc

Chapter 2: Strategy, Organization Design, and Effectiveness 81

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

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

9. What are the similarities and differences between assess- ing effectiveness on the basis of the balanced scorecard versus the stakeholder approach described in Chapter 1? Explain.

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

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82 Part 2: Organizational Purpose and Structural Design

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Chapter 2: Strategy, Organization Design, and Effectiveness 83

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84 Part 2: Organizational Purpose and Structural Design

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Chapter 2: Strategy, Organization Design, and Effectiveness 85

Chapter 2 Workshop: The Balanced Scorecard and Organizational Effectiveness*

1. Divide into groups of four to six members. 2. Select an organization to study for this exercise. It

should be an organization for which one of you has worked, or it could be part of the university.

3. Using the exhibit “The Balanced Scorecard Approach to Effectiveness” (Exhibit 2.8), your group should list eight potential measures that show a balanced view of performance across the four categories. Use the follow- ing table.

4. How will achieving these goals help the organization to become more effective? Which goals could be given more weight than others? Why?

5. Present your chart to the rest of the class. Each group should explain why it chose those particular measures and which they think are more important. Be prepared to defend your position to the other groups, which are encouraged to question your choices.


Compare percentages of 25% reduction (Example) Equilibrium Turnover rates workers who left HRM fi les in fi rst year

Financial 1.

2. Customers 3.

4. Internal 5. Business Processes 6. Learning 7. and Growth


Effectiveness Goal Performance How to Source What Do You Category or Subgoal Gauge Measure of Data Consider Effective?

*Adapted by Dorothy Marcic from general ideas in Jennifer Howard and Larry Miller, Team Management, The Miller Consulting Group, 1994, p. 92.

Text not available due to copyright restrictions

86 Part 2: Organizational Purpose and Structural Design


1. Brian Stelter, “Plenty of Users, Too Few Dollars; Trying to Turn Popularity Into Gold, MySpace Gets a New Look,” International Herald Tribune (June 16, 2008), 10; and Ellen McGirt, “MySpace, the Sequel,” Fortune (September 2008), 92–102.

2. Amitai Etzioni, Modern Organizations (Englewood Cliffs, N.J.: Prentice-Hall, 1964), 6.

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

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7. Hamel and Prahalad, “Strategic Intent.” 8. Barbara Bartkus, Myron Glassman, and R. Bruce McAfee,

“Mission Statements: Are They Smoke and Mirrors?” Business Horizons (November–December 2000), 23–28.

9. Mark C. Suchman, “Managing Legitimacy: Strategic and Institutional Approaches,” Academy of Management Review 20, no. 3 (1995), 571–610.

10. Ian Wilson, “The Agenda for Redefining Corporate Purpose: Five Key Executive Actions,” Strategy & Leadership 32, no. 1 (2004), 21–26.

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

12. Hamel and Prahalad, “Strategic Intent.” 13. Amy Merrick, “How Walgreen Changes Its Prescription for

Growth,” The Wall Street Journal (March 19, 2008), B1. 14. Arthur A. Thompson, Jr., and A. J. Strickland III, Strategic

Management: Concepts and Cases, 6th ed. (Homewood, Ill.: Irwin, 1992); and Briance Mascarenhas, Alok Baveja, and Mamnoon Jamil, “Dynamics of Core Competencies in Leading Multinational Companies,” California Management Review 40, no. 4 (Summer 1998), 117–132.

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16. “Gaylord Says Hotels Prosper by Becoming Destinations,” The Tennessean (July 24, 2005),

17. Chris Woodyard, “Big Dreams for Small Choppers Paid Off,” USA Today (September 11, 2005), http://www.

18. Charles Perrow, “The Analysis of Goals in Complex Organizations,” American Sociological Review 26 (1961), 854–866.

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

20. Kate Murphy, “Not Just Another Jelly Bean,” The New York Times (June 26, 2008), C5.

21. Joseph Pereira and Christopher J. Chipello, “Battle of the Block Makers,” The Wall Street Journal (February 4, 2004), B1.

22. Reed Abelson, “Managing Outcomes Helps a Children’s Hospital Climb in Renown,” The New York Times (September 15, 2007), C1.

23. Kevin E. Joyce, “Lessons for Employers from Fortune’s ‘100 Best,’” Business Horizons (March–April 2003), 77–84; Ann Harrington, “The 100 Best Companies to Work for Hall of Fame,” Fortune (January 24, 2005), 94; and Robert Levering and Milton Moskowitz, “100 Best Companies to Work For: The Rankings,” Fortune (February 4, 2008), 75–94.

24. Kim Cross, “Does Your Team Measure Up?” (June 12, 2001), 22–28.

25. Larry Huston and Nabil Sakkab, “Connect and Develop; Inside Procter & Gamble’s New Model for Innovation,” Harvard Business Review (March 2006), 58–66.

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

27. Paul Sloan, “The Sales Force That Rocks,” Business 2.0 (July 2005), 102–107.

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

29. Michael E. Porter, “What Is Strategy?” Harvard Business Review (November–December 1996), 61–78.

30. Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review (January 2008), 78–93.

31. Sean Gregory, “Under Armour’s Big Step Up,” Time (May 26, 2008), 44–45.

32. Bill Carter, “Nielsen Tells TV Clients It Is Working on Ending Delays in Ratings,” The New York Times (February 9, 2008), C3; and Stephanie Kang, “NBC to Use TiVo’s TV Viewership Data,” The Wall Street Journal (November 27, 2007), B8.

33. Peter Loftus, “Drug Firms Employ Strategy Masters,” The Wall Street Journal (April 14, 2008), B5.

34. Geoffrey A. Fowler and Betsy McKay, “Coke Pins China Hopes on Blitz in Beijing,” The Wall Street Journal (August 19, 2008), A1, A13.

35. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).

36. Tom Krazit, “Apple’s iPhone Price Cuts Leave Mixed Feelings,” CNet, Apples+iPhone+price+cuts+leave+mixed+feelings/ 2100-1041_3-6206367.html, accessed on August 13, 2008;


Chapter 2: Strategy, Organization Design, and Effectiveness 87

Nick Wingfield, “Apple Positions iPhone As Rival to the BlackBerry,” The Wall Street Journal (March 7, 2008), B1; Laura M. Holson, “Even AT&T Is Startled By Cost of iPhone Partnership,” The New York Times (October 23, 2008), B2; and Brad Stone, “BlackBerry’s Quest: Fend Off the iPhone,” The New York Times (April 27, 2008), BU1.

37. Rob Walker, “Branching Out,” New York Times Magazine (September 24, 2006), 21.

38. Alan Ruddock, “Keeping Up with O’Leary,” Management Today (September 2003), 48–55; Jane Engle, “Flying High for Pocket Change; Regional Carriers Offer Inexpensive Travel Alternative,” South Florida Sun Sentinel (February 13, 2005), 5.

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

40. Kevin J. O’Brien, “Focusing on Armchair Athletes, Puma Becomes a Leader,” The New York Times (March 12, 2004), W1.

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

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

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

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

45. Mylene Mangalindan, “Slow Slog for Amazon’s Digital Media—Earnings Today May Provide Data on What Works,” The Wall Street Journal (April 23, 2008), B1.

46. Nanette Byrnes and Peter Burrows, “Where Dell Went Wrong,” BusinessWeek (February 19, 2007), 62–63.

47. “On the Staying Power of Defenders, Analyzers, and Prospectors: Academic Commentary by Donald C. Hambrick,” Academy of Management Executive 17, no. 4 (2003), 115–118.

48. Etzioni, Modern Organizations, 8. 49. Etzioni, Modern Organizations, 8; and Gary D. Sandefur,

“Efficiency in Social Service Organizations,” Administration and Society 14 (1983), 449–468.

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

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

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

53. David L. Blenkhorn and Brian Gaber, “The Use of ‘Warm Fuzzies’ to Assess Organizational Effectiveness,” Journal of

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

54. James L. Price, “The Study of Organizational Effectiveness,” Sociological Quarterly 13 (1972), 3–15; and Steven Strasser, J. D. Eveland, Gaylord Cummins, O. Lynn Deniston, and John H. Romani, “Conceptualizing the Goal and Systems Models of Organizational Effectiveness—Implications for Comparative Evaluation Research,” Journal of Management Studies 18 (1981), 321–340.

55. Lucy McCauley, ed., “Unit of One: Measure What Matters,” Fast Company (May 1999), 97.

56. Richard H. Hall and John P. Clark, “An Ineffective Effectiveness Study and Some Suggestions for Future Research,” Sociological Quarterly 21 (1980), 119–134; Price, “The Study of Organizational Effectiveness”; and Perrow, “Analysis of Goals.”

57. The discussion of the resource-based approach is based in part on Michael V. Russo and Paul A. Fouts, “A Resource- Based Perspective on Corporate Environmental Performance and Profitability,” Academy of Management Journal 40, no. 3 (June 1997), 534–559; and Jay B. Barney, J. L. “Larry” Stempert, Loren T. Gustafson, and Yolanda Sarason, “Organizational Identity within the Strategic Management Conversation: Contributions and Assumptions,” in David A. Whetten and Paul C. Godfrey, eds., Identity in Organizations: Building Theory through Conversations (Thousand Oaks, Calif.: Sage Publications, 1998), 83–98.

58. Chris Argyris, Integrating the Individual and the Organization (New York: Wiley, 1964); Warren G. Bennis, Changing Organizations (New York: McGraw-Hill, 1966); Rensis Likert, The Human Organization (New York: McGraw-Hill, 1967); and Richard Beckhard, Organization Development Strategies and Models (Reading, Mass.: Addison-Wesley, 1969).

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60. J. Barton Cunningham, “Approaches to the Evaluation of Organizational Effectiveness,” Academy of Management Review 2 (1977), 463–474; Beckhard, Organization Development.

61. “On Balance,” a CFO Interview with Robert Kaplan and David Norton, CFO (February 2001), 73–78; Chee W. Chow, Kamal M. Haddad, and James E. Williamson, “Applying the Balanced Scorecard to Small Companies,” Management Accounting 79, no. 2 (August 1997), 21–27; and Robert Kaplan and David Norton, “The Balanced Scorecard: Measures That Drive Performance,” Harvard Business Review (January-February 1992), 71–79.

62. Scott Leibs, “Measuring Up,” CFO (June 2007), 63–66. 63. Geary A. Rummler and Kimberly Morrill, “The Results

Chain,” TD (February 2005), 27–35; and John C. Crotts, Duncan R. Dickson, and Robert C. Ford, “Aligning Organizational Processes with Mission: The Case of Service Excellence,” Academy of Management Executive 19, no. 3 (August 2005), 54–68.


B et

tin a

An ze

le tt


Fundamentals of Organization


Organization Structure

Information-Sharing Perspective on Structure Vertical Information Sharing • Horizontal Information Sharing

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

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

Matrix Structure Conditions for the Matrix • Strengths and Weaknesses

Horizontal Structure Characteristics • Strengths and Weaknesses

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

Hybrid Structure

Applications of Structural Design Structural Alignment • Symptoms of Structural Deficiency

Design Essentials

Chapter 3

Wyeth Pharmaceuticals makes and sells some very powerful drugs, including Effexor for depression, Zosyn to treat infectious diseases, and Telazol, a combined anesthetic/tranquilizer for animals. But Wyeth no longer manages clinical testing of new drugs or vaccines. Outrageous? Shocking? No, just a new reality. In 2004, Wyeth outsourced its entire clinical testing operation—from protocol design to patient recruitment to site monitoring—to Accenture’s Health and Life Sciences Practice. Accenture also took over the management of Wyeth’s 175 or so clinical data employees and operations. An additional 400 or so people from the Accenture Global Delivery Centers assist in operations.1 It’s all part of Wyeth’s drive to improve quality, efficiency, speed, and innovation by outsourcing some of its operations to other firms that can handle them better and faster.

Now, you might wonder how Accenture operates. Let’s just say that even CEO Bill Green doesn’t have a permanent desk. Accenture doesn’t have a formal head- quarters, no official branches, no permanent offices. The company’s chief tech- nologist is in Germany, its head of human resources in Chicago, the chief financial officer in Silicon Valley, and most of its consultants constantly on the move.2

No doubt about it, many organizations are more complex and amorphous than they used to be. Wyeth and Accenture reflect the structural trend among today’s organizations toward outsourcing, alliances, and virtual networking. Today’s companies also use other structural innovations such as teams and matrix designs to achieve the flexibility they need. Still other firms continue to be successful with traditional functional structures that are coordinated and con- trolled through the vertical hierarchy. Organizations use a wide variety of struc- tural alternatives to help them achieve their purpose and goals, and nearly every firm needs to undergo reorganization at some point to help meet new challenges. Structural changes are needed to reflect new strategies or respond to changes in other contingency factors introduced in Chapter 2: environment, technology, size and life cycle, and culture.

Managing by Design Questions

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

1 2 3 4 5


2 Committees and task forces whose members are from different departments are often worthless for getting things done. 1 2 3 4 5


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

1 2 3 4 5



Before reading this chapter, please circle your opinion below for each of the following statements:

Purpose of This Chapter

This chapter introduces basic concepts of organization structure and shows how to design structure as it appears on the organization chart. First we define structure and provide an overview of structural design. Then, an information-sharing per- spective explains how to design vertical and horizontal linkages to provide needed information flow. The chapter next presents basic design options, followed by strat- egies for grouping organizational activities into functional, divisional, matrix, hori- zontal, virtual network, or hybrid structures. The final section examines how the application of basic structures depends on the organization’s situation and outlines the symptoms of structural misalignment.


There are three key components in the definition of organization structure:

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

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

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

These three elements of structure pertain to both vertical and horizontal aspects of organizing. For example, the first two elements are the structural framework, which is the vertical hierarchy.4 The third element pertains to the pattern of interac- tions among organizational employees. An ideal structure encourages employees to provide horizontal information and coordination where and when it is needed.

Organization structure is reflected in the organization chart. It isn’t possible to see the internal structure of an organization the way we might see its manufactur- ing tools, offices, or products. Although we might see employees going about their duties, performing different tasks, and working in different locations, the only way to actually see the structure underlying all this activity is through the organiza- tion chart. The organization chart is the visual representation of a whole set of underlying activities and processes in an organization. Exhibit 3.1 shows a simple organization chart for a traditional organization. The organization chart can be quite useful in understanding how a company works. It shows the various parts of an organization, how they are interrelated, and how each position and department fits into the whole.

The concept of an organization chart, showing what positions exist, how they are grouped, and who reports to whom, has been around for centuries.5 For example, diagrams outlining church hierarchy can be found in medieval churches in Spain. However, the use of the organization chart for business stems largely from the Industrial Revolution. As we discussed in Chapter 1, as work grew more complex and was performed by greater and greater numbers of workers, there was a pressing need to develop ways of managing and controlling organizations. The growth of the railroads provides an example. After the collision of two passenger trains in Massachusetts in 1841, the public demanded better control of the operation. As a result, the board of directors of the Western Railroad took steps to outline “definite responsibilities for

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

Develop organization charts that describe task responsibilities, reporting relation- ships, and the group- ing of individuals into departments. Provide sufficient documenta- tion so that all people within the organiza- tion know to whom they report and how they fit into the total organization picture.

90 Part 2: Organizational Purpose and Structural Design

Chapter 3: Fundamentals of Organization Structure 91


Vice President Manufacturing

Director Human Resources

Vice President Finance

Chief Accountant

Budget Analyst

Plant Superintendent

Training Specialist

Maintenance Superintendent

Benefits Administrator

EXHIBIT 3.1 A Sample Organization Chart

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

ANSWER: Disagree. A small number of fi rms have tried this approach with some success, but a typical organization needs to structure its work activities, positions, and departments in a way that ensures work is accomplished and coordinated to meet organizational goals. Many managers try to give some consideration to employee choices as a way to keep enthusiasm high.


each phase of the company’s business, drawing solid lines of authority and command for the railroad’s administration, maintenance, and operation.”6

The type of organization structure that grew out of these efforts in the late nine- teenth and early twentieth centuries was one in which the CEO was placed at the top and everyone else was arranged in layers down below, as illustrated in Exhibit 3.1. The thinking and decision making are done by those at the top, and the physical work is performed by employees who are organized into distinct, functional departments. This structure was quite effective and became entrenched in business, nonprofit, and military organizations for most of the twentieth century. However, this type of vertical structure is not always effective, particularly in rapidly changing envi- ronments. Over the years, organizations have developed other structural designs, many of them aimed at increasing horizontal coordination and communication and encouraging adaptation to external changes. This chapter’s Book Mark suggests that new approaches to organizing and managing people are crucial for companies to attain durable competitive advantages in the 21st century.

92 Part 2: Organizational Purpose and Structural Design


The organization should be designed to provide both vertical and horizontal infor- mation flow as necessary to accomplish the organization’s overall goals. If the struc- ture doesn’t fit the information requirements of the organization, people either will have too little information or will spend time processing information that is not vital

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

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

• Whole Foods Market. Teams are the basic organizational unit at Whole Foods, and they have a degree of auton- omy nearly unprecedented in the retail industry. Each store is made up of eight or so self-directed teams that oversee departments such as fresh produce, prepared foods, dairy, or checkout. Teams are responsible for all

key operating decisions, including pricing, ordering, hir- ing, and in-store promotions.

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

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

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

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

The Future of Management By Gary Hamel with Bill Breen


Chapter 3: Fundamentals of Organization Structure 93

to their tasks, thus reducing effectiveness.7 However, there is an inherent tension between vertical and horizontal mechanisms in an organization. Whereas vertical linkages are designed primarily for control, horizontal linkages are designed for coordination and collaboration, which usually means reducing control.

Organizations can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical communication and control, or toward a contemporary learning organization, which emphasizes horizontal com- munication and coordination. Exhibit 3.2 compares organizations designed for effi- ciency with those designed for learning and adaptation. An emphasis on efficiency and control is associated with specialized tasks, a hierarchy of authority, rules and regulations, formal reporting systems, few teams or task forces, and centralized decision making, which means problems and decisions are funneled to top levels of the hierarchy for resolution. Emphasis on learning and adaptation is associated with shared tasks, a relaxed hierarchy, few rules, face-to-face communication, many teams and task forces, and informal, decentralized decision making. Decentralized decision making means decision-making authority is pushed down to lower orga- nizational levels.

Organizations may have to experiment to find the correct degree of central- ization or decentralization to meet their needs. For example, a study by William Ouchi found that three large school districts that shifted to a more flexible, decen- tralized structure, giving school principals more autonomy, responsibility, and control over resources, performed better and more efficiently than large districts that were highly centralized.8 Top executives at New York City Transit are decen- tralizing the subway system to let managers of individual subway lines make almost every decision about what happens on the tracks, in the trains, and in the stations. Decentralization helps New York City Transit respond faster and more directly to customer complaints and other problems. Previously, a request to fix a leak causing slippery conditions in a station could languish for years because the centralized system slowed decision making to a crawl.9 On the other hand, some large decentralized companies sometimes need to build in more centralized com- munication and control systems to keep these huge, global corporations function- ing efficiently. Consider the structural decisions that helped CEO Lewis Campbell revive Textron Inc., a $12 billion industrial conglomerate with headquarters in Providence, Rhode Island.

EXHIBIT 3.2 The Relationship of Organization Design to Efficiency versus Learning Outcomes

Dominant Structural Approach

Vertical Organization Designed for Efficiency

Horizontal Organization Designed for Learning

Horizontal structure is dominant • • • • •

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

Vertical structure is dominant • • • • •

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

94 Part 2: Organizational Purpose and Structural Design

Textron CEO Lewis Campbell was a confirmed believer in decentralization, but in 2001, he took a look at the company’s situation and knew something had to change. “We were

adrift,” says Campbell. “We were doing all the things we used to do but were not getting results.” An economic downturn, combined with a steep decline in the industrial and aviation markets from which Textron derived most of its profits, had left Textron in a free fall. Over a two-year period, profits declined 75 percent.

To get the company operating at peak efficiency required some dramatic changes. At the time, Textron’s many business units operated autonomously, with each unit handling its own administrative functions and managers making decisions focused on meeting their own division’s goals. Many division managers didn’t even know what other units of the company did. At the annual management summit, Campbell decreed that the various units would now be required to cooperate and share resources. The new focus would be on how the company as a whole was doing, and bonuses were linked to companywide rather than divi- sion performance. To improve efficiency, more than 1,500 payroll systems were cut down to just three, numerous health care plans across the disparate divisions were reduced to just one, and more than a hundred data centers were consolidated into a handful. Managers who had been accustomed to making all their own decisions lost some of their autonomy as companywide decisions, such as a Six Sigma quality improvement program, were centralized to headquarters level and implemented top down.

Taking Textron away from its roots as a decentralized organization to one with a single vision and more centralized decision making didn’t lead to overnight success, but the efficiencies soon began to accumulate. Within a few years, Textron’s economic health had significantly improved, and Campbell was being hailed as a turnaround artist.10 ■

It couldn’t have been easy, bringing centralization to a company that had thrived on decentralization for its entire existence, but Campbell believed it was necessary for the current situation the company faced. Managers are always searching for the best combination of vertical control and horizontal collaboration, centralization and decentralization, for their own situations.11

Vertical Information Sharing

Organization design should facilitate the communication among employees and departments that is necessary to accomplish the organization’s overall task. Managers create information linkages to facilitate communication and coordination among organizational elements. Vertical linkages are used to coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization. Employees at lower levels should carry out activities consistent with top-level goals, and top executives must be informed of activities and accom- plishments at the lower levels. Organizations may use any of a variety of structural devices to achieve vertical linkage, including hierarchical referral, rules, plans, and formal management information systems.12

Hierarchical Referral. The first vertical device is the hierarchy, or chain of command, which is illustrated by the vertical lines in Exhibit 3.1. If a problem arises that employees don’t know how to solve, it can be referred up to the next level in the

Textron Inc.


Chapter 3: Fundamentals of Organization Structure 95

hierarchy. When the problem is solved, the answer is passed back down to lower levels. The lines of the organization chart act as communication channels.

Rules and Plans. The next linkage device is the use of rules and plans. To the extent that problems and decisions are repetitious, a rule or procedure can be established so employees know how to respond without communicating directly with their manager. Rules and procedures provide a standard information source enabling employees to be coordinated without actually communicating about every task. At PepsiCo’s Gemesa cookie business in Mexico, for example, managers carefully brief production workers on goals, processes, and procedures so that employees them- selves do most of the work of keeping the production process running smoothly, enabling the plants to operate with fewer managers.13 Plans also provide standing information for employees. The most widely used plan is the budget. With carefully designed and communicated budget plans, employees at lower levels can be left on their own to perform activities within their resource allotment.

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

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

Horizontal Information Sharing

Horizontal communication overcomes barriers between departments and provides opportunities for coordination among employees to achieve unity of effort and organizational objectives. Horizontal linkage refers to communication and coordi- nation horizontally across organizational departments. Its importance is articu- lated by comments made by Lee Iacocca when he took over Chrysler Corporation in the 1980s:

What I found at Chrysler were thirty-five vice presidents, each with his own turf . . . I couldn’t believe, for example, that the guy running engineering departments wasn’t in constant touch with his counterpart in manufacturing. But that’s how it was. Everybody worked independently. I took one look at that system and I almost threw up. That’s when I knew I was in really deep trouble . . . Nobody at Chrysler seemed to understand that interaction among the different functions in a company is absolutely critical. People in engineering and manufacturing almost have to be sleeping together. These guys weren’t even flirting!14

During his tenure at Chrysler, Iacocca pushed horizontal coordination to a high level. Everyone working on a specific vehicle project—designers, engineers, and manufacturers, as well as representatives from marketing, finance, purchasing, and even outside suppliers—worked together on a single floor so they could easily communicate.

Horizontal linkage mechanisms often are not drawn on the organization chart, but nevertheless are a vital part of organization structure. The following devices are

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

Provide vertical and horizontal information linkages to integrate diverse departments into a coherent whole. Achieve vertical link- age through hierarchy referral, rules and plans, and vertical information systems. Achieve horizontal linkage through cross- functional informa- tion systems, direct contact, task forces, full-time integrators, and teams.

96 Part 2: Organizational Purpose and Structural Design

structural alternatives that can improve horizontal coordination and information flow.15 Each device enables people to exchange information.

Information Systems. A significant method of providing horizontal linkage in today’s organizations is the use of cross-functional information systems. Computerized information systems enable managers or frontline workers throughout the organi- zation to routinely exchange information about problems, opportunities, activities, or decisions. For example, Siemens uses an organization-wide information system that enables 450,000 employees around the world to share knowledge and col- laborate on projects to provide better solutions to customers. The information and communications division recently collaborated with the medical division to develop new products for the health care market.16

Some organizations also encourage employees to use the company’s informa- tion systems to build relationships all across the organization, aiming to support and enhance ongoing horizontal coordination across projects and geographical boundaries. CARE International, one of the world’s largest private international relief organizations, enhanced its personnel database to make it easy for people to find others with congruent interests, concerns, or needs. Each person in the database has listed past and current responsibilities, experience, language abili- ties, knowledge of foreign countries, emergency experiences, skills and competen- cies, and outside interests. The database makes it easy for people working across borders to seek each other out, share ideas and information, and build enduring horizontal connections.17

Direct Contact. A higher level of horizontal linkage is direct contact between man- agers or employees affected by a problem. One way to promote direct contact is to create a special liaison role. A liaison person is located in one department but has the responsibility for communicating and achieving coordination with another depart- ment. Liaison roles often exist between engineering and manufacturing depart- ments because engineering has to develop and test products to fit the limitations of manufacturing facilities. Companies also implement other forms of direct contact. At Johnson & Johnson, top executives set up a committee made up of managers from research and development (R&D) and sales and marketing. The direct contact between managers in these two departments enables the company to establish pri- orities for which new drugs to pursue and market. J & J’s CEO also created a new position to oversee R&D, with an express charge to increase coordination with sales and marketing executives.18

Task Forces. Liaison roles usually link only two departments. When linkage involves several departments, a more complex device such as a task force is required. A task force is a temporary committee composed of representatives from each orga- nizational unit affected by a problem.19 Each member represents the interest of a department or division and can carry information from the meeting back to that department.

Task forces are an effective horizontal linkage device for temporary issues. They solve problems by direct horizontal coordination and reduce the information load on the vertical hierarchy. Typically, they are disbanded after their tasks are accomplished.

Organizations have used task forces for everything from organizing the annual company picnic to solving expensive and complex manufacturing problems. One

Chapter 3: Fundamentals of Organization Structure 97

example is the Executive Automotive Committee established by Jürgen Schremp when he was CEO of DaimlerChrysler (now Daimler AG) This task force was set up spe- cifically to identify ideas for increasing cooperation and component sharing among Mercedes, Chrysler (which was then owned by Daimler) and Mitsubishi (in which DaimlerChrysler owned a 37 percent stake). The task force started with a product road map, showing all Mercedes, Chrysler, Dodge, Jeep, and Mitsubishi vehicles to be launched over a ten-year period, along with an analysis of the components they would use, so task force members could identify overlap and find ways to share parts and cut time and costs.20

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


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

The integrator can also be responsible for an innovation or change project, such as coordinating the design, financing, and marketing of a new product. An organization chart that illustrates the location of project managers for new prod- uct development is shown in Exhibit 3.3. The project managers are drawn to the side to indicate their separation from other departments. The arrows indicate project members assigned to the new product development. New Product A, for example, has a financial accountant assigned to keep track of costs and budgets. The engineering member provides design advice, and purchasing and manufac- turing members represent their areas. The project manager is responsible for the entire project. He or she sees that the new product is completed on time, is intro- duced to the market, and achieves other project goals. The horizontal lines in Exhibit 3.3 indicate that project managers do not have formal authority over team members with respect to giving pay raises, hiring, or firing. Formal authority rests with the managers of the functional departments, who have formal authority over subordinates.

Integrators need excellent people skills. Integrators in most companies have a lot of responsibility but little authority. The integrator has to use expertise and persua- sion to achieve coordination. He or she spans the boundary between departments and must be able to get people together, maintain their trust, confront problems, and resolve conflicts and disputes in the interest of the organization.21

98 Part 2: Organizational Purpose and Structural Design

Teams. Project teams tend to be the strongest horizontal linkage mechanism. Teams are permanent task forces and are often used in conjunction with a full-time inte- grator. When activities among departments require strong coordination over a long period of time, a cross-functional team is often the solution. Special project teams may be used when organizations have a large-scale project, a major innovation, or a new product line. One good example of a special project team comes from Healthwise, a nonprofit organization that works with numerous health care orga- nizations and online health sites like WebMD. The company put together a special project team made up of doctors, other health specialists, writers, and technical peo- ple to create a new product line called HealthMastery Campaigns. HealthMastery is a series of programs that e-mails information, surveys, and reminders to consumers on topics such as asthma, back problems, or smoking cessation, fitting with the company’s goal of providing information to help consumers make informed health- care decisions.22

Hewlett-Packard’s Medical Products Group uses virtual cross-functional teams, made up of members from various countries, to develop and market medical prod- ucts and services such as electrocardiograph systems, ultrasound imaging technologies, and patient monitoring systems.23 A virtual team is one that is made up of organi- zationally or geographically dispersed members who are linked primarily through

Finance Department

Engineering Department

Purchasing Department

Marketing Department

Project Manager–

New Product A

Project Manager–

New Product B

Project Manager–

New Product C

Financial Accountant Product

Designer Buyer



Market Researcher

Advertising Specialist

Market Planner

Budget Analyst Draftsperson

Electrical Designer

Management Accountant


EXHIBIT 3.3 Project Manager Location in the Structure

Briefcase As an organization manager, keep this guideline in mind:

Recognize that the strongest horizontal linkage mechanisms are more costly in terms of time and human resources but are necessary when the organization needs a high degree of horizontal coordi- nation to achieve its goals.

Chapter 3: Fundamentals of Organization Structure 99

advanced information and communications technologies. Members frequently use the Internet and collaboration software to work together, rather than meeting face to face.24 IBM’s virtual teams, for instance, collaborate primarily via internal web- sites using wiki technology.25

An illustration of how teams provide strong horizontal coordination is shown in Exhibit 3.4. Wizard Software Company develops and markets software for various applications, from videogames to financial services. Wizard uses teams to coordinate each product line across the research, programming, and marketing departments, as illustrated by the dashed lines and shaded areas in the exhibit. Members from each

Marketing Vice President

Videogames Sales Manager

Memory Products Sales Manager

Memory Products International


Advertising Manager

Customer Service Manager

Procurement Supervisor

Research Vice President

Videogames Basic Research


Applications and Testing


Memory Products Research


Programming Vice President

Videogames Chief Programmer

Memory Products Chief Programmer


Videogames Product Team

Memory Products


EXHIBIT 3.4 Teams Used for Horizontal Coordination at Wizard Software Company

100 Part 2: Organizational Purpose and Structural Design

team meet at the beginning of each day as needed to resolve problems concerning customer needs, backlogs, programming changes, scheduling conflicts, and any other problem with the product line. Are you cut out for horizontal team work? Complete the questionnaire in the “How Do You Fit the Design?” box to assess your feelings about working on a team.

Exhibit 3.5 summarizes the mechanisms for achieving horizontal linkages. These devices represent alternatives that managers can select to increase horizontal coordi- nation in any organization. The higher-level devices provide more horizontal infor- mation capacity, although the cost to the organization in terms of time and human resources is greater. If horizontal communication is insufficient, departments will find themselves out of synchronization and will not contribute to the overall goals of the organization. When the amount of horizontal coordination needed is high, managers should select higher-level mechanisms.

Text not available due to copyright restrictions

Chapter 3: Fundamentals of Organization Structure 101


The overall design of organization structure indicates three things—required work activities, reporting relationships, and departmental groupings.

Required Work Activities

Departments are created to perform tasks considered strategically important to the company. For example, in a typical manufacturing company, work activities fall into a range of functions that help the organization accomplish its goals, such as a human resource department to recruit and train employees, a purchasing department to obtain supplies and raw materials, a production department to build products, a sales department to sell products, and so forth. As organiza- tions grow larger and more complex, managers find that more functions need to be performed. Organizations typically define new positions, departments, or divi- sions as a way to accomplish new tasks deemed valuable by the organization. An interesting example comes from the United States Army, which created a small aviation unit to provide surveillance in Iraq. The new unit was to be focused on detecting and stopping insurgents planting roadside bombs. Previously, the Army had relied totally on air surveillance from the Air Force, but those resources were limited and had to be assigned by top headquarters. The Army’s new aviation unit is on call for commanders in the field and fits with the Army’s goal of being more responsive to the needs of smaller combat units in direct conflict with adversaries.26

Cost of Coordination in Time and Human Resources

A m

ou nt

o f H

or iz

on ta

l Co

or di

na tio

n Re

qu ir







Full-time Integrators

Direct Contact

Information Systems

Task Forces

EXHIBIT 3.5 Ladder of Mechanisms for Horizontal Linkage and Coordination

102 Part 2: Organizational Purpose and Structural Design

Reporting Relationships

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

Departmental Grouping Options

Options for departmental grouping, including functional grouping, divisional grouping, multifocused grouping, horizontal grouping, and virtual network group- ing, are illustrated in Exhibit 3.6. Departmental grouping affects employees because they share a common supervisor and common resources, are jointly responsible for performance, and tend to identify and collaborate with one another.27

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

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

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

Horizontal grouping means employees are organized around core work processes, the end-to-end work, information, and material flows that provide value directly to custom- ers. All the people who work on a core process are brought together in a group rather than being separated into functional departments. For example, at field offices of the U.S. Occupational Safety and Health Administration, teams of workers representing various functions respond to complaints from American workers regarding health and safety issues, rather than having the work divided up among specialized employees.28

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

Chapter 3: Fundamentals of Organization Structure 103

Functional Grouping

Divisional Grouping

Horizontal Grouping

Virtual Network Grouping

Multifocused Grouping


Product Division 1


Product Division 2


Human Resources

Product Division 1

Core Process 1

Product Division 2

Core Process 2






Product Division 3





EXHIBIT 3.6 Structural Design Options for Grouping Employees into Departments

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

104 Part 2: Organizational Purpose and Structural Design

The organizational forms described in Exhibit 3.6 provide the overall options within which the organization chart is drawn and the detailed structure is designed. Each structural design alternative has significant strengths and weaknesses, to which we now turn.


Functional grouping and divisional grouping are the two most common approaches to structural design.

Functional Structure

In a functional structure, activities are grouped together by common function from the bottom to the top of the organization. All engineers are located in the engineering department, and the vice president of engineering is responsible for all engineering activities. The same is true in marketing, R&D, and manufacturing. An example of the functional organization structure was shown in Exhibit 3.1 earlier in this chapter.

With a functional structure, all human knowledge and skills with respect to specific activities are consolidated, providing a valuable depth of knowledge for the organization. This structure is most effective when in-depth expertise is critical to meeting organizational goals, when the organization needs to be controlled and coordinated through the vertical hierarchy, and when efficiency is important. The structure can be quite effective if there is little need for horizontal coordination. Exhibit 3.7 summarizes the strengths and weaknesses of the functional structure.

One strength of the functional structure is that it promotes economy of scale within functions. Economy of scale results when all employees are located in the same place and can share facilities. Producing all products in a single plant, for example, enables the plant to acquire the latest machinery. Constructing only

Strengths Weaknesses

1. Allows economies of scale within functional departments

2. Enables in-depth knowledge and skill development

3. Enables organization to accomplish functional goals

4. Is best with only one or a few products

1. Slow response time to environmental changes

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

3. Leads to poor horizontal coordination among departments

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

organizational goals

Source: Organizational Dynamics by Duncan. Copyright 1979 by Elsevier Science & Technology Journals. Reproduced with permission of Elsevier Science & Technology Journals in the format Other book via Copyright Clearance Center.

EXHIBIT 3.7 Strengths and Weaknesses of Functional Organization Structure

Chapter 3: Fundamentals of Organization Structure 105

one facility instead of separate facilities for each product line reduces duplication and waste. The functional structure also promotes in-depth skill development of employees. Employees are exposed to a range of functional activities within their own department.29

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

Some organizations perform very effectively with a functional structure. Consider the case of Blue Bell Creameries, Inc.

It is the third best-selling brand of ice cream in the United States but many Americans have never heard of it. That’s because Blue Bell Creameries, with headquarters in Brenham, Texas, sells its ice cream in only seventeen, mostly southern, states. Keeping distribution limited “allows us to focus on making and selling ice cream,” says CEO and president Paul Kruse, the fourth generation of Kruses to run Blue Bell. Or, as another family slogan puts it, “It’s a cinch by the inch but it’s hard by the yard.”

The “little creamery in Brenham,” as the company markets itself, is obsessed with qual- ity control and doesn’t let anyone outside the company touch its product from the plant to the freezer case. “We make it all, we deliver it all in our own trucks, and we maintain all the stock in retailers’ freezers,” says chairman Ed Kruse. At one time, the company was even buy- ing packages of Oreos at retail prices, cutting open each package by hand, and dumping the cookies into the mixers to make Blue Bell’s Cookies ’n Cream flavor. Blue Bell sells more than $400 million in ice cream a year and commands a huge percentage of the ice cream market in Texas, Louisiana, and Alabama. People outside the region often pay $89 to have four half- gallons packed in dry ice and shipped to them. Despite the demand, management refuses to compromise quality by expanding into regions that cannot be satisfactorily serviced or by growing so fast that the company can’t adequately train employees in the art of making ice cream.

Blue Bell’s major departments are sales, quality control, production, maintenance, and distribution. There is also an accounting department and a small R&D group. Most employ- ees have been with the company for years and have a wealth of experience in making qual- ity ice cream. The environment is stable. The customer base is well established. The only change has been the increase in demand for Blue Bell Ice Cream.30 ■

The functional structure is just right for Blue Bell Creameries. The organization has chosen to stay medium-sized and focus on making a single product—quality ice cream. However, as Blue Bell expands, it may have problems coordinating across departments, requiring stronger horizontal linkage mechanisms.

Functional Structure with Horizontal Linkages

A recent survey found that organizing by functions is still the prevalent approach to organization design.31 However, in today’s fast-moving world, very few companies can be successful with a strictly functional structure. Organizations compensate for

Blue Bell Creameries, Inc.


106 Part 2: Organizational Purpose and Structural Design

the vertical functional hierarchy by installing horizontal linkages, as described ear- lier in this chapter. Managers improve horizontal coordination by using information systems, direct contact between departments, full-time integrators or project man- agers (illustrated in Exhibit 3.3), task forces, or teams (illustrated in Exhibit 3.4). One interesting use of horizontal linkages occurred at Karolinska Hospital in Stockholm, Sweden, which had forty-seven functional departments. Even after top executives cut that down to eleven, coordination was still inadequate. The top executive team set about reorganizing workflow at the hospital around patient care. Instead of bouncing a patient from department to department, Karolinska now envisions the illness to recovery period as a process with “pit stops” in admis- sions, X-ray, surgery, and so forth. The most interesting aspect of the approach is the new position of nurse coordinator. Nurse coordinators serve as full-time inte- grators, troubleshooting transitions within or between departments. The improved horizontal coordination dramatically improved productivity and patient care at Karolinska.32 Karolinska is effectively using horizontal linkages to overcome some of the disadvantages of the functional structure.

Divisional Structure

The term divisional structure is used here as the generic term for what is sometimes called a product structure or strategic business units. With this structure, divisions can be organized according to individual products, services, product groups, major projects or programs, divisions, businesses, or profit centers. The distinctive feature of a divisional structure is that grouping is based on organizational outputs. For example, United Technologies Corporation (UTC), which is among the 50 largest U.S. industrial firms, has numerous divisions, including Carrier (air conditioners and heating), Otis (elevators and escalators), Pratt & Whitney (aircraft engines), and Sikorsky (helicopters).33

The difference between a divisional structure and a functional structure is illus- trated in Exhibit 3.8. The functional structure can be redesigned into separate product groups, and each group contains the functional departments of R&D, manufactur- ing, accounting, and marketing. Coordination across functional departments within each product group is maximized. The divisional structure promotes flexibility and change because each unit is smaller and can adapt to the needs of its environment. Moreover, the divisional structure decentralizes decision making, because the lines of authority converge at a lower level in the hierarchy. The functional structure, by contrast, is centralized, because it forces decisions all the way to the top before a problem affecting several functions can be resolved.

Strengths and weaknesses of the divisional structure are summarized in Exhibit 3.9. The divisional organization structure is excellent for achieving coordination across functional departments. It works well when organizations can no longer be adequately controlled through the traditional vertical hierarchy, and when goals are oriented toward adaptation and change. Giant, complex organizations such as General Electric, Nestlé, and Johnson & Johnson are subdivided into a series of smaller, self-contained organizations for better control and coordination. In these large companies, the units are sometimes called divisions, businesses, or strategic business units. The structure at Johnson & Johnson includes some 250 separate operating units, including McNeil Consumer Products, makers of Tylenol; Ortho Pharmaceuticals, which makes Retin-A and birth-control pills; and J & J Consumer Products, the company that brings us

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

When designing overall organization structure, choose a functional structure when efficiency is important, when in- depth knowledge and expertise are critical to meeting organi- zational goals, and when the organization needs to be controlled and coordinated through the verti- cal hierarchy. Use a divisional structure in a large organization with multiple product lines and when you wish to give priority to product goals and coordination across functions.

Chapter 3: Fundamentals of Organization Structure 107

Johnson’s Baby Shampoo and Band-Aids. Each unit is a separately chartered, auton- omous company operating under the guidance of Johnson & Johnson’s corporate headquarters.34 Some U.S. government organizations also use a divisional structure to better serve the public. One example is the Internal Revenue Service, which wanted to be more customer oriented. The agency shifted its focus to informing, educating, and serving the public through four separate divisions serving distinct taxpayer groups— individual taxpayers, small businesses, large businesses, and tax-exempt organizations. Each division has its own budget, personnel, policies, and planning staffs that are focused on what is best for each particular taxpayer segment.35

The divisional structure has several strengths.36 This structure is suited to fast change in an unstable environment and provides high product or service visibility. Since each product line has its own separate division, customers are able to con- tact the correct division and achieve satisfaction. Coordination across functions is excellent. Each product can adapt to requirements of individual customers or regions. The divisional structure typically works best in organizations that have

Functional Structure

Divisional Structure

Info-Tech President

Office Automation

Virtual Reality

Electronic Publishing

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

Info-Tech President

Manufacturing MarketingAccountingR D&

EXHIBIT 3.8 Reorganization from Functional Structure to Divisional Structure at Info-Tech

108 Part 2: Organizational Purpose and Structural Design

multiple products or services and enough personnel to staff separate functional units. Decision making is pushed down to the divisions. Each division is small enough to be quick on its feet, responding rapidly to changes in the market.

One disadvantage of using divisional structuring is that the organization loses economies of scale. Instead of fifty research engineers sharing a common facility in a functional structure, ten engineers may be assigned to each of five product divisions. The critical mass required for in-depth research is lost, and physical facilities have to be duplicated for each product line. Another problem is that product lines become separate from each other, and coordination across product lines can be difficult. As one Johnson & Johnson executive said, “We have to keep reminding ourselves that we work for the same corporation.”37

Some companies that have a large number of divisions have had real prob- lems with cross-unit coordination. Sony lost the digital media products business to Apple partly because of poor coordination. With the introduction of the iPod, Apple quickly captured 60 percent of the U.S. market versus 10 percent for Sony. The digital music business depends on seamless coordination. Sony’s Walkman didn’t even recognize some of the music sets that could be made with the company’s SonicStage software and thus didn’t mesh well with the division selling music down- loads.38 Unless effective horizontal mechanisms are in place, a divisional structure can hurt overall performance. One division may produce products or programs that are incompatible with products sold by another division, as at Sony. Customers can become frustrated when a sales representative from one division is unaware of developments in other divisions. Task forces and other horizontal linkage devices are needed to coordinate across divisions. A lack of technical specialization is also a problem in a divisional structure. Employees identify with the product line rather than with a functional specialty. R&D personnel, for example, tend to do applied research to benefit the product line rather than basic research to benefit the entire organization.

Strengths Weaknesses

1. Suited to fast change in unstable environment

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

3. Involves high coordination across functions

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

5. Best in large organizations with several products

6. Decentralizes decision making

1. Eliminates economies of scale in functional departments

2. Leads to poor coordination across product lines

3. Eliminates in-depth competence and technical specialization

4. Makes integration and standardization across product lines difficult

Source: Organizational Dynamics by Duncan. Copyright 1979 by Elsevier Science & Technology Journals. Reproduced with permission of Elsevier Science & Technology Journals in the format Textbook via Copyright Clearance Center.

EXHIBIT 3.9 Strengths and Weaknesses of Divisional Organization Structure

Chapter 3: Fundamentals of Organization Structure 109

Geographic Structure

Another basis for structural grouping is the organization’s users or customers. The most common structure in this category is geography. Each region of the country may have distinct tastes and needs. Each geographic unit includes all functions required to produce and market products or services in that region. Large non- profit organizations such as the Girl Scouts of the USA, Habitat for Humanity, Make-A-Wish Foundation, and the United Way of America frequently use a type of geographic structure, with a central headquarters and semi-autonomous local units. The national organization provides brand recognition, coordinates fund-raising ser- vices, and handles some shared administrative functions, while day-to-day control and decision making is decentralized to local or regional units.39

For multinational corporations, self-contained units are created for different countries and parts of the world. Exhibit 3.10 shows a potential geographic structure for a computer company. This structure focuses managers and employees on specific geographic regions and sales targets.40 Top executives at Citigroup are considering reorganizing to a geographic structure to improve efficiency and give the giant global corporation a more unified face to local customers. The reorganization would put one top manager in charge of all the various banking operations throughout a specific region such as Asia, Europe, or North America.41

The strengths and weaknesses of a geographic divisional structure are similar to the divisional organization characteristics listed in Exhibit 3.9. The organization can adapt to the specific needs of its own region, and employees identify with regional

Text not available due to copyright restrictions

110 Part 2: Organizational Purpose and Structural Design

adapt to the specific needs of its own region, and employees identify with regional goals rather than with national goals. Horizontal coordination within a region is emphasized rather than linkages across regions or to the national office.


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

The matrix is a strong form of horizontal linkage. The unique characteristic of the matrix organization is that both product divisions and functional structures (horizontal and vertical) are implemented simultaneously, as shown in Exhibit 3.11. The product managers and functional managers have equal authority within the organization, and employees report to both of them. The matrix structure is similar to the use of full-time integrators or product managers described earlier in this chap- ter (Exhibit 3.3), except that in the matrix structure the product managers (horizon- tal) are given formal authority equal to that of the functional managers (vertical).

Conditions for the Matrix

A dual hierarchy may seem an unusual way to design an organization, but the matrix is the correct structure when the following conditions are present:42

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

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

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

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

Referring again to Exhibit 3.11, assume the matrix structure is for a clothing manufacturer. Product A is footwear, product B is outerwear, product C is sleepwear, and so on. Each product line serves a different market and customers. As a medium- size organization, the company must effectively use people from manufacturing, design, and marketing to work on each product line. There are not enough designers

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

Consider a matrix structure when the organization needs to give equal priority to both products and functions because of dual pressures from customers in the envi- ronment. Use either a functional matrix or a product matrix if the balanced matrix with dual lines of authority is not appropriate for your organization.

Chapter 3: Fundamentals of Organization Structure 111

to warrant a separate design department for each product line, so the designers are shared across product lines. Moreover, by keeping the manufacturing, design, and marketing functions intact, employees can develop the in-depth expertise to serve all product lines efficiently.

The matrix formalizes horizontal teams along with the traditional vertical hier- archy and tries to give equal balance to both. However, the matrix may shift one way or the other. Many companies have found a balanced matrix hard to imple- ment and maintain because one side of the authority structure often dominates. As a consequence, two variations of matrix structure have evolved—the functional matrix and the product matrix. In a functional matrix, the functional bosses have primary authority and the project or product managers simply coordinate product activities. In a product matrix, by contrast, the project or product managers have primary authority and functional managers simply assign technical personnel to projects and provide advisory expertise as needed. For many organizations, one of these approaches works better than the balanced matrix with dual lines of authority.43

All kinds of organizations have experimented with the matrix, including hospi- tals, consulting firms, banks, insurance companies, government agencies, and many

Director of Product Operations

Design Vice President

Manufacturing Vice President


Marketing Vice President Controller

Procurement Manager

Product Manager A

Product Manager B

Product Manager C

Product Manager D

EXHIBIT 3.11 Dual-Authority Structure in a Matrix Organization

112 Part 2: Organizational Purpose and Structural Design

types of industrial firms.44 This structure has been used successfully by large, global organizations such as Procter & Gamble, Unilever, and Dow Chemical, which fine- tuned the matrix to suit their own particular goals and culture.

Strengths and Weaknesses

The matrix structure is best when environmental change is high and when goals reflect a dual requirement, such as for both product and functional goals. The dual-authority structure facilitates communication and coordination to cope with rapid environmen- tal change and enables an equal balance between product and functional bosses. The matrix facilitates discussion and adaptation to unexpected problems. It tends to work best in organizations of moderate size with a few product lines. The matrix is not needed for only a single product line, and too many product lines make it difficult to coordinate both directions at once. Exhibit 3.12 summarizes the strengths and weak- nesses of the matrix structure based on what we know of organizations that use it.45

The strength of the matrix is that it enables an organization to meet dual demands from customers in the environment. Resources (people, equipment) can be flexibly allocated across different products, and the organization can adapt to changing external requirements.46 This structure also provides an opportunity for employees to acquire either functional or general management skills, depending on their interests.

One disadvantage of the matrix is that some employees experience dual author- ity, reporting to two bosses and sometimes juggling conflicting demands. This can be frustrating and confusing, especially if roles and responsibilities are not clearly defined by top managers.47 Employees working in a matrix need excellent interper- sonal and conflict-resolution skills, which may require special training in human

Strengths Weaknesses

1. Achieves coordination necessary to meet dual demands from customers

2. Flexible sharing of human resources across products

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

4. Provides opportunity for both functional and product skill development

5. Best in medium-sized organizations with multiple products

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

2. Means participants need good interpersonal skills and extensive training

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

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

5. Requires great effort to maintain power balance

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

EXHIBIT 3.12 Strengths and Weaknesses of Matrix Organization Structure

Chapter 3: Fundamentals of Organization Structure 113

relations. The matrix also forces managers to spend a great deal of time in meet- ings.48 If managers do not adapt to the information and power sharing required by the matrix, the system will not work. Managers must collaborate with one another rather than rely on vertical authority in decision making. The successful implemen- tation of one matrix structure occurred at a steel company in Great Britain.

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

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

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

Englander Steel had four product lines: open-die forgings, ring-mill products, wheels and axles, and sheet steel. A business manager was given responsibility for and authority over each line, which included preparing a business plan and developing targets for production costs, product inventory, shipping dates, and gross profit. The managers were given author- ity to meet those targets and to make their lines profitable. Functional vice presidents were responsible for technical decisions. Functional managers were expected to stay abreast of the latest techniques in their areas and to keep personnel trained in new technologies that could apply to product lines. With 20,000 recipes for specialty steels and several hundred new recipes ordered each month, functional personnel had to stay current. Two functional departments—field sales and industrial relations—were not included in the matrix because they worked independently. The final design was a hybrid matrix structure with both matrix and functional relationships, as illustrated in Exhibit 3.13.

Implementation of the matrix was slow. Middle managers were confused. Meetings to coor- dinate orders across functional departments seemed to be held every day. After about a year of training by external consultants, Englander Steel was on track. Ninety percent of the orders were now delivered on time and market share recovered. Both productivity and profitability increased steadily. The managers thrived on matrix involvement. Meetings to coordinate product and functional decisions provided a growth experience. Middle managers began including younger managers in the matrix discussions as training for future management responsibility.49 ■

Englander Steel


1 1


P art 2

: O rganizational P

urpose and S tructural D


H or

iz on

ta l P

ro du

ct L

in es

Vertical Functions

Marketing Vice President

Manufacturing Vice President

Finance Vice President

Mfg. Services Vice President

Metallurgy Vice President

Field Sales Vice President

Industrial Relations

Vice President


Open Die Business Manager

Ring Products Business Manager

Wheels & Axles Business Manager

Sheet Steel Business Manager

EXHIBIT 3.13 Matrix Structure for Englander Steel

3 3 Matrix Structure for Englander Steel

Chapter 3: Fundamentals of Organization Structure 115

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


A recent approach to organizing is the horizontal structure, which organizes employ- ees around core processes. Organizations typically shift toward a horizontal struc- ture during a procedure called reengineering. Reengineering, or business process reengineering, basically means the redesign of a vertical organization along its hori- zontal workflows and processes. A process refers to an organized group of related tasks and activities that work together to transform inputs into outputs that create value for customers.50 Examples of processes include order fulfillment, new product development, and customer service. Reengineering changes the way managers think about how work is done. Rather than focusing on narrow jobs structured into dis- tinct functional departments, they emphasize core processes that cut horizontally across the organization and involve teams of employees working together to serve customers.

A good illustration of process is provided by claims handling at Progressive Casualty Insurance Company. In the past, a customer would report an accident to an agent, who would pass the information to a customer service representative, who, in turn, would pass it to a claims manager. The claims manager would batch the claim with others from the same territory and assign it to an adjuster, who would schedule a time to inspect the vehicle damage. Today, adjusters are organized into teams that handle the entire claims process from beginning to end. One member handles claim- ant calls to the office while others are stationed in the field. When an adjuster takes a call, he or she does whatever is possible over the phone. If an inspection is needed, the adjuster contacts a team member in the field and schedules an appointment immediately. Progressive now measures the time from call to inspection in hours rather than the seven to ten days it once took.51

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

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

Consider a horizon- tal structure when customer needs and demands change rap- idly and when learn- ing and innovation are critical to orga- nizational success. Carefully determine core processes and train managers and employees to work within the horizontal structure.

116 Part 2: Organizational Purpose and Structural Design


An illustration of a company reengineered into a horizontal structure appears in Exhibit 3.14. Such an organization has the following characteristics:52

• Structure is created around cross-functional core processes rather than tasks, functions, or geography. Thus, boundaries between departments are obliterated. Ford Motor Company’s Customer Service Division, for example, has core pro- cess groups for business development, parts supply and logistics, vehicle service and programs, and technical support.

• Self-directed teams, not individuals, are the basis of organizational design and performance. Schwa, a restaurant in Chicago that serves elaborate multicourse meals, is run by a team. Members rotate jobs so that everyone is sometimes a chef, sometimes a dishwasher, sometimes a waiter, or sometimes the person who answers the phone, takes reservations, or greets customers at the door.53

• Process owners have responsibility for each core process in its entirety. For Ford’s parts supply and logistics process, for example, a number of teams may work on jobs such as parts analysis, purchasing, material flow, and distribution, but a process owner is responsible for coordinating the entire process.

• People on the team are given the skills, tools, motivation, and authority to make decisions central to the team’s performance. Team members are cross-trained to perform one another’s jobs, and the combined skills are sufficient to complete a major organizational task.




New Product Development Process

Procurement and Logistics Process

Team 1

Team 1

Team 2

Team 2

Team 3

Team 3

Product PlanningResearch

Material FlowPurchasing

Process Owner

Market Analysis


Top Management


Process Owner

EXHIBIT 3.14 A Horizontal Structure

Source: Based on Frank Ostroff, The Horizontal Organization (New York: Oxford University Press, 1999); John A. Byrne, “The Horizontal Corporation,” BusinessWeek (December 20, 1993), 76–81; and Thomas A. Stewart, “The Search for the Organization of Tomorrow,” Fortune (May 18, 1992), 92–98.

Chapter 3: Fundamentals of Organization Structure 117

• Teams have the freedom to think creatively and respond flexibly to new chal- lenges that arise.

• Customers drive the horizontal corporation. Effectiveness is measured by end- of-process performance objectives (based on the goal of bringing value to the customer), as well as customer satisfaction, employee satisfaction, and financial contribution.

• The culture is one of openness, trust, and collaboration, focused on continuous improvement. The culture values employee empowerment, responsibility, and well-being.

General Electric’s Salisbury, North Carolina, plant shifted to a horizontal struc- ture to improve flexibility and customer service.

General Electric’s plant in Salisbury, North Carolina, which manufactures electrical lighting panel boards for industrial and com- mercial purposes, used to be organized functionally and vertically. Because no two GE customers have identical needs, each panel board has to be configured and built to order, which frequently created bottlenecks in the standard production process. In the mid-1980s, faced with high product-line costs, inconsis- tent customer service, and a declining market share, managers began exploring new ways of organizing that would emphasize teamwork, responsibility, continuous improvement, empow- erment, and commitment to the customer.

By the early 1990s, GE Salisbury had made the transition to a horizontal structure that links sets of multiskilled teams who are responsible for the entire build-to-order pro- cess. The new structure is based on the goal of producing lighting panel boards “of the highest possible quality, in the shortest possible cycle time, at a competitive price, with the best possible service.” The process consists of four linked teams, each made up of ten to fifteen members representing a range of skills and functions. A production-control team serves as process owner (as illustrated earlier in Exhibit 3.14) and is responsible for order receipt, planning, coordination of production, purchasing, working with suppliers and customers, tracking inventory, and keeping all the teams focused on meeting objec- tives. The fabrication team cuts, builds, welds, and paints the various parts that make up the steel box that will house the electrical components panel, which is assembled and tested by the electrical components team. The electrical components team also handles shipping. A maintenance team takes care of heavy equipment maintenance that cannot be performed as part of the regular production process. Managers have become associ- ate advisors who serve as guides and coaches and bring their expertise to the teams as needed.

The key to success of the horizontal structure is that all the operating teams work in concert with each other and have access to the information they need to meet team and process goals. Teams are given information about sales, backlogs, inventory, staffing needs, productivity, costs, quality, and other data, and each team regularly shares infor- mation about its part of the build-to-order process with the other teams. Joint production meetings, job rotation, and cross-training of employees are some of the mechanisms that help ensure smooth integration. The linked teams assume responsibility for setting their own production targets, determining production schedules, assigning duties, and identifying and solving problems.

GE Salisbury



118 Part 2: Organizational Purpose and Structural Design

Productivity and performance have dramatically improved with the horizontal structure. Bottlenecks in the workflow, which once wreaked havoc with production schedules, have been virtually eliminated. A six-week lead time has been cut to two-and-a-half days. More subtle but just as important are the increases in employee and customer satisfaction that GE Salisbury has realized since implementing its new structure.54 ■

Strengths and Weaknesses

As with all structures, the horizontal structure has both strengths and weaknesses, as listed in Exhibit 3.15.

The most significant strength of the horizontal structure is enhanced coordina- tion, which can dramatically increase the company’s flexibility and response to changes in customer needs. The structure directs everyone’s attention toward the customer, which leads to greater customer satisfaction as well as improvements in productivity, speed, and efficiency. In addition, because there are no boundar- ies between functional departments, employees take a broader view of organiza- tional goals rather than being focused on the goals of a single department. The horizontal structure promotes an emphasis on teamwork and cooperation, so that team members share a commitment to meeting common objectives. Finally, the horizontal structure can improve the quality of life for employees by giving them opportunities to share responsibility, make decisions, and contribute significantly to the organization.

A weakness of the horizontal structure is that it can harm rather than help orga- nizational performance unless managers carefully determine which core processes are critical for bringing value to customers. Simply defining the processes around

Sources: Based on Frank Ostroff, The Horizontal Organization: What the Organization of the Future Looks Like and How It Delivers Value to Customers (New York: Oxford University Press, 1999); and Richard L. Daft, Organization Theory and Design, 6th ed. (Cincinnati, Ohio: South-Western, 1998), 253.

Strengths Weaknesses

1. Promotes flexibility and rapid response to changes in customer needs

2. Directs the attention of everyone toward the production and delivery of value to the customer

3. Each employee has a broader view of organizational goals

4. Promotes a focus on teamwork and collaboration

5. Improves quality of life for employees by offering them the opportunity to share responsibility, make decisions, and be accountable for outcomes

1. Determining core processes is difficult and time consuming

2. Requires changes in culture, job design, management philosophy, and information and reward systems

3. Traditional managers may balk when they have to give up power and authority

4. Requires significant training of employees to work effectively in a horizontal team environment

5. Can limit in-depth skill development

EXHIBIT 3.15 Strengths and Weaknesses of Horizontal Structure

Chapter 3: Fundamentals of Organization Structure 119

which to organize can be difficult. In addition, shifting to a horizontal structure is complicated and time consuming because it requires significant changes in cul- ture, job design, management philosophy, and information and reward systems. Traditional managers may balk when they have to give up power and authority to serve instead as coaches and facilitators of teams. Employees have to be trained to work effectively in a team environment. Finally, because of the cross-functional nature of work, a horizontal structure can limit in-depth knowledge and skill devel- opment unless measures are taken to give employees opportunities to maintain and build technical expertise.


Recent developments in organization design extend the concept of horizontal coor- dination and collaboration beyond the boundaries of the traditional organization. The most widespread design trend in recent years has been the outsourcing of vari- ous parts of the organization to outside partners.55 Outsourcing means to contract out certain tasks or functions, such as manufacturing, human resources, or credit processing, to other companies.

Companies in almost every industry are jumping on the outsourcing band- wagon. For example, more than 1,000 law enforcement agencies across the United States have turned to to manage the time-consuming business of cataloging and auctioning off unclaimed stolen goods such as cars, computers, jewelry, or paintings.56 And consider the U.S. military, which increas- ingly uses private military company contractors to handle just about everything except the core activity of fighting battles and securing defensive positions. Kellogg Brown & Root, a subsidiary of the Halliburton Corporation, for instance, builds and maintains military bases and provides catering and cleaning services. In the business world, Wachovia Corporation transferred administration of its human resources programs to Hewitt Associates, and British food retailer J. Sainsbury’s lets Accenture handle its entire information technology depart- ment. About 20 percent of drug manufacturer Eli Lilly & Company’s chemistry work is done in China by start-up labs such as Chem-Explorer; and companies such as India’s Wipro, France’s S.R. Teleperformance, and the U.S.-based Convergys manage call center and technical support operations for big computer and cell phone companies around the world. Fiat Auto is involved in multiple complex outsourcing relationships with other companies handling logistics, maintenance, and the manufacturing of some parts.57

Once, a company’s units of operation “were either within the organization and ‘densely connected’ or they were outside the organization and not connected at all,” as one observer phrased it.58 Today, the lines are so blurred that it can be difficult to tell what is part of the organization and what is not. IBM handles back-office operations for many large companies, but it also outsources some of its own activi- ties to other firms, which in turn may farm out some of their functions to still other organizations.59

A few organizations carry outsourcing to the extreme to create a virtual network structure. With a virtual network structure, sometimes called a modular structure, the firm subcontracts most of its major functions or processes to separate companies and coordinates their activities from a small headquarters organization.60

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

Use a virtual network structure for extreme flexibility and rapid response to chang- ing market condi- tions. Focus on key activities that give the organization its com- petitive advantage and outsource other activities to carefully selected partners.

120 Part 2: Organizational Purpose and Structural Design

How the Structure Works

The virtual network organization may be viewed as a central hub surrounded by a network of outside specialists. Rather than being housed under one roof or located within one organization, services such as accounting, design, manufacturing, mar- keting, and distribution are outsourced to separate companies that are connected electronically to a central office. Organizational partners located in different parts of the world may use networked computers or the Internet to exchange data and information so rapidly and smoothly that a loosely connected network of suppli- ers, manufacturers, and distributors can look and act like one seamless company. The virtual network form incorporates a free-market style to replace the traditional vertical hierarchy. Subcontractors may flow into and out of the system as needed to meet changing needs.

With a network structure, the hub maintains control over processes in which it has world-class or difficult-to-imitate capabilities and then transfers other activities— along with the decision making and control over them—to other organizations. These partner organizations organize and accomplish their work using their own ideas, assets, and tools.61 The idea is that a firm can concentrate on what it does best and contract out everything else to companies with distinctive competence in those specific areas, enabling the organization to do more with less.62 The network struc- ture is often advantageous for start-up companies, such as TiVo Inc., the company that introduced the digital video recorder.

The market for digital video recorders is hot, and major electronics, cable, and satellite companies are getting in on the action. The company that started it all was TiVo, a small

organization based in the San Francisco Bay area. TiVo’s founders developed a technology to allow users to record up to 80 hours of

television and replay it at their convenience, without commercial interruption and minus the hassles of digital storage media or videotapes. They knew speed was of the essence if they were to take this new market by storm. The only way to do it was by outsourcing practically everything. TiVo first developed major manufacturing and marketing partnerships with large companies such as Sony, Hughes Electronics, and Royal Philips Electronics. In addition, the company outsourced distribution, public relations, advertising, and customer support. TiVo managers considered the customer support function particularly critical. Because TiVo was a new concept, ordinary call-center approaches wouldn’t work. Leaders worked closely with outsourcing partner ClientLogic to develop processes and training materials that would help customer-service agents “think like a TiVo customer.”

Using the virtual network structure enabled a small company like TiVo to get the advanced capabilities it needed without having to spend time and limited financial resources building an organization from scratch. TiVo leaders concentrated on technological innovation and developing and managing relationships with outsourcing firms. Today, TiVo has partnership agreements with numerous organizations, including a recent one with YouTube that will allow TiVo subscribers to watch user-generated videos from the website on their televi- sions, and one with Comcast, the nation’s number one cable operator, that will help TiVo reach a larger customer base. The deal with Comcast is critical. Without a cable partner, TiVo would find it difficult to remain a major player in the growing market for digital video recorders.63 ■

TiVo Inc.


Chapter 3: Fundamentals of Organization Structure 121

TiVo faces stiff competition, but using the virtual network structure enabled it to get established and survive in the growing industry. TiVo is marketing itself as a premium DVR service to compete with the fast-growing and less expensive options offered by satellite and cable providers. Exhibit 3.16 illustrates a simplified network structure for TiVo, showing some of the functions that are outsourced to other companies.

Strengths and Weaknesses

Exhibit 3.17 summarizes the strengths and weaknesses of the virtual network struc- ture.64 One of the major strengths is that the organization, no matter how small, can be truly global, drawing on resources worldwide to achieve the best quality and price and then selling products or services worldwide just as easily through subcontractors. The network structure also enables a new or small company to develop products or services and get them to market rapidly without huge invest- ments in factories, equipment, warehouses, or distribution facilities. The ability to arrange and rearrange resources to meet changing needs and best serve customers gives the network structure extreme flexibility and rapid response. New technolo- gies can be developed quickly by tapping into a worldwide network of experts. The organization can continually redefine itself to meet changing product or market opportunities. A final strength is reduced administrative overhead. Large teams of staff specialists and administrators are not needed. Managerial and technical talent can be focused on key activities that provide competitive advantage while other activities are outsourced.

Manufacturing Companies

Customer Support Function

Marketing and

Public Relations Firm

Logistics and

Distribution Systems

TiVo Core focuses on

technological development

EXHIBIT 3.16 Partial Virtual Network Structure at TiVo

The virtual network structure also has a number of weaknesses. The primary weakness is a lack of control. The network structure takes decentralization to the extreme. Managers do not have all operations under their jurisdiction and must rely on contracts, coordination, and negotiation to hold things together. This also means increased time spent managing relationships with partners and resolving conflicts.

A problem of equal importance is the risk of failure if one organizational part- ner fails to deliver, has a plant burn down, or goes out of business. Managers in the headquarters organization have to act quickly to spot problems and find new arrangements. Finally, from a human resource perspective, employee loyalty can be weak in a network organization because of concerns over job security. Employees may feel that they can be replaced by contract services. In addition, it is more dif- ficult to develop a cohesive corporate culture. Turnover may be higher because emo- tional commitment between the organization and employees is low. With changing products, markets, and partners, the organization may need to reshuffle employees at any time to get the correct mix of skills and capabilities.


As a practical matter, many structures in the real world do not exist in the pure forms we have outlined in this chapter. Most large organizations, in particular, often use a hybrid structure that combines characteristics of various approaches tailored to specific strategic needs. Most companies combine characteristics of func- tional, divisional, geographic, horizontal, or network structures to take advantage of the strengths of various structures and avoid some of the weaknesses. Hybrid structures tend to be used in rapidly changing environments because they offer the organization greater flexibility.

Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982), 46–66; and Frank Ostroff, The Horizontal Organization (New York: Oxford University Press, 1999), Fig 2.1, 34.

Strengths Weaknesses

1. Enables even small organizations to obtain talent and resources worldwide

2. Gives a company immediate scale and reach without huge investments in factories, equipment, or distribution facilities

3. Enables the organization to be highly flexible and responsive to changing needs

4. Reduces administrative overhead costs

1. Managers do not have hands-on control over many activities and employees

2. Requires a great deal of time to manage relationships and potential conflicts with contract partners

3. There is a risk of organizational failure if a partner fails to deliver or goes out of business

4. Employee loyalty and corporate culture might be weak because employees feel they can be replaced by contract services

EXHIBIT 3.17 Strengths and Weaknesses of Virtual Network Structure

122 Part 2: Organizational Purpose and Structural Design

Chapter 3: Fundamentals of Organization Structure 123

One type of hybrid that is often used is to combine characteristics of the func- tional and divisional structures. When a corporation grows large and has several products or markets, it typically is organized into self-contained divisions of some type. Functions that are important to each product or market are decentralized to the self-contained units. However, some functions that are relatively stable and require economies of scale and in-depth specialization are also centralized at headquarters. Sun Petroleum Products Corporation (SPPC) reorganized to a hybrid structure to be more responsive to changing markets. The hybrid organization structure adopted by SPPC is illustrated in part 1 of Exhibit 3.18. Three major product divisions—fuels, lubricants, and chemicals—were created, each serving a different market and requir- ing a different strategy and management style. Each product-line vice president is now in charge of all functions for that product, such as marketing, planning, supply and distribution, and manufacturing. However, activities such as human resources, legal, technology, and finance were centralized as functional departments at head- quarters in order to achieve economies of scale. Each of these departments provides services for the entire organization.65

A second hybrid approach that is increasingly used today is to combine charac- teristics of functional, divisional, and horizontal structures. Ford Motor Company’s Customer Service Division, a global operation made up of 12,000 employees serv- ing nearly 15,000 dealers, provides an example of this type of hybrid. Beginning in 1995, when Ford launched its “Ford 2000” initiative aimed at becoming the world’s leading automotive firm in the twenty-first century, top executives grew increasingly concerned about complaints regarding customer service. They decided that the horizontal model offered the best chance to gain a faster, more efficient, integrated approach to customer service. Part 2 of Exhibit 3.18 illustrates a portion of the Customer Service Division’s hybrid structure. Several horizontally aligned groups, made up of multiskilled teams, focus on core processes such as parts supply and logistics (acquiring parts and getting them to dealers quickly and efficiently), vehicle service and programs (collecting and disseminating information about repair problems), and technical support (ensuring that every service department receives updated technical information). Each group has a process owner who is responsible for seeing that the teams meet overall objectives. Ford’s Customer Service Division retained a functional structure for its finance, strategy and communications, and human resources departments. Each of these departments provides services for the entire division.66

In a huge organization such as Ford, managers may use a variety of structural characteristics to meet the needs of the total organization. Like many large organi- zations, for example, Ford also outsources some of its activities to other firms. A hybrid structure is often preferred over the pure functional, divisional, horizontal, or virtual network structure because it can provide some of the advantages of each and overcome some of the disadvantages.


Each type of structure is applied in different situations and meets different needs. In describing the various structures, we touched briefly on conditions such as envi- ronmental stability or change and organizational size that are related to struc- ture. Each form of structure—functional, divisional, matrix, horizontal, network, hybrid—represents a tool that can help managers make an organization more effec- tive, depending on the demands of its situation.

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

Implement hybrid structures, when needed, to combine characteristics of functional, divisional, and horizontal struc- tures. Use a hybrid structure in complex environments to take advantage of the strengths of various structural characteris- tics and avoid some of the weaknesses.

1 2


P art 2

: O rganizational P

urpose and S tructural D


Functional Structure Functional Structure

Horizontal Structure

Product Structure

Part 1. Sun Petrochemical Products Part 2. Ford Customer Service Division

Parts Supply / Logistics Group

Vehicle Service Group

Technical Support Group

President Vice President and General Manager

Chief Counsel

Fuels Vice President

Director and Process


Director and Process


Lubricants Vice President

Human Resources

Director FinanceTechnology

Vice President Strategy and


Chemicals Vice President

Financial Services

Vice President

Human Resources



Director and Process



EXHIBIT 3.18 Two Hybrid Structures

Chapter 3: Fundamentals of Organization Structure 125

Structural Alignment

Ultimately, the most important decision that managers make about structural design is to find the right balance between vertical control and horizontal coordi- nation, depending on the needs of the organization. Vertical control is associated with goals of efficiency and stability, while horizontal coordination is associated with learning, innovation, and flexibility. Exhibit 3.19 shows a simplified con- tinuum that illustrates how structural approaches are associated with vertical control versus horizontal coordination. The functional structure is appropriate when the organization needs to be coordinated through the vertical hierarchy and when efficiency is important for meeting organizational goals. The functional structure uses task specialization and a strict chain of command to gain efficient use of scarce resources, but it does not enable the organization to be flexible or innovative. At the opposite end of the scale, the horizontal structure is appro- priate when the organization has a high need for coordination among functions to achieve innovation and promote learning. The horizontal structure enables organizations to differentiate themselves and respond quickly to changes, but at the expense of efficient resource use. The virtual network structure offers even greater flexibility and potential for rapid response by allowing the organization to add or subtract pieces as needed to adapt and meet changing needs from the environment and marketplace. Exhibit 3.19 also shows how other types of struc- ture defined in this chapter—functional with horizontal linkages, divisional, and matrix—represent intermediate steps on the organization’s path to efficiency or innovation and learning. The exhibit does not include all possible structures, but it illustrates how organizations attempt to balance the needs for efficiency and vertical control with innovation and horizontal coordination. In addition, as described in the chapter, many organizations use a hybrid structure to combine characteristics of various structural types.

Symptoms of Structural Deficiency

Top executives periodically evaluate organization structure to determine whether it is appropriate to changing needs. Managers try to achieve the best fit between internal reporting relationships and the needs of the external envi- ronment. As a general rule, when organization structure is out of alignment

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

ANSWER: Disagree. Virtual networks and outsourcing forms of organization design have become popular because they offer increased fl exibility and more rapid response in a fast-changing environment. Outsourced departments can be added or dropped as conditions change. Keeping control over all activities in-house might be more comfortable for some managers, but it discourages fl exibility.


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

Find the correct bal- ance between vertical control and horizontal coordination to meet the needs of the orga- nization. Consider a structural reorganiza- tion when symptoms of structural defi- ciency are observed.

126 Part 2: Organizational Purpose and Structural Design

with organization needs, one or more of the following symptoms of structural deficiency appear.67

• Decision making is delayed or lacking in quality. Decision makers may be over- loaded because the hierarchy funnels too many problems and decisions to them. Delegation to lower levels may be insufficient. Another cause of poor-quality decisions is that information may not reach the correct people. Information link- ages in either the vertical or horizontal direction may be inadequate to ensure decision quality.

• The organization does not respond innovatively to a changing environment. One reason for lack of innovation is that departments are not coordinated horizon- tally. The identification of customer needs by the marketing department and the identification of technological developments in the research department must be coordinated. Organization structure also has to specify departmental responsi- bilities that include environmental scanning and innovation.

• Employee performance declines and goals are not being met. Employee per- formance may decline because the structure doesn’t provide clear goals, respon- sibilities, and mechanisms for coordination. The structure should reflect the complexity of the market environment yet be straightforward enough for employees to effectively work within.

• Too much conflict is evident. Organization structure should allow conflicting departmental goals to combine into a single set of goals for the entire organiza- tion. When departments act at cross-purposes or are under pressure to achieve departmental goals at the expense of organizational goals, the structure is often at fault. Horizontal linkage mechanisms are not adequate.

Dominant Structural Approach

Functional Structure

Horizontal: Coordination, learning, innovation, flexibility

Vertical: Control, efficiency, stability, reliability

Functional with cross-functional

teams, integrators

Divisional Structure

Matrix Structure

Horizontal Structure

Virtual Network Structure

EXHIBIT 3.19 Relationship of Structure to Organization’s Need for Efficiency versus Learning

Chapter 3: Fundamentals of Organization Structure 127


■ Organization structure must accomplish two things for the organization. It must provide a framework of responsibilities, reporting relationships, and groupings, and it must provide mechanisms for linking and coordinating orga- nizational elements into a coherent whole. The structure is reflected on the organization chart. Linking the organization into a coherent whole requires the use of information systems and linkage devices in addition to the organiza- tion chart.

■ Organization structure can be designed to provide vertical and horizontal information linkages based on the information processing required to meet the organization’s overall goal. Managers can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical linkages such as hierarchy, rules and plans, and formal information systems, or toward a contemporary organization designed for learning and adaptation, which emphasizes horizontal communication and coordination. Vertical link- ages are not sufficient for most organizations today. Organizations provide horizontal linkages through cross-functional information systems, direct con- tact between managers across department lines, temporary task forces, full-time integrators, and teams.

■ Alternatives for grouping employees and departments into overall structural design include functional grouping, divisional grouping, multifocused grouping, horizontal grouping, and virtual network grouping. The choice among func- tional, divisional, and horizontal structures determines where coordination and integration will be greatest. With functional and divisional structures, managers also use horizontal linkage mechanisms to complement the vertical dimension and achieve integration of departments and levels into an organizational whole. With a horizontal structure, activities are organized horizontally around core work processes.

■ A virtual network structure extends the concept of horizontal coordination and collaboration beyond the boundaries of the organization. Core activities are performed by a central hub while other functions and activities are outsourced to contract partners.

■ The matrix structure attempts to achieve an equal balance between the vertical and horizontal dimensions of structure. Most organizations do not exist in these pure forms, using instead hybrid structures that incorporate characteristics of two or more types of structure.

■ Ultimately, managers attempt to find the correct balance between vertical control and horizontal coordination. Signs of structural misalignment include delayed decision making, lack of innovation, poor employee performance, and excessive conflict.

■ Finally, an organization chart is only so many lines and boxes on a piece of paper. The purpose of the organization chart is to encourage and direct employees into activities and communications that enable the organization to achieve its goals. The organization chart provides the structure, but employees provide the behavior. The chart is a guideline to encourage people to work together, but management must implement the structure and carry it out.

128 Part 2: Organizational Purpose and Structural Design

centralized decentralized departmental grouping divisional grouping divisional structure functional grouping functional matrix functional structure horizontal grouping horizontal linkage

horizontal structure hybrid structure integrator liaison role matrix structure multifocused grouping organization structure outsourcing process product matrix

reengineering symptoms of structural deficiency task force teams vertical information system vertical linkages virtual network grouping virtual network structure virtual team

Key ConceptsKey

1. What is the definition of organization structure? Does organization structure appear on the organization chart? Explain.

2. When is a functional structure preferable to a divisional structure?

3. Large corporations tend to use hybrid structures. Why?

4. What are the primary differences between a traditional organization designed for efficiency and a more con- temporary organization designed for learning?

5. What is the difference between a task force and a team? Between liaison role and integrating role? Which of these provides the greatest amount of horizontal coordination?

6. What conditions usually have to be present before an organization should adopt a matrix structure?

7. The manager of a consumer products firm said, “We use the brand manager position to train future execu- tives.” Why do you think the brand manager position is considered a good training ground? Discuss.

8. Why do companies using a horizontal structure have cul- tures that emphasize openness, employee empowerment, and responsibility? What do you think a manager’s job would be like in a horizontally organized company?

9. What types of organizational activities do you think are most likely to be outsourced? What types are least likely?

10. Describe the virtual network structure. What are the advantages and disadvantages of using this structure compared to performing all activities in-house within an organization?

Discussion QuestionsDisc

Chapter 3 Workbook: You and Organization Structure*

To better understand the importance of organization struc- ture in your life, do the following assignment.

Select one of the following situations to organize:

• A copy and print shop • A travel agency • A sports rental (such as Jet Skis or snowmobiles) in a

resort area • A bakery

Background Organization is a way of gaining some power against an unreliable environment. The environment provides the organization with inputs, which include raw materials, human resources, and financial resources. There is a ser- vice or product to produce that involves technology. The

output goes to clients, a group that must be nurtured. The complexities of the environment and the technology deter- mine the complexity of the organization.

Planning Your Organization 1. Write down the mission or purpose of the organization

in a few sentences. 2. What are the specific tasks to be completed to accom-

plish the mission? 3. Based on the specifics in question 2, develop an organi-

zation chart. Each position in the chart will perform a specific task or is responsible for a certain outcome.

4. You are into your third year of operation, and your busi- ness has been very successful. You want to add a second location a few miles away. What issues will you face


Chapter 3: Fundamentals of Organization Structure 129

running the business at two locations? Draw an organi- zation chart that includes the two business locations.

5. Five more years go by and the business has grown to five locations in two cities. How do you keep in touch with it all? What issues of control and coordination have arisen? Draw an up-to-date organization chart and explain your rationale for it.

6. Twenty years later you have seventy-five business loca- tions in five states. What are the issues and problems that have to be dealt with through organizational structure? Draw an organization chart for this organization, indicat-

ing such factors as who is responsible for customer sat- isfaction, how you will know if customer needs are met, and how information will flow within the organization.

*Adapted by Dorothy Marcic from “Organizing,” in Donald D. White and H. William Vroman, Action in Organizations, 2nd ed. (Boston: Allyn & Bacon, 1982), 154, and Cheryl Harvey and Kim Morouney, “Organization Structure and Design: The Club Ed Exercise,” Journal of Management Education (June 1985), 425–429.

Case for Analysis: C & C Grocery Stores Inc.*

The first C & C Grocery store was started in 1947 by Doug Cummins and his brother Bob. Both were veterans who wanted to run their own business, so they used their savings to start the small grocery store in Charlotte, North Carolina. The store was immediately successful. The location was good, and Doug Cummins had a winning personality. Store employees adopted Doug’s informal style and “serve the customer” attitude. C & C’s increasing circle of customers enjoyed an abundance of good meats and produce.

By 1997, C & C had over 200 stores. A standard physical layout was used for new stores. Company head- quarters moved from Charlotte to Atlanta in 1985. The organization chart for C & C is shown in Exhibit 3.20. The central offices in Atlanta handled personnel, merchandis- ing, financial, purchasing, real estate, and legal affairs for the entire chain. For management of individual stores, the organization was divided by regions. The southern, south- eastern, and northeastern regions each had about seventy stores. Each region was divided into five districts of ten to fifteen stores each. A district director was responsible for supervision and coordination of activities for the ten to fifteen district stores.

Each district was divided into four lines of authority based on functional specialty. Three of these lines reached into the stores. The produce department manager within each store reported directly to the produce specialist for the division, and the same was true for the meat department manager, who reported directly to the district meat spe- cialist. The meat and produce managers were responsible for all activities associated with the acquisition and sale of perishable products. The store manager’s responsibil- ity included the grocery line, front-end departments, and store operations. The store manager was responsible for appearance of personnel, cleanliness, adequate checkout service, and price accuracy. A grocery manager reported to the store manager, maintained inventories, and restocked shelves for grocery items. The district merchandising office was responsible for promotional campaigns, advertising circulars, district advertising, and attracting customers into

the stores. The grocery merchandisers were expected to coordinate their activities with each store in the district.

Business for the C & C chain has dropped off in all regions in recent years—partly because of a declining econ- omy, but mostly because of increased competition from large discount retailers such as Wal-Mart, Target, and Costco Wholesale. When these large discounters entered the grocery business, they brought a level of competition unlike any C & C had seen before. C & C had managed to hold its own against larger supermarket chains, but now even the big chains were threatened by Wal-Mart, which became no. 1 in grocery sales in 2001. C & C managers knew they couldn’t compete on price, but they were con- sidering ways they could use advanced information tech- nology to improve service and customer satisfaction and distinguish the store from the large discounters.

However, the most pressing problem was how to improve business with the resources and stores they now had. A consulting team from a major university was hired to investigate store structure and operations.

The consultants visited several stores in each region, talking to about fifty managers and employees. The con- sultants wrote a report that pinpointed four problem areas to be addressed by store executives.

1. The chain was slow to adapt to change. Store layout and structure were the same as had been designed fif- teen years ago. Each store did things the same way, even though some stores were in low-income areas and other stores in suburban areas. A new computerized supply chain management system for ordering and stocking had been developed, but after two years it was only partially implemented in the stores. Other proposed information technology (IT) initiatives were still “on the back burner,” not yet even in the development stage.

2. Roles of the district store supervisor and the store man- ager were causing dissatisfaction. The store managers wanted to learn general management skills for potential promotion into district or regional management positions.

130 Part 2: Organizational Purpose and Structural Design

However, their jobs restricted them to operational activi- ties and they learned little about merchandising, meat, and produce. Moreover, district store supervisors used store visits to inspect for cleanliness and adherence to operating standards rather than to train the store man- ager and help coordinate operations with perishable departments. Close supervision on the operational details had become the focus of operations management rather than development, training, and coordination.

3. Cooperation within stores was low and morale was poor. The informal, friendly atmosphere originally cre- ated by Doug Cummins was gone. One example of this problem occurred when the grocery merchandiser and store manager in a Louisiana store decided to pro- mote Coke and Diet Coke as a loss leader. Thousands of cartons of Coke were brought in for the sale, but the stockroom was not prepared and did not have

room. The store manager wanted to use floor area in the meat and produce sections to display Coke cartons, but those managers refused. The produce department manager said that Diet Coke did not help his sales and it was okay with him if there was no promotion at all.

4. Long-term growth and development of the store chain would probably require reevaluation of long- term strategy. The percent of market share going to traditional grocery stores was declining nationwide due to competition from large superstores and discount retail- ers. In the near future, C & C might need to introduce nonfood items into the stores for one-stop shopping, add specialty or gourmet sections within stores, and investigate how new technology could help distinguish the company, such as through targeted marketing and promotion, pro- viding superior service and convenience, and offering their customers the best product assortment and availability.

(Same as Southeast)(Same as Southeast)

President Cummins

Vice President Purchasing

Vice President Human Resources

Vice President Merchandising

Vice President Distribution

Vice President Northeast

Vice President Southeast

District Director

Vice President South

Vice President Finance and I.T.

Grocery Merchandiser

Meat Merchandiser

Operations Manager

Produce Manager

District Produce Specialist

District Store Supervisor

Store Manager

District Meat Specialist

Store Meat Department


Grocery Department


Store Produce Department


District Grocery Specialist

EXHIBIT 3.20 Organization Structure for C & C Grocery Stores Inc.

Chapter 3: Fundamentals of Organization Structure 131

To solve the first three problems, the consultants rec- ommended reorganizing the district and the store structure as illustrated in Exhibit 3.21. Under this reorganization, the meat, grocery, and produce department managers would all report to the store manager. The store manager would have complete store control and would be responsible for coordina- tion of all store activities. The district supervisor’s role would be changed from supervision to training and development. The district supervisor would head a team that included himself and several meat, produce, and merchandise specialists who would visit area stores as a team to provide advice and help for the store managers and other employees. The team would act in a liaison capacity between district specialists and the stores.

The consultants were enthusiastic about the proposed structure. With the removal of one level of district opera- tional supervision, store managers would have more freedom and responsibility. The district liaison team would establish a cooperative team approach to management that could be

adopted within stores. Focusing store responsibility on a sin- gle manager would encourage coordination within stores and adaptation to local conditions. It would also provide a focus of responsibility for storewide administrative changes.

The consultants also believed that the proposed struc- ture could be expanded to accommodate nongrocery lines and gourmet units if these were included in C & C’s future plans. Within each store, a new department manager could be added for pharmacy, gourmet/specialty items, or other major departments. The district team could be expanded to include specialists in these lines, as well as an informa- tion technology coordinator to act as liaison for stores in the district.

*Prepared by Richard L. Daft, from Richard L. Daft and Richard Steers, Organizations: A Micro/Macro Approach (Glenview, Ill.: Scott Foresman, 1986). Reprinted with permission.

District Director

Operations Manager

Grocery Merchandiser

Grocery Merchandiser

Meat Specialist

Produce Specialist

District Coordinator

Meat Merchandiser

Produce Manager

Store Manager

Meat Department


Grocery Department


Produce Department


EXHIBIT 3.21 Proposed Reorganization of C & C Grocery Stores Inc.

132 Part 2: Organizational Purpose and Structural Design

The Aquarius Advertising Agency is a middle-sized firm that offered two basic services to its clients: (1) custom- ized plans for the content of an advertising campaign (for example, slogans and layouts) and (2) complete plans for media (such as radio, TV, newspapers, billboards, and Internet). Additional services included aid in marketing and distribution of products and marketing research to test advertising effectiveness.

Its activities were organized in a traditional manner. The organization chart is shown in Exhibit 3.22. Each department included similar functions.

Each client account was coordinated by an account executive who acted as a liaison between the client and the various specialists on the professional staff of the operations and marketing divisions. The number of direct communications and contacts between clients and Aquarius specialists, clients and account executives, and Aquarius specialists and account executives is indicated in Exhibit 3.23. These sociometric data were gathered by a consultant who conducted a study of the patterns of for- mal and informal communication. Each intersecting cell of Aquarius personnel and the clients contains an index of the direct contacts between them.

Although an account executive was designated to be the liaison between the client and specialists within the agency, communications frequently occurred directly between clients and specialists and bypassed the account executive. These direct contacts involved a wide range of interactions, such as meetings, telephone calls, e-mail mes- sages, and so on. A large number of direct communications occurred between agency specialists and their counterparts in the client organization. For example, an art specialist working as one member of a team on a particular client account would often be contacted directly by the client’s in-house art specialist, and agency research personnel had direct communication with research people of the client firm. Also, some of the unstructured contacts often led to more formal meetings with clients in which agency person- nel made presentations, interpreted and defended agency policy, and committed the agency to certain courses of action.

Both hierarchical and professional systems operated within the departments of the operations and marketing divi- sions. Each department was organized hierarchically with a director, an assistant director, and several levels of authority. Professional communications were widespread and mainly concerned with sharing knowledge and techniques, techni- cal evaluation of work, and development of professional interests. Control in each department was exercised mainly through control of promotions and supervision of work done by subordinates. Many account executives, however, felt the need for more influence, and one commented:

Creativity and art. That’s all I hear around here. It is hard as hell to effectively manage six or seven hotshots who claim they have to do their own thing. Each of them tries to sell his or her idea to the client, and most of the time I don’t know what has happened until a week later. If I were a despot, I would make all of them check with me first to get approval. Things would sure change around here.

The need for reorganization was made more acute by changes in the environment. Within a short period of time, there was a rapid turnover in the major accounts handled by the agency. It was typical for advertising agencies to gain or lose clients quickly, often with no advance warning as consumer behavior and lifestyle changes emerged and product innovations occurred.

An agency reorganization was one solution proposed by top management to increase flexibility in this unpre- dictable environment. The reorganization would be aimed at reducing the agency’s response time to environmental changes and at increasing cooperation and communica- tion among specialists from different departments. The top managers are not sure what type of reorganization is appropriate. They would like your help analyzing their context and current structure and welcome your advice on proposing a new structure.

*Adapted from John F. Veiga and John N. Yanouzas, “Aquarius Advertising Agency,” The Dynamics of Organization Theory (St. Paul, Minn.: West, 1984), 212–217, with permission.

Case for Analysis: Aquarius Advertising Agency*

Chapter 3: Fundamentals of Organization Structure 133

Media Department

Merchandising Department

Research Department

Newspapers/ Magazine

Production Department

TV/Radio/Internet Production Department

Copy Department

Art Department

Board of Directors


Executive Vice President Policy CommitteeLegal Counsel

Financial Manager Human Resources


Accounts Vice President

Operations Vice President

Marketing Vice President

Account Executive

Accounts Manager

Account Executive

Account Executive

Account Executive

EXHIBIT 3.22 Aquarius Advertising Agency Organization Chart

134 Part 2: Organizational Purpose and Structural Design


Account Manager

Account Executives

TV/Radio Specialists

Newspaper/Magazine Specialists

Copy Specialists

Art Specialists

Merchandising Specialists

Media Specialists

Research Specialists

Cl ie

nt s

A cc

ou nt

M an

ag er

A cc

ou nt

E xe

cu tiv



ad io

S pe

ci al

is ts

N ew

sp ap

er /M

ag az

in e

Sp ec

ia lis


Co py

S pe

ci al

is ts

A rt

S pe

ci al

is ts

M er

ch an

di si

ng S

pe ci

al is


M ed

ia S

pe ci

al is


Re se

ar ch

S pe

ci al

is ts















































EXHIBIT 3.23 Sociometric Index of Aquarius Personnel and Clients F � Frequent—daily O � Occasional—once or

twice per project N � None


1. Pete Engardio with Michael Arndt and Dean Foust, “The Future of Outsourcing,” BusinessWeek (January 30, 2006), 50–58; and “Working with Wyeth to Establish a High- Performance Drug Discovery Capability,” Accenture, http:// AD6F-FCC5095CA02A/0/wyeth.pdf, accessed on August 15, 2008.

2. Carol Hymowitz, “Have Advice, Will Travel; Lacking Permanent Offices, Accenture’s Executives Run ‘Virtual’ Company on the Fly,” The Wall Street Journal (June 5, 2006), B1.

3. John Child, Organization (New York: Harper & Row, 1984). 4. Stuart Ranson, Bob Hinings, and Royston Greenwood,

“The Structuring of Organizational Structures,”


Chapter 3: Fundamentals of Organization Structure 135

Administrative Science Quarterly 25 (1980), 1–17; and Hugh Willmott, “The Structuring of Organizational Structure: A Note,” Administrative Science Quarterly 26 (1981), 470–474.

5. This section is based on Frank Ostroff, The Horizontal Organization: What the Organization of the Future Looks Like and How It Delivers Value to Customers (New York: Oxford University Press, 1999).

6. Stephen Salsbury, The State, the Investor, and the Railroad: The Boston & Albany, 1825–1867 (Cambridge: Harvard University Press, 1967), 186–187.

7. David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988).

8. William C. Ouchi, “Power to the Principals: Decentralization in Three Large School Districts,” Organization Science 17, no. 2 (March–April 2006), 298–307.

9. William Newman, “Management of Subways to Be Split,” The New York Times (December 6, 2007), B1.

10. Brian Hindo, “Making the Elephant Dance,” BusinessWeek (May 1, 2006), 88–90.

11. “Country Managers: From Baron to Hotelier,” The Economist (May 11, 2002), 55–56.

12. Based on Jay R. Galbraith, Designing Complex Organizations (Reading, Mass.: Addison-Wesley, 1973), and Organization Design (Reading, Mass.: Addison-Wesley, 1977), 81–127.

13. George Anders, “Overseeing More Employees—With Fewer Managers,” The Wall Street Journal (March 24, 2008), B6.

14. Lee Iacocca with William Novak, Iacocca: An Autobiography (New York: Phantom Books, 1984), 152–153.

15. Based on Galbraith, Designing Complex Organizations. 16. “Mandate 2003: Be Agile and Efficient,” Microsoft

Executive Circle (Spring 2003), 46–48. 17. Jay Galbraith, Diane Downey, and Amy Kates, “How

Networks Undergird the Lateral Capability of an Organization—Where the Work Gets Done,” Journal of Organizational Excellence (Spring 2002), 67–78.

18. Amy Barrett, “Staying on Top,” BusinessWeek (May 5, 2003), 60–68.

19. Walter Kiechel III, “The Art of the Corporate Task Force,” Fortune (January 28, 1991), 104–105; and William J. Altier, “Task Forces: An Effective Management Tool,” Management Review (February 1987), 52–57.

20. Neal E. Boudette, “Marriage Counseling; At DaimlerChrysler, A New Push to Make Its Units Work Together,” The Wall Street Journal (March 12, 2003), A1, A15.

21. Paul R. Lawrence and Jay W. Lorsch, “New Managerial Job: The Integrator,” Harvard Business Review (November–December 1967), 142–151.

22. Laurianne McLaughlin, “Project Collaboration: How One Company Got a Diverse Team on the Same Page,” CIO (August 13, 2007), Project_Collaboration_How_One_Company_Got_A_ Diverse_Team_on_the_Same_Page?contentId=130300&slug=&, accessed on August 20, 2008.

23. Thomas L. Legare, “How Hewlett-Packard Used Virtual Cross-Functional Teams to Deliver Healthcare Industry Solutions,” Journal of Organizational Excellence (Autumn 2001), 29–37.

24. Anthony M. Townsend, Samuel M. DeMarie, and Anthony R. Hendrickson, “Virtual Teams: Technology and the Workplace of the Future,” Academy of Management Executive 12, no. 3 (August 1998), 17–29.

25. Erin White, “How a Company Made Everyone a Team Player,” The Wall Street Journal (August 13, 2007), B1.

26. Thom Shanker, “Edging Away from Air Force, Army Is Starting Its Own Aviation Unit,” The New York Times (June 22, 2008), A6.

27. Henry Mintzberg, The Structuring of Organizations (Englewood Cliffs, N.J.: Prentice-Hall, 1979).

28. Frank Ostroff, “Stovepipe Stomper,” Government Executive (April 1999), 70.

29. Based on Robert Duncan, “What Is the Right Organization Structure?” Organizational Dynamics (Winter 1979), 59–80; and W. Alan Randolph and Gregory G. Dess, “The Congruence Perspective of Organization Design: A Conceptual Model and Multivariate Research Approach,” Academy of Management Review 9 (1984), 114–127.

30. R. W. Apple, Jr., “Making Texas Cows Proud,” The New York Times (May 31, 2006), F1; Lynn Cook, “How Sweet It Is,” Forbes (March 1, 2004), 90ff; David Kaplan, “Cool Commander; Brenham’s Little Creamery Gets New Leader in Low-Key Switch,” Houston Chronicle (May 1, 2004), 1; Toni Mack, “The Ice Cream Man Cometh,” Forbes (January 22, 1990), 52–56; David Abdalla, J. Doehring, and Ann Windhager, “Blue Bell Creameries, Inc.: Case and Analysis” (unpublished manuscript, Texas A&M University, 1981); Jorjanna Price, “Creamery Churns Its Ice Cream into Cool Millions,” Parade (February 21, 1982), 18–22; and Art Chapman, “Lone Star Scoop—Blue Bell Ice Cream Is a Part of State’s Culture,” http://www.

31. Timothy Galpin, Rod Hilpirt, and Bruce Evans, “The Connected Enterprise: Beyond Division of Labor,” Journal of Business Strategy 28, no. 2 (2007), 38–47.

32. Rahul Jacob, “The Struggle to Create an Organization for the 21st Century,” Fortune (April 3, 1995), 90–99.

33. N. Anand and Richard L. Daft, “What Is the Right Organization Design?” Organizational Dynamics 36, no. 4 (2007), 329–344.

34. Johnson & Johnson website, connect/about-jnj/company-structure/?flash=true, accessed on August 18, 2008; and Joseph Weber, “A Big Company That Works,” BusinessWeek (May 4, 1992), 124–132.

35. Eliza Newlin Carney, “Calm in the Storm,” Government Executive (October 2003), 57–63; and Brian Friel, “Hierarchies and Networks,” Government Executive (April 2002), 31–39.

36. Based on Duncan, “What Is the Right Organization Structure?”

37. Weber, “A Big Company That Works.” 38. Phred Dvorak and Merissa Marr, “Stung by iPod, Sony

Addresses a Digital Lag,” The Wall Street Journal (December 30, 2004), B1.

39. Maisie O’Flanagan and Lynn K. Taliento, “Nonprofits: Ensuring That Bigger Is Better,” McKinsey Quarterly, Issue 2 (2004), 112ff.

40. John Markoff, “John Sculley’s Biggest Test,” The New York Times (February 26, 1989), sec. 3, 1, 26.

136 Part 2: Organizational Purpose and Structural Design

41. David Enrich and Carrick Mollenkamp, “Citi’s Focus: Out with Old, In with Profit Drivers,” The Wall Street Journal (February 20, 2008), C3.

42. Stanley M. Davis and Paul R. Lawrence, Matrix (Reading, Mass.: Addison-Wesley, 1977), 11–24.

43. Erik W. Larson and David H. Gobeli, “Matrix Management: Contradictions and Insight,” California Management Review 29 (Summer 1987), 126–138.

44. Davis and Lawrence, Matrix, 155–180. 45. Robert C. Ford and W. Alan Randolph, “Cross-

Functional Structures: A Review and Integration of Matrix Organizations and Project Management,“ Journal of Management 18 (June 1992), 267–294; and Duncan, “What Is the Right Organization Structure?”

46. Lawton R. Burns, “Matrix Management in Hospitals: Testing Theories of Matrix Structure and Development,” Administrative Science Quarterly 34 (1989), 349–368.

47. Carol Hymowitz, “Managers Suddenly Have to Answer to a Crowd of Bosses” (In the Lead column), The Wall Street Journal (August 12, 2003), B1; and Michael Goold and Andrew Campbell, “Making Matrix Structures Work: Creating Clarity on Unit Roles and Responsibilities,” European Management Journal 21, no. 3 (June 2003), 351–363.

48. Christopher A. Bartlett and Sumantra Ghoshal, “Matrix Management: Not a Structure, a Frame of Mind,” Harvard Business Review (July–August 1990), 138–145.

49. This case was inspired by John E. Fogerty, “Integrative Management at Standard Steel” (unpublished manu- script, Latrobe, Pennsylvania, 1980); Stanley Reed with Adam Aston, “Steel: The Mergers Aren’t Over Yet,” BusinessWeek (February 21, 2005), 6; Michael Amdt, “Melting Away Steel’s Costs,” BusinessWeek (November 8, 2004), 48; and “Steeling for a Fight,” The Economist (June 4, 1994), 63.

50. Michael Hammer, “Process Management and the Future of Six Sigma,” Sloan Management Review (Winter 2002), 26–32; and Michael Hammer and Steve Stanton, “How Process Enterprises Really Work,” Harvard Business Review 77 (November–December 1999), 108–118.

51. Hammer, “Process Management and the Future of Six Sigma.”

52. Based on Ostroff, The Horizontal Organization, and Anand and Daft, “What Is the Right Organization Design?.”

53. Julia Moskin, “Your Waiter Tonight . . . Will Be the Chef,” The New York Times (March 12, 2008), F1.

54. Frank Ostroff, The Horizontal Organization, 102–114. 55. See Anand and Daft, “What Is the Right Organization

Design?”; Pete Engardio, “The Future of Outsourcing,” BusinessWeek (January 30, 2006), 50–58; Jane C. Linder, “Transformational Outsourcing,” MIT Sloan Management Review (Winter 2004), 52–58; and Denis Chamberland, “Is It Core or Strategic? Outsourcing as a Strategic Management Tool,” Ivey Business Journal (July–August 2003), 1–5.

56. Raymund Flandez, “Firms Tackle Government Chores,” The Wall Street Journal (June 17, 2008), B7.

57. Anand and Daft, “What Is the Right Organization Design?”; Engardio, “The Future of Outsourcing”; Chamberland,

“Is It Core or Strategic?”; Keith H. Hammonds, “Smart, Determined, Ambitious, Cheap: The New Face of Global Competition,” Fast Company (February 2003), 91–97;

Giuseppe Bonazzi and Cristiano Antonelli, “To Make or to Sell? The Case of In-House Outsourcing at Fiat Auto,” Organization Studies 24, no. 4 (2003), 575–594.

58. David Nadler, quoted in “Partners in Wealth: The Ins and Outs of Collaboration,” The Economist (January 21–27, 2006), 16–17.

59. Ranjay Gulati, “Silo Busting: How to Execute on the Promise of Customer Focus,” Harvard Business Review (May 2007), 98–108.

60. The discussion of virtual networks is based on Anand and Daft, “What Is the Right Organization Design?”; Melissa A. Schilling and H. Kevin Steensma, “The Use of Modular Organizational Forms: An Industry-Level Analysis,” Academy of Management Journal 44, no. 6 (2001), 1149–1168; Raymond E. Miles and Charles C. Snow, “The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy,” Organizational Dynamics (Spring 1995), 5–18; and R. E. Miles, C. C. Snow, J. A. Matthews, G. Miles, and H. J. Coleman Jr., “Organizing in the Knowledge Age: Anticipating the Cellular Form,” Academy of Management Executive 11, no. 4 (1997), 7–24.

61. Paul Engle, “You Can Outsource Strategic Processes,” Industrial Management (January–February 2002), 13–18.

62. Don Tapscott, “Rethinking Strategy in a Networked World,” Strategy & Business 24 (Third Quarter, 2001), 34–41.

63. Based on the story of TiVo as described in Jane C. Linder, “Transformational Outsourcing,” MIT Sloan Management Review (Winter 2004), 52–58; with additional information from Alison Neumer, “I Want My TiVo; Subscriptions Hike as Nation Gets Hooked,” Chicago Tribune (February 22, 2005), 8; Carolyn Y. Johnson, “In Strategic Shift, Comcast, TiVo Team Up; Move Is 1st Step Toward a More Open Platform,” Boston Globe (January 22, 2008), C6; and David Lieberman, “TiVo Expands Its Reach with YouTube Videos,” USA Today (March 13, 2008), B3.

64. This discussion of strengths and weaknesses is based on Miles and Snow, “The New Network Firm”; Gregory G. Dess, Abdul M. A. Rasheed, Kevin J. McLaughlin, and Richard L. Priem, “The New Corporate Architecture,” Academy of Management Executive 9, no. 2 (1995), 7–20; Engle, “You Can Outsource Strategic Processes”; Anand and Daft, “What Is the Right Organization Structure?”; and Henry W. Chesbrough and David J. Teece, “Organizing for Innovation: When Is Virtual Virtuous?” Harvard Business Review (August 2002), 127–134.

65. Linda S. Ackerman, “Transition Management: An In-depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982), 46–66.

66. Based on Ostroff, The Horizontal Organization, 29–44. 67. Based on Child, Organization, Ch. 1; and Jonathan D. Day,

Emily Lawson, and Keith Leslie, “When Reorganization Works,” The McKinsey Quarterly, 2003 Special Edition: The Value in Organization, 21–29.

Part 3

Open System Design Elements

Chapter 4

The External Environment

Chapter 5



Chapter 6

Designing Organizations

for the International


© K

en K



The Organization’s Environment Task Environment · General Environment · International Environment

The Changing Environment Simple–Complex Dimension · Stable–Unstable Dimension · Framework

Adapting to a Changing Environment Adding Positions and Departments · Building Relationships · Differentiation and Integration · Organic versus Mechanistic Management Processes · Planning, Forecasting, and Responsiveness

Framework for Responses to Environmental Change

Dependence on External Resources

Influencing External Resources Establishing Formal Relationships · Influencing Key Sectors · Organization– Environment Integrative Framework

Design Essentials

The External Environment

© K

en K


Chapter 4

In the spring and summer of 2008, anyone in the United States with a car felt the effects of skyrocketing oil prices each time they had to fill the gas tank. It was a surprise change in the environment that hit consumers on a personal level, caus- ing them to alter their buying habits, travel routes, and vacation plans. That, in turn, created even bigger headaches for organizations already struggling with higher costs. Several restaurant chains filed for bankruptcy as people stayed home to save money and reduce their gasoline use. Amusement parks such as Six Flags and Cedar Fair saw their attendance slump. Airlines suffered the double whammy of fewer cus- tomers and exorbitant fuel costs. Retailers, auto makers, food processors, trucking companies, school systems, car rental firms, and every other type of organization felt the pinch.

On the other hand, some companies also benefited from the crisis. “Four- dollar gas is the best marketing tool I have,” said Betsy Kachmar, assistant general manager of Fort Wayne Public Transportation Corporation, which saw a dramatic jump in bus ridership. Organic farmers and small companies produc- ing food or other products for a local market became more competitive as prices of mass-produced goods increased due to transportation costs. Manufacturers of energy efficient appliances saw a rise in sales with consumers looking for ways to cut their energy use on everything from washing clothes to heating their homes.1 Sales at New York-based Eco Bags, which makes reusable fishnet shop- ping bags, doubled as grocers and customers turned away from using plastic bags made with oil.2

The rapid rise in oil prices provides a dramatic example of how shifts in the external environment create both threats and opportunities for organizations. Organizations face tremendous uncertainty in dealing with events in the external environment and often have to adapt quickly to new competition, economic turmoil, changes in con- sumer interests, or innovative technologies.

Managing by Design Questions

1 The best way for an organization to cope with a complex environment is to develop a complex structure (rather than keep it simple and uncomplicated).

1 2 3 4 5


2 In a volatile, fast-changing environment, serious planning activities are a waste of time and resources. 1 2 3 4 5


3 Managers of business organizations should not get involved in political activities. 1 2 3 4 5



Before reading this chapter, please circle your opinion below for each of the following statements:

Purpose of This Chapter

The purpose of this chapter is to develop a framework for assessing environments and how organizations can respond to them. First, we identify the organizational domain and the sectors that influence the organization. Then, we explore two major environ- mental forces on the organization—the need for information and the need for resources. Organizations respond to these forces through structural design, planning systems, and attempts to adapt to and influence elements in the external environment.


In a broad sense the environment is infinite and includes everything outside the organization. However, the analysis presented here considers only those aspects of the environment to which the organization is sensitive and must respond to survive. Thus, organizational environment is defined as all elements that exist outside the boundary of the organization and have the potential to affect all or part of the organization.

The environment of an organization can be understood by analyzing its domain within external sectors. An organization’s domain is the chosen environmental field of action. It is the territory an organization stakes out for itself with respect to products, services, and markets served. Domain defines the organization’s niche and defines those external sectors with which the organization will interact to accom- plish its goals.

The environment comprises several sectors or subdivisions that contain similar elements. Ten sectors can be analyzed for each organization: industry, raw materi- als, human resources, financial resources, market, technology, economic conditions, government, sociocultural, and international. The sectors and a hypothetical orga- nizational domain are illustrated in Exhibit 4.1. For most companies, the sectors in Exhibit 4.1 can be further subdivided into the task environment and general environment.

Task Environment

The task environment includes sectors with which the organization interacts directly and that have a direct impact on the organization’s ability to achieve its goals. The task environment typically includes the industry, raw materials, and market sectors, and perhaps the human resources and international sectors.

The following examples illustrate how each of these sectors can affect organizations:

• In the industry sector, the retail landscape has begun a decided shift, with con- sumers rejecting huge stores for smaller shops or Internet retailers that offer greater choice, better service, or higher quality. In clothing, for instance, shop- pers favor small niche retailers that offer rapid style changes. Regional grocery chains have grown more competitive by offering fresher and organic foods as well as prepared meals.3

• An interesting example in the raw materials sector concerns the beverage can industry. Steelmakers owned the beverage can market until the mid-1960s, when Reynolds Aluminum Company launched a huge aluminum recycling program to

140 Part 3: Open System Design Elements

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

Organize elements in the external environ- ment into ten sectors for analysis: industry, raw materials, human resources, financial resources, market, technology, economic conditions, govern- ment, sociocultural, and international. Focus on sectors that may experience sig- nificant change at any time.

Chapter 4: The External Environment 141

(a)(a) IndustryIndustry SectorSector (b)(b)RawRaw

MaterialsMaterials SectorSector

(c)(c) HumanHuman

ResourcesResources SectorSector

(d)(d) FinancialFinancial

ResourcesResources SectorSector

(e)(e) MarketMarket SectorSector

(f)(f) TechnologyTechnology


(g)(g) EconomicEconomic ConditionsConditions


(h)(h) GovernmentGovernment


(i)(i) SocioculturalSociocultural


(j)(j) InternationalInternational


Interna tional Context



EXHIBIT 4.1 An Organization’s Environment

(a) Competitors, industry size and competitiveness, related industries

(b) Suppliers, manufacturers, real estate, services

(c) Labor market, employment agencies, universities, training schools, employees in other companies, unionization

(d) Stock markets, banks, savings and loans, private investors

(e) Customers, clients, potential users of products and services

(f) Techniques of production, science, computers, information technology, e-commerce

(g) Recession, unemployment rate, inflation rate, rate of investment, economics, growth

(h) City, state, federal laws and regulations, taxes, services, court system, political processes

(i) Age, values, beliefs, education, religion, work ethic, consumer and green movements

(j) Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rate

gain a cheaper source of raw materials and make aluminum cans price-competitive with steel.4

• In the market sector, makers of computer games have benefitted from a shift in consumer interest away from gaming consoles and back to lower-cost options. Today’s more powerful PCs and bigger screens are perfect for gamers, and with the tough economy, many people aren’t interested in laying out the big bucks for a console and a big screen television. After being overshadowed for several

142 Part 3: Open System Design Elements

year by consoles, PC games made a big comeback, particularly for role-playing adventure games.5

• The human resources sector is of significant concern to every business. At a recent CEO roundtable discussion, Steve Creamer, president and CEO of Energy Solutions, said his company’s single biggest problem is human capital. Other leaders agreed that factors such as the aging of the workforce, govern- ment limitations on visas for foreign workers, and fewer students entering fields such as engineering and science have combined to create a tremendous human resources headache for companies trying to stay competitive in a rapidly chang- ing world.6

• For most companies today, the international sector is also a part of the task environment because of globalization and intense competition. China is already the world’s largest producer of raw materials for pharmaceuticals, and in 2007, for the first time, a Chinese company won permission from the Food and Drug Administration to export finished medicines to the United States. India-based companies have been exporting generics to the United States for a decade, but experts believe China’s growing firms, blessed with low costs and brilliant scientists, will quickly overtake them.7

General Environment

The general environment includes those sectors that might not have a direct impact on the daily operations of a firm but will indirectly influence it. The general environment often includes the government, sociocultural, economic conditions, technology, and financial resources sectors. These sectors affect all organizations eventually. Consider the following examples:

• In the government sector, regulations influence every phase of organizational life. One of the most prominent and far-reaching changes in the United States in recent years was the 2002 Sarbannes-Oxley Act, often referred to as SOX. SOX required several types of corporate governance reforms, including better inter- nal monitoring to reduce the risk of fraud, certification of financial results by top executives, improved measures for internal auditing, and enhancing public financial disclosure. Additional regulations of this type are certain to follow the financial meltdown of banks and firms on Wall Street in 2008.

• Shifting demographics is a significant element in the sociocultural sector. In the United States, Hispanics have passed African Americans as the nation’s largest minority group, and their numbers are growing so fast that Hispanics (or Latinos, as some prefer to be called) are becoming a driving force in U.S. politics, economics, and culture. The growing Hispanic population is forcing gradual changes in organizations from the U.S. Labor Department to the major television networks to the local auto parts store.8

• General economic conditions often affect the way a company must do business. The already-struggling auto industry had an abysmal year in 2008. Sales of cars and light trucks in the United States dropped about 20 percent and sales of gas- guzzling large trucks and sport utility vehicles slowed to a crawl due to high gas prices, a weakening economy, the credit crunch, and declining consumer confidence. Auto makers had to scale back production, offer incentives to car buyers, and cut back their sales goals.9

Chapter 4: The External Environment 143

• The technology sector is an area in which massive changes have occurred in recent years, from digital music and advances in mobile technology to cloning and stem-cell research. Chris DeWolfe, CEO of MySpace, believes the world has seen only the beginning of the “mobile revolution.” Mobile devices extend the phenomenal power of blogging and social networking, which are breaking down barriers to the exchange of knowledge, information, opinions, and ideas around the world. The exchange of new scientific insights, for example, now happens in hours instead of years. So, too, does the exchange of opinions about a company’s products or services.10

• All businesses have to be concerned with financial resources, and this sector is often first and foremost in the minds of entrepreneurs. Many small busi- ness owners have turned to online person-to-person (P-to-P) lending networks for small loans as banks have tightened their lending standards. Jeff Walsh, for example, borrowed around $22,000 through for his coin laundry business. Alex Kalempa needed $15,000 to expand his business of developing racing shift systems for motorcycles, but banks offered him credit lines of only $500 to $1,000. Kalempa went to, where he got the $15,000 loan at an interest rate several points lower than the banks were offering.11

International Environment

The international sector can directly affect many organizations, and it has become extremely important in the last few years. In addition, international events can influ- ence all domestic sectors of the environment as well. For example, adverse weather and a workers’ strike in Western Africa, which supplies about two-thirds of the world’s cocoa beans, sharply increased raw materials costs for Choco-Logo, a small maker of gourmet chocolates in Buffalo, New York.12 Farmers, fertilizer companies, food manufacturers, and grocers in the United States faced new competitive issues because of an unexpected grain shortage and rising costs related to international changes. Strong economic growth in developing countries has enabled millions of people to afford richer diets, including grain-fed meat, which directly contributed to the grain shortage in the United States.13 Countries and organizations around the world are connected as never before, and economic, political, and sociocultural changes in one part of the world eventually affect other areas.

Moreover, the distinctions between foreign and domestic operations have become increasingly irrelevant. Thomas Middelhoff of Germany’s Bertelsmann AG, which purchased U.S. publisher Random House, put it this way: “There are no German and American companies. There are only successful and unsuccessful companies.”14 U.S.-based Ford Motor Company owns Sweden’s Volvo, while the iconic American beer Miller is owned by a South African company. Toyota is a Japanese corpora- tion, but it has manufactured millions of vehicles in North American factories. The technology behind Intel’s Centrino wireless components was born in a lab in Haifa, Israel, and Chinese researchers designed the microprocessors that control the pitch of the blade on General Electric’s giant wind turbines.15 Because of the significance of the international sector and its tremendous impact on organization design, this topic will be covered in detail in Chapter 6.

Every organization faces uncertainty domestically as well as globally. Consider a new challenge facing managers at television network Univision.

144 Part 3: Open System Design Elements

The Latino population in the United States is growing by leaps and bounds, and Univi- sion, the giant of Spanish-language television in the United States, now challenges the

major networks CBS, NBC, ABC, and Fox, especially in large cities. Univision won the loyalty of Latino audiences by keeping English out of its programs and commercials. Its prime-time lineup is based on telenovelas from Mexico, sexy soap-opera stories that attract a vast audience. Nielsen ratings indicate that Univision has 90 of the 100 most-watched Spanish- language shows in the United States.

But there’s a shift taking place that Univision managers have so far failed to respond to: the interests and tastes of viewers are changing much more rapidly than Univision’s shows. Births, not immigration, are now the main source of Latino growth, and American-born Latinos aren’t interested in the same type of programs their parents and grandparents were. “I think of [Univision] as a horse-and-buggy company,” said David R. Morse, president and CEO of New American Dimensions, which conducted a study of younger Latino viewers. Younger Latinos are more likely to speak English as their primary language, are better educated than their parents, and are more prone to marry outside their ethnic group. They want a broader variety of programs, and many prefer English-language television or bilingual programming.

Second- and third-generation bilingual Latinos are largely underserved by both Spanish and English language networks. Although they are ethnically proud, they don’t feel they have to prove themselves. They just want quality programming that addresses their interests. As Jeff Valdez, founder of SiTV, an English language cable start-up that caters to young Latinos says, “They want to see themselves on screen. They want to hear their stories.”16 ■

Can Univision transform its programming to satisfy younger Latino viewers, or is it destined to fade away as new companies like SiTV come on the scene with hip programs that attract the coveted audience of 18-to-34-year-olds? Univision is still a powerhouse, and it can succeed for years using its current formula. However, if the network doesn’t keep pace with changing demands from the environment, it could indeed go the way of the horse and buggy.

Television networks are not the only organizations that have to adapt to both subtle and massive shifts in the environment. In the following sections, we will dis- cuss in greater detail how companies can cope with and respond to environmental uncertainty and instability.


How does the environment influence an organization? The patterns and events occurring in the environment can be described along several dimensions, such as whether the environment is stable or unstable, homogeneous or heterogeneous, simple or complex; the munificence, or amount of resources available to support the organization’s growth; whether those resources are concentrated or dispersed; and the degree of consensus in the environment regarding the organization’s intended domain.17 These dimensions boil down to two essential ways the envi- ronment influences organizations: (1) the need for information about the environ- ment and (2) the need for resources from the environment. The environmental conditions of complexity and change create a greater need to gather information



Chapter 4: The External Environment 145

and to respond based on that information. The organization also is concerned with scarce material and financial resources and with the need to ensure availability of resources.

Environmental uncertainty pertains primarily to those sectors that an orga- nization deals with on a regular, day-to-day basis. Although sectors of the gen- eral environment—such as economic conditions, social trends, or technological changes—can create uncertainty for organizations, determining an organization’s environmental uncertainty generally means focusing on sectors of the task environ- ment, such as how many elements the organization deals with regularly, how rap- idly these elements change, and so forth. To assess uncertainty, each sector of the organization’s task environment can be analyzed along dimensions such as stability or instability and degree of complexity.18 The total amount of uncertainty felt by an organization is the uncertainty accumulated across environmental sectors.

Organizations must cope with and manage uncertainty to be effective. Uncertainty means that decision makers do not have sufficient information about environmental factors, and they have a difficult time predicting external changes. Uncertainty increases the risk of failure for organizational responses and makes it difficult to compute costs and probabilities associated with decision alternatives.19

The remainder of this section will focus on the information perspective, which is concerned with uncertainty created by the extent to which the environment is simple or complex and the extent to which events are stable or unstable. Later in the chapter, we discuss how organizations influence the environment to acquire needed resources.

Simple–Complex Dimension

The simple–complex dimension concerns environmental complexity, which refers to heterogeneity, or the number and dissimilarity of external elements relevant to an organization’s operations. The more external factors that regularly influence the organization and the greater number of other companies in an organization’s domain, the greater the complexity. A complex environment is one in which the organization interacts with and is influenced by numerous diverse external elements. In a simple environment, the organization interacts with and is influenced by only a few similar external elements.

Aerospace firms such as Boeing and Airbus operate in a complex environment, as do universities. Universities span a large number of technologies and are continu- ally buffeted by social, cultural, and value changes. Universities also must cope with numerous ever-changing government regulations, competition for quality students and highly educated employees, and scarce financial resources for many programs. They deal with granting agencies, professional and scientific associations, alumni, parents, foundations, legislators, community residents, international agencies, donors, corporations, and athletic teams. This large number of external elements makes up the organization’s domain, creating a complex environment. On the other hand, a family-owned hardware store in a suburban community is in a simple envi- ronment. The store does not have to deal with complex technologies or extensive government regulations, and cultural and social changes have little impact. Human resources are not a problem because the store is run by family members and part- time help. The only external elements of real importance are a few competitors, suppliers, and customers.

Stable–Unstable Dimension

The stable–unstable dimension refers to whether elements in the environment are dynamic. An environmental domain is stable if it remains the same over a period of months or years. Under unstable conditions, environmental elements shift abruptly. Environmental domains seem to be increasingly unstable for most organizations. This chapter’s Book Mark examines the volatile nature of today’s business world and gives some tips for managing in a fast-shifting environment.

Instability may occur when competitors react with aggressive moves and countermoves regarding advertising and new products or services. For example, News Corporation’s MySpace held the crown as king of social networking until managers

The business world is changing at an increasingly rapid pace. That’s the reality that spurred Larry Bossidy, retired chair- man and CEO of Honeywell International, and Ram Charan, a noted author, speaker, and business consultant, to write Confronting Reality: Doing What Matters to Get Things Right. Too many managers, they believe, are tempted to hide their heads in the sand of financial issues rather than face the confusion and complexity of the organization’s environment.

LESSONS FOR FACING REALITY For many companies, today’s environment is characterized by global hyper-competition, declining prices, and the growing power of consumers. Bossidy and Charan offer some les- sons to leaders for navigating in a fast-changing world.

• Understand the environment as it is now and is likely to be in the future, rather than as it was in the past. Relying on the past and conventional wisdom can lead to disaster. Kmart, for example, stuck to its old formula as Wal-Mart gobbled its customers and carved out a new business model. Few could have predicted in 1990, for example, that Wal-Mart would now be America’s biggest seller of groceries.

• Seek out and welcome diverse and unorthodox ideas. Managers need to be proactive and open-minded toward conversing with employees, suppliers, customers, col- leagues, and anyone else they come in contact with. What are people thinking about? What changes and opportunities do they see? What worries them about the future?

• Avoid the common causes of manager failure to confront reality: filtered information, selective hearing, wishful think- ing, fear, emotional overinvestment in a failing course of action, and unrealistic expectations. For example, when

sales and profits fell off a cliff at data-storage giant EMC, managers displayed a bias toward hearing good news and believed the company was only experiencing a blip in the growth curve. When Joe Tucci was named CEO, however, he was determined to find out if the slump was temporary. By talking directly with top leaders at his cus- tomers’ organization, Tucci was able to face the reality that EMC’s existing business model based on high-cost technology was dead. Tucci implemented a new business model to fit that reality.

• Ruthlessly assess your organization. Understanding the internal environment is just as important. Managers need to evaluate whether their company has the talent, commitment, and attitude needed to drive the impor- tant changes. At EMC, Tucci realized his sales force needed an attitude shift to sell software, services, and business solutions rather than just expensive hardware. The arrogant, hard-driving sales tactics of the past had to be replaced with a softer, more customer-oriented approach.

STAYING ALIVE Staying alive in today’s business environment requires that managers stay alert. Managers should always be looking at their competitors, broad industry trends, technological changes, shifting government policies, changing market forces, and economic developments. At the same time, they work hard to stay in touch with what their customers really think and really want. By doing so, leaders can confront real- ity and be poised for change.

Confronting Reality: Doing What Matters to Get Things Right, by Lawrence A. Bossidy and Ram Charan, is published by Crown Business Publishing.

Confronting Reality: Doing What Matters to Get Things Right By Lawrence A. Bossidy and Ram Charan


146 Part 3: Open System Design Elements

Chapter 4: The External Environment 147

at upstart Facebook began aggressively promoting the college-focused niche site as a place for everyone. The “face” of Facebook—youthful founder and CEO Mark Zuckerberg—was suddenly crowding MySpace off of magazine covers and tele- vision talk shows, and the size of Facebook’s worldwide user base surpassed MySpace before managers at MySpace even had time to react.20 Sometimes specific, unpredictable events—such as reports of lead-tainted paint in Mattel toys made in China, the Pakistani government’s attempt to block access to certain videos on YouTube, or the discovery of heart problems related to pain drugs such as Vioxx and Celebrex—create unstable conditions for organizations. Today, freewheeling bloggers are a tremendous source of instability for scores of companies, able to destroy a company’s reputation virtually overnight. Kryptonite’s reputation in bicycle locks plummeted after a blog noted that the locks could be opened with a Bic pen. After 10 days of blogging, Kryptonite announced a free product exchange that would cost the company about $10 million.21

Although environments are more unstable for most organizations today, an example of a traditionally stable environment is a public utility.22 In the rural Midwest, demand and supply factors for a public utility are stable. A gradual increase in demand may occur, which is easily predicted over time. Toy companies, by contrast, have an unstable environment. Hot new toys are difficult to predict, a problem compounded by the fact that children are losing interest in toys at a younger age, their interest captured by video and computer games, electronics, and the Internet. Adding to the instability for toymakers is the shrinking retail market, with big toy retailers going out of business trying to compete with discounters such as Wal-Mart. Toymakers are trying to attract more customers in developing markets such as China, Poland, Brazil, and India to make up for the declining U.S. market, but hitting the target in those countries has proven to be a challenge. Companies such as Fisher-Price, owned by Mattel, can find their biggest products languishing on shelves as shoppers turn to less expensive locally made toys in countries where brand consciousness doesn’t come into play. As one toy analyst said, “Chinese kids have been growing for 5,000 years without the benefits of Fisher-Price.”23


The simple–complex and stable–unstable dimensions are combined into a frame- work for assessing environmental uncertainty in Exhibit 4.2. In the simple, stable environment, uncertainty is low. There are only a few external elements to contend with, and they tend to remain stable. The complex, stable environment represents somewhat greater uncertainty. A large number of elements have to be scanned, analyzed, and acted upon for the organization to perform well. External elements do not change rapidly or unexpectedly in this environment.

Even greater uncertainty is felt in the simple, unstable environment.24 Rapid change creates uncertainty for managers. Even though the organization has few external elements, those elements are hard to predict, and they react unexpectedly to organizational initiatives. The greatest uncertainty for an organization occurs in the complex, unstable environment. A large number of elements impinge upon the organization, and they shift frequently or react strongly to organizational initiatives. When several sectors change simultaneously, the environment becomes turbulent.25

A soft drink distributor functions in a simple, stable environment. Demand changes only gradually. The distributor has an established delivery route, and supplies of soft drinks arrive on schedule. State universities, appliance manufacturers, and insurance companies are in somewhat stable, complex environments. A large number of external elements are present, but although they change, changes are gradual and predictable.

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Toy manufacturers are in simple, unstable environments. Organizations that design, make, and sell toys, as well as those that are involved in the clothing or music industry, face shifting supply and demand. Most Internet companies focus on a specific competitive niche and, hence, operate in simple but unstable environments as well. Although there may be few elements to contend with—e.g., technology, competitors—they are difficult to predict and change abruptly and unexpectedly.

The telecommunications industry and the airline industry face complex, unsta- ble environments. Many external sectors are changing simultaneously. In the case





Simple Complex

Simple + Stable = Low Uncertainty

1. Small number of external elements, and elements are similar

2. Elements remain the same or change slowly

Examples: Soft drink bottlers, beer distributors, container manufacturers, food processors

1. Small number of external elements, and elements are similar

2. Elements change frequently and unpredictably

Examples: E-commerce, fashion clothing, music industry, toy manufacturers

1. Large number of external elements, and elements are dissimilar

2. Elements change frequently and unpredictably

Examples: Computer firms, aerospace firms, telecommunications firms, airlines

1. Large number of external elements, and elements are dissimilar

2. Elements remain the same or change slowly

Examples: Universities, appliance manufacturers, chemical companies, insurance companies

Complex + Stable = Low-Moderate Uncertainty

Simple + Unstable = High-Moderate Uncertainty

Complex + Unstable = High Uncertainty


Source: American Science Quarterly. Characteristics of Organizational Environments and Perceived Environments Uncertainty by Robert Duncan vol. 17, pp. 313–327, September 1972. Reprinted by permission.

EXHIBIT 4.2 Framework for Assessing Environmental Uncertainty

Chapter 4: The External Environment 149

of airlines, in just a few years the major carriers were confronted with an air-traffic controller shortage, aging fleets of planes, labor unrest, soaring fuel prices, the entry of new competitors such as JetBlue and AirTran, a series of major air-traffic disasters, and a drastic decline in customer demand. Between 2001 and 2008, four large airlines and many smaller ones went through bankruptcy, and the airlines col- lectively laid off 170,000 employees.26


Once you see how environments differ with respect to change and complexity, the next question is, “How do organizations adapt to each level of environmental uncertainty?” Environmental uncertainty represents an important contingency for organization structure and internal behaviors. Recall from Chapter 3 that organiza- tions facing uncertainty often use structural mechanisms that encourage horizontal communication and collaboration to help the company adapt to changes in the environment. In this section we discuss in more detail how the environment affects organizations. An organization in a certain environment will be managed and con- trolled differently from an organization in an uncertain environment with respect to positions and departments, organizational differentiation and integration, control processes, and future planning and forecasting. Organizations need to have the right fit between internal structure and the external environment.

Adding Positions and Departments

As complexity and uncertainty in the external environment increase, so does the number of positions and departments within the organization, leading to increased internal complexity. This relationship is part of being an open system. Each sector in the external environment requires an employee or department to deal with it. The human resource department deals with unemployed people who want to work for the company. The marketing department finds customers. Procurement employees obtain raw materials from hundreds of suppliers. The finance group deals with bankers. The legal department works with the courts and government agencies. E-business depart- ments handle electronic commerce, and information technology departments deal with the increasing complexity of computerized information and knowledge management systems. Adding new positions and departments is a common way for organizations to adapt to growing environmental complexity and uncertainty. Consider this example of how Wal-Mart is trying to mitigate some of the uncertainty in its environment.

Any organization with the size and power of Wal-Mart presents a large target for criticism, and the retailer has come under blistering attack for everything from its low wages and minimal health benefits to its high-pressure tactics with suppliers and its environmental policies. Much of the criticism is organized by two union-backed organizations, Wake Up Wal-Mart and Wal-Mart Watch, which have spearheaded a relentless public relations cam- paign against the company, including rallies, blogs, letter-writing blitzes, press conferences, and town hall meetings.




150 Part 3: Open System Design Elements

Wal-Mart managers went on the offensive. The company’s tiny public relations depart- ment was expanded to dozens of employees, including a “war room” where former political operatives look for ways to dispute the claims of opponents. Additionally, Wal-Mart created two high-level executive positions to act as generals in the PR war. The position of director of media relations, for instance, oversees crisis communications and manages the hundreds of phone calls a day the company receives from reporters. The director is on call 24/7 to assist with “emergency response” related to PR issues. The second new position, senior director of campaign management, includes researching the opposition, managing Wal-Mart’s relations with bloggers, and overseeing the war room.

Wal-Mart is profitable and successful, but the intense criticism has had an impact. Surveys reveal that the negative publicity has caused some shoppers to stop buying there. Wal-Mart leaders hope the new executives and expanded PR department can help turn the tide.27 ■

Building Relationships

The traditional approach to coping with environmental uncertainty was to establish buffer departments. The purpose of buffering roles is to absorb uncertainty from the environment.28 The technical core performs the primary production activity of an organization. Buffer departments surround the technical core and exchange materials, resources, and money between the environment and the organization. They help the technical core function efficiently. The purchasing department buffers the technical core by stockpiling supplies and raw materials. The human resource department buffers the technical core by handling the uncertainty associated with finding, hiring, and training production employees.

A newer approach some organizations are trying is to drop the buffers and expose the technical core to the uncertain environment. These organizations no longer create buffers because they believe being well connected to customers and suppliers is more important than internal efficiency. For example, John Deere has assembly-line workers visiting local farms to determine and respond to customer concerns. LG Electronics pays consumers to test cell phone models, asking them to keep a journal where they jot down their feelings about features they like or don’t like and draw pictures that represent their mood when they use the phone.29

Opening up the organization to the environment by building closer relationships with external parties makes it more fluid and adaptable.

Boundary-spanning roles link and coordinate an organization with key elements in the external environment. Boundary spanning is primarily concerned with the exchange of information to (1) detect and bring into the organization information about changes in the environment and (2) send information into the environment that presents the organization in a favorable light.30

Organizations have to keep in touch with what is going on in the environ- ment so that managers can respond to market changes and other developments. A study of high-tech firms found that 97 percent of competitive failures resulted from lack of attention to market changes or the failure to act on vital information.31 To detect and bring important information into the organization, boundary personnel scan the environment. For example, a market-research department scans and moni- tors trends in consumer tastes. Boundary spanners in engineering and research and development (R&D) departments scan new technological developments, innova- tions, and raw materials. Boundary spanners prevent the organization from stag- nating by keeping top managers informed about environmental changes. Often, the

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

Scan the external environment for threats, changes, and opportunities. Use boundary-spanning roles, such as market research and intelli- gence teams, to bring into the organization information about changes in the envi- ronment. Enhance boundary-spanning capabilities when the environment is uncertain.

Chapter 4: The External Environment 151

greater the uncertainty in the environment, the greater the importance of boundary spanners.32

One recent approach to boundary spanning is business intelligence, which refers to the high-tech analysis of large amounts of internal and external data to spot pat- terns and relationships that might be significant. For example, Verizon uses business intelligence to actively monitor customer interactions so that it can catch problems and fix them almost immediately.33 Tools to automate the process are a hot area of software, with companies spending billions on business-intelligence software in recent years.34

Business intelligence is related to another important area of boundary spanning, known as competitive intelligence (CI). Competitive intelligence gives top executives a systematic way to collect and analyze public information about rivals and use it to make better decisions.35 Using techniques that range from Internet surfing to dig- ging through trash cans, intelligence professionals dig up information on competi- tors’ new products, manufacturing costs, or training methods and share it with top leaders. Intelligence teams are the newest wave of CI activities. An intelligence team is a cross-functional group of managers and employees, usually led by a competi- tive intelligence professional, who work together to gain a deep understanding of a specific business issue, with the aim of presenting insights, possibilities, and rec- ommendations to top leaders.36 Intelligence teams can provide insights that enable managers to make more informed decisions about goals, as well as devise contin- gency plans and scenarios related to major competitive issues.

Many successful companies involve everyone in boundary-spanning activities. People at the grassroots level are often able to see and interpret changes or problems sooner than managers, who are typically more removed from the day-to-day work.37

At Cognos, which sells planning and budgeting programs to large corporations, any of the company’s 3,000 employees can submit scoops about competitors through an internal Web site called Street Fighter. Each day, R&D and sales managers pore over the dozens of entries. Good tips are rewarded with prizes.38

The boundary task of sending information into the environment to represent the organization is used to influence other people’s perception of the organization. In the marketing department, advertising and sales people represent the organization to customers. Purchasers may call on suppliers and describe purchasing needs. The legal department informs lobbyists and elected officials about the organization’s needs or views on political matters. Many companies set up special Web pages and blogs to present the organization in a favorable light.

1 The best way for an organization to cope with a complex environment is to develop a complex structure (rather than keep it simple and uncomplicated).

ANSWER: Agree. As an organization’s environment becomes more complex, the organization has to add jobs, departments, and boundary spanning roles to cope with all the elements in the environment. When environmental sectors are complex, there is no way for an organization to stay simple and uncomplicated and continue to be effective.


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Differentiation and Integration

Another response to environmental uncertainty is the amount of differentiation and integration among departments. Organizational differentiation refers to “the differ- ences in cognitive and emotional orientations among managers in different functional departments, and the difference in formal structure among these departments.”39

When the external environment is complex and rapidly changing, organizational departments become highly specialized to handle the uncertainty in their external sector. Success in each sector requires special expertise and behavior. Employees in an R&D department thus have unique attitudes, values, goals, and education that distinguish them from employees in manufacturing or sales departments.

A study by Paul Lawrence and Jay Lorsch examined three organizational departments—manufacturing, research, and sales—in ten corporations.40 This study found that each department evolved toward a different orientation and structure to deal with specialized parts of the external environment. Exhibit 4.3 illustrates the market, scientific, and manufacturing subenvironments identified by Lawrence and Lorsch. As shown in the exhibit, each department interacted with different external groups. The differences that evolved among departments within the organizations are shown in Exhibit 4.4. To work effectively with the scientific subenvironment, R&D had a goal of quality work, a long time horizon (up to five years), an infor- mal structure, and task-oriented employees. Sales was at the opposite extreme. It had a goal of customer satisfaction, was oriented toward the short term (two weeks or so), had a very formal structure, and was socially oriented.

One outcome of high differentiation is that coordination among depart- ments becomes difficult. More time and resources must be devoted to achieving


R & D Department

Sales Department

Manufacturing Department

Scientific Subenvironment

Manufacturing Subenvironment

Market Subenvironment

Scientific journals

Research centers

Raw materials


Distribution system

Advertising agencies


Labor Suppliers

Professional associations

Production equipment

EXHIBIT 4.3 Organizational Departments Differentiate to Meet Needs of Subenvironments

Chapter 4: The External Environment 153

coordination when attitudes, goals, and work orientation differ so widely. Integration is the quality of collaboration among departments.41 Formal integrators are often required to coordinate departments. When the environment is highly uncertain, fre- quent changes require more information processing to achieve horizontal coordination, so integrators become a necessary addition to the organization structure. Sometimes integrators are called liaison personnel, project managers, brand managers, or coordi- nators. As illustrated in Exhibit 4.5, organizations with highly uncertain environments and a highly differentiated structure assign about 22 percent of management person- nel to integration activities, such as serving on committees, on task forces, or in liaison roles.42 In organizations characterized by very simple, stable environments, almost no managers are assigned to integration roles. Exhibit 4.5 shows that, as environmental uncertainty increases, so does differentiation among departments; hence, the organi- zation must assign a larger percentage of managers to coordinating roles.

Lawrence and Lorsch’s research concluded that organizations perform better when the levels of differentiation and integration match the level of uncertainty in the environment. Organizations that performed well in uncertain environ- ments had high levels of both differentiation and integration, while those per- forming well in less uncertain environments had lower levels of differentiation and integration.

Organic versus Mechanistic Management Processes

Another response to environmental uncertainty is the amount of formal structure and control imposed on employees. Tom Burns and G. M. Stalker observed twenty indus- trial firms in England and discovered that internal management structure was related to the external environment.43 When the external environment was stable, the internal organization was characterized by standard rules, procedures, and a clear hierarchy of authority. Organizations were formalized. They were also centralized, with most deci- sions made at the top. Burns and Stalker called this a mechanistic organization system.

In rapidly changing environments, the internal organization was much looser, free-flowing, and adaptive. Rules and regulations often were not written down or, if written down, were ignored. People had to find their own way through the system to figure out what to do. The hierarchy of authority was not clear. Decision-making authority was decentralized. Burns and Stalker used the term organic to characterize this type of management structure.

Source: Based on Paul R. Lawrence and Jay W. Lorsch, Organization and Environment (Homewood, Ill.: Irwin, 1969), 23–29.

Characteristic R&D Department Manufacturing Department Sales Department

Goals New developments, quality Efficient production Customer satisfaction Time horizon Long Short Short Interpersonal orientation Mostly task Task Social Formality of structure Low High High

EXHIBIT 4.4 Differences in Goals and Orientations among Organizational Departments

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

Match internal organi- zation structure to the external environment. If the external envi- ronment is complex, make the organization structure complex. Associate a stable environment with a mechanistic struc- ture and an unstable environment with an organic structure. If the external environ- ment is both complex and changing, make the organization highly differentiated and organic, and use mechanisms to achieve coordination across departments.

154 Part 3: Open System Design Elements

Exhibit 4.6 summarizes the differences in organic and mechanistic systems. As environmental uncertainty increases, organizations tend to become more organic, which means decentralizing authority and responsibility to lower levels, encour- aging employees to take care of problems by working directly with one another, encouraging teamwork, and taking an informal approach to assigning tasks and responsibility. Thus, the organization is more fluid and is able to adapt continually to changes in the external environment.44 Complete the questionnaire in the “How Do You Fit the Design?” box for some insight into whether you are more suited to working in an organic organization or a mechanistic one.

The learning organization, described in Chapter 1, and the horizontal and virtual network structures, described in Chapter 3, are organic organizational forms that are used by companies to compete in rapidly changing environments. Guiltless Gourmet, which sells low-fat tortilla chips and other high-quality snack foods, provides an example. When large companies like Frito Lay entered the low-fat snack-food market, Guiltless Gourmet shifted to a flexible network structure to remain competitive. The company redesigned itself to become basically a full-time marketing organization, while production and other activities were outsourced. An 18,000-square-foot plant in

Source: Based on Jay W. Lorsch and Paul R. Lawrence, “Environmental Factors and Organizational Integration,” Organizational Planning: Cases and Concepts (Homewood, Ill.: Irwin and Dorsey, 1972), 45.

Industry Plastics Foods Container

Environmental uncertainty High Moderate Low Departmental differentiation High Moderate Low Percent management in integrating roles 22% 17% 0%

EXHIBIT 4.5 Environmental Uncertainty and Organizational Integrators

Mechanistic Organic

1. Tasks are broken down into specialized, separate parts.

2. Tasks are rigidly defined.

3. There is a strict hierarchy of authority and control, and there are many rules.

4. Knowledge and control of tasks are centralized at the top of the organization.

5. Communication is vertical.

1. Employees contribute to the common tasks of the department.

2. Tasks are adjusted and redefined through employee teamwork.

3. There is less hierarchy of authority and control, and there are few rules.

4. Knowledge and control of tasks are located anywhere in the organization.

5. Communication is horizontal.

Source: Adapted from Gerald Zaltman, Robert Duncan, and Jonny Holbek, Innovations and Organizations (New York: Wiley, 1973), 131.

EXHIBIT 4.6 Mechanistic and Organic Forms

Chapter 4: The External Environment 155

Does your mind best fit an organization in a certain or an uncertain environment? Think back to how you thought or behaved as a student, employee, or in a formal or infor- mal leader position. Please answer whether each follow- ing item was Mostly True or Mostly False for you.

Mostly True

Mostly False

1. I always offered comments on my interpretation of data or issues. ____ ____

2. I welcomed unusual viewpoints of others even if we were working under pressure. ____ ____

3. I made it a point to attend indus- try trade shows and company (school) events. ____ ____

4. I explicitly encouraged others to express opposing ideas and arguments. ____ ____

5. I asked “dumb” questions. ____ ____

6. I enjoyed hearing about new ideas even when working toward a deadline. ____ ____

7. I expressed a controversial opinion to bosses and peers. ____ ____

8. I suggested ways of improving my and others’ ways of doing things. ____ ____

Scoring: Give yourself one point for each item you marked as Mostly True. If you scored less than 5, your mindful- ness level may be suited to an organization in a stable rather than unstable environment. A score of 5 or above suggests a higher level of mindfulness and a better fit for an organization in an uncertain environment.

Interpretation: In an organization in a highly uncertain environment everything seems to be changing. In that case, an important quality for a professional employee or manager is “mindfulness,” which includes the qualities of being open minded and an independent thinker. In a stable environment, an organization will be more “mecha- nistic,” and a manager without mindfulness may perform okay because much work can be done in the traditional way. In an uncertain environment, everyone needs to facil- itate new thinking, new ideas, and new ways of working. A high score on this exercise suggests higher mindful- ness and a better fit with an “organic” organization in an uncertain environment.

Source: These questions are based on ideas from R. L. Daft and R. M. Lengel, Fusion Leadership, Chapter 4 (San Francisco, Calif.: Berrett Koehler, 2000); B. Bass and B. Avolio, Multifactor Leadership Questionnaire, 2nd ed. (Menlo Park, Calif.: Mind Garden, Inc); and Karl E. Weick and Kathleen M. Sutcliffe, Managing the Unexpected: Assuring High Performance in an Age of Complexity (San Francisco, Calif.: Jossey-Bass, 2001).

Mind and Environmentvironment How Do You Fit the Design?

Austin was closed and the workforce cut from 125 to about 10 core people who handle marketing and sales promotions. The flexible structure allowed Guiltless Gourmet to adapt quickly to changing market conditions.45

Planning, Forecasting, and Responsiveness

The whole point of increasing internal integration and shifting to more organic pro- cesses is to enhance the organization’s ability to quickly respond to sudden changes in an uncertain environment. It might seem that in an environment where everything is changing all the time, planning is useless. However, in uncertain environments, planning and environmental forecasting actually become more important as a way

156 Part 3: Open System Design Elements

to keep the organization geared for a coordinated, speedy response. When the envi- ronment is stable, the organization can concentrate on current operational problems and day-to-day efficiency. Long-range planning and forecasting are not needed because environmental demands in the future will be the same as they are today.

With increasing environmental uncertainty, planning and forecasting become necessary.46 Indeed, surveys of multinational corporations have found that as environments become more turbulent, managers increase their planning activities, particularly in terms of planning exercises that encourage learning, continual adap- tation, and innovation.47 Following the September 11, 2001, terrorist attacks in the United States, for example, there was a surge in the use of scenario and contingency planning as a way to manage uncertainty.48

Planning can soften the adverse impact of external shifts. Organizations that have unstable environments often establish a separate planning department. In an unpredictable environment, planners scan environmental elements and analyze potential moves and countermoves by other organizations. Planning can be exten- sive and may forecast various scenarios for environmental contingencies. With sce- nario building, managers mentally rehearse different scenarios based on anticipating various changes that could affect the organization. Scenarios are like stories that offer alternative, vivid pictures of what the future will look like and how managers will respond. Royal Dutch/Shell Oil has long used scenario building and has been a leader in speedy response to massive changes that other organizations failed to perceive until it was too late.49

2 In a volatile, fast-changing environment, serious planning activities are a waste of time and resources. ANSWER: Disagree. General Colin Powell once said, “No battle plan survives contact with the enemy.”50 Yet no wise general would go into battle without one. Serious planning becomes more important in a turbulent environment, even though a plan will not last long. Planning and environmental forecasting help managers anticipate and be prepared to respond to changes. Lack of planning makes more sense in a stable, easily predictable environment.



Planning, however, cannot substitute for other actions, such as effective bound- ary spanning and adequate internal integration and coordination. The organizations that are most successful in uncertain environments are those that keep everyone in close touch with the environment so they can spot threats and opportunities, enabling the organization to respond immediately.


Exhibit 4.7 summarizes the ways in which environmental uncertainty influences organizational characteristics. The change and complexity dimensions are combined and illustrate four levels of uncertainty. The low uncertainty environment is simple

Chapter 4: The External Environment 157

and stable. Organizations in this environment can have few departments and a mechanistic structure. In a low–moderate uncertainty environment, more depart- ments are needed, along with more integrating roles to coordinate the departments. Some planning may occur. Environments that are high–moderate uncertainty are unstable but simple. Organization structure is organic and decentralized. Planning is emphasized and managers are quick to make internal changes as needed. The high uncertainty environment is both complex and unstable and is the most dif- ficult environment from a management perspective. Organizations are large and have many departments, but they are also organic. A large number of management





Simple Complex

Low Uncertainty

1. Mechanistic structure: formal, centralized

2. Few departments

3. No integrating roles

4. Current operations orientation; low-speed response

1. Organic structure, teamwork: participative, decentralized

2. Few departments, much boundary spanning

3. Few integrating roles

4. Planning orientation; fast response

1. Organic structure, teamwork: participative, decentralized

2. Many departments differentiated, extensive boundary spanning

3. Many integrating roles

4. Extensive planning, forecasting; high-speed response

1. Mechanistic structure: formal, centralized

2. Many departments, some boundary spanning

3. Few integrating roles

4. Some planning; moderate-speed response

Low-Moderate Uncertainty

High-Moderate Uncertainty High Uncertainty


EXHIBIT 4.7 Contingency Framework for Environmental Uncertainty and Organizational Responses

158 Part 3: Open System Design Elements

personnel are assigned to coordination and integration, and the organization uses boundary spanning, planning, and forecasting to enable a high-speed response to environmental changes.


Thus far, this chapter has described several ways in which organizations adapt to the lack of information and to the uncertainty caused by environmental change and complexity. We turn now to the third characteristic of the organization–environment relationship that affects organizations, which is the need for material and financial resources. The environment is the source of scarce and valued resources essential to organizational survival. Research in this area is called the resource-dependence perspective. Resource dependence means that organizations depend on the environ- ment but strive to acquire control over resources to minimize their dependence.51

Organizations are vulnerable if vital resources are controlled by other organizations, so they try to be as independent as possible. Organizations do not want to become too vulnerable to other organizations because of negative effects on performance.

Although companies like to minimize their dependence, when costs and risks are high they also team up to share scarce resources and be more competitive on a global basis. Formal relationships with other organizations present a dilemma to managers. Organizations seek to reduce vulnerability with respect to resources by developing links with other organizations, but they also like to maximize their own autonomy and independence. Organizational linkages require coordination,52 and they reduce the freedom of each organization to make decisions without concern for the needs and goals of other organizations. Interorganizational relationships thus represent a tradeoff between resources and autonomy. To maintain autonomy, orga- nizations that already have abundant resources will tend not to establish new link- ages. Organizations that need resources will give up independence to acquire those resources. For example, DHL, the express delivery unit of Germany’s Deutsche Post AG, lost billions of dollars trying to take over the U.S. package delivery market. By 2008, the company’s boast in an early advertising campaign that “Yellow is the new Brown” (a swipe at package delivery leader UPS and its chocolate-brown trucks) was put on the shelf. DHL joined Big Brown in a strategic partnership that will have UPS handling DHL parcels in the United States. The two companies will continue to compete in overseas markets. In the face of $3 billion in losses, difficulty building a local management team in the United States, and maintenance problems at U.S. package handling facilities, Deutsche Post’s CEO Frank Appel called the partnership “a pragmatic and realistic strategy” for his company’s U.S. operations.53 Resource dependence will be discussed in more detail in the next chapter.


In response to the need for resources, organizations try to maintain a balance between linkages with other organizations and their own independence. Organizations maintain this balance through attempts to modify, manipulate, or control other organizations.54 To survive, the focal organization often tries to reach out and

Chapter 4: The External Environment 159

change or control elements in the environment. Two strategies can be adopted to influence resources in the external environment: (1) establish favorable rela- tionships with key elements in the environment and (2) shape the environmental domain by influencing key sectors.55 Techniques to accomplish each of these strat- egies are summarized in Exhibit 4.8. As a general rule, when organizations sense that valued resources are scarce, they will use the strategies in Exhibit 4.8 rather than go it alone. Notice how dissimilar these strategies are from the responses to environmental change and complexity described in Exhibit 4.7. The dissimilarity reflects the difference between responding to the need for resources and responding to the need for information.

Establishing Formal Relationships

Building formal relationships includes techniques such as acquiring ownership, establishing joint ventures and partnerships, developing connections with important people in the environment, recruiting key people, and using advertising and public relations.

Acquire an Ownership Stake. Companies use various forms of ownership to reduce uncertainty in an area important to the acquiring company. For example, a firm might buy a part of or a controlling interest in another company, giving it access to technology, products, or other resources it doesn’t currently have.

A greater degree of ownership and control is obtained through acquisition or merger. An acquisition involves the purchase of one organization by another so that the buyer assumes control, such as when Ford bought Volvo, Hewlett-Packard bought EDS Corporation, and Wal-Mart purchased Britain’s ASDA Group. A merger is the unification of two or more organizations into a single unit.56 Sirius Satellite Radio and XM Satellite Radio Holdings merged to become Sirius XM Radio. The merger enabled the companies to combine resources and share risks to be more competitive against digital music providers and other emerging types of music distribution. In the past few years, there has been a huge wave of acquisition and merger activity in the telecommunications industry, reflecting how these com- panies cope with the tremendous uncertainty they face. Consider the emergence of the “new” AT&T.

Establishing Formal Relationships Influencing Key Sectors

1. Acquire an ownership stake 2. Form joint ventures and

partnerships 3. Lock in key players 4. Recruit executives 5. Use advertising and public relations

1. Change where you do business (your domain)

2. Use political activity, regulation 3. Join in trade associations 4. Avoid illegitimate activities

EXHIBIT 4.8 Organizing Strategies for Controlling the External Environment

160 Part 3: Open System Design Elements

AT&T was once all but dead, but the com- pany has reemerged as a $165 billion giant in the global telecommunications field thanks to mergers and acquisitions. SBC

Communications, which was born after the break-up of giant AT&T in 1984, went on an acquisitions spree after the Telecommunications Act of 1996 opened the door to compe- tition, buying Pacific Telesis Group (1997), Southern New England Telecommunications (1998), and Ameritech Corporation (1999). In 2005, SBC acquired AT&T, taking the name of that iconic organization and gaining a foothold in wireless with Cingular Wireless, which was a joint venture between AT&T and BellSouth. A year later, the newly-named AT&T merged with BellSouth, giving AT&T full control of Cingular and creating a telecommunications giant not unlike the “old” AT&T of the 1980s.

However, unlike the old company, AT&T faces a pack of tough rivals, including the No. 2 telecom company, Verizon Communications, which has also been involved in many mergers and acquisitions over the past several years. Other competitors include cable com- panies such as Comcast and Time Warner Cable, which are bundling together television, broadband, and Internet phone service, stealing customers from AT&T all over the country. The cable providers have also formed a partnership with Sprint, enabling them to provide wireless service as well. For its part, AT&T now sells packages of wireless phone services, Internet access, and pay television, as does Verizon. The two companies have recently taken integration one step further by airing video programming—from Saturday Night Live clips to user-generated video—across all three platforms. That enables them to sell adver- tising as a new source of revenue as growth in wireless begins to slow. However, the risks are high, and both companies face significant uncertainty and many new rivals as they enter this new area of business.57 ■

Form Joint Ventures and Partnerships. When there is a high level of complementar- ity between the business lines, geographical positions, or skills of two companies, the firms often go the route of a strategic alliance rather than ownership through merger or acquisition.58 Such alliances are formed through contracts and joint ventures.

Contracts and joint ventures reduce uncertainty through a legal and binding relationship with another firm. Contracts come in the form of license agreements that involve the purchase of the right to use an asset (such as a new technology) for a specific time and supplier arrangements that contract for the sale of one firm’s output to another. Contracts can provide long-term security by tying customers and suppliers to specific amounts and prices. For example, the Italian fashion house Versace forged a deal to license its primary asset—its name—for a line of designer eyeglasses. McDonald’s contracts for an entire crop of russet potatoes to be certain of its supply of french fries. McDonald’s also gains influence over suppliers through these contracts and has changed the way farmers grow potatoes and the profit mar- gins they earn, which is consistent with the resource dependence perspective.59

Joint ventures result in the creation of a new organization that is formally inde- pendent of the parents, although the parents will have some control.60 Madrid-based tech startup FON has formed a joint venture with British phone carrier BT that will install FON wi-fi technology in the modems of nearly 2 million BT customers. Office Depot and Reliance Retail Limited, a division of India’s largest private-sector employer, entered into a joint venture to provide office products and services to busi- ness customers in India. Food and agricultural corporation Cargill Inc. has numerous



Chapter 4: The External Environment 161

joint ventures around the world and recently set up a venture with Spanish coopera- tive Hojiblance to source, trade, and supply customers worldwide with private label and bulk olive oils. As evidenced by these short examples, many joint ventures are undertaken to share risks when companies are doing business in other countries or on a global scale.

Lock in Key Players. Cooptation occurs when leaders from important sectors in the environment are made part of an organization. It takes place, for example, when influential customers or suppliers are appointed to the board of directors, such as when the senior executive of a bank sits on the board of a manufacturing company. As a board member, the banker may become psychologically coopted into the inter- ests of the manufacturing firm. An interlocking directorate is a formal linkage that occurs when a member of the board of directors of one company sits on the board of directors of another company. The individual is a communications link between companies and can influence policies and decisions. When one individual is the link between two companies, this is typically referred to as a direct interlock. An indirect interlock occurs when a director of company A and a director of company B are both directors of company C. They have access to one another but do not have direct influence over their respective companies.61 Research shows that, as a firm’s finan- cial fortunes decline, direct interlocks with financial institutions increase. Financial uncertainty facing an industry also has been associated with greater indirect inter- locks between competing companies.62

Important business or community leaders also can be appointed to other orga- nizational committees or task forces. By serving on committees or advisory panels, these influential people learn about the needs of the company and are more likely to include the company’s interests in their decision making. Today, many companies face uncertainty from environmental pressure groups, so organizations are trying to bring in leaders from this sector, such as when DuPont appointed environmentalists to its biotechnology advisory panel.63

Recruit Executives. Transferring or exchanging executives also offers a method of establishing favorable linkages with external organizations. For example, the aerospace industry often hires retired generals and executives from the Department of Defense. These generals have personal friends in the department, so the aero- space companies obtain better information about technical specifications, prices, and dates for new weapons systems. They can learn the needs of the defense depart- ment and are able to present their case for defense contracts in a more effective way. Companies without personal contacts find it nearly impossible to get a defense contract. Having channels of influence and communication between organizations serves to reduce financial uncertainty and dependence for an organization.

Get Your Side of the Story Out. A traditional way of establishing favorable rela- tionships is through advertising. Organizations spend large amounts of money to influence the tastes and opinions of consumers. Advertising is especially important in highly competitive industries and in industries that experience variable demand. For example, since the U.S. Food and Drug Administration loosened regulations to permit advertising of prescription drugs in the United States, the major pharma- ceutical companies have spent nearly $5 billion annually on advertisements such as a cute cartoon bee pushing Nasonex spray for allergies or heart attack survivors promoting the benefits of cholesterol-fighting Lipitor.64

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

Reach out and con- trol external sectors that threaten needed resources. Influence the domain by engaging in political activity, joining trade associations, and establishing favor- able relationships. Establish relationships through ownership, joint ventures and strategic partnerships, cooptation, interlock- ing directorates, and executive recruitment. Reduce the amount of change or threat from the external environ- ment so the organiza- tion will not have to change internally.

162 Part 3: Open System Design Elements

Public relations is similar to advertising, except that stories often are free and aimed at public opinion. Public relations people cast an organization in a favorable light in speeches, on websites, in press reports, and on television. Public relations attempts to shape the company’s image in the minds of customers, suppliers, and government officials. Blogging is an important part of public relations activities for many companies today. Randy Baseler, vice president for marketing at Boeing Commercial Airplanes, started a public blog to share the company’s view on prod- ucts and marketing strategies. The open forum exposes Boeing to some stinging criticism, but it also enables the company to tell its side of the story and build better relationships with customers and the public.65

Influencing Key Sectors

In addition to establishing favorable linkages, organizations often try to change the environment. There are four techniques for influencing or changing a firm’s environment.

Change Where You Do Business. Early in this chapter, we talked about the orga- nization’s domain and the ten sectors of the task environment. An organization’s domain is not fixed. Managers make decisions about which business to be in, the markets to enter, and the suppliers, banks, employees, and location to use, and this domain can be changed if necessary to keep the organization competitive.66 An orga- nization can seek new environmental relationships and drop old ones. Managers may try to find a domain where there is little competition, no government regula- tion, abundant suppliers, affluent customers, and barriers to keep competitors out.

Acquisition and divestment are two techniques for altering the domain. For example, Google has acquired a number of companies to expand its domain beyond Internet search, including the $1.65 billion acquisition of YouTube.67 Divestment occurred when JC Penney sold off its chain of Eckerd drug stores to focus resources on the department store. Time Inc. is altering its domain as more readers and adver- tisers switch from print to online media. The company is selling off eighteen of its smaller niche magazines, including Field & Stream and Parenting, as well as cutting hundreds of employees at its other magazines—even such top sellers such as People and Sports Illustrated. Time managers made a decision to streamline publications in order to bolster the company’s presence online.68

Get Political. Political activity includes techniques to influence government leg- islation and regulation. Political strategy can be used to erect regulatory barriers against new competitors or to squash unfavorable legislation. Corporations also try to influence the appointment to agencies of people who are sympathetic to their needs.

As e-commerce continues to evolve, Internet companies such as Yahoo, Amazon, and Google have opened lobbying offices in Washington, D.C., to rep- resent their interests. One example of their political activities is when telecom companies threatened to start charging Internet providers for speedy delivery of the Internet content the phone companies carry on their lines. The Internet firms lobbied Congress to insert language into telecom laws that would prohibit them from doing so.69 Another Internet company that has become a sophisticated and influential lobbyist is eBay.

Chapter 4: The External Environment 163

“It is a fast-moving train, and if you get in front of it you’ll get flattened,” said an offi- cial with the state of Louisiana’s licensing agency. She was talking about eBay’s lob- bying machine, which has become so powerful that it can practically make damaging or restrictive regulations disappear.

At any given time, there are approximately 90 million items for sale on eBay, and the company gets a fee for each successful transaction. Managers know that regulations on sellers would slow sales traffic, so lobbying against such regulation is a top priority for the company. In Louisiana, eBay lobbyists worked overtime to promote passage of a bill that would exempt some Internet transactions, such as those on eBay, from the state’s licens- ing requirements for businesses conducting auctions. When Ohio passed a law that would have regulated eBay sellers in that state, the company worked to get it reversed. Auctioning laws in both Maine and Tennessee were also changed to exempt Internet sellers after lob- bying efforts from eBay. Managers know that if a law takes hold in one state, other states might follow suit.

In addition to lobbying against unfavorable legislation, eBay also pushes for legislative changes that will benefit the company. For example, eBay’s lobbying efforts in Illinois, New York, and Florida influenced those states to revise laws to allow Internet auction sites to compete with licensed ticket brokers and sell tickets for more than their face value, provid- ing another stream of revenue for eBay.70 ■

Until recently, eBay worked primarily through a corps of local lobbyists in states all across the country. Now, though, like other major Internet firms, eBay has opened its own lobbying office in Washington, D.C. Former CEO Meg Whitman was always heavily involved in lobbying efforts. Many CEOs believe they should participate directly in lobbying. CEOs have easier access than lobbyists and can be especially effective when they do the politicking. Political activity is so important that “infor- mal lobbyist” is an unwritten part of almost any CEO’s job description.71



3 Managers of business organizations should not get involved in political activities. ANSWER: Disagree. Smart business managers get involved in lobbying and other political activities to try to make sure the consequences of new laws and regulations are mostly positive for their own fi rms. Companies pay huge fees to associations and lobbyists to make sure government actions work out in their favor.


Unite with Others. Much of the work to influence the external environment is accomplished jointly with other organizations that have similar interests. For exam- ple, most large pharmaceutical companies belong to Pharmaceutical Research and Manufacturers of America. Manufacturing companies are part of the National Association of Manufacturers, and retailers join the Retail Industry Leaders Association. Many software companies are members of the Initiative for Software

164 Part 3: Open System Design Elements

Choice (ISC). By pooling resources, these organizations can pay people to carry out activities such as lobbying legislators, influencing new regulations, developing pub- lic relations campaigns, and making campaign contributions. The National Tooling and Machining Association (NTMA) conducts lobbying on behalf of its members on issues that affect small business, such as taxes, health insurance, or government mandates. NTMA also gives its members statistics and information that help them become more competitive in the global marketplace.72

Don’t Fall into Illegitimate Activities. Illegitimate activities represent the final tech- nique companies sometimes use to control their environmental domain, but this technique typically backfires. Conditions such as low profits, pressure from senior managers, or scarce environmental resources may lead managers to adopt behaviors not considered legitimate.73 One study found that companies in industries with low demand, shortages, and strikes were more likely to be convicted for illegal activities, suggesting that illegal acts are an attempt to cope with resource scarcity. Some non- profit organizations have been found to use illegitimate or illegal actions to bolster their visibility and reputation as they compete with other organizations for scarce grants and donations, for example.74

Types of illegitimate activities include payoffs to foreign governments, illegal political contributions, promotional gifts, and wiretapping. Bribery is one of the most frequent types of illegitimate activity, particularly in companies operating globally. Energy companies face tremendous uncertainty, for example, and need foreign governments to approve giant investments and authorize risky projects. Under pressure to win contracts in Nigeria, Albert “Jack” Stanley, a former execu- tive at KBR (then a division of Halliburton Company), admits he orchestrated a total of about $182 million in bribes to get Nigerian officials to approve the con- struction of a liquefied natural gas plant in that country. Stanley faces up to seven years in prison and a hefty fine after pleading guilty.75 In Germany, executives at both Siemens and Volkswagen have been charged with bribing labor representa- tives on their companies’ supervisory boards. German law requires that firms give as many as half of their supervisory board seats to labor representatives. Executives need the board’s support to carry out their plans and strategies for the company, and some resort to bribery to get the cooperation they need.76

Organization–Environment Integrative Framework

The relationships illustrated in Exhibit 4.9 summarize the two major themes about organization–environment relationships discussed in this chapter. One theme is that the amount of complexity and change in an organization’s domain influences the need for information and hence the uncertainty felt within an organization. Greater information uncertainty is resolved through greater structural flexibility and the assignment of additional departments and boundary roles. When uncertainty is low, management structures can be more mechanistic, and the number of departments and boundary roles can be fewer. The second theme pertains to the scarcity of mate- rial and financial resources. The more dependent an organization is on other orga- nizations for those resources, the more important it is to either establish favorable linkages with those organizations or control entry into the domain. If dependence on external resources is low, the organization can maintain autonomy and does not need to establish linkages or control the external domain.

Chapter 4: The External Environment 165


■ Change and complexity in the external environment have major implications for organization design and management action. Organizations are open social systems. Most are involved with hundreds of external elements. Important envi- ronmental sectors with which organizations deal are the industry, raw materials, human resources, financial resources, market, technology, economic conditions, government, sociocultural, and international.

■ Organizational environments differ in terms of uncertainty and resource dependence. Organizational uncertainty is the result of the stable–unstable


Many departments and boundary roles

Greater differentiation and more integrators for internal coordination

Organic structure and systems with low formalization, decentralization, and low standardization to enable a high-speed response

Establishment of favorable relationships: ownership, joint ventures, strategic partnerships, interlocking directorates, executive recruitment, advertising, and public relations

Control of the environmental domain: change of domain, political activity, trade associations, and illegitimate activities

Environmental domain (ten sectors)

High complexity

High rate of change

Scarcity of valued resources

Resource dependence

High uncertainty

EXHIBIT 4.9 Relationship between Environmental Characteristics and Organizational Actions

166 Part 3: Open System Design Elements

and simple–complex dimensions of the environment. Resource dependence is the result of scarcity of the material and financial resources needed by the organization.

■ Organization design takes on a logical perspective when the environment is con- sidered. Organizations try to survive and achieve efficiencies in a world char- acterized by uncertainty and scarcity. Specific departments and functions are created to deal with uncertainties. The organization can be conceptualized as a technical core and departments that buffer environmental uncertainty. Boundary- spanning roles bring information about the environment into the organization and send information about the organization to the external environment.

■ The concepts in this chapter provide specific frameworks for understanding how the environment influences the structure and functioning of an organization. Environmental complexity and change, for example, have specific impact on internal complexity and adaptability. Under great uncertainty, more resources are allocated to departments that will plan, deal with specific environmental elements, and integrate diverse internal activities. Moreover, organizations in rapidly changing environments typically reflect a loose, organic structure and management processes.

■ When risk is great or resources are scarce, the organization can establish link- ages through acquisitions, strategic alliances, interlocking directorates, executive recruitment, or advertising and public relations that will minimize risk and main- tain a supply of scarce resources. Other techniques for influencing the environ- ment include a change of the domain in which the organization operates, political activity, participation in trade associations, and perhaps illegitimate activities.

■ Two important themes in this chapter are that organizations can learn and adapt to the environment and that organizations can change and control the environ- ment. These strategies are especially true for large organizations that command many resources. Such organizations can adapt when necessary but can also neutralize or change problematic areas in the environment.

boundary-spanning roles buffering roles business intelligence cooptation differentiation direct interlock domain

general environment indirect interlock integration intelligence team interlocking directorate mechanistic organic

organizational environment resource dependence sectors simple–complex dimension stable–unstable dimension task environment uncertainty

Key ConceptsKey

1. Define organizational environment. Would the task environment of a new Internet-based company be the same as that of a large government agency? Discuss.

2. What are some forces that influence environmental uncertainty? Which typically has the greatest impact on uncertainty—environmental complexity or environ- mental change? Why?

Discussion QuestionsDisc

Chapter 4: The External Environment 167

3. Name some factors causing environmental complex- ity for an organization of your choice. How might this environmental complexity lead to organizational com- plexity? Explain.

4. Discuss the importance of the international sector for today’s organizations, compared to domestic sectors. What are some ways in which the international sector affects organizations in your city or community?

5. Describe differentiation and integration. In what type of environmental uncertainty will differentiation and integration be greatest? Least?

6. How do you think planning in today’s organizations compares to planning twenty-five years ago? Do you think planning becomes more important or less impor- tant in a world where everything is changing fast and crises are a regular part of organizational life? Why?

7. What is an organic organization? A mechanistic orga- nization? How does the environment influence organic and mechanistic structures?

8. Why do organizations become involved in interorgani- zational relationships? Do these relationships affect an organization’s dependency? Performance?

9. Assume you have been asked to calculate the ratio of staff employees to production employees in two orga- nizations—one in a simple, stable environment and one in a complex, shifting environment. How would you expect these ratios to differ? Why?

10. Is changing the organization’s domain a feasible strategy for coping with a threatening environment? Explain. Can you think of an organization in the recent news that has changed its domain?

Chapter 4 Workbook: Organizations You Rely On*

Below, list eight organizations you somehow rely on in your daily life. Examples might be a restaurant, a cloth- ing or CD store, a university, your family, the post office, the telephone company, an airline, a pizzeria that deliv- ers, your place of work, and so on. In the first column, list those eight organizations. Then, in column 2, choose

another organization you could use in case the ones in column 1 were not available. In column 3, evaluate your level of dependence on the organizations listed in column 1 as Strong, Medium, or Weak. Finally, in column 4, rate the certainty of that organization being able to meet your needs as High (certainty), Medium, or Low.







Organization Backup Organization Level of Dependence Level of Certainty

168 Part 3: Open System Design Elements

Questions 1. Do you have adequate backup organizations for those

of high dependence? How might you create even more backups?

2. What would you do if an organization you rated high for dependence and high for certainty suddenly became high-dependence and low-certainty? How would your behavior relate to the concept of resource dependence?

3. Have you ever used any behaviors similar to those in Exhibit 4.8 to manage your relationships with the orga- nizations listed in column 1?

*Adapted by Dorothy Marcic from “Organizational Dependencies,” in Ricky W. Griffin and Thomas C. Head, Practicing Management, 2nd ed. (Dallas: Houghton Mifflin), 2–3.

Part I In 1986, Technological Products of Erie, Pennsylvania, was bought out by a Cleveland manufacturer. The Cleveland firm had no interest in the electronics division of Technological Products and subsequently sold to dif- ferent investors two plants that manufactured computer chips and printed circuit boards. Integrated circuits, or chips, were the first step into microminiaturization in the electronics industry, and both plants had developed some expertise in the technology, along with their superior capa- bilities in manufacturing printed circuit boards. One of the plants, located in nearby Waterford, was renamed Acme Electronics; the other plant, within the city limits of Erie, was renamed Omega Electronics, Inc.

Acme retained its original management and upgraded its general manager to president. Omega hired a new presi- dent who had been a director of a large electronic research

laboratory and upgraded several of the existing personnel within the plant. Acme and Omega often competed for the same contracts. As subcontractors, both firms benefited from the electronics boom and both looked forward to future growth and expansion. The world was going digi- tal, and both companies began producing digital micro- processors along with the production of circuit boards. Acme had annual sales of $100 million and employed 550 people. Omega had annual sales of $80 million and employed 480 people. Acme regularly achieved greater net profits, much to the chagrin of Omega’s management.

Inside Acme The president of Acme, John Tyler, was confident that, had the demand not been so great, Acme’s competitor would not have survived. “In fact,” he said, “we have been able to beat Omega regularly for the most profitable contracts, thereby

Case for Analysis: The Paradoxical Twins: Acme and Omega Electronics*




Organization Backup Organization Level of Dependence Level of Certainty

Chapter 4: The External Environment 169

increasing our profit.” Tyler credited his firm’s greater effec- tiveness to his managers’ abilities to run a “tight ship.” He explained that he had retained the basic structure developed by Technological Products because it was most efficient for high-volume manufacturing. Acme had detailed organiza- tion charts and job descriptions. Tyler believed everyone should have clear responsibilities and narrowly defined jobs, which would lead to efficient performance and high com- pany profits. People were generally satisfied with their work at Acme; however, some of the managers voiced the desire to have a little more latitude in their jobs.

Inside Omega Omega’s president, Jim Rawls, did not believe in organiza- tion charts. He felt his organization had departments similar to Acme’s, but he thought Omega’s plant was small enough that things such as organization charts just put artificial bar- riers between specialists who should be working together. Written memos were not allowed since, as Rawls expressed it, “the plant is small enough that if people want to com- municate, they can just drop by and talk things over.”

The head of the mechanical engineering department said, “Jim spends too much of his time and mine making sure everyone understands what we’re doing and listening to suggestions.” Rawls was concerned with employee sat- isfaction and wanted everyone to feel part of the organiza- tion. The top management team reflected Rawls’s attitudes. They also believed that employees should be familiar with activities throughout the organization so that cooperation between departments would be increased. A newer mem- ber of the industrial engineering department said, “When I first got here, I wasn’t sure what I was supposed to do. One day I worked with some mechanical engineers and the next day I helped the shipping department design some packing cartons. The first months on the job were hectic, but at least I got a real feel for what makes Omega tick.”

Part II In the 1990s, mixed analog and digital devices began threat- ening the demand for the complex circuit boards manu- factured by Acme and Omega. This “system-on-a-chip” technology combined analog functions, such as sound, graphics, and power management, together with digital cir- cuitry, such as logic and memory, making it highly useful for new products such as cellular phones and wireless com- puters. Both Acme and Omega realized the threat to their futures and began aggressively to seek new customers.

In July 1992, a major photocopier manufacturer was looking for a subcontractor to assemble the digital memory units of its new experimental copier. The projected contract for the job was estimated to be $7 million to $9 million in annual sales.

Both Acme and Omega were geographically close to this manufacturer, and both submitted highly competitive

bids for the production of 100 prototypes. Acme’s bid was slightly lower than Omega’s; however, both firms were asked to produce 100 units. The photocopier manufacturer told both firms that speed was critical because its president had boasted to other manufacturers that the firm would have a finished copier available by Christmas. This boast, much to the designer’s dismay, required pressure on all subcontractors to begin prototype production before the final design of the copier was complete. This meant Acme and Omega would have at most two weeks to produce the prototypes or would delay the final copier production.

Part III Inside Acme As soon as John Tyler was given the blueprints (Monday, July 13, 1992), he sent a memo to the purchasing depart- ment asking to move forward on the purchase of all neces- sary materials. At the same time, he sent the blueprints to the drafting department and asked that it prepare manufac- turing prints. The industrial engineering department was told to begin methods design work for use by the produc- tion department supervisors. Tyler also sent a memo to all department heads and executives indicating the critical time constraints of this job and how he expected that all employ- ees would perform as efficiently as they had in the past.

The departments had little contact with one another for several days, and each seemed to work at its own speed. Each department also encountered problems. Purchasing could not acquire all the parts on time. Industrial engineer- ing had difficulty arranging an efficient assembly sequence. Mechanical engineering did not take the deadline seriously and parceled its work to vendors so the engineers could work on other jobs scheduled previously. Tyler made it a point to stay in touch with the photocopier manufacturer to let it know things were progressing and to learn of any new developments. He traditionally worked to keep impor- tant clients happy. Tyler telephoned someone at the photo- copier company at least twice a week and got to know the head designer quite well.

On July 17, Tyler learned that mechanical engineering was far behind in its development work, and he “hit the roof.” To make matters worse, purchasing had not obtained all the parts, so the industrial engineers decided to assemble the product without one part, which would be inserted at the last minute. On Thursday, July 23, the final units were being assembled, although the process was delayed sev- eral times. On Friday, July 24, the last units were finished while Tyler paced around the plant. Late that afternoon, Tyler received a phone call from the head designer of the photocopier manufacturer, who told Tyler that he had received a call on Wednesday from Jim Rawls of Omega. He explained that Rawls’s workers had found an error in the design of the connector cable and taken corrective action on their prototypes. He told Tyler that he had checked out

170 Part 3: Open System Design Elements

the design error and that Omega was right. Tyler, a bit overwhelmed by this information, told the designer that he had all the memory units ready for shipment and that, as soon as they received the missing component on Monday or Tuesday, they would be able to deliver the final units. The designer explained that the design error would be rectified in a new blueprint he was sending over by messenger and that he would hold Acme to the Tuesday delivery date.

When the blueprint arrived, Tyler called in the produc- tion supervisor to assess the damage. The alterations in the design would call for total disassembly and the unsolder- ing of several connections. Tyler told the supervisor to put extra people on the alterations first thing Monday morn- ing and to try to finish the job by Tuesday. Late Tuesday afternoon, the alterations were finished and the missing components were delivered. Wednesday morning, the pro- duction supervisor discovered that the units would have to be torn apart again to install the missing component. When John Tyler was told this, he again “hit the roof.” He called industrial engineering and asked if it could help out. The production supervisor and the methods engineer couldn’t agree on how to install the component. John Tyler settled the argument by ordering that all units be taken apart again and the missing component installed. He told shipping to prepare cartons for delivery on Friday afternoon.

On Friday, July 31, fifty prototypes were shipped from Acme without final inspection. John Tyler was concerned about his firm’s reputation, so he waived the final inspection after he personally tested one unit and found it operational. On Tuesday, August 4, Acme shipped the last fifty units.

Inside Omega On Friday, July 10, Jim Rawls called a meeting that included department heads to tell them about the potential contract they were to receive. He told them that as soon as he received the blueprints, work could begin. On Monday, July 13, the prints arrived and again the department heads met to discuss the project. At the end of the meeting, drafting had agreed to prepare manufacturing prints, while industrial engineering and production would begin methods design.

Two problems arose within Omega that were simi- lar to those at Acme. Certain ordered parts could not be delivered on time, and the assembly sequence was difficult

to engineer. The departments proposed ideas to help one another, however, and department heads and key employ- ees had daily meetings to discuss progress. The head of electrical engineering knew of a Japanese source for the components that could not be purchased from normal sup- pliers. Most problems were solved by Saturday, July 18.

On Monday, July 20, a methods engineer and the production supervisor formulated the assembly plans, and production was set to begin on Tuesday morning. On Monday afternoon, people from mechanical engineering, electrical engineering, production, and industrial engineer- ing got together to produce a prototype just to ensure that there would be no snags in production. While they were building the unit, they discovered an error in the connector cable design. All the engineers agreed, after checking and rechecking the blueprints, that the cable was erroneously designed. People from mechanical engineering and electri- cal engineering spent Monday night redesigning the cable, and on Tuesday morning, the drafting department finalized the changes in the manufacturing prints. On Tuesday morn- ing, Rawls was a bit apprehensive about the design changes and decided to get formal approval. Rawls received word on Wednesday from the head designer at the photocopier firm that they could proceed with the design changes as discussed on the phone. On Friday, July 24, the final units were inspected by quality control and were then shipped.

Part IV Ten of Acme’s final memory units were defective, whereas all of Omega’s units passed the photocopier firm’s tests. The photocopier firm was disappointed with Acme’s delivery delay and incurred further delays in repairing the defective Acme units. However, rather than give the entire contract to one firm, the final contract was split between Acme and Omega with two directives added: (1) maintain zero defects and (2) reduce final cost. In 1993, through extensive cost-cutting efforts, Acme reduced its unit cost by 20 percent and was ultimately awarded the total contract.

*Adapted from John F. Veiga, “The Paradoxical Twins: Acme and Omega Electronics,” in John F. Veiga and John N. Yanouzas, The Dynamics of Organizational Theory (St. Paul: West, 1984), 132–138.


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Chapter 4: The External Environment 171

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31. Michelle Cook, “The Intelligentsia,” Business 2.0 (July 1999), 135–136.

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38. “Snooping on a Shoestring,” Business 2.0 (May 2003), 64–66.

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41. Lorsch, “Introduction to the Structural Design of Organizations,” 7.

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Relationships,” Academy of Management Review 19 (1994), 90–118; Jeffrey Pfeffer, “Beyond Management and the Worker: The Institutional Function of Management,” Academy of Management Review 1 (April 1976), 36–46; and John P. Kotter, “Managing External Dependence,” Academy of Management Review 4 (1979), 87–92.

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Chapter 4: The External Environment 173

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Organizational Ecosystems Is Competition Dead? • The Changing Role of Management • Interorganizational Framework

Resource Dependence Supply Chain Relationships • Power Implications

Collaborative Networks Why Collaboration? • From Adversaries to Partners

Population Ecology Organizational Form and Niche • Process of Ecological Change • Strategies for Survival

Institutionalism The Institutional View and Organization Design • Institutional Similarity

Design Essentials

© K

en K


Interorganizational Relationships

Chapter 5

SAP and Microsoft go at each other tooth-and-nail for customers, but the two called a truce to jointly develop a piece of software that allows a Microsoft spreadsheet to bring in data from an SAP accounting program. Rival Internet companies Google, Yahoo!, and MySpace created an alliance to develop new technologies that will benefit all of the partners.1 All over corporate America, and particularly in the rapidly changing and uncertain high-tech industry, com- panies are cheerfully sleeping with the enemy.

A widespread organizational trend today is to reduce boundaries and increase collaboration between companies, sometimes even between competitors. In many industries, the business environment is so complicated that no single com- pany can develop all the expertise and resources needed to stay competitive. Why? Globalization and rapid advances in technology, communications, and transportation have created amazing new opportunities, but they have also raised the cost of doing business and made it increasingly difficult for any com- pany to take advantage of those opportunities on its own. In this new economy, webs of organizations are emerging. Collaboration and partnership is the new way of doing business. Organizations think of themselves as teams that create value jointly rather than as autonomous companies that are in competition with all others.

You can see the results of interorganizational collaboration when a movie like the animated Star Wars: The Clone Wars from Lucasfilm Ltd. is launched. More than a month before the movie opened, Toys “R” Us mounted digital clocks in many of its stores, counting down the days until the chain began selling toys and action figures based on the film. Two of the retailer’s flagship stores held midnight costume parties and trivia contests in connection with the opening. McDonald’s teamed up with Lucasfilm to put together a Star Wars Happy Meal promotion, each meal coming with a specially-designed box and one of eighteen exclusive toys. Kids could continue their Star Wars experience online at the Happy Meal Virtual World, where

Managing by Design Questions

1 Organizations should strive to be as independent and self-suffi cient as possible so that their managers aren’t put in the position of “dancing to someone else’s tune.”

1 2 3 4 5


2 The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. 1 2 3 4 5


3 Managers should quickly copy or borrow techniques being used by other successful companies to make their own organization more effective and to keep pace with changing times.

1 2 3 4 5


175 175

Before reading this chapter, please circle your opinion below for each of the following statements:

176 Part 3: Open System Design Elements

codes printed on Happy Meal packaging enabled them to unlock top-secret Jedi quests.2 For some blockbuster movies, coordinated action among companies can yield millions in addition to box-office and DVD profits.

Purpose of This Chapter

This chapter explores the most recent trend in organizing, which is the increas- ingly dense web of relationships among organizations. Companies have always been dependent on other organizations for supplies, materials, and information. The question is how these relationships are managed. At one time it was a mat- ter of a large, powerful company tightening the screws on small suppliers. Today a company can choose to develop positive, trusting relationships. The notion of horizontal relationships described in Chapter 3 and the understanding of environ- mental uncertainty in Chapter 4 are leading to the next stage of organizational evolution, which is horizontal relationships across organizations. Organizations can choose to build relationships in many ways, such as appointing preferred sup- pliers, establishing agreements, business partnering, joint ventures, or even mergers and acquisitions.

Interorganizational research has yielded perspectives such as resource depen- dence, collaborative networks, population ecology, and institutionalism. The sum total of these ideas can be daunting, because it means managers no longer can rest in the safety of managing a single organization. They have to figure out how to manage a whole set of interorganizational relationships, which is a great deal more challenging and complex.


Interorganizational relationships are the relatively enduring resource transactions, flows, and linkages that occur among two or more organizations.3 Traditionally, these transactions and relationships have been seen as a necessary evil to obtain what an organization needs. The presumption has been that the world is composed of distinct businesses that thrive on autonomy and compete for supremacy. A com- pany may be forced into interorganizational relationships depending on its needs and the instability and complexity of the environment.

A new view described by James Moore argues that organizations are now evolv- ing into business ecosystems. An organizational ecosystem is a system formed by the interaction of a community of organizations and their environment. An ecosystem cuts across traditional industry lines.4 A company can create its own ecosystem. Apple, for instance, travels in several major industries, including consumer elec- tronics, Internet services, mobile phones, personal computers, and entertainment. Its ecosystem also includes hundreds of suppliers and millions of customers across many markets. Google is getting into the entertainment business as well, rolling out dozens of short cartoons by “Family Guy” creator Seth McFarlane and build- ing a role as “middleman to Hollywood talent coming online.”5 Cable television companies are offering new forms of phone service, and telephone companies are getting into the television business. Today, successful companies develop rela- tionships with numerous other organizations cutting across traditional business boundaries.

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

Look for and develop relationships with other organizations. Don’t limit your think- ing to a single indus- try or business type. Build an ecosystem of which your organiza- tion is a part.

Chapter 5: Interorganizational Relationships 177

Is Competition Dead?

No company can go it alone under a constant onslaught of international competitors, changing technology, and new regulations. Organizations around the world are embed- ded in complex networks of confusing relationships—collaborating in some markets, competing fiercely in others. The number of corporate alliances has been increasing at a rate of 25 percent a year, and many of those have been between competitors.6 These alliances influence organizations’ competitive behavior in varied ways.

Traditional competition, which assumes a distinct company competing for sur- vival and supremacy with other stand-alone businesses, no longer exists because each organization both supports and depends on the others for success, and per- haps for survival. However, most managers recognize that the competitive stakes are higher than ever in a world where market share can crumble overnight and no industry is immune from almost instant obsolescence.7 In today’s world, a new form of competition is in fact intensifying.8

For one thing, companies now need to coevolve with others in the ecosystem so that everyone gets stronger. Consider the wolf and the caribou. Wolves cull weaker caribou, which strengthens the herd. A strong herd means that wolves must become stronger themselves. With coevolution, the whole system becomes stronger. In the same way, companies coevolve through discussion with each other, shared visions, alliances, and managing complex relationships.

Exhibit 5.1 illustrates the complexity of an ecosystem by showing the myriad overlapping relationships in which high-tech companies were involved in 1999. Since then, many of these companies have merged, been acquired, or gone out of business. Ecosystems constantly change and evolve, with some relationships grow- ing stronger while others weaken or are terminated. The changing pattern of rela- tionships and interactions in an ecosystem contributes to the health and vitality of the system as an integrated whole.9

In an organizational ecosystem, conflict and cooperation exist at the same time. Consider the partnership between rivals Sony and Samsung.

Sony and Samsung illustrate the tangled connections that have developed among consumer electronics firms over the past several years. Many electronics companies that long prided themselves on independence have shifted to an ecosystem approach.

Samsung’s mission has long been clear: knock off Sony as the world’s top electron- ics maker. Within the past several years, the Korean underdog surpassed giant Sony in market capitalization, revenue, and profits. The two companies continue to battle, along with a few other top electronics makers, for the No. 1 spot in global television sales.

So what possible reason could Samsung have for letting Sony use some of its key technol- ogies for flat-panel televisions before Samsung’s own products used them? Sony’s televisions using those technologies ended up outselling Samsung’s LCD sets by more than three to one in the year they were released. Not such a smart move on Samsung’s part, you would think, but you might be wrong. By working closely with Sony, Samsung engineers and managers knew they were getting a crash course in how to make better LCD televisions. Previously the company had used the technology primarily for computer monitors and cellphones. Samsung engineer Jang Insik and his Sony counterpart Hiroshi Murayama talk by phone several times a day. “If we can learn from Sony,” says Jang, “it will help us in advancing our technology.”

Sony Corporation and Samsung Electronics Company



1 7


P art 3

: O pen S

ystem D

esign Elem ents
























The largest companies (those with more than 10,000 employees) are, not surprisingly, the hubs of the digital universe: they tend to have the most strategic partnerships (black lines) and investments (red lines).*

*Smaller companies that have no relationships with the hubs are not featured.





























































EXHIBIT 5.1 An Organizational Ecosystem (based on 1999 data)

Chapter 5: Interorganizational Relationships 179

Mutual dependencies and partnerships have become a fact of life. Is competition dead? Companies today may use their strength to achieve victory over competitors, but ultimately cooperation carries the day.

The Changing Role of Management

Within business ecosystems managers learn to move beyond traditional responsibili- ties of corporate strategy and designing hierarchical structures and control systems. If a top manager looks down to enforce order and uniformity, the company is miss- ing opportunities for new and evolving external relationships.11 In this new world, managers think about horizontal processes rather than vertical structures. Important initiatives are not just top down; they cut across the boundaries separating organiza- tional units. Moreover, horizontal relationships now include linkages with suppliers and customers, who become part of the team. Business leaders can learn to lead economic coevolution. Managers learn to see and appreciate the rich environment of opportunities that grow from cooperative relationships with other contributors to the ecosystem. Rather than trying to force suppliers into low prices or customers into high prices, managers strive to strengthen the larger system evolving around them, finding ways to understand this big picture and how to contribute.

This is a broader leadership role than ever before. Managers in charge of coordi- nating with other companies have to learn new executive skills. A study of executive roles by the Hay Group distinguished between operations roles and collaborative roles. Most traditional managers are skilled in handling operations roles, which have traditional vertical authority and are accountable for business results primarily through direct control over people and resources. Collaborative roles, on the other hand, don’t have direct authority over horizontal colleagues or partners, but are nonetheless accountable for specific business results. Managers in collaborative roles have to be highly flexible and proactive. They achieve results through personal communication and assertively seeking out needed information and resources.12

The old way of managing relied almost exclusively on operations roles, defend- ing the organization’s boundaries and maintaining direct control over resources. Today, though, collaborative roles are becoming more important for success. When alliances fail, it is usually because of an inability of the partners to develop trusting, collaborative relationships rather than due to the lack of a solid business plan or strategy. In successful alliances, people work together almost as if they were mem- bers of the same company.13 Donovan Neale-May, president of advertising firm Neale-May & Partners, provides an example of the new collaborative management style. Neale-May realized that his agency was having trouble winning accounts because of its lack of international experience. He talked with other ad executives

As competition in electronics has intensified, Sony and Samsung have come to realize that they depend on each other in areas of technology and developing new products. The partner- ship between the two companies began in 2003, when both first started making LCD panels. Samsung had the better technology, but Sony had a far superior understanding of how to turn that technology into top-selling products. Sony closely guards its know-how, but Samsung was able to get a close-up look because of the partnership. Samsung televisions that came out the following year used some of the same features that made Sony’s designs so popular. The two firms continue to try to out-do one another, but they continue to share information too, because managers at both companies know it’s the best route to growing stronger.10 ■

180 Part 3: Open System Design Elements

and learned that they experienced the same frustrations. “We have companies—our own neighbors here in Colorado—that won’t hire us because we don’t have offices in sixty-five countries,” said John Metzger, CEO of a Boulder firm. Neale-May eventually spearheaded GlobalFluency, an international alliance of forty indepen- dent high-tech public relations agencies that share information and jointly market their services. The power of GlobalFluency has enabled small, owner-run agencies to win accounts that once went only to large competitors. Alliance members maintain their independence for small jobs but they work together through GlobalFluency to pitch for regional projects or international campaigns.14

Interorganizational Framework

Appreciating the larger organizational ecosystem is one of the most exciting areas of organization theory. The models and perspectives for understanding interorga- nizational relationships ultimately help managers change their role from top-down management to horizontal management across organizations. Exhibit 5.2 shows a framework for analyzing the different views of interorganizational relationships. Relationships among organizations can be characterized by whether the organiza- tions are dissimilar or similar and whether relationships are competitive or coopera- tive. By understanding these perspectives, managers can assess their environment and adopt strategies to suit their needs. The first perspective is called resource- dependence theory, which was briefly described in Chapter 4. It describes rational ways organizations deal with each other to reduce dependence on the environment. The second perspective is about collaborative networks, wherein organizations allow themselves to become dependent on other organizations to increase value and pro- ductivity for all. The third perspective is population ecology, which examines how new organizations fill niches left open by established organizations and how a rich variety of new organizational forms benefits society. The final approach is called institutionalism and explains why and how organizations legitimate themselves in

EXHIBIT 5.2 A Framework of Interorganizational Relationships*












Dissimilar Similar


Resource Dependence

Collaborative Network

Population Ecology


*Thanks to Anand Narasimhan for suggesting this framework.

Chapter 5: Interorganizational Relationships 181

the larger environment and design structures by borrowing ideas from each other. These four approaches to the study of interorganizational relationships are described in the remainder of this chapter.


Resource dependence represents the traditional view of relationships among orga- nizations. As described in Chapter 4, resource-dependence theory argues that orga- nizations try to minimize their dependence on other organizations for the supply of important resources and try to influence the environment to make resources avail- able.15 Organizations succeed by striving for independence and autonomy. When threatened by greater dependence, organizations will assert control over external resources to minimize that dependence.

When organizations feel resource or supply constraints, the resource dependence perspective says they maneuver to maintain their autonomy through a variety of strat- egies, several of which were described in Chapter 4. One strategy is to adapt to or alter the interdependent relationships. This could mean purchasing ownership in sup- pliers, developing long-term contracts or joint ventures to lock in necessary resources, or building relationships in other ways. Other techniques, as described in Chapter 4, include interlocking directorships to include members of supplier companies on the board of directors, joining trade associations to coordinate needs, using lobbying and political activities, or merging with another firm to guarantee resources and material supplies. Organizations operating under the resource-dependence philosophy will do whatever is needed to avoid excessive dependence on the environment and maintain control of resources, thereby reducing uncertainty. Locking in resources through long- term supplier relationships is one of the most common strategies.

Supply Chain Relationships

To operate efficiently and produce high-quality items that meet customers’ needs, an organization must have reliable deliveries of high-quality, reasonably priced supplies and materials. Many organizations develop close relationships with key suppliers to gain control over necessary resources. Supply chain management refers to manag- ing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw materials to distributing finished goods to consumers.16 Exhibit 5.3 illustrates a basic supply chain model. A supply chain is a network of multiple businesses and individuals that are connected through the flow of products or ser- vices. Research indicates that formalizing collaborative supply chain relationships can help organizations obtain and use resources more efficiently and improve their performance.17

Many organizations manage supply chain relationships using the Internet and other sophisticated technologies, establishing electronic linkages between the organi- zation and these external partners for the sharing and exchange of data.18 Companies such as Apple, Wal-Mart, Nokia, Toyota, Tesco, and Samsung, for instance, are electronically connected with their partners so that everyone along the supply chain has almost completely transparent information about sales, orders, shipments, and other data. That means suppliers have data about orders, production levels, and needed materials, ensuring that resources are available when needed. In a recent study of supply chains, AMR Research ranked Apple as the best-performing supply

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

Reach out and influ- ence external sectors that threaten needed resources. Adopt strategies to control resources, especially when your organiza- tion is dependent and has little power. Assert your company’s influence when you have power and con- trol over resources.

182 Part 3: Open System Design Elements

chain in the world, with Nokia at No. 2, Wal-Mart at No. 6, Samsung Electronics at No. 9, and the British supermarket chain Tesco at No. 12.19

Power Implications

In resource-dependence theory, large, independent companies have power over small suppliers.20 For example, power in consumer products has shifted from ven- dors such as Rubbermaid and Procter & Gamble to the big discount retail chains, which can demand—and receive—special pricing deals. Wal-Mart has grown so large and powerful that it can dictate the terms with virtually any supplier. When one company has power over another, it can ask suppliers to absorb more costs, ship more efficiently, and provide more services than ever before, often without a price increase. Often the suppliers have no choice but to go along, and those who fail to do so may go out of business.

Power is also shifting in other industries. For decades, technology vendors have been putting out incompatible products and expecting their corporate customers to assume the burden and expense of making everything work together. Those days may be coming to an end. With a shaky economy, big corporations cut back their spending on technology, which led to stiffer competition among technology vendors and gave their corporate customers greater power to make demands. Another area that is seeing a big power shift is the publishing and bookselling industry, as illus- trated by the following example.

Retail StoresManufacturers

Distributors Suppliers

Horizontal Relationships

Source: Global Supply Chain Games Project, Delft University and the University of Maryland, R. H. Smith School of Business, http://www.gscg. org:8080/opencms/export/sites/default/gscg/images/supplychain_simple.gif (accessed on February 6, 2008).

EXHIBIT 5.3 A Basic Supply Chain Model

Chapter 5: Interorganizational Relationships 183

Amazon calls itself the most customer- centric company on earth, but many small publishers and authors are beginning to call it the biggest bully in the publishing indus- try. If you’ve purchased from Amazon, you might have used the “Buy Now with 1 Click” button, which allows registered users to buy a book from Amazon instantly and get free shipping. But if you’re a publisher and you cross the giant online retailer, you’re likely to have the “Buy Now” button disabled for your titles. Customers can still buy the books, but they have to navigate to an open marketplace linking them to third-party sellers.

That’s what happened to books published by the British unit of Hachette Livre, a sub- sidiary of French media company Lagardère, after a dispute with Amazon over the division of revenues from online sales. In Britain, as in other markets where Amazon has a com- manding position, publishers have tough annual negotiations with Amazon about their cut of sales. Hachette Livre says Amazon has demanded an ever-increasing slice of the revenue pie that is shared between author, publisher, retailer, printer, and so forth.

Amazon has also disabled the “Buy Now” button for some small publishers in the United States that resisted the giant company’s demands that they use an Amazon-owned company, BookSurge, for print-on-demand services. “This is a clear indication that once they have the clout they are willing to use it to the full extent that they can,” said Paul Aiken, executive director of the Authors Guild, a trade group that uses for print-on- demand books. “It’s ugly with Amazon and will probably get uglier.”21 ■


The collaborative-network perspective is an emerging alternative to resource- dependence theory. Companies join together to become more competitive and to share scarce resources. Large aerospace firms partner with one another and with smaller companies and suppliers to design next-generation jets. Large pharmaceuti- cal companies join with small biotechnology firms to share resources and knowl- edge and spur innovation. Consulting firms, investment companies, and accounting firms may join in an alliance to meet customer demands for expanded services.22 As companies move into their own uncharted territory, they are also racing into alli- ances. Sprint, Clearwire, Comcast, Google, Time Warner, Intel, and Bright House formed an alliance to develop new technology for ultrafast wireless Internet access for cell phones and laptops, called WiMax. They believed the collaborative network approach was the best way to get a jump on rivals Verizon and AT&T in develop- ing next-generation wireless services. So far, the companies have jointly invested more than $3 billion to develop a national WiMax network that will have the Internet download speed of a cable connection and the broad reach of a cell phone network.23 Corporate alliances require managers who are good at building personal networks across boundaries. How effective are you at networking? Complete the questionnaire in the “How Do You Fit the Design?” box to find out.

Why Collaboration?

Why all this interest in interorganizational collaboration? Some key reasons include sharing risks when entering new markets, mounting expensive new programs and reducing costs, and enhancing organizational profile in selected industries or


184 Part 3: Open System Design Elements

technologies. Cooperation is a prerequisite for greater innovation, problem solv- ing, and performance.24 In addition, partnerships are a major avenue for entering global markets, with both large and small firms developing partnerships overseas and in North America.

North American companies traditionally have worked alone, competing with each other and believing in the tradition of individualism and self-reliance, but they have learned from their international experience just how effective interorganizational relationships can be. Both Japan and Korea have long traditions of corporate clans or industrial groups that collaborate and assist each other. North Americans typi- cally have considered interdependence a bad thing, believing it would reduce compe- tition. However, the experience of collaboration in other countries has shown that competition among companies can be fierce in some areas even as they collaborate

Are you a natural at reaching out to others for personal networking? Having multiple sources of information is a building block for partnering with people in other organiza- tions. To learn something about your networking, answer the following questions. Please answer whether each item is Mostly True or Mostly False for you in school or at work.

Mostly True

Mostly False

1. I learn early on about changes going on in the organization and how they might affect me or my job. _____ _____

2. I network as much to help other people solve problems as to help myself. _____ _____

3. I join professional groups and associations to expand my contacts and knowledge. _____ _____

4. I know and talk with peers in other organizations. _____ _____

5. I act as a bridge from my work group to other work groups. _____ _____

6. I frequently use lunches to meet and network with new people. _____ _____

7. I regularly participate in charitable causes. _____ _____

Mostly True

Mostly False

8. I maintain a list of friends and colleagues to whom I send Christmas cards. _____ _____

9. I maintain contact with people from previous organizations and school groups. _____ _____

10. I actively give information to subordinates, peers, and my boss. _____ _____

Scoring: Give yourself one point for each item marked as Mostly True. A score of 7 or higher suggests very active networking. If you scored three or less, reaching out to others may not be natural for you and will require extra effort.

Interpretation: In a world of adversarial relationships between organizations, networking across organizational boundaries was not important. However, in a world of interorganizational partnerships, many good things flow from active networking, which will build a web of organiza- tional relationships to get things done. If you are going to manage relationships with other organizations, networking is an essential part of your job. Networking builds social, work, and career relationships that facilitate mutual ben- efit. People with large, active networks tend to enjoy and contribute to partnerships and have broader impact on interorganizational relationships.

Personal Networkingworking How Do You Fit the Design?

Chapter 5: Interorganizational Relationships 185

in others. It is as if the brothers and sisters of a single family went into separate businesses and want to outdo one another, but they will help each other out when push comes to shove.

Interorganizational linkages provide a kind of safety net that encourages long- term investment and risk taking. Organizations can achieve higher levels of inno- vation and performance as they learn to shift from an adversarial to a partnership mindset.25 Consider the following examples:

• Nintendo had become an “also-ran” in the video game console market, but it had a clear hit with the Wii. Why? Partly because, for the first time, Nintendo reached out to independent software developers and game makers. Nintendo executives made a special presentation at Namco Bandai Games, for example, listing reasons why the Wii would be profitable for both companies. By being a partner with other game developers rather that a rival, Nintendo dramatically increased the number and diversity of games that can run on the Wii.26

• Procter & Gamble (P&G) and Clorox are fierce rivals in cleaning products and water purification, but both companies profited when they collaborated to produce Glad Press ’n Seal. The technology for the innovative plastic wrap was invented in P&G labs, but the company didn’t have a plastic-wrap category of products. Managers approached Clorox with the idea of a joint venture to mar- ket the new plastic wrap under the well-established Glad brand name. Glad’s share of the wrap market shot up 23 percent virtually overnight with the intro- duction of Glad Press ’n Seal.27

• The Disney Channel invites magazines such as J-14, Twist, and Popstar to visit the sets of shows like “Hannah Montana” and “High School Musical,” gives reporters access for interviews and photo shoots, and provides brief videos for the magazines to post on their websites. By working together, these companies continually find new ways to keep preteen interest booming for both the televi- sion shows and the magazines.28

From Adversaries to Partners

Fresh flowers are blooming on the battle-scarred landscape where once-bitter rival- ries once took place. In North America, collaboration among organizations initially occurred in nonprofit social service and mental health organizations, where public interest was involved. Community organizations collaborated to achieve greater effec- tiveness and better use of scarce resources.29 With the push from international com- petitors and international examples, hard-nosed American business managers soon began shifting to a new partnership paradigm on which to base their relationships.

1 Organizations should strive to be as independent and self-suffi cient as possible so that their managers aren’t put in the position of “dancing to someone else’s tune.”

ANSWER: Disagree. Trying to be separate and independent is the old way of thinking. This view says organizations should minimize their dependence on other fi rms so that they do not become vulnerable. Today, though, successful companies see collaboration as a better approach to maintaining a balance of power and getting things done.


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

Seek collaborative partnerships that enable mutual depen- dence and enhance value and gain for both sides. Get deeply involved in your part- ner’s business, and vice versa, to benefit both.

186 Part 3: Open System Design Elements

Exhibit 5.4 provides a summary of this change in mindset. Rather than organi- zations maintaining independence, the new model is based on interdependence and trust. Performance measures for the partnership are loosely defined, and problems are resolved through discussion and dialogue. Managing strategic relationships with other firms has become a critical management skill, as discussed in this chapter’s Book Mark. In the new orientation, people try to add value to both sides and believe in high commitment rather than suspicion and competition. Companies work toward equitable profits for both sides rather than just for their own ben- efit. The new model is characterized by lots of shared information, including elec- tronic linkages and face-to-face discussions to provide feedback and solve problems. Sometimes people from other companies are on site to enable very close coordina- tion. Partners develop equitable solutions to conflicts rather than relying on legal contracts and lawsuits. Contracts may be loosely specified, and it is not unusual for business partners to help each other outside whatever is specified in the contract.30

In this new view of partnerships, dependence on another company is seen to reduce rather than increase risks. Greater value can be achieved by both parties. By being entwined in a system of interorganizational relationships, everyone does bet- ter because they help one another. This is a far cry from the belief that organizations do best by being autonomous. The partnership mindset can be seen in a number of industries. Chrysler and Nissan formed a partnership whereby Nissan will build a fuel-efficient small car for Chrysler and Chrysler will build a full-size pickup based on the Dodge Ram to be sold by Nissan.31 Deere & Company joined with several

Traditional Orientation: Adversarial New Orientation: Partnership

Low dependence Suspicion, competition, arm’s length

Detailed performance measures, closely monitored

Price, efficacy, own profits Limited information and feedback

Legal resolution of conflict

Minimal involvement and up-front investment, separate resources

Short-term contracts Contract limiting the relationship

High dependence Trust, addition of value to both sides,

high commitment Loose performance measures; problems

discussed Equity, fair dealing, both profit Electronic linkages to share key

information, problem feedback, and discussion

Mechanisms for close coordination; people on site

Involvement in partner’s product design and production, shared resources

Long-term contracts Business assistance beyond the


Source: Based on Mick Marchington and Steven Vincent, “Analysing the Influence of Institutional, Organizational, and Interpersonal Forces in Shaping Inter-Organizational Relations,” Journal of Management Studies 41, no. 6 (September 2004), 1029–1056; Jeffrey H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review (July–August 1996), 42–56; Myron Magnet, “The New Golden Rule of Business,” Fortune (February 21, 1994), 60–64; and Peter Grittner, “Four Elements of Successful Sourcing Strategies,” Management Review (October 1995), 41–45.

EXHIBIT 5.4 Changing Characteristics of Interorganizational Relationships

Chapter 5: Interorganizational Relationships 187

independent Deere dealerships and two technical colleges to develop programs for training technicians to service agricultural and construction machines that now rely heavily on electronics and complex advanced technologies.32

Canada’s Bombardier and its suppliers were linked together almost like one organization to build the Continental, a “super-midsize” business jet that can com- fortably fly eight passengers nonstop from coast to coast. Bombardier relied heavily on suppliers all over the world for design and manufacturing help. At one point, about 250 team members from Bombardier and 250 from outsider suppliers worked together in Montreal to make sure the design was going to be good for everyone. Integrating the partners and managing this multinational, multicompany endeavor was no easy task, but with development costs for a new plane reaching more than $1 billion, the partnership approach just made sense.33

By breaking down boundaries and becoming involved in partnerships with an attitude of fair dealing and adding value to both sides, today’s companies are chang- ing the concept of what makes an organization. The type of collaborative network

What determines organizational success in the twenty- first century? According to Leonard Greenhalgh, author of Managing Strategic Relationships: The Key to Business Success, it’s how successfully managers support, foster, and protect collaborative relationships both inside and out- side the firm. In separate chapters, the book offers strate- gies for managing relationships between people and groups within the company and with other organizations. Effectively managing relationships generates a sense of common- wealth and consensus, which ultimately results in competi- tive advantage.

MANAGING RELATIONSHIPS IN A NEW ERA Greenhalgh says managers need a new way of thinking to fit the realities of the new era. Here are a few guidelines:

• Recognize that detailed legal contracts can undermine trust and goodwill. Greenhalgh stresses the need to build relationships that are based on honesty, trust, under- standing, and common goals instead of on narrowly defined legal contracts that concentrate on what one business can give to the other.

• Treat partners like members of your own organization. Members of partner organizations need to be active par- ticipants in the learning experience by becoming involved in training, team meetings, and other activities. Giving a

partner organization’s employees a chance to make gen- uine contributions promotes deeper bonds and a sense of unity.

• Top managers must be champions for the alliance. Managers from both organizations have to act in ways that signal to everyone inside and outside the organiza- tion a new emphasis on partnership and collaboration. Using ceremony and symbols can help instill a commit- ment to partnership in the company culture.

A PARTNERSHIP PARADIGM To succeed in today’s environment, old-paradigm manage- ment practices based on power, hierarchy, and adversarial relationships must be traded for new-era commonwealth practices that emphasize collaboration and communal forms of organization. The companies that will thrive, Greenhalgh believes, “are those that really have their act together— those that can successfully integrate strategy, processes, business arrangements, resources, systems, and empow- ered workforces.” That can be accomplished, he argues, only by effectively creating, shaping, and sustaining strategic relationships.

Managing Strategic Relationships: The Key to Business Success, by Leonard Greenhalgh, is published by The Free Press.

Managing Strategic Relationships: The Key to Business Success By Leonard Greenhalgh


188 Part 3: Open System Design Elements

illustrated by Bombardier is also being used by a growing number of automotive companies. These companies are pushing the idea of partnership further than ever before, moving somewhat toward a network approach to organization design, as described in Chapter 3.


This section introduces a different perspective on relationships among organiza- tions. The population-ecology perspective differs from the other perspectives because it focuses on organizational diversity and adaptation within a population of orga- nizations.34 A population is a set of organizations engaged in similar activities with similar patterns of resource utilization and outcomes. Organizations within a popu- lation compete for similar resources or similar customers, such as financial institu- tions in the Seattle area or car dealerships in Houston, Texas.

Within a population, the question asked by ecology researchers is about the large number and variation of organizations in society. Why are new organizational forms that create such diversity constantly appearing? The answer is that individual orga- nizational adaptation is severely limited compared to the changes demanded by the environment. Innovation and change in a population of organizations take place through the birth of new types of organizations more so than by the reform and change of existing organizations. Indeed, organizational forms are considered rela- tively stable, and the good of a whole society is served by the development of new forms of organization through entrepreneurial initiatives. New organizations meet the new needs of society more than established organizations that are slow to change.35

What does this theory mean in practical terms? It means that large, established orga- nizations often become dinosaurs. Consider that among the companies that appeared on the first Fortune 500 list in 1955, only 71 are still on the list today. The most powerful companies on today’s list—companies like Apple, Google, or Intel—hadn’t even been thought of then. Large, established firms often have tremendous difficulty adapting to a rapidly changing environment. Hence, new organizational forms that fit the current environment emerge, fill a new niche, and over time take away business from established companies.36 According to the population-ecology view, when look- ing at an organizational population as a whole, the changing environment determines which organizations survive or fail. The assumption is that individual organizations suffer from structural inertia and find it difficult to adapt to environmental changes. Thus, when rapid change occurs, old organizations are likely to decline or fail, and new organizations emerge that are better suited to the needs of the environment.

Why do established organizations have such a hard time adapting to a rap- idly changing environment? Michael Hannan and John Freeman, originators of the population ecology model of organization, argue that there are many limitations on the ability of organizations to change. The limitations come from heavy investment in plants, equipment, and specialized personnel, limited information, established viewpoints of decision makers, the organization’s own successful history that justi- fies current procedures, and the difficulty of changing corporate culture. True trans- formation is a rare and unlikely event in the face of all these barriers.37

The population–ecology model is developed from theories of natural selection in biology, and the terms evolution and selection are used to refer to the underlying behavioral processes. Theories of biological evolution try to explain why certain life

Chapter 5: Interorganizational Relationships 189

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

Adapt your organiza- tion to new variations being selected and retained in the exter- nal environment. If you are starting a new organization, find a niche that contains a strong environmental need for your product or service, and be prepared for a com- petitive struggle over scarce resources.


forms appear and survive whereas others perish. Some theories suggest the forms that survive are typically best fitted to the immediate environment.

The environment of the 1940s and 1950s was suitable to Woolworth, but new organizational forms like Wal-Mart became dominant in the 1980s. Now, the envi- ronment is shifting again, indicating that the “Wal-Mart Era” might be coming to a close. Though Wal-Mart is still profitable and powerful, its influence in retail is slipping. Wal-Mart managers find themselves scrambling to keep up with swifter competitors and new types of retailers that offer greater selection or higher quality.38

No company is immune to the processes of social change. In recent years, tech- nology has brought tremendous environmental change, leading to the decline of many outdated organizations and a proliferation of new companies such as Google, Facebook, TiVo, MySpace, and eBay.

Organizational Form and Niche

The population-ecology model is concerned with organizational forms. Organizational form is an organization’s specific technology, structure, products, goals, and person- nel, which can be selected or rejected by the environment. Each new organization tries to find a niche (a domain of unique environmental resources and needs) suf- ficient to support it. The niche is usually small in the early stages of an organization but may increase in size over time if the organization is successful. If the organiza- tion does not find an appropriate niche, it will decline and may perish.

From the viewpoint of a single firm, luck, chance, and randomness play impor- tant parts in survival. New products and ideas are continually being proposed by both entrepreneurs and large organizations. Whether these ideas and organizational forms survive or fail is often a matter of chance—whether external circumstances happen to support them. A woman who started a small electrical contracting busi- ness in a rapidly growing area such as Austin, Texas, or Atlanta, Georgia, would have an excellent chance of success. If the same woman were to start the same business in a declining community elsewhere in the United States, her chance of success would be far less. Success or failure of a single firm thus is predicted by the characteristics of the environment as much as by the skills or strategies used by the organization’s managers.

2 The success or failure of a start-up is largely determined by the smarts and management ability of the entrepreneur. ANSWER: Disagree. Luck is often as important as smarts because larger forces in the environment, typically unseen by managers, allow some fi rms to succeed and others to fail. If a start-up happens to be in the right place at the right time, chances for success are much higher, regardless of management ability.

Process of Ecological Change

The population-ecology model assumes that new organizations are always appear- ing in the population. Thus, organizational populations are continually undergoing

190 Part 3: Open System Design Elements

change. The process of change in the population occurs in three stages: variation, selection, and retention, as summarized in Exhibit 5.5.

• Variation. Variation means the appearance of new, diverse forms in a popula- tion of organizations. These new organizational forms are initiated by entre- preneurs, established with venture capital by large corporations, or set up by governments seeking to provide new services. Some forms may be conceived to cope with a perceived need in the external environment. In recent years, a large number of new firms have been initiated to develop computer software, to pro- vide consulting and other services to large corporations, and to develop products and technologies for Internet commerce. Other new organizations produce a traditional product or service, but do it using new technology, new business models, or new management techniques that make the new companies far more able to survive. Organizational variations are analogous to mutations in biol- ogy, and they add to the scope and complexity of organizational forms in the environment. Two entrepreneurs in New York started a new type of law firm that experienced immediate success.

When Mark Harris was a young associate at a prestigious law firm, he happened to glimpse a client’s bill for a case he was work- ing on. “It was only February, and already

we’d billed an amount equal to my salary for the year,” Harris said. He realized that most of the money big law firms bring in goes to defray overhead expenses or into the pockets of the firm’s partners. “The model seemed broken to me,” Harris explains about his idea for a new kind of law firm.

Along with partner Alec Guettel, Harris founded Axiom Global Inc. Axiom provides legal services to corporations on an as-needed basis, typically charging fees that are far less than traditional law firms. Axiom can charge less because it doesn’t have to compensate highly-paid partners, and the company’s lawyers often work from home or at a client’s offices, helping to keep overhead to a minimum. Axiom has a staff of around 220 lawyers who take temporary assignments with corporate clients. They are employed full-time by Axiom and get benefits but no pay between assignments. Harris and Guettel found there were many highly-trained lawyers who wanted a different kind of life—more time with family, time to try their hand at writing a book, or just a break from the grueling pace. Joe Risco, for example, says he “wanted to chill out and try something different.” Risco’s first assign- ment was a nine-month project for Goldman Sachs. Although it took a while for Risco to get used to the prestige disparity between working for a big well-known firm and working for Axiom, he says he loves the broad range of experience he’s getting.

Variation Selection Retention

Large number of variations appear in the population of organizations

Some organizations find a niche and survive

A few organizations grow large and become institutionalized in the environment

EXHIBIT 5.5 Elements in the Population–Ecology Model of Organizations

Axiom Global Inc.


Chapter 5: Interorganizational Relationships 191

Axiom has scored a number of Fortune 500 companies as clients, including Cisco Systems, General Electric, Google, and Xerox Corporation. “The model makes a lot of sense,” says Don Liu of Xerox. Axiom isn’t trying to displace top law firms for high-end work such as a major merger or a make-or-break lawsuit. But for more modest projects, this new type of law firm fits the bill—and cuts it by 25 to 50 percent.39 ■

Axiom is one of a number of start-ups using this variation on the traditional law firm. Some work primarily with smaller businesses that don’t have in-house legal departments, while others aim for projects with large corporate clients. By providing services on an as-needed project basis at a lower cost, these new organizations are challenging the grip big law firms have on corporate business.

• Selection. Selection refers to whether a new organizational form such as Axiom is suited to the environment and can survive. Only a few variations are “selected in” by the environment and survive over the long term. Some variations will suit the external environment better than others. Some prove beneficial and thus are able to find a niche and acquire the resources from the environment necessary to survive. Other variations fail to meet the needs of the environment and perish. When there is insufficient demand for a firm’s product and when insufficient resources are available to the organization, that organization will be “selected out.”

• Retention. Retention is the preservation and institutionalization of selected orga- nizational forms. Certain technologies, products, and services are highly valued by the environment. The retained organizational form may become a dominant part of the environment. Many forms of organization have been institution- alized, such as government, schools, churches, and automobile manufacturers. McDonald’s, which owns 43 percent of the fast-food market and provides the first job for many teenagers, has become institutionalized in American life.

Institutionalized organizations like McDonald’s seem to be relatively perma- nent features in the population of organizations, but they are not permanent in the long run. The environment is always shifting, and if the dominant organizational forms do not adapt to external change, they will gradually diminish and be replaced by other organizations. McDonald’s has struggled in recent years to adapt to a changing fast-food market. Consumer satisfaction surveys reveal that customers think rivals Burger King and Wendy’s provide fresher, higher-quality food at better prices. In addition, chains such as Subway and Quizno’s are offering today’s health- conscious customer an alternative to burgers and fries.40

From the population-ecology perspective, the environment is the important determinant of organizational success or failure. The organization must meet an environmental need, or it will be selected out. The principles of variation, selection, and retention lead to the establishment of new organizational forms in a population of organizations.

Strategies for Survival

Another principle that underlies the population ecology model is the struggle for exis- tence, or competition. Organizations and populations of organizations are engaged in a competitive struggle over resources, and each organizational form is fighting to

192 Part 3: Open System Design Elements

survive. The struggle is most intense among new organizations, and both the birth and survival frequencies of new organizations are related to factors in the larger environment. Factors such as size of urban area, percentage of immigrants, political turbulence, industry growth rate, and environmental variability, for example, have influenced the launching and survival of newspapers, telecommunication firms, rail- roads, government agencies, labor unions, and even voluntary organizations.41

In the population ecology perspective, generalist and specialist strategies distin- guish organizational forms in the struggle for survival. Organizations with a wide niche or domain, that is, those that offer a broad range of products or services or that serve a broad market, are generalists. Organizations that provide a narrower range of goods or services or that serve a narrower market are specialists.

In the natural environment, a specialist form of flora and fauna would evolve in protective isolation in a place like Hawaii, where the nearest body of land is 2,000 miles away. The flora and fauna are heavily protected. In contrast, a place like Costa Rica, which experienced wave after wave of external influences, developed a generalist set of flora and fauna that has better resilience and flexibility for adapt- ing to a broad range of environments. In the business world, started with a specialist strategy, selling books over the Internet, but evolved to a generalist strategy with the addition of music, DVDs, greeting cards, and other products, plus partnering with other organizations as an online shopping mall to sell a wide range of products. A company such as Olmec Corporation, which sells African-American and Hispanic dolls, would be considered a specialist, whereas Mattel is a generalist, marketing a broad range of toys for boys and girls of all ages.42

Specialists are generally more competitive than generalists in the narrow area in which their domains overlap. However, the breadth of the generalist’s domain serves to protect it somewhat from environmental changes. Though demand may decrease for some of the generalist’s products or services, it usually increases for others at the same time. In addition, because of the diversity of products, services, and customers, generalists are able to reallocate resources internally to adapt to a changing environment, whereas specialists are not. However, because specialists are often smaller companies, they can sometimes move faster and be more flexible in adapting to changes.43

Managerial impact on company success often comes from selecting a strategy that steers a company into an open niche. Axiom’s founders, for example, saw that traditional law firms weren’t meeting the needs of many small businesses as well as large corporations wanting lower-cost, as-needed legal services.


The institutional perspective provides yet another view of interorganizational relation- ships.44 The institutional perspective describes how organizations survive and succeed through congruence between an organization and the expectations from its environ- ment. The institutional environment is composed of norms and values from stakehold- ers (customers, investors, associations, boards, other organizations, government, the community, and so on). Thus the institutional view believes that organizations adopt structures and processes to please outsiders, and these activities come to take on rule- like status in organizations. The institutional environment reflects what the greater society views as correct ways of organizing and behaving.45

Chapter 5: Interorganizational Relationships 193

Legitimacy is defined as the general perception that an organization’s actions are desirable, proper, and appropriate within the environment’s system of norms, values, and beliefs.46 Institutional theory thus is concerned with the set of intangible norms and values that shape behavior, as opposed to the tangible elements of tech- nology and structure. Organizations and industries must fit within the cognitive and emotional expectations of their audience. For example, people will not deposit money in a bank unless it sends signals of compliance with norms of wise financial management. Consider also your local government and whether it could raise prop- erty taxes for increased school funding if community residents did not approve of the school district’s policies and activities.

Most organizations are concerned with legitimacy, as reflected in the annual Fortune magazine survey that ranks corporations based on their reputations, and the annual Reputation Quotient study, a survey of public opinion conducted by Harris Interactive and the Reputation Institute.47 The fact that there is a payoff for having a good reputation is verified by a study of organizations in the airline industry. Having a good reputation was significantly related to higher levels of per- formance based on measures such as return on assets and net profit margin.48

Many corporations actively shape and manage their reputations to increase their competitive advantage. In the wake of the mortgage meltdown and the failure of giants Bear Stearns and Lehman Brothers, for example, many companies in the finance industry began searching for new ways to bolster legitimacy. Citigroup, Merrill Lynch, and Wachovia all ousted their chief executives over mortgage-related issues, partly as a way to signal a commitment to better business practices.

The notion of legitimacy answers an important question for institutional the- orists: Why is there so much homogeneity in the forms and practices of estab- lished organizations? For example, visit banks, high schools, hospitals, government departments, or business firms in a similar industry, in any part of the country, and they will look strikingly similar. When an organizational field is just getting started, such as in Internet-related businesses, diversity is the norm. New organizations fill emerging niches. However, once an industry becomes established, there is an invis- ible push toward similarity. Isomorphism is the term used to describe this move toward similarity.

The Institutional View and Organization Design

The institutional view also sees organizations as having two essential dimensions— technical and institutional. The technical dimension is the day-to-day work, tech- nology, and operating requirements. The institutional structure is that part of the organization most visible to the outside public. Moreover, the technical dimension is governed by norms of rationality and efficiency, but the institutional dimension is governed by expectations from the external environment. As a result of pressure to do things in a proper and correct way, the formal structures of many organizations reflect the expectations and values of the environment rather than the demand of work activities. This means that an organization may incorporate positions or activ- ities (equal employment officer, e-commerce division, chief ethics officer) perceived as important by the larger society to increase its legitimacy and survival prospects, even though these elements may decrease efficiency. For example, many small com- panies set up websites, even though the benefits gained from the site are sometimes outweighed by the costs of maintaining it. Having a website is perceived as essential by the larger society today. The formal structure and design of an organization may

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not be rational with respect to workflow and products or services, but it will ensure survival in the larger environment.

Organizations adapt to the environment by signaling their congruence with the demands and expectations stemming from cultural norms, standards set by professional bodies, funding agencies, and customers. Structure is something of a facade disconnected from technical work through which the organization obtains approval, legitimacy, and continuing support. The adoption of structures thus might not be linked to actual pro- duction needs and might occur regardless of whether specific internal problems are solved. Formal structure is separated from technical action in this view.49

Institutional Similarity

Organizations have a strong need to appear legitimate. In so doing, many aspects of structure and behavior may be targeted toward environmental acceptance rather than toward internal technical efficiency. Interorganizational relationships thus are characterized by forces that cause organizations in a similar population to look like one another. Institutional similarity, called institutional isomorphism in the academic literature, is the emergence of a common structure and approach among organiza- tions in the same field. Isomorphism is the process that causes one unit in a popula- tion to resemble other units that face the same set of environmental conditions.50

Exactly how does increasing similarity occur? How are these forces realized? Exhibit 5.6 provides a summary of three mechanisms for institutional adaptation. These three core mechanisms are mimetic forces, which result from responses to uncertainty; coercive forces, which stem from political influence; and normative forces, which result from common training and professionalism.51

Mimetic Forces. Most organizations, especially business organizations, face great uncertainty. It is not clear to senior executives exactly what products, services, technologies, or management practices will achieve desired goals, and sometimes the goals themselves are not clear. In the face of this uncertainty, mimetic forces, the pressure to copy or model other organizations, occur. Executives observe an innovation in a firm generally regarded as successful, so the practice is quickly copied. One example was the rapid growth of wi-fi hotspots in cafes, hotels, air- ports, and other public areas. Starbucks was one of the first companies to adopt

Mimetic Coercive Normative

Reason to become similar: Events:

Social basis: Example:

Uncertainty Innovation visibility

Culturally supported Reengineering,


Dependence Political law, rules,

sanctions Legal Pollution controls, school


Duty, obligation Professionalism—

certification, accreditation Moral Accounting standards,

consultant training

Source: Adapted from W. Richard Scott, Institutions and Organizations (Thousand Oaks, Calif.: Sage, 1995).

EXHIBIT 5.6 Three Mechanisms for Institutional Adaptation

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

Pursue legitimacy with your organiza- tion’s major stake- holders in the external environment. Adopt strategies, structures, and management techniques that meet the expectations of significant parties, thereby ensuring their cooperation and access to resources.

Chapter 5: Interorganizational Relationships 195


wi-fi, enabling customers to use laptops and handheld computers at its stores. The practice was quickly copied by both large and small companies, from Holiday Inns to the local deli.

Many times, this modeling is done without any clear proof that performance will be improved. Mimetic processes explain why fads and fashions occur in the business world. Once a new idea starts, many organizations grab onto it, only to learn that the application is difficult and may cause more problems than it solves. This was the case with the recent merger wave that swept many industries. The past few decades have seen the largest merger and acquisition wave in history, but evidence shows that many of these mergers did not produce the expected financial gains and other benefits. The sheer momentum of the trend was so powerful that many companies chose to merge not because of potential increases in efficiency or profitability but simply because it seemed like the right thing to do.52

Techniques such as outsourcing, teams, Six Sigma quality programs, brain- storming, and the balanced scorecard have all been adopted without clear evidence that they will improve efficiency or effectiveness. The one certain benefit is that management’s feelings of uncertainty will be reduced, and the company’s image will be enhanced because the firm is seen as using the latest management techniques. A study of 100 organizations confirmed that those companies associated with using popular management techniques were more admired and rated higher in quality of management, even though these organizations often did not reflect higher economic performance.53 Perhaps the clearest example of official copying is the technique of benchmarking that occurs as part of the total quality movement. Benchmarking means identifying who’s best at something in an industry and then duplicating the technique for creating excellence, perhaps even improving it in the process.

The mimetic process works because organizations face high uncertainty, they are aware of innovations occurring in the environment, and the innovations are cul- turally supported, thereby giving legitimacy to adopters. This is a strong mechanism by which a group of banks, or high schools, or manufacturing firms begin to look and act like one another.

3 Managers should quickly copy or borrow techniques being used by other successful companies to make their own organization more effective and to keep pace with changing times.

ANSWER: Agree. Managers frequently copy techniques used by other, successful organizations as a way to appear legitimate and up to date. Copying other fi rms is one reason organizations may begin to look and act similar in their structures, processes, and management systems.

Coercive Forces. All organizations are subject to pressure, both formal and infor- mal, from government, regulatory agencies, and other important organizations in the environment, especially those on which a company is dependent. Coercive forces are the external pressures exerted on an organization to adopt structures, tech- niques, or behaviors similar to other organizations. For example, large corpora- tions have recently been putting pressure on service providers, such as accounting or law firms, to step up their diversity efforts. Managers in these corporations have

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felt pressure to increase diversity within their own organizations and they want the firms with which they do business to reflect a commitment to hiring and promoting more women and minorities as well.54

Some pressures may have the force of law, such as government mandates to adopt new pollution control equipment. Health and safety regulations may demand that a safety officer be appointed. New regulations and government oversight boards have been set up for the accounting industry following widespread accounting scandals.

Coercive pressures may also occur between organizations where there is a power difference, as described in the resource-dependence section earlier in this chapter. Large retailers and manufacturers often insist that certain policies, procedures, and techniques be used by their suppliers. Wal-Mart, for instance, requires many of its suppliers to affix radio-frequency identification (RFID) tags to their products to enable easier tracking of merchandise. The giant retailer has also begun granting preference to suppliers who make their products more environmentally friendly, which acts as a coercive force.

As with other changes, those brought about because of coercive forces may not make the organization more effective, but it will look more effective and will be accepted as legitimate in the environment. Organizational changes that result from coercive forces occur when an organization is dependent on another, when there are political factors such as rules, laws, and sanctions involved, or when some other contractual or legal basis defines the relationship. Organizations operating under those constraints will adopt changes and relate to one another in a way that increases homogeneity and limits diversity.

Normative Forces. The third reason organizations change according to the institu- tional view is normative forces. Normative forces are pressures to change to achieve standards of professionalism and to adopt techniques that are considered by the professional community to be up to date and effective. Changes may be in any area, such as information technology, accounting requirements, marketing techniques, or collaborative relationships with other organizations.

Professionals share a body of formal education based on university degrees and professional networks through which ideas are exchanged by consultants and professional leaders. Universities, consulting firms, trade associations, and profes- sional training institutions develop norms among professional managers. People are exposed to similar training and standards and adopt shared values, which are imple- mented in organizations with which they work. Business schools teach finance, mar- keting, and human resource majors that certain techniques are better than others, so using those techniques becomes a standard in the field. In one study, for example, a radio station changed from a functional to a multidivisional structure because a consultant recommended it as a “higher standard” of doing business. There was no proof that this structure was better, but the radio station wanted legitimacy and to be perceived as fully professional and up to date in its management techniques.

Companies accept normative pressures to become like one another through a sense of obligation or duty to high standards of performance based on professional norms shared by managers and specialists in their respective organizations. These norms are conveyed through professional education and certification and have almost a moral or ethical requirement based on the highest standards accepted by the profession at that time. In some cases, though, normative forces that maintain legitimacy break down, as they recently did in the accounting and finance industries, and coercive forces are needed to shift organizations back toward acceptable standards.

Briefcase As an organization manager, keep this guideline in mind:

Enhance legitimacy by borrowing good ideas from other firms, complying with laws and regulations, and following procedures considered best for your company.

Chapter 5: Interorganizational Relationships 197

An organization may use any or all of the mechanisms of mimetic, coercive, or normative forces to change itself for greater legitimacy in the institutional environment. Firms tend to use these mechanisms when they are acting under con- ditions of dependence, uncertainty, ambiguous goals, and reliance on professional credentials. The outcome of these processes is that organizations become far more homogeneous than would be expected from the natural diversity among managers and environments.


■ This chapter has been about the important evolution in interorganizational rela- tionships. At one time organizations considered themselves autonomous and separate, trying to outdo other companies. Today more organizations see them- selves as part of an ecosystem. The organization may span several industries and will be anchored in a dense web of relationships with other companies. In this ecosystem, collaboration is as important as competition. Indeed, organizations may compete and collaborate at the same time, depending on the location and issue. In business ecosystems, the role of management is changing to include the development of horizontal relationships with other organizations.

■ Four perspectives have been developed to explain relationships among organiza- tions. The resource-dependence perspective is the most traditional, arguing that organizations try to avoid excessive dependence on other organizations. In this view, organizations devote considerable effort to controlling the environment to ensure ample resources while maintaining independence. One key approach is to develop close relationships with suppliers through supply chain management.

■ The collaborative-network perspective is an emerging alternative to resource dependence. Organizations welcome collaboration and interdependence with other organizations to enhance value for both. Many executives are changing mindsets away from autonomy toward collaboration, often with former corpo- rate enemies. The new partnership mindset emphasizes trust, fair dealing, and achieving profits for all parties in a relationship.

■ The population-ecology perspective explains why organizational diversity con- tinuously increases with the appearance of new organizations filling niches left open by established companies. This perspective says that large companies usually cannot adapt to meet a changing environment; hence, new companies emerge with the appropriate form and skills to serve new needs. Through the process of variation, selection, and retention, some organizations will survive and grow while others perish. Companies may adopt a generalist or specialist strategy to survive in the population of organizations.

■ The institutional perspective argues that interorganizational relationships are shaped as much by a company’s need for legitimacy as by the need for provid- ing products and services. The need for legitimacy means that the organization will adopt structures and activities that are perceived as valid, proper, and up to date by external stakeholders. In this way, established organizations copy techniques from one another and begin to look very similar. The emergence of common structures and approaches in the same field is called institutional

198 Part 3: Open System Design Elements

similarity or institutional isomorphism. There are three core mechanisms that explain increasing organizational homogeneity: mimetic forces, which result from responses to uncertainty; coercive forces, which stem from power differ- ences and political influences; and normative forces, which result from common training and professionalism.

■ Each of the four perspectives is valid. They each represent different lenses through which the world of interorganizational relationships can be viewed: organiza- tions experience a competitive struggle for autonomy; they can thrive through collaborative relationships with others; the slowness to adapt provides openings for new organizations to flourish; and organizations seek legitimacy as well as profits from the external environment. The important thing is for managers to be aware of interorganizational relationships and to consciously manage them.

1. The concept of business ecosystems implies that organi- zations are more interdependent than ever before. From personal experience, do you agree? Explain.

2. How do you feel about the prospect of becoming a manager and having to manage a set of relationships with other companies rather than just managing your own company? Discuss.

3. Assume you are the manager of a small firm that is depen- dent on a large computer manufacturing customer that uses the resource-dependence perspective. Put yourself in the position of the small firm, and describe what actions you would take to survive and succeed. What actions would you take from the perspective of the large firm?

4. Many managers today were trained under assumptions of adversarial relationships with other companies. Do you think operating as adversaries is easier or more dif- ficult than operating as partners with other companies? Discuss.

5. Discuss how the adversarial versus partnership orien- tations work among students in class. Is there a sense

of competition for grades? Is it possible to develop true partnerships in which your work depends on others?

6. The population-ecology perspective argues that it is healthy for society to have new organizations emerg- ing and old organizations dying as the environment changes. Do you agree? Why would European coun- tries pass laws to sustain traditional organizations and inhibit the emergence of new ones?

7. Explain how the process of variation, selection, and retention might explain innovations that take place within an organization.

8. Do you believe that legitimacy really motivates a large, powerful organization such as Wal-Mart? Is acceptance by other people a motivation for individuals as well? Explain.

9. How does the desire for legitimacy result in organiza- tions becoming more similar over time?

10. How do mimetic forces differ from normative forces? Give an example of each.

coercive forces collaborative network generalist institutional environment institutional perspective institutional similarity interorganizational relationships legitimacy

mimetic forces niche normative forces organizational ecosystem organizational form population population-ecology perspective resource dependence

retention selection specialist struggle for existence supply chain management variation

Key ConceptsKey

Discussion QuestionsDisc

Chapter 5: Interorganizational Relationships 199

Case for Analysis: Oxford Plastics Company*

Oxford Plastics manufactures high-quality plastics and resins for use in a variety of products, from lawn orna- ments and patio furniture to automobiles. The Oxford plant located near Beatty, a town of about 45,000 in a southeastern state, employs about 3,000 workers. It plays an important role in the local economy and, indeed, that of the entire state, which offers few well-paying factory jobs.

In early 2004, Sam Henderson, plant manager of the Beatty facility, notified Governor Tom Winchell that Oxford was ready to announce plans for a major addition to the factory—a state-of-the-art color lab and paint shop that would enable better and faster matching of colors to cus- tomer requirements. The new shop would keep Oxford com- petitive in the fast-paced global market for plastics, as well as bring the Beatty plant into full compliance with updated U.S. Environmental Protection Agency (EPA) regulations.

Plans for the new facility were largely complete. The big- gest remaining task was identifying the specific location. The new color lab and paint shop would cover approximately 25 acres, requiring Oxford to purchase some additional land adjacent to its 75-acre factory campus. Henderson was somewhat concerned with top management’s preferred site because it fell outside the current industrial zoning boundary, and, moreover, would necessitate destruction of several 400- to 500-year-old beech trees. The owner of the property, a nonprofit agency, was ready to sell, whereas property located on the other side of the campus might be more difficult to obtain in a timely manner. Oxford was on a tight schedule to get the project completed. If the new facility wasn’t up and running in a timely manner, there was a chance the EPA could force Oxford to stop using its old process—in effect, shutting down the factory.

The governor was thrilled with Oxford’s decision to build the new shop in Beatty and he urged Henderson to immediately begin working closely with local and state officials to circumvent any potential problems. It was

essential, he stressed, that the project not be bogged down or thwarted by conflict among different interest groups, as it was too important to the economic development of the region. Governor Winchell assigned Beth Friedlander, direc- tor of the Governor’s Office of Economic Development, to work closely with Henderson on the project. However, Winchell was not willing to offer his commitment to help push through the rezoning, as he had been an enthusiastic public supporter of environmental causes.

Following his conversation with Governor Winchell, Henderson sat down to identify the various people and organizations that would have an interest in the new color lab project and that would need to collaborate in order for it to proceed in a smooth and timely manner. They are:

Oxford Plastics

• Mark Thomas, vice president of North American Operations. Thomas would be flying in from Oxford’s Michigan headquarters to oversee land purchase and negotiations regarding the expansion.

• Sam Henderson, Beatty plant manager, who has spent his entire career at the Beatty facility, beginning on the factory floor fresh out of high school.

• Wayne Talbert, local union president. The union is strongly in favor of the new shop being located in Beatty because of the potential for more and higher-wage jobs.

State Government

• Governor Tom Winchell, who can exert pressure on local officials to support the project.

• Beth Friedlander, director of the Governor’s Office of Economic Development.

• Manu Gottlieb, director of the State Department of Environmental Quality.

Text not available due to copyright restrictions

200 Part 3: Open System Design Elements

City Government

• Mayor Barbara Ott, a political newcomer, who has been in office for less than a year and who campaigned on environmental issues.

• Major J. Washington, the Chamber of Commerce chair of local economic development.


• May Pinelas, chairman of Historic Beatty, who argues vociferously that the future of the region lies in historic and natural preservation and tourism.

• Tommy Tompkins, president of the Save Our Future Foundation, a coalition of private individuals and rep- resentatives from the local university who have long been involved in public environmental issues and have successfully thwarted at least one previous expansion project.

Henderson is feeling torn about how to proceed. He thinks to himself, “To move forward, how will I build a coalition among these diverse organizations and groups?” He understands the need for Oxford to move quickly, but he wants Oxford to have a good relationship with the peo- ple and organizations that will surely oppose destruction

of more of Beatty’s natural beauty. Henderson has always liked finding a win-win compromise, but there are so many groups with an interest in this project that he’s not sure where to start. Maybe he should begin by working closely with Beth Friedlander from the governor’s office—there’s no doubt this is an extremely important project for the state’s economic development. On the other hand, it’s the local people who are going to be most affected and most involved in the final decisions. Oxford’s vice president has suggested a press conference to announce the new shop at the end of the week, but Henderson is worried about put- ting the news out cold. Perhaps he should call a meeting of interested parties now and let everyone get their feelings out into the open? He knows it could get emotional, but he wonders if things won’t get much uglier later on if he doesn’t.

*Source: Based on “Mammoth Motors’ New Paint Shop,” a role play originally prepared by Arnold Howitt, executive director of the A. Alfred Taubman Center for State and Local Government at the Kennedy School of Government, Harvard University, and subsequently edited by Gerald Cormick, a principal in the CSE Group and senior lecturer for the Graduate School of Public Affairs at the University of Washington.

Case for Analysis: Hugh Russel, Inc.*

The following story is a personal recollection by David Hurst of the experience of a group of managers in a mature orga- nization undergoing profound change. . . . The precipitating event in this change was a serious business crisis. . . .

When I joined Hugh Russel Inc. in 1979, it was a medium-sized Canadian distributor of steel and industrial products. With sales of CDN $535 million and 3,000 employ- ees, the business was controlled by the chairman, Archie Russel, who owned 16 percent of the common shares. The business consisted of four groups—the core steel distribution activities (called “Russelsteel”), industrial bearings and valves distribution, a chain of wholesalers of hardware and sporting goods, and a small manufacturing business. . . .

The company was structured for performance. . . . The management was professional, with each of the divi- sional hierarchies headed by a group president reporting to Peter Foster in his capacity as president of the corporation. Jobs were described in job descriptions, and their mode of execution was specified in detailed standard operating procedures. Three volumes of the corporate manual spelled out policy on everything from accounting to vacation pay. Extensive accounting and data processing systems allowed

managers to track the progress of individual operations against budgets and plans. Compensation was performance- based, with return on net assets (RONA) as the primary measure and large bonuses (up to 100 percent of base) for managers who made their targets.

At the senior management level, the culture was polite but formal. The board of directors consisted of Archie’s friends and associates together with management insiders. Archie and Peter ran the organization as if they were major- ity owners. Their interaction with management outside of the head office was restricted to the occasional field trip. . . .

Crisis Nine months after I joined the company as a financial plan- ner, we were put “in play” by a raider and, after a fierce bidding war, were acquired in a hostile takeover. Our acquirer was a private company controlled by the eldest son of an entrepreneur of legendary wealth and ability, so we had no inkling at the time of the roller-coaster ride that lay ahead of us. We were unaware that not only did the son not have the support of his father in this venture but also he had neglected to consult his two brothers, who

Chapter 5: Interorganizational Relationships 201

were joint owners of the acquiring company! As he had taken on $300 million of debt to do the deal, this left each of the brothers on the hook for a personal guarantee of $100 million. They were not amused, and it showed!

Within days of the deal, we were inundated by waves of consultants, lawyers, and accountants: each shareholder seemed to have his or her own panel of advisers. After six weeks of intensive analysis, it was clear that far too much had been paid for us and that the transaction was vastly overleveraged. At the start of the deal, the acquirer had approached our bankers and asked them if they wanted a piece of the “action.” Concerned at the possible loss of our banking business and eager to be associated with such a prominent family, our bankers had agreed to provide the initial financing on a handshake. Now, as they saw the detailed numbers for the first time and became aware of the dissent among the shareholders, they withdrew their support and demanded their money back. We needed to refinance $300 million of debt—fast. . . .

Change The takeover and the subsequent merger of our new own- er’s moribund steel-fabricating operations into Hugh Russel changed our agenda completely. We had new shareholders (who fought with each other constantly), new bankers, and new businesses in an environment of soaring interest rates and plummeting demand for our products and services. Almost overnight, the corporation went from a growth- oriented, acquisitive, earnings-driven operation to a bro- ken, cash-starved company, desperate to survive. Closures, layoffs, downsizing, delayering, asset sales, and “ratio- nalization” became our new priorities. . . . At the head office, the clarity of jobs vanished. For example, I had been hired to do financial forecasting and raise capital in the equity markets, but with the company a financial mess, this clearly could not be done. For all of us, the future looked dangerous and frightening as bankruptcy, both personal and corporate, loomed ahead.

And so it was in an atmosphere of crisis that Wayne Mang, the new president (Archie Russel and Peter Foster left the organization soon after the deal), gathered the first group of managers together to discuss the situation. Wayne Mang had been in the steel business for many years and was trusted and respected by the Hugh Russel people. An accountant by training, he used to call himself the “person- nel manager” to underscore his belief in both the ability of people to make the difference in the organization and the responsibility of line management to make this happen. The hastily called first meeting consisted of people whom Wayne respected and trusted from all over the organiza- tion. They had been selected without regard for their posi- tion in the old hierarchy.

The content and style of that first meeting were a rev- elation to many! Few of them had ever been summoned

to the head office for anything but a haranguing over their budgets. Now they were being told the complete gory details of the company’s situation and, for the first time, being treated as if they had something to contribute. Wayne asked for their help.

During that first meeting, we counted nineteen major issues confronting the corporation. None of them fell under a single functional area. We arranged ourselves into task forces to deal with them. I say “arranged ourselves” because that was the way it seemed to happen. Individuals volunteered without coercion to work on issues in which they were interested or for which their skills were rel- evant. They also volunteered others who were not at the meeting but, it was thought, could help. There was some guidance—each task force had one person from the head office whose function it was to report what was hap- pening back to the “center”—and some members found themselves on too many task forces, which required that substitutes be found. But that was the extent of the con- scious management of the process.

The meeting broke up at 2:00 a.m., when we all went home to tell our incredulous spouses what had happened. . . .

The cross-functional project team rapidly became our preferred method of organizing new initiatives, and at the head office, the old formal structure virtually disap- peared. The teams could be formed at a moment’s notice to handle a fast-breaking issue and dissolved just as quickly. We found, for example, that even when we weren’t hav- ing formal meetings, we seemed to spend most of our time talking to each other informally. Two people would start a conversation in someone’s office, and almost before you knew it, others had wandered in and a small group session was going. Later on, we called these events “bubbles”; they became our equivalent of campfire meetings. . . .

Later, when I became executive vice president, Wayne and I deliberately shared an office so we could each hear what the other was doing in real time and create an envi- ronment in which “bubbles” might form spontaneously. As people wandered past our open door, we would wave them in to talk; others would wander in after them. The content of these sessions always had to do with our predicament, both corporate and personal. It was serious stuff, but the atmosphere was light and open. Our fate was potentially a bad one, but at least it would be shared. All of us who were involved then cannot remember ever having laughed so much. We laughed at ourselves and at the desperate situation. We laughed at the foolishness of the bankers in having financed such a mess, and we laughed at the antics of the feuding shareholders, whose outrageous manners and language we learned to mimic to perfection.

I think it was the atmosphere from these informal ses- sions that gradually permeated all our interactions—with employees, bankers, suppliers, everyone with whom we

202 Part 3: Open System Design Elements

came into contact. Certainly, we often had tough meetings, filled with tension and threat, but we were always able to “bootstrap” ourselves back up emotionally at the informal debriefings afterward. . . .

Perhaps the best example of both the change in structure and the blurring of the boundaries of the organization was our changing relationships with our bankers. In the begin- ning, at least for the brief time that the loan was in good standing, the association was polite and at arm’s length. Communication was formal. As the bank realized the full horror of what it had financed (a process that took about 18 months), the relationship steadily grew more hostile. Senior executives of the bank became threatening, spelling out what actions they might take if we did not solve our problem. This hostility culminated in an investigation by the bank for possible fraud (a standard procedure in many banks when faced with a significant loss).

Throughout this period, we had seen a succession of different bankers, each of whom had been assigned to our account for a few months. As a result of our efforts to brief every new face that appeared, we had built a signifi- cant network of contacts within the bank with whom we had openly shared a good deal of information and opinion. When no fraud was found, the bank polled its own people on what to do. Our views presented so coherently by our people (because everyone knew what was going on), and shared so widely with so many bankers, had an enormous influence on the outcome of this process. The result was the formation of a joint company-bank team to address a shared problem that together we could solve. The boundary between the corporation and the bank was now blurred: to an outside observer, it would have been unclear where the corporation ended and the bank began. . . .

Our corporation had extensive formal reporting sys- tems to allow the monitoring of operations on a regular basis. After the takeover, these systems required substantial modifications. For example . . . we had to report our results to the public every quarter at a time when we were losing nearly 2 million dollars a week! We knew that unless we got to our suppliers ahead of time, they could easily panic and refuse us credit. Hasty moves on their part could have had fatal consequences for the business.

In addition, our closure plans for plants all over Canada and the United States brought us into contact with unions and governments in an entirely different way. We realized that we had no option but to deal with these audiences in advance of events.

I have already described how our relationship with the bankers changed as a result of our open communication. We found exactly the same effect with these new audiences. Initially, our major suppliers could not understand why we had told them we were in trouble before we had to. We succeeded, however, in framing the situation in a way that

enlisted their cooperation in our survival, and by the time the “war story” was news, we had their full support. Similarly, most government and union organizations were so pleased to be involved in the process before announcements were made that they bent over backward to be of assistance. Just as had been the case with the bank, we set up joint task forces with these “outside” agencies to resolve what had become shared problems. A significant contributor to our ability to pull this off was the high quality of our internal communica- tion. Everyone on the teams knew the complete, up-to-date picture of what was happening. An outside agency could talk to anyone on a team and get the same story. In this way, we constructed a formidable network of contacts, many of whom had special skills and experience in areas that would turn out to be of great help to us in the future.

The addition of multiple networks to our information sys- tems enhanced our ability both to gather and to disseminate information. The informality and openness of the networks, together with the high volume of face-to-face dialogues, gave us an early-warning system with which to detect hurt feel- ings and possible hostile moves on the part of shareholders, suppliers, nervous bankers, and even customers. This infor- mation helped us head off trouble before it happened. The networks also acted as a broadcast system through which we could test plans and actions before announcing them for- mally. In this way, not only did we get excellent suggestions for improvement, but everyone felt that he or she had been consulted before action was taken. . . .

We had a similar experience with a group of people outside the company during the hectic last six months of 1983, when we were trying to finalize a deal for the share- holders and bankers to sell the steel distribution business to new owners. The group of people in question comprised the secretaries of the numerous lawyers and accountants involved in the deal. . . .

We made these secretaries part of the network, briefing them in advance on the situation, explaining why things were needed, and keeping them updated on the progress of the deal. We were astounded at the cooperation we received: our calls were put through, our messages received prompt responses, and drafts and opinions were produced on time. In the final event, a complex deal that should have taken nine months to complete was done in three. All of this was accomplished by ordinary people going far beyond what might have been expected of them. . . .

We had been thrust into crisis without warning, and our initial activities were almost entirely reactions to issues that imposed themselves upon us. But as we muddled along in the task forces, we began to find that we had unex- pected sources of influence over what was happening. The changing relationship with the bank illustrates this neatly. Although we had no formal power in that situation, we found that by framing a confusing predicament in a coherent

Chapter 5: Interorganizational Relationships 203

way, we could, via our network, influence the outcomes of the bank’s decisions. The same applied to suppliers: by briefing them ahead of time and presenting a reasonable scenario for the recovery of their advances, we could influ- ence the decisions they would make.

Slowly we began to realize that, although we were powerless in a formal sense, our networks, together with our own internal coherence, gave us an ability to get things done invisibly. As we discussed the situation with all the parties involved, a strategy began to emerge. A complicated financial/tax structure would allow the bank to “manage” its loss and give it an incentive not to call on the share- holders’ personal guarantees. The core steel distribution business could be refinanced in the process and sold to new owners. The wrangle between the shareholders could be resolved, and each could go his or her own way. All that had to be done was to bring all the parties together, includ- ing a buyer for the steel business, and have them agree that this was the best course to follow. Using our newfound skills, we managed to pull it off.

It was not without excitement: at the last minute, the shareholders raised further objections to the deal. Only the bank could make them sell, and they were reluctant to do so, fearful that they might attract a lawsuit. Discreet calls to the major suppliers, several of whose executives were on the board of the bank, did the trick. “This busi- ness needs to be sold and recapitalized,” the suppliers were told. “If the deal does not go through, you should probably reduce your credit exposure.” The deal went through. By the end of 1983, we had new owners, just in time to benefit from the general business recovery. The ordeal was over.

*Source: Reprinted by permission of Harvard Business School Press. From Crisis and Renewal: Meeting the Challenge of Organizational Change, by David K. Hurst (Boston: Harvard Business School Press, 1995), pp. 53–73. Copyright © 1995 by the Harvard Business School Publishing Corporation; all rights reserved.

Text not available due to copyright restrictions

204 Part 3: Open System Design Elements


1. “SAP and Microsoft Tighten Bonds,” IT Week (November 20, 2006), 1; Miguel Helft, “Yahoo Is Joining An Alliance That Has Google As Leader,” The New York Times (March 26, 2008), C7.

2. Douglas Quenqua, “The Force Lives On, As Do the Toys,” The New York Times (July 1, 2008), C2; “Star Wars: The Clone Wars and McDonald’s Join Forces for an Intergalactic Happy Meal Experience,” PR Newswire (August 14, 2008); and Mike Scott, “‘Clone Wars’ Is More Marketing Than Movie,” Times-Picayune (August 15, 2008), 5.

3. Christine Oliver, “Determinants of Interorganizational Relationships: Integration and Future Directions,” Academy of Management Review 15 (1990), 241–265.

4. James Moore, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems (New York: HarperCollins, 1996).

5. John Jurgensen, “The Family Guy Goes Online,” The Wall Street Journal (September 5, 2006), W1.

6. Jonathan Hughes and Jeff Weiss, “Simple Rules for Making Alliances Work,” Harvard Business Review (November 2007), 122–131; Howard Muson, “Friend? Foe? Both?


Text not available due to copyright restrictions

Chapter 5: Interorganizational Relationships 205

The Confusing World of Corporate Alliances,” Across the Board (March–April 2002), 19–25; and Devi R. Gnyawali and Ravindranath Madhavan, “Cooperative Networks and Competitive Dynamics: A Structural Embeddedness Perspective,” Academy of Management Review 26, no. 3 (2001), 431–445.

7. Thomas Petzinger, Jr., The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace (New York: Simon & Schuster, 1999), 53–54.

8. James Moore, “The Death of Competition,” Fortune (April 15, 1996), 142–144.

9. Brian Goodwin, How the Leopard Changed Its Spots: The Evolution of Complexity (New York: Touchstone, 1994), 181, quoted in Petzinger, The New Pioneers, 53.

10. Phred Dvorak and Evan Ramstad, “TV Marriage: Behind Sony-Samsung Rivalry, An Unlikely Alliance Develops,” The Wall Street Journal (January 3, 2006), A1.

11. Sumantra Ghoshal and Christopher A. Bartlett, “Changing the Role of Top Management: Beyond Structure and Process,” Harvard Business Review (January–February 1995), 86–96.

12. “Toward a More Perfect Match: Building Successful Leaders by Effectively Aligning People and Roles,” Hay Group Working Paper (2004); and “Making Sure the Suit Fits,” Hay Group Research Brief (2004). Available from Hay Group, The McClelland Center, 116 Huntington Avenue, Boston, MA 02116, or at

13. Hughes and Weiss, “Simple Rules for Making Alliances Work.”

14. Susan Greco and Kate O’Sullivan, “Independents’ Day,” Inc. (August 2002), 76–83.

15. J. Pfeffer and G. R. Salancik, The External Control of Organizations: A Resource Dependence Perspective (New York: Harper & Row, 1978).

16. Definition based on Steven A. Melnyk and David R. Denzler, Operations Management: A Value Driven Approach (Burr Ridge, Ill.: Irwin, 1996): 613.

17. Patricia J. Daugherty, R. Glenn Richey, Anthony S. Roath, Soonhong Min, Haozhe Chen, Aaron D. Arndt, and Stefan E. Gencehv, “Is Collaboration Paying Off for Firms?” Business Horizons 49, no. 2 (January–February 2006), 61–70.

18. Jim Turcotte, Bob Silveri, and Tom Jobson, “Are You Ready for the E-Supply Chain?” APICS–The Performance Advantage (August 1998): 56–59.

19. “The AMR Research Supply Chain Top 25 for 2008,”, accessed on May 30, 2008.

20. This discussion is based on Matthew Schifrin, “The Big Squeeze,” Forbes (March 11, 1996), 45–46; Wendy Zellner with Marti Benedetti, “CLOUT!” BusinessWeek (December 21, 1992), 62–73; Kevin Kelly and Zachary Schiller with James B. Treece, “Cut Costs or Else,” BusinessWeek (March 22, 1993), 28–29; and Lee Berton, “Push from Above,” The Wall Street Journal (May 23, 1996), R24.

21. Doreen Carvajal, “Small Publishers Feel Power of Amazon’s ‘Buy’ Button,” The New York Times (June 16, 2008), C7.

22. Mitchell P. Koza and Arie Y. Lewin, “The Co-Evolution of Network Alliances: A Longitudinal Analysis of an International Professional Service Network,” Center for Research on New Organizational Forms, Working Paper 98–09–02; and Kathy Rebello with Richard Brandt, Peter Coy, and Mark Lewyn, “Your Digital Future,” BusinessWeek (September 7, 1992), 56–64.

23. Amol Sharma and Vishesh Kumar, “Big Tech Firms to Invest in Wireless,” The Wall Street Journal (May 7, 2008), B1.

24. Christine Oliver, “Determinants of Inter- organizational Relationships: Integration and Future Directions,” Academy of Management Review, 15 (1990), 241–265; Ken G. Smith, Stephen J. Carroll, and Susan Ashford, “Intra- and Interorganizational Cooperation: Toward a Research Agenda,” Academy of Management Journal, 38 (1995), 7–23; and Ken G. Smith, Stephen J. Carroll, and Susan Ashford, “Intra- and Interorganizational Cooperation: Toward a Research Agenda,” Academy of Management Journal 38 (1995), 7–23.

25. Timothy M. Stearns, Alan N. Hoffman, and Jan B. Heide, “Performance of Commercial Television Stations as an Outcome of Interorganizational Linkages and Environmental Conditions,” Academy of Management Journal 30 (1987), 71–90; and David A. Whetten and Thomas K. Kueng, “The Instrumental Value of Interorganizational Relations: Antecedents and Consequences of Linkage Formation,” Academy of Management Journal 22 (1979), 325–344.

26. Martin Fackler, “Nintendo Changes Direction, and It Appears to Be Paying Off,” The New York Times (June 8, 2007), C1.

27. Alice Dragoon, “A Travel Guide to Collaboration,” CIO (November 15, 2004), 68–75.

28. Elizabeth Olson, “OMG! Cute Boys, Kissing Tips and Lots of Pics, As Magazines Find a Niche,” The New York Times (May 28, 2007): C1.

29. Keith G. Provan and H. Brinton Milward, “A Preliminary Theory of Interorganizational Network Effectiveness: A Comparative of Four Community Mental Health Systems,” Administrative Science Quarterly 40 (1995), 1–33.

30. Peter Smith Ring and Andrew H. Van de Ven, “Developmental Processes of Corporate Interorganizational Relationships,” Academy of Management Review 19 (1994), 90–118; Jeffrey H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review (July– August 1996), 42–56; Peter Grittner, “Four Elements of Successful Sourcing Strategies” Management Review (October 1995), 41–45; Myron Magnet, “The New Golden Rule of Business,” Fortune (February 21, 1994), 60–64; and Mick Marchington and Steven Vincent, “Analysing the Influence of Institutional, Organizational and Interpersonal Forces in Shaping Inter-Organizational Relationships,” Journal of Management Studies 41, no. 6 (September 2004), 1029–1056.

31. Nick Bunkley, “Chrysler and Nissan Agree to Vehicle- Building Pact,” The New York Times (April 15, 2008), C5.

206 Part 3: Open System Design Elements

32. Dan Mankin and Susan G. Cohen, “Business Without Boundaries: Collaboration Across Organizations,” Journal of Organizational Excellence (Spring 2006), 63–78.

33. Philip Siekman, “The Snap-Together Business Jet,” Fortune (January 21, 2002), 104[A]–104[H].

34. This section draws from Joel A. C. Baum, “Organizational Ecology,” in Stewart R. Clegg, Cynthia Hardy, and Walter R. Nord, eds., Handbook of Organization Studies (Thousand Oaks, Calif.: Sage, 1996); Jitendra V. Singh, Organizational Evolution: New Directions (Newbury Park, Calif.: Sage, 1990); Howard Aldrich, Bill McKelvey, and Dave Ulrich, “Design Strategy from the Population Perspective,” Journal of Management 10 (1984), 67–86; Howard E. Aldrich, Organizations and Environments (Englewood Cliffs, N.J.: Prentice Hall, 1979); Michael Hannan and John Freeman, “The Population Ecology of Organizations,” American Journal of Sociology 82 (1977), 929–964; Dave Ulrich, “The Population Perspective: Review, Critique, and Relevance,” Human Relations 40 (1987), 137–152; Jitendra V. Singh and Charles J. Lumsden, “Theory and Research in Organizational Ecology,” Annual Review of Sociology 16 (1990), 161–195; Howard E. Aldrich, “Understanding, Not Integration: Vital Signs from Three Perspectives on Organizations,” in Michael Reed and Michael D. Hughes, eds., Rethinking Organizations: New Directions in Organizational Theory and Analysis (London: Sage, 1992); Jitendra V. Singh, David J. Tucker, and Robert J. House, “Organizational Legitimacy and the Liability of Newness,” Administrative Science Quarterly 31 (1986), 171–193; and Douglas R. Wholey and Jack W. Brittain, “Organizational Ecology: Findings and Implications,” Academy of Management Review 11 (1986), 513–533.

35. Derek S. Pugh and David J. Hickson, Writers on Organizations (Thousand Oaks, Calif.: Sage, 1996); and Lex Donaldson, American Anti-Management Theories of Organization (New York: Cambridge University Press, 1995).

36. Jim Collins, “The Secret of Enduring Greatness,” Fortune (May 5, 2008), 72–76.

37. Hannan and Freeman, “The Population Ecology of Organizations.”

38. Gary McWilliams, “Wal-Mart Era Wanes Amid Big Shifts in Retail,” The Wall Street Journal (October 3, 2007), A1.

39. Ashby Jones, “Corporate News—Legal Beat: Newcomer Law Firms Are Creating Niches with Blue-Chip Clients,” The Wall Street Journal (July 2, 2008), B4.

40. David Stires, “Fallen Arches,” Fortune (April 29, 2002), 74–76.

41. David J. Tucker, Jitendra V. Singh, and Agnes G. Meinhard, “Organizational Form, Population Dynamics, and Institutional Change: The Founding Patterns of Voluntary Organizations,” Academy of Management Journal 33 (1990), 151–178; Glenn R. Carroll and Michael T. Hannan, “Density Delay in the Evolution of Organizational

Populations: A Model and Five Empirical Tests,” Administrative Science Quarterly 34 (1989), 411–430; Jacques Delacroix and Glenn R. Carroll, “Organizational Foundings: An Ecological Study of the Newspaper Industries of Argentina and Ireland,” Administrative Science Quarterly 28 (1983), 274–291; Johannes M. Pennings, “Organizational Birth Frequencies: An Empirical Investigation,” Administrative Science Quarterly 27 (1982), 120–144; David Marple, “Technological Innovation and Organizational Survival: A Population Ecology Study of Nineteenth-Century American Railroads,” Sociological Quarterly 23 (1982), 107–116; and Thomas G. Rundall and John O. McClain, “Environmental Selection and Physician Supply,” American Journal of Sociology 87 (1982), 1090–1112.

42. Robert D. Hof and Linda Himelstein, “eBay vs. Amazon. com,” BusinessWeek (May 31, 1999), 128–132; and Maria Mallory with Stephanie Anderson Forest, “Waking Up to a Major Market,” BusinessWeek (March 23, 1992), 70–73.

43. Arthur G. Bedeian and Raymond F. Zammuto, Organizations: Theory and Design (Orlando, Fla.: Dryden Press, 1991); and Richard L. Hall, Organizations: Structure, Process and Outcomes (Englewood Cliffs, N.J.: Prentice- Hall, 1991).

44. M. Tina Dacin, Jerry Goodstein, and W. Richard Scott, “Institutional Theory and Institutional Change: Introduction to the Special Research Forum,” Academy of Management Journal 45, no. 1 (2002), 45–47. Thanks to Tina Dacin for her material and suggestions for this section of the chapter.

45. J. Meyer and B. Rowan, “Institutionalized Organizations: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83 (1990), 340–363.

46. Mark C. Suchman, “Managing Legitimacy: Strategic and Institutional Approaches,” Academy of Management Review 20 (1995), 571–610.

47. Anne Fisher, “America’s Most Admired Companies,” Fortune (March 17, 2008), 665–67; and Survey Results from Harris Interactive and the Reputation Institute, reported in Ronald Alsop, “In Business Ranking, Some Icons Lose Luster,” The Wall Street Journal (November 15, 2004), B1.

48. Richard J. Martinez and Patricia M. Norman, “Whither Reputation? The Effects of Different Stakeholders,” Business Horizons 47, no. 5 (September–October 2004), 25–32.

49. Pamela S. Tolbert and Lynne G. Zucker, “The Institutionalization of Institutional Theory,” in Stewart R. Clegg, Cynthia Hardy, and Walter R. Nord, eds., Handbook of Organization Studies (Thousand Oaks, Calif.: Sage, 1996).

50. Pugh and Hickson, Writers on Organizations; and Paul J. DiMaggio and Walter W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” American Sociological Review 48 (1983), 147–160.

Chapter 5: Interorganizational Relationships 207

51. This section is based largely on DiMaggio and Powell, “The Iron Cage Revisited”; Pugh and Hickson, Writers on Organizations; and W. Richard Scott, Institutions and Organizations (Thousand Oaks, Calif.: Sage, 1995).

52. Ellen R. Auster and Mark L. Sirower, “The Dynamics of Merger and Acquisition Waves,” The Journal of Applied Behavioral Science 38, no. 2 (June 2002), 216–244; and Monica Yang and Mary Anne Hyland, “Who Do Firms Imitate? A Multilevel Approach to

Examining Sources of Imitation in Choice of Mergers and Acquisitions,” Journal of Management 32, no. 3 (June 2006), 381–399.

53. Barry M. Staw and Lisa D. Epstein, “What Bandwagons Bring: Effects of Popular Management Techniques on Corporate Performance, Reputation, and CEO Pay,” Administrative Science Quarterly 45, no. 3 (September 2000), 523–560.

54. Karen Donovan, “Pushed by Clients, Law Firms Step Up Diversity Efforts,” The New York Times (July 21, 2006), C6.


Entering the Global Arena Motivations for Global Expansion • Stages of International Development • Global Expansion through International Strategic Alliances

Designing Structure to Fit Global Strategy Model for Global versus Local Opportunities • International Division • Global Product Division Structure • Global Geographic Division Structure • Global Matrix Structure

Building Global Capabilities The Global Organizational Challenge • Global Coordination Mechanisms

Cultural Differences in Coordination and Control National Value Systems • Three National Approaches to Coordination and Control

The Transnational Model of Organization

Design Essentials

© K

en K


Designing Organizations

for the International Environment

Chapter 6

Saks Incorporated planned to open a store in China in time for the Beijing Olympics, but the games came and went before construction ever got underway. Bertlesmann AG’s Gruner � Jahr division, Europe’s largest magazine publisher, tried for decades to extend that success into the United States but eventually sold off its U.S. assets in what one reporter called “a billion dollar experiment gone horribly wrong.” The entrepreneurial firm First Net Card was established with a goal of providing credit for online transactions to anyone in the world, but managers found the complica- tions of dealing with international credit and banking laws mind-boggling. After two years and a mountain of legal research, First Net was licensed to provide credit only in the United States, Canada, and Britain.1

That’s the reality of international business. When an organization decides to do business in another country, managers face a whole new set of challenges and roadblocks. They sometimes find that transferring their domestic success interna- tionally requires a totally different approach. Wal-Mart entered South Korea with high hopes in 1996, but ten years later sold all its South Korean stores to a local retailer and withdrew from that country.2 It is not the only successful organization to have pulled out of one or another foreign market battered and bruised, managers scratching their heads over what went wrong.

Succeeding on a global scale isn’t easy. Managers have to make tough decisions about strategic approach, how best to get involved in international markets, and how to design the organization to reap the benefits of international expansion. Despite the challenges, managers in most organizations think the potential rewards outweigh the risks. U.S.-based firms set up foreign operations to produce goods and services needed by consumers in other countries, as well as to obtain lower costs or technical know-how for producing products and services to sell domestically. In return, companies from Japan, Germany, the United Kingdom, and other countries

Managing by Design Questions

1 The only way an organization can reasonably expect to be successful in different countries is to customize its products and services to suit the local interests, preferences, and values in each country.

1 2 3 4 5


2 It is an especially diffi cult challenge to work on a global team to coordinate one’s own activities and share new ideas and insights with colleagues in different divisions around the world.

1 2 3 4 5


3 If management practices and coordination techniques work well for a company in its home country, they probably will be successful in the company’s international divisions as well.

1 2 3 4 5


209 209

Before reading this chapter, please circle your opinion below for each of the following statements:

210 Part 3: Open System Design Elements

compete with American organizations on their own turf as well as abroad. Interest in international business is stronger today than ever before.

Purpose of This Chapter

This chapter explores how managers design the organization for the international environment. We begin by looking at some of the primary motivations for organi- zations to expand internationally, the typical stages of international development, and the use of strategic alliances as a means for international expansion. Then, the chapter examines global strategic approaches and the application of various structural designs for global advantage. Next, we discuss some of the specific chal- lenges global organizations face, mechanisms for addressing them, and cultural differences that influence the organization’s approach to designing and managing a global firm. Finally, the chapter takes a look at the transnational model, a type of global organization that achieves high levels of the varied capabilities needed to succeed in a complex and volatile international environment.


Only a few decades ago, many companies could afford to ignore the international envi- ronment. Today, the number of companies doing business on a global scale is increasing and the awareness of national borders decreasing, as reflected in the frequency of for- eign participation at the top management level. Fourteen of the Fortune 100 companies are now run by foreign-born CEOs. Citigroup picked India-born Vikram S. Pandit as its CEO, Alcoa’s top leader was born in Morocco, and Dow Chemical is headed by a native Australian.3 The trend is seen in other countries as well. Wales-born Howard Stringer was named Sony’s first non-Japanese CEO in 2004, and Nancy McKinstry is the first American to head Dutch publisher Wolters Kluwer.4

Why has global experience at the top become so important to organizations? Because the world is rapidly developing into a unified global field, and companies need top leaders who have a global outlook. The Book Mark discusses some of the factors contributing to our increasingly-interconnected world and how this interconnection affects organizations. Extraordinary advancements in communications, technology, and transportation have created a new, highly competitive landscape. Products can be made and sold anywhere in the world, communications are instant, and product- development life cycles are growing shorter. No company is isolated from global influ- ence. Some large so-called American companies such as Coca-Cola, IBM, McDonald’s, and Procter & Gamble rely on international sales for a substantial portion of their sales and profits. Yum! Brands, which owns Pizza Hut, Taco Bell, KFC, and Long John Silver’s, gets 55 percent of its profits from overseas, and managers expect that to grow to 70 percent within a decade.5 On the other hand, organizations in other countries search for customers in the United States. Vietnam-based Kinh Do Foods Corporation operates fast food restaurants in the Philippines, Singapore, and South Korea, as well as Vietnam, and managers are aiming at both the British and U.S. markets. Russia’s Lukoil has hundreds of gas stations in New Jersey and Pennsylvania and plans further expansion. India’s top technology-services companies get 60 to 70 percent of their sales from North America, while Armonk, New York-based IBM gets about the same percentage of its revenues from overseas.6

Chapter 6: Designing Organizations for the International Environment 211

The global competitive playing field is being leveled. How fast is globalization happening? Three-time Pulitzer-Prize winning New York Times columnist Thomas L. Friedman started working on the second edition of his best-selling book, The World Is Flat, before the first edition was barely off the press. However, Friedman asserts that the forces caus- ing this accelerated phase of globalization actually began to unfold in the final years of the twentieth century.

WHAT MAKES THE WORLD GO FLAT? Friedman outlines ten forces that flattened the world, which he calls Flatteners. Many of these forces are directly or indi- rectly related to advanced technology, including:

• Work Flow Software. A dizzying array of software pro- grams enable computers to easily communicate with one another. That’s what makes it possible for a company like animation studio Wild Brain to make films with a team of production employees spread all over the world, or for Boeing airplane factories to automatically resupply global customers with parts. It means companies can create global virtual offices, as well as outsource pieces of their operations to whoever can do the job best and most effi- ciently, no matter in which country they are located.

• Supply-Chaining. Work flow software also enhances supply-chaining, the horizontal collaboration among sup- pliers, retailers, and customers that became a phenom- enon in the 1990s. In turn, the more supply chains grow and proliferate, the flatter the world becomes. Supply

chaining forces the adoption of common standards and technologies among companies so that every link can interact seamlessly.

• The Steroids. Friedman refers to a variety of new tech- nologies as steroids “because they are amplifying and turbocharging all the other flatteners.” Perhaps the most significant element is the wireless revolution, which enables you to “take everything that had been digitized, made virtual and personal, and do it from anywhere.” As Alan Cohen, senior vice president at Airespace says, “Your desk goes with you everywhere you are now. And the more people have the ability to push and pull informa- tion from anywhere to anywhere faster, the more barriers to competition and communication disappear.”

HOW TO BENEFIT FROM A FLATTER WORLD A flatter, interconnected world means employees and organi- zations can collaborate and compete more successfully than ever, whatever their size and wherever they are located. But the benefits of a flatter world are not automatic. Friedman offers strategies for how companies can align themselves with the new reality of globalization. He warns U.S. companies (and employees) that they should embrace the idea that there will no longer be such a thing as an American firm or an American job. In a flat world, the best companies are the best collaborators.

The World Is Flat, by Thomas L. Friedman, is published by Farrar, Straus & Giroux.

The World Is Flat: A Brief History of the Twenty-First Century By Thomas L. Friedman


Motivations for Global Expansion

Economic, technological, and competitive forces have combined to push many com- panies from a domestic to a global focus. The importance of the global environment for today’s organizations is reflected in the shifting global economy. As one indica- tion, Fortune magazine’s list of the Global 500, the world’s 500 largest companies by revenue, indicates that economic clout is being diffused across a broad global scale. In Exhibit 6.1, each circle represents the total revenues of all Global 500 companies in each country. Although the United States accounts for the majority of the Global 500 revenues, a number of less-developed countries are growing stronger. China, for example, had fifteen companies on the Global 500 in 2003, the year this chart was pro- duced by Fortune, compared to only three companies on the list ten years earlier. China has grown even stronger since then, with twenty-nine companies on the 2008 Global

212 Part 3: Open System Design Elements

Briefcase As an organization manager, keep this guideline in mind:

Consider building an international presence to realize economies of scale, exploit economies of scope, or obtain scarce or low-cost production factors such as labor and raw materials.

500 list. Japan, on the other hand, has continued to decline in importance, dropping from 149 companies in 1993 to eighty-two in 2003 and down to sixty-four in 2008.7

As power continues to shift, organizations are viewing participation in global business as a necessity. Indeed, in some industries, a company can be successful only by succeeding on a global scale. In general, three primary factors motivate companies to expand internationally: economies of scale, economies of scope, and low-cost production factors.8

Economies of Scale. Building a global presence expands an organization’s scale of operations, enabling it to realize economies of scale. The trend toward large orga- nizations was initially sparked by the Industrial Revolution, which created pressure in many industries for larger factories that could seize the benefits of economies of scale offered by new technologies and production methods. Through large-volume production, these industrial giants were able to achieve the lowest possible cost per unit of production. However, for many companies, domestic markets no longer pro- vide the high level of sales needed to maintain enough volume to achieve scale econ- omies. In an industry such as automobile manufacturing, for example, a company would need a tremendous share of the domestic market to achieve scale economies.

Source: Fortune Global 500, Copyright 2004 Time Inc. All rights reserved.

Canada $185 (13)

Britain $1,079


Britain/ Netherlands

$250 (2) Netherlands $388 (12)

Switzerland $382 (12)

Italy $300 (8)

China $358 (15)

South Korea $266 (11)

Note: Each circle represents the total revenues of all Global 500 companies in that country in 2003. The number in parentheses indicates the number of companies that country had on the Global 500 list in that year.

Brazil $61 (3)

Sweden $96 (6) Finland

$71 (4)

India $60 (4)

Malaysia $26 (1)

Australia $107 (7)

Mexico $49 (1)

Germany $1,363


Japan $2,181


France $1,246

(37) Spain $162 (7)

United States Revenue: $5,841 billion

Number of companies on Global 500: (189)

EXHIBIT 6.1 The Global Economy as Reflected in the Fortune Global 500.

Chapter 6: Designing Organizations for the International Environment 213

Thus, an organization such as Ford Motor Company is forced to become interna- tional in order to survive. Economies of scale also enable companies to obtain vol- ume discounts from suppliers, lowering the organization’s cost of production.

Economies of Scope. A second factor is the enhanced potential for exploiting economies of scope. Scope refers to the number and variety of products and services a company offers, as well as the number and variety of regions, countries, and markets it serves. Having a presence in multiple countries provides marketing power and synergy com- pared to the same size firm that has presence in fewer countries. For example, an adver- tising agency with a presence in several global markets gains a competitive edge serving large companies that span the globe. Or consider the case of McDonald’s, which has to obtain nearly identical ketchup and sauce packets for its restaurants around the world. A supplier that has a presence in every country McDonald’s serves has an advantage because it provides cost, consistency, and convenience benefits to McDonald’s, which does not have to deal with a number of local suppliers in each country. Transmatic Manufacturing Co., based in Holland, Michigan, supplies high-precision metal parts to companies such as Motorola and Delphi Corp. When Transmatic began losing contracts to suppliers in China, where the large U.S. firms had manufacturing facili- ties, owner P. J. Thompson decided to make the international leap. “My customers are multinational and they want me to be multinational too,” says Thompson.9

Economies of scope can also increase a company’s market power as compared to competitors, because the company develops broad knowledge of the cultural, social, economic, and other factors that affect its customers in varied locations and can provide specialized products and services to meet those needs.

Low-Cost Production Factors. The third major force motivating global expansion relates to factors of production. One of the earliest, and still one of the most power- ful, motivations for U.S. companies to invest abroad is the opportunity to obtain raw materials, labor, and other resources at the lowest possible cost. Organizations have long turned overseas to secure raw materials that were scarce or unavailable in their home country. In the early twentieth century, for example, tire companies went abroad to develop rubber plantations to supply tires for America’s growing automobile industry. Today, U.S. paper manufacturers such as Weyerhaeuser and U.S. Paper Co., forced by environmental concerns to look overseas for new timberlands, are managing millions of acres of tree farms in New Zealand and other areas.10

Many companies also turn to other countries as a source of cheap labor. Textile manufacturing in the United States is now practically nonexistent as companies have shifted most production to Asia, Mexico, Latin America, and the Caribbean, where the costs of labor and supplies are much lower. Aerospace-related companies are building factories in Mexico, where they get cheaper labor and favorable gov- ernment regulations. U.S. makers of toys, consumer electronics, and other goods outsource work to China and other low-wage countries. Manufacturing of non- upholstered furniture is rapidly following the same pattern. Companies are clos- ing plants in the United States and importing high-quality wooden furniture from China, where as many as thirty workers can be hired for the cost of one cabinet- maker in the United States.11 But the trend isn’t limited to manufacturing. A number of growing service firms in India, for example, write software, perform consulting work, integrate back-office solutions, and handle technical support for some of the biggest corporations in the United States—and do the work for 40 percent less than comparable U.S. firms.12

214 Part 3: Open System Design Elements

Other organizations have gone international in search of lower costs of capital, sources of cheap energy, reduced government restrictions, or other factors that lower the company’s total production costs. Companies can locate facilities wherever it makes the most economic sense in terms of needed employee education and skill levels, labor and raw materials costs, and other production factors. Companies such as Yahoo! and Google, for instance, can’t find the technological brainpower they need in the United States, so they are building research and development facilities in India to take advantage of highly-skilled workers.13 Automobile manufacturers such as Toyota, BMW, General Motors, and Ford have built plants in South Africa, Brazil, and Thailand, where they typically get dramatically lower costs for factors such as land, water, and electricity.14 Foreign companies also come to the United States to obtain favorable circumstances. Kalexsyn, a small chemical research firm in Kalamazoo, Michigan, does about 25 percent of its business with Western European biotechnology firms that need high quality instead of low prices.15 Japan’s Honda and Toyota, South Korea’s Samsung Electronics, and the Swiss drug company Novartis have all built plants or research centers in the United States to take advantage of tax breaks, find skilled workers, or be closer to major customers and suppliers.16

Stages of International Development

No company can become a global giant overnight. Managers have to consciously adopt a strategy for global development and growth. Organizations enter foreign markets in a variety of ways and follow diverse paths. However, the shift from domestic to global typically occurs through stages of development, as illustrated in Exhibit 6.2.17 In stage one, the domestic stage, the company is domestically oriented, but managers are aware of the global environment and may want to consider initial foreign involvement to expand production volume and realize economies of scale. Market potential is limited and is primarily in the home country. The structure of the company is domestic, typically functional or divisional, and initial foreign sales are handled through an export department. The details of freight forwarding, cus- toms problems, and foreign exchange are handled by outsiders.

I. Domestic

II. International

III. Multinational

IV. Global

Strategic Orientation Domestically oriented Export-oriented, multidomestic

Multinational Global

Stage of Development Initial foreign involvement

Competitive positioning

Explosion Global

Structure Domestic structure plus export department

Domestic structure plus international division

Worldwide geographic product

Matrix, transnational

Market Potential Moderate, mostly domestic

Large, multidomestic Very large, multinational

Whole world

Source: Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, Ohio: South-Western, 2002), 8–9; and Theodore T. Herbert, “Strategy and Multinational Organization Structure: An Interorganizational Relationships Perspective,” Academy of Management Review 9 (1984), 259–271.

EXHIBIT 6.2 Four Stages of International Evolution

Chapter 6: Designing Organizations for the International Environment 215

In stage two, the international stage, the company takes exports seriously and begins to think multidomestically. Multidomestic means competitive issues in each country are independent of other countries; the company deals with each coun- try individually. The concern is with international competitive positioning com- pared with other firms in the industry. At this point, an international division has replaced the export department, and specialists are hired to handle sales, service, and warehousing abroad. Multiple countries are identified as a potential market. For example, Purafil, a small company with headquarters in Doraville, Georgia, sells air filters that remove pollution and cleanse the air in fifty different countries. Although Purafil is small, it maintains contracts with independent sales firms in the various countries who know the local markets and cultures.18 The company first began exporting in the early 1990s and now gets 60 percent of its revenues from overseas.

In stage three, the multinational stage, the company has extensive experience in a number of international markets and has established marketing, manufacturing, or research and development (R&D) facilities in several foreign countries. The organi- zation obtains a large percentage of revenues from sales outside the home country. Explosive growth occurs as international operations take off, and the company has business units scattered around the world along with suppliers, manufacturers, and distributors. Examples of companies in the multinational stage include Siemens of Germany, Sony of Japan, and Coca-Cola of the United States. Wal-Mart, although it is the world’s biggest company, is just moving into the multinational stage, with only about 22 percent of sales from international business in fiscal year 2006 (the most recent figures available). However, international sales are the fastest growing part of the retail giant’s business.19

The fourth and ultimate stage is the global stage, which means the company transcends any single country. The business is not merely a collection of domestic industries; rather, subsidiaries are interlinked to the point where competitive posi- tion in one country significantly influences activities in other countries.20 Truly global companies no longer think of themselves as having a single home country, and, indeed, have been called stateless corporations.21 This represents a new and dramatic evolution from the multinational company of the 1960s and 1970s. For example, the CEO of digital-media company Thomson SA says he doesn’t want people to think of the company as being based any particular place.22

Global companies operate in truly global fashion, and the entire world is their marketplace. Global companies such as Nestlé, Royal Dutch/Shell, Unilever, and Matsushita Electric may operate in more than a hundred countries. The structural problem of holding together this huge complex of subsidiaries scattered thousands of miles apart is immense. Organization structure for global companies can be extremely complex and often evolves into an international matrix or transnational model, which will be discussed later in this chapter.

Global Expansion through International Strategic Alliances

One of the most popular ways companies get involved in international operations is through international strategic alliances. Companies in rapidly changing industries such as media and entertainment, pharmaceuticals, biotechnology, and software might have hundreds of these relationships.23

216 Part 3: Open System Design Elements

Typical alliances include licensing, joint ventures, and consortia.24 For example, when entering new markets, particularly in developing areas of the world, retailers such as Saks Fifth Avenue and Barneys New York limit their risks by licensing their names to foreign partners. Saks has licensed stores in Riyadh and Dubai, Saudi Arabia, and in Mexico, for instance, and Barneys has a licensed store in Japan. Both firms, as well as other U.S.-based department stores, are currently making a strong international push in light of weak sales and stiff competition in the United States.25 A joint venture is a separate entity created with two or more active firms as sponsors. This is a popular approach to sharing development and production costs and penetrating new markets. Joint ventures may be with either customers or competitors.26 Competing firms Sprint, Deutsche Telecom, and Telecom France cooperate with each other and with several smaller firms in a joint venture that serves the telecommunication needs of global corporations in sixty-five countries.27

Navistar International Corporation, based in Warrenville, Illinois, formed a joint venture with rival Mahindra & Mahindra Ltd., a fast-growing equipment maker in India, to build trucks and buses for export.28 And Wal-Mart hopes to get a foothold in India’s fast-growing but difficult retail market through a joint venture with Bharti Enterprises to establish Bharti Wal-Mart Private Limited.29

Companies often seek joint ventures to take advantage of a partner’s knowledge of local markets, to achieve production cost savings through economies of scale, to share complementary technological strengths, or to distribute new products and ser- vices through another country’s distribution channels. Another growing approach is for companies to become involved in consortia, groups of independent companies— including suppliers, customers, and even competitors—that join together to share skills, resources, costs, and access to one another’s markets.30 Consortia are often used in other parts of the world, such as the keiretsu family of corporations in Japan. In Korea, these interlocking company arrangements are called chaebol.


As we discussed in Chapter 3, an organization’s structure must fit its situation by providing sufficient information processing for coordination and control while focus- ing employees on specific functions, products, or geographic regions. Organization design for international firms follows a similar logic, with special interest in global versus local strategic opportunities.

Model for Global versus Local Opportunities

When organizations venture into the international domain, managers strive to formu- late a coherent global strategy that will provide synergy among worldwide operations for the purpose of achieving common organizational goals. One dilemma they face is choosing whether to emphasize global standardization versus national responsiveness. Managers must decide whether they want each global affiliate to act autonomously or whether activities should be standardized across countries. These decisions are reflected in the choice between a globalization versus a multidomestic global strategy.

The globalization strategy means that product design, manufacturing, and marketing strategy are standardized throughout the world.31 For example, the Japanese took business away from Canadian and American companies by developing

Briefcase As an organization manager, keep this guideline in mind:

Develop international strategic alliances, such as licensing, joint ventures, part- nerships, and con- sortia, as fast and inexpensive ways to become involved in international sales and operations.

Chapter 6: Designing Organizations for the International Environment 217


similar high-quality, low-cost products for all countries. The Canadian and American companies incurred higher costs by tailoring products to specific countries. Black & Decker became much more competitive internationally when it standardized its line of power hand tools. Other products, such as Coca-Cola, are naturals for globalization, because only advertising and marketing need to be tailored for different regions. In general, services are less suitable for globalization because different customs and habits often require a different approach to providing service. This was part of Wal-Mart’s trouble in the South Korean market. The retailer continued to use Western- style displays and marketing strategies, whereas successful South Korean retailers build bright, eye-catching displays and hire clerks to promote their goods using megaphones and hand-clapping. Wal-Mart similarly flubbed in Indonesia, where it closed its stores after only a year. Customers didn’t like the brightly lit, highly organized stores, and, because no haggling was permitted, they perceived the goods as being overpriced.32

Other companies have also begun shifting away from a strict globalization strat- egy. Economic and social changes, including a backlash against huge global corpo- rations, have prompted consumers to be less interested in global brands and more in favor of products that have a local feel.33 However, a globalization strategy can help a manufacturing organization reap economy-of-scale efficiencies by standardizing product design and manufacturing, using common suppliers, introducing products around the world faster, coordinating prices, and eliminating overlapping facilities. By sharing technology, design, suppliers, and manufacturing standards worldwide in a coordinated global automotive operation, Ford saved $5 billion during the first three years.34 Similarly, Gillette Company, which makes grooming products such as the Mach3 shaving system for men and the Venus razor for women, has large pro- duction facilities that use common suppliers and processes to manufacture products whose technical specifications are standardized around the world.35

1 The only way an organization can reasonably expect to be successful in different countries is to customize its products and services to suit the local interests, preferences, and values in each country.

ANSWER: Disagree. It is the case that people around the world often want products and services that are tailored to their local needs and interests, and many organizations are quite successful by responding to local market demands. However, other international organizations attain competitive advantages by using the same product design and marketing strategies in many countries throughout the world.

A multidomestic strategy means that competition in each country is handled inde- pendently of competition in other countries. Thus, a multidomestic strategy would encourage product design, assembly, and marketing tailored to the specific needs of each country. Some companies have found that their products do not thrive in a single global market. For instance, people in different countries have very differ- ent expectations for personal-care products such as deodorant or toothpaste. Many people in parts of Mexico use laundry detergent for washing dishes. Food companies such as Kraft have discovered that they must tailor their cookies and crackers to dif- ferent markets. Kraft’s Oreo, the top-selling cookie in the United States, sold poorly

218 Part 3: Open System Design Elements

in China until the company reformulated it to suit local tastes. Now, it’s the top seller in that country too.36

Different global organization designs, as well, are better suited to the need for either global standardization or national responsiveness. Recent research on more than 100 international firms based in Spain has provided further support for the connection between international structure and strategic focus.37 The model in Exhibit 6.3 illustrates how organization design and international strategy fit the needs of the environment.38

Companies can be characterized by whether their product and service lines have potential for globalization, which means advantages through worldwide standard- ization. Companies that sell similar products or services across many countries have a globalization strategy. On the other hand, some companies have products and services appropriate for a multidomestic strategy, which means local-country advantages through differentiation and customization to meet local needs.

As indicated in Exhibit 6.3, when forces for both global standardization and national responsiveness in many countries are low, simply using an international division with the domestic structure is an appropriate way to handle international business. For some industries, however, technological, social, or economic forces may create a situation in which selling standardized products worldwide provides a basis for competitive advantage. In these cases, a global product structure is appro- priate. This structure provides product managers with authority to handle their product lines on a global basis and enables the company to take advantage of a uni- fied global marketplace. In other cases, companies can gain competitive advantages through national responsiveness—by responding to unique needs in the various countries in which they do business. For these companies, a worldwide geographic structure is appropriate. Each country or region will have subsidiaries modifying

Text not available due to copyright restrictions

Chapter 6: Designing Organizations for the International Environment 219

products and services to fit that locale. A good illustration is the advertising firm of Ogilvy & Mather, which divides its operations into four primary geographic regions because advertising approaches need to be modified to fit the tastes, preferences, cul- tural values, and government regulations in different parts of the world.39 Children are frequently used to advertise products in the United States, but this approach in France is against the law. The competitive claims of rival products regularly seen on U.S. television would violate government regulations in Germany.40

In many instances, companies need to respond to both global and local opportuni- ties simultaneously, in which case the global matrix structure can be used. Part of the product line may need to be standardized globally and other parts tailored to the needs of local countries. Let’s discuss each of the structures in Exhibit 6.3 in more detail.

International Division

As companies begin to explore international opportunities, they typically start with an export department that grows into an international division. The international divi- sion has a status equal to the other major departments or divisions within the com- pany and is illustrated in Exhibit 6.4. Whereas the domestic divisions are typically


Human Resources

Electrical Products Division

Scientific Products Division

Medical Products Division

International Division

Europe (Sales)

Brazil (Subsidiary)

Mideast (Sales)

Staff (Legal, Licensing)

Corporate Finance

Research & Development

EXHIBIT 6.4 Domestic Hybrid Structure with International Division

220 Part 3: Open System Design Elements

organized along functional or product lines, the international division is organized according to geographic interests, as illustrated in the exhibit. The international divi- sion has its own hierarchy to handle business (licensing, joint ventures) in various countries, selling the products and services created by the domestic divisions, opening subsidiary plants, and in general moving the organization into more sophisticated international operations.

Although functional structures are often used domestically, they are less frequently used to manage a worldwide business.41 Lines of functional hierarchy running around the world would extend too long, so some form of product or geographic structure is used to subdivide the organization into smaller units. Firms typically start with an international department and, depending on their strategy, later use product or geographic division structures or a matrix. One study found that 48 percent of organizations identified as global leaders use divisional structures, while 28 percent reported using matrix structures.42

Global Product Division Structure

In a global product structure, the product divisions take responsibility for global operations in their specific product area. This is one of the most commonly used structures through which managers attempt to achieve global goals because it pro- vides a fairly straightforward way to effectively manage a variety of businesses and products around the world. Managers in each product division can focus on orga- nizing for international operations as they see fit and directing employees’ energy toward their own division’s unique set of global problems or opportunities.43 In addition, the structure provides top managers at headquarters with a broad perspec- tive on competition, enabling the entire corporation to respond more rapidly to a changing global environment.44

With a global product structure, each division’s manager is responsible for planning, organizing, and controlling all functions for the production and distribution of its products for any market around the world. As we saw in Exhibit 6.3, the global product structure works best when the company has oppor- tunities for worldwide production and sale of standard products for all markets, thus providing economies of scale and standardization of production, marketing, and advertising.

Eaton Corporation has used a form of worldwide product structure, as illus- trated in Exhibit 6.5. In this structure, the automotive components group, industrial group, and so on are responsible for manufacture and sale of products worldwide. The vice president of the international division is responsible for coordinators in each region, including a coordinator for Japan, Australia, South America, and northern Europe. The coordinators find ways to share facilities and improve production and delivery across all product lines sold in their regions. These coordinators fulfill the same function as integrators described in Chapter 3.

The product structure is great for standardizing production and sales around the globe, but it also has problems. Often the product divisions do not work well together, competing instead of cooperating in some countries; and some countries may be ignored by product managers. The solution adopted by Eaton Corporation of using country coordinators who have a clearly defined role is a superb way to overcome these problems.

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

Choose a global prod- uct structure when the organization can gain competitive advantages through a globalization strategy (global integration). Choose a global geographic structure when the company has advantages with a multidomestic strategy (national responsive- ness). Use an interna- tional division when the company is pri- marily domestic and has only a few interna- tional operations.

Chapter 6: Designing Organizations for the International Environment 221

Global Geographic Division Structure

A regionally based organization is well suited to companies that want to emphasize adaptation to regional or local market needs through a multidomestic strategy, as illustrated earlier in Exhibit 6.3. The global geographic structure divides the world into geographic regions, with each geographic division reporting to the CEO. Each division has full control of functional activities within its geographic area. For example, Nestlé, with headquarters in Switzerland, puts great emphasis on the autonomy of regional managers who know the local culture. The largest branded food company in the world, Nestlé rejects the idea of a single global market and uses a geographic structure to focus on the local needs and competition in each country. Local managers have the authority to tinker with a product’s flavoring, packaging, portion size, or other elements as they see fit. Many of the company’s 8,000 brands are registered in only one country.45


President International

Regional Coordinators

Global Truck

Components Group

Global Materials Handling


Global Instruments

Product Group

Global Automotive Components


Global Industrial


Finance Administration

&Engineering Law

Corporate Relations


Source: Based on New Directions in Multinational Corporate Organization (New York: Business International Corp., 1981).

EXHIBIT 6.5 Partial Global Product Structure Used by Eaton Corporation

222 Part 3: Open System Design Elements

Companies that use this type of structure have typically been those with mature product lines and stable technologies. They can find low-cost manufacturing within countries, as well as meet different needs across countries for marketing and sales. However, several business and organizational trends have led to a broadening of the kinds of companies that use the global geographic structure.46 The growth of service organizations has outpaced manufacturing for several years, and services by their nature must occur on a local level. In addition, to meet new competitive threats, many manufacturing firms are emphasizing the ability to customize their products to meet specific needs, which requires a greater emphasis on local and regional responsiveness. All organizations are compelled by current environmental and competitive challenges to develop closer relationships with customers, which may lead companies to shift from product-based to geographic-based structures. IBM, for example, is creating new regional divisions for developing markets, such as the Middle East, Asia, the Americas, Africa, and Eastern Europe. CEO Sam Palmisano believes developing relationships with governments, utilities, and other organizations in each region is critical to helping IBM tailor software and services to the needs of these emerging and fast-growing information technology markets.47

The problems encountered by senior management using a global geographic structure result from the autonomy of each regional division. For example, it is dif- ficult to do planning on a global scale—such as new-product R&D—because each division acts to meet only the needs of its region. New domestic technologies and products can be difficult to transfer to international markets because each division thinks it will develop what it needs. Likewise, it is difficult to rapidly introduce products developed offshore into domestic markets, and there is often duplication of line and staff managers across regions. Because regional divisions act to meet spe- cific needs in their own areas, tracking and maintaining control of costs can be a real problem. The following example illustrates how executives at Colgate-Palmolive overcame some of the problems associated with the geographic structure.

For several years, Colgate-Palmolive Company, which manufactures and markets personal-care, household, and specialty products, used a global geographic struc-

ture of the form illustrated in Exhibit 6.6. Colgate has a long, rich history of international involvement and has relied on regional divisions in North America, Europe, Latin America, the Far East, and the South Pacific to stay on the competitive edge. Well over half of the company’s total sales are generated outside of the United States.

The regional approach supports Colgate’s cultural values, which emphasize individual autonomy, an entrepreneurial spirit, and the ability to act locally. Each regional president reports directly to the chief operating officer, and each division has its own staff functions such as human resources (HR), finance, manufacturing, and marketing. Colgate handled the problem of coordination across geographic divisions by creating an international business development group that has responsibility for long-term company planning and worldwide product coordina- tion and communication. It used several product team leaders, many of whom had been former country managers with extensive experience and knowledge. The product leaders are essen- tially coordinators and advisors to the geographic divisions; they have no power to direct, but they have the ability and the organizational support needed to exert substantial influence. The addition of this business development group quickly reaped positive results in terms of more rapid introduction of new products across all countries and better, lower-cost marketing.

Colgate- Palmolive Company


Chapter 6: Designing Organizations for the International Environment 223

The success of the international business development group prompted Colgate’s top management to add two additional coordinating positions—a vice president of corporate development to focus on acquisitions, and a worldwide sales and marketing group that coordinates sales and marketing initiatives across all geographic locations. With these worldwide positions added to the structure, Colgate maintains its focus on each region and achieves global coordination for overall planning, faster product introductions, and enhanced sales and marketing efficiency.48 ■

Global Matrix Structure

We’ve discussed how Eaton used a global product division structure and found ways to coordinate across worldwide divisions. Colgate-Palmolive used a global geo- graphic division structure and found ways to coordinate across geographic regions. Each of these companies emphasized a single dimension. Recall from Chapter 3

Chairman, President, & CE0

Latin America

Chief Operating Officer

South-Pacific Region

Far East

International Business


Worldwide Sales &


Corporate Development

Corporate Staff

Europe North


Human Resources




Human Resources




Human Resources




Human Resources




Human Resources




Source: Based on Robert J. Kramer, Organizing for Global Competitiveness: The Geographic Design (New York: The Conference Board, 1993), 30.

EXHIBIT 6.6 Global Geographic Structure of Colgate- Palmolive Company

224 Part 3: Open System Design Elements

that a matrix structure provides a way to achieve vertical and horizontal coordi- nation simultaneously along two dimensions. A global matrix structure is similar to the matrix described in Chapter 3, except that for multinational corporations the geographic distances for communication are greater and coordination is more complex.

The matrix works best when pressure for decision making balances the interests of both product standardization and geographic localization and when coordina- tion to share resources is important. For many years, Asea Brown Boveri (ABB), an electrical equipment corporation headquartered in Zurich, used a global matrix structure that worked extremely well to coordinate a 200,000-employee company operating in more than 140 countries.

ABB has given new meaning to the notion of “being local worldwide.” ABB owns 1,300 subsidiary companies, divided into 5,000 profit centers located in 140 coun-

tries. ABB’s average plant has fewer than 200 workers and most of the company’s 5,000 profit centers contain only forty to fifty people, meaning almost everyone stays close to the customer. For many years, ABB used a complex global matrix structure similar to Exhibit 6.7 to achieve worldwide economies of scale combined with local flexibility and responsiveness.

At the top are the chief executive officer and an international committee of eight top managers, who hold frequent meetings around the world. Along one side of the matrix are sixty-five or so business areas located worldwide, into which ABB’s products and services are grouped. Each business area leader is responsible for handling business on a global scale, allocating export markets, establishing cost and quality standards, and creating mixed-nationality teams to solve problems. For example, the leader for power transformers is responsible for twenty-five factories in sixteen countries.

Along the other side of the matrix is a country structure; ABB has more than 100 country managers, most of them citizens of the country in which they work. They run national compa- nies and are responsible for local balance sheets, income statements, and career ladders. The German president, for example, is responsible for 36,000 people across several busi- ness areas that generate annual revenues in Germany of more than $4 billion.

The matrix structure converges at the level of the 1,300 local companies. The presi- dents of local companies report to two bosses—the business area leader, who is usually located outside the country, and the country president, who runs the company of which the local organization is a subsidiary.

ABB’s philosophy is to decentralize things to the lowest levels. Global managers are generous, patient, and multilingual. They must work with teams made up of different nation- alities and be culturally sensitive. They craft strategy and evaluate performance for people and subsidiaries around the world. Country managers, by contrast, are regional line manag- ers responsible for several country subsidiaries. They must cooperate with business area managers to achieve worldwide efficiencies and the introduction of new products. Finally, the presidents of local companies have both a global boss—the business area manager— and a country boss, and they learn to coordinate the needs of both.49 ■

ABB is a large, successful company that achieved the benefits of both product and geographic organizations through this matrix structure. However, over the past several years, as ABB has faced increasingly complex competitive issues, leaders

Asea Brown Boveri Ltd.



Chapter 6: Designing Organizations for the International Environment 225

have transformed the company toward a complex structure called the transnational model, which will be discussed later in this chapter.

In the real world, as with the domestic hybrid structure, many international firms such as ABB, Colgate, IBM, Nestlé, or Eaton Corp. apply a global hybrid or mixed structure, in which two or more different structures or elements of different structures are used. Hybrid structures are typical in highly volatile environments. Siemens AG of Germany, for example, combines elements of functional, geographic, and product divisions to respond to dynamic market conditions in the multiple countries where it operates.50

Organizations that operate on a global scale frequently have to make adjust- ments to their structures to overcome the challenges of doing business in a global environment. In the following sections, we will look at some specific challenges orga- nizations face in the global arena and mechanisms for successfully addressing them.


There are many instances of well-known companies that have trouble transferring successful ideas, products, and services from their home country to the international domain. We talked earlier about the struggles Wal-Mart is facing internationally, but Wal-Mart is not alone. PepsiCo set a five-year goal to triple its international soft-drink revenues and boldly expanded its presence in international markets. Yet five years later, the company had withdrawn from some of those markets and had to take a nearly $1 billion loss from international beverage operations.51 Hundreds of American companies that saw Vietnam as a tremendous international oppor- tunity in the mid-1990s are now calling it quits amid heavy losses. Political and

Local Divisions or Subsidiary Companies

International Executive Committee


Power Transformers


Norway Argentina/Brazil Spain/PortugalBusiness Areas

Country Managers


EXHIBIT 6.7 Global Matrix Structure

226 Part 3: Open System Design Elements

cultural differences sidetracked most of the ventures. Only a few companies, such as Citigroup’s Citibank unit and Caterpillar’s heavy-equipment business, have found success in that country.52 Managers taking their companies international face a tre- mendous challenge in how to capitalize on the incredible opportunities that global expansion presents.

The Global Organizational Challenge

Exhibit 6.8 illustrates the three primary segments of the global organizational chal- lenge: greater complexity and differentiation, the need for integration, and the prob- lem of transferring knowledge and innovation across a global firm. Organizations have to accept an extremely high level of environmental complexity in the inter- national domain and address the many differences that occur among countries. Environmental complexity and country variations require greater organizational differentiation, as described in Chapter 4.

At the same time, organizations must find ways to effectively achieve coordina- tion and collaboration among far-flung units and facilitate the development and transfer of organizational knowledge and innovation for global learning.53 Although many small companies are involved in international business, most international companies grow very large, creating a huge coordination problem. Exhibit 6.9 provides some understanding of the size and impact of international firms by com- paring the revenues of several large multinational companies with the gross domestic product (GDP) of selected countries.

Complexity and Differentiation

Need for Integration

Transfer of Knowledge and Innovation

EXHIBIT 6.8 The Global Organizational Challenge

Chapter 6: Designing Organizations for the International Environment 227

Increased Complexity and Differentiation. When organizations enter the interna- tional arena, they encounter a greater level of internal and external complexity than anything experienced on the domestic front. Companies have to create a structure to operate in numerous countries that differ in economic development, language, political systems and government regulations, cultural norms and values, and infra- structure such as transportation and communication facilities. For example, com- puter maker Lenovo, incorporated in Hong Kong, has nine operational hubs, and its top managers and corporate functions are spread around the world. The CEO is in Singapore, the chairman in Raleigh, North Carolina, and the chief financial officer in Hong Kong. Worldwide marketing is coordinated in India.54

One factor increasing the complexity for organizations is the growing consumer demand for products and services that meet local needs and preferences. Even American fast food chains, once considered ultimate examples of standardization for a world market, have felt the need to be more responsive to local and national differences. KFC sells chicken in China, but you can also find congee soup and fried dough there for breakfast. McDonald’s sells Rice Burgers in Taiwan, a deep-fried patty of beef ragout called the McKroket in the Netherlands, a Maharaja Mac made with chicken instead of beef in India, and the Bulgogi Burger, a pork patty marinated in soy-sauce, in South Korea. Restaurant design and décor may also vary widely in different countries.55

All the complexity in the international environment is mirrored in a greater internal organizational complexity. Recall from Chapter 4 that, as environments become more complex and uncertain, organizations grow more highly differenti- ated, with many specialized positions and departments to cope with specific sectors in the environment. Top management might need to set up specialized departments to deal with the diverse government, legal, and accounting regulations in various countries, for example. More boundary-spanning departments are needed to sense and respond to the external environment. Companies operating globally frequently disperse operations such as engineering, design, manufacturing, marketing, and

Company Revenue* Country Annual GDP†

Exxon Mobil Wal-Mart Royal Dutch Shell BP Toyota ING Group General Motors General Electric

$404.6 billion $378.8 billion $355.8 billion $291.4 billion $262.3 billion $212.0 billion $181.1 billion $172.7 billion

Egypt Greece Malaysia Nigeria Algeria Peru Finland Kazakhstan

$403.9 billion $370.2 billion $355.2 billion $292.6 billion $269.2 billion $218.8 billion $182.0 billion $167.6 billion

*This size comparison is assuming revenues were valued at the equivalent of GDP. †Gross domestic product.

Source: “Count: Really Big Business,” Fast Company (December 2008–January 2009), 46.

EXHIBIT 6.9 Comparison of Leading Multinational Companies and Selected Countries, 2008 (in U.S. dollars)

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sales around the world. In particular, many organizations have set up global prod- uct development systems to achieve greater access to international expertise and design products that are better suited to global markets. A Deloitte Research study found that 48 percent of North American and Western European manufacturers surveyed had set up engineering operations in other countries.56 In addition, organi- zations might implement a variety of strategies, a broader array of activities, and a much larger number of products and services on an international level.

Need for Integration. As organizations become more differentiated, with mul- tiple products, divisions, departments, and positions scattered across numerous countries, managers face a tremendous integration challenge. Integration refers to the quality of collaboration across organizational units. The question is how to achieve the coordination and collaboration that is necessary for a global organi- zation to reap the benefits of economies of scale, economies of scope, and labor and production cost efficiencies that international expansion offers. Even in a domestic firm, high differentiation among departments requires that more time and resources be devoted to achieving coordination because employees’ attitudes, goals, and work orientations differ widely. Imagine what it must be like for an international organization, whose operating units are divided not only by goals and work attitudes but by geographic distance, time differences, cultural values, and perhaps even language as well. Recall how Colgate-Palmolive created several specific units to achieve coordination and integration among regional divisions. Other companies, too, must find ways to share information, ideas, new products, and technologies across the organization. Consider how IBM is striving for bet- ter integration as it tries to fend off growing competition from Indian technology services companies.

IBM has more than 200,000 employees around the world, but that doesn’t help if the skills needed by a specific client in London or New York or Bangalore can’t be

rapidly put into action because the experts are located elsewhere. In its globalization effort, IBM created geographic divisions around the world that each

had their own administration, manufacturing, and service operations. Yet, as competition has increased, particularly from companies such as India’s Tata Consultancy Services and Infosys Technologies, that approach is too slow and too costly. Thus, IBM has embarked on a massive project to go one step further and organize employees along skill lines rather than just geography. “Our customers need us to put the right skills in the right place at the right time,” says Senior Vice President Robert W. Moffatt Jr., the manager in charge of the operation.

The new organization involves bunching employees into “competency centers” spread around the world, so that people with specific skills are grouped together. The approach enables IBM to take advantage of low-cost labor in some places, yet also have highly-skilled employees in close proximity to clients. Instead of each country division having its own com- plete workforce, some people are drawn from the competency centers long enough to com- plete a specific client project. IBM has even come up with mathematical formulas to identify who should be pulled from the various centers to work on a particular project. Managers believe their new approach, which they call “globally integrated operations,” can help lower costs, provide superior service, and give IBM an edge over fast-growing rivals.57 ■



Chapter 6: Designing Organizations for the International Environment 229

All organizations working globally, like IBM, face the challenge of getting all the pieces working together in the right way at the right time and in the right place. Another issue is how to share knowledge and innovations across global divisions.

Transfer of Knowledge and Innovation. The third piece of the international chal- lenge is for organizations to learn from their international experiences by sharing knowledge and innovations across the enterprise. The diversity of the international environment offers extraordinary opportunities for learning and the development of diverse capabilities.

Organizational units in each location acquire the skills and knowledge to meet environmental challenges that arise in that particular locale. Much of that knowl- edge, which may be related to product improvements, operational efficiencies, tech- nological advancements, or myriad other competencies, is relevant across multiple countries, so organizations need systems that promote the transfer of knowledge and innovation across the global enterprise. One good example comes from Procter & Gamble. Liquid Tide was one of P&G’s most successful U.S. product launches in the 1980s, but the product came about from the sharing of innovations developed in diverse parts of the firm. Liquid Tide incorporated a technology for helping to sus- pend dirt in wash water from P&G headquarters in the United States, the formula for its cleaning agents from P&G technicians in Japan, and special ingredients for fighting mineral salts present in hard water from company scientists in Brussels.58

However, getting employees to transfer ideas and knowledge across national boundaries can be exceedingly challenging. Consider what happened in one virtual team made up of members from India, Israel, Canada, the United States, Singapore, Spain, Brussels, Great Britain, and Australia:

“Early on . . . team members were reluctant to seek advice from teammates who were still strangers, fearing that a request for help might be interpreted as a sign of incompetence. Moreover, when teammates did ask for help, assistance was not always forthcoming. One team member confessed to carefully calculating how much information she was willing to share. Going the extra mile on behalf of a virtual teammate, in her view, came at a high price of time and energy, with no guarantee of reciprocation.”59

This lack of trust among people scattered at different locations around the world is one primary reason why many organizations tap only a fraction of the potential that is available from the cross-border transfer of knowledge and innovation. Other reasons include:60

• Language barriers, cultural dissimilarities, and geographic distances can prevent managers from spotting the knowledge and opportunities that exist across dis- parate country units.

• Sometimes managers don’t appreciate the value of organizational integration and want to protect the interests of their own division rather than cooperate with other divisions.

• Divisions sometimes view knowledge and innovation as power and want to hold onto it as a way to gain an influential position within the global firm.

• The “not-invented-here” syndrome makes some managers reluctant to tap into the know-how and expertise of other units.

• Much of an organization’s knowledge is in the minds of employees and cannot easily be written down and shared with other units.

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Organizations have to encourage both the development and the sharing of knowledge, implement systems for tapping into knowledge wherever it exists, and share innovations to meet global challenges.

Global Coordination Mechanisms

Managers meet the global challenge of coordination and transferring knowledge and innovation across highly differentiated units in a variety of ways. Some of the most common are the use of global teams, stronger headquarters planning and con- trol, and specific coordination roles.

Global Teams. The popularity and success of teams on the domestic front allowed managers to see firsthand how this mechanism can achieve strong horizontal coor- dination, as described in Chapter 3, and thus recognize the promise teams held for coordination across a global firm as well. Global teams, also called transnational teams, are cross-border work groups made up of multiskilled, multinational members whose activities span multiple countries.61 Typically, teams are of two types: intercultural teams, whose members come from different countries and meet face to face, and vir- tual global teams, whose members remain in separate locations around the world and conduct their work electronically.62 Heineken formed the European Production Task Force, a thirteen-member team made up of multinational members, to meet regularly and come up with ideas for optimizing the company’s production facilities across Europe.63 Tandem Services uses virtual global teams of software developers who coor- dinate their work electronically so that the team is productive around the clock. Team members in London code a project and transmit the code each evening to members in the United States for testing. U.S. team members then forward the code they’ve tested to Tokyo for debugging. The next morning, the London team members pick up with the code debugged by their Tokyo colleagues, and another cycle begins.64

The most advanced and competitive use of global teams involves simultaneous contributions in three strategic areas.65 First, global teams help companies address the differentiation challenge, enabling them to be more locally responsive by pro- viding knowledge to meet the needs of different regional markets, consumer prefer- ences, and political and legal systems. At the same time, teams provide integration benefits, helping organizations achieve global efficiencies by developing regional or worldwide cost advantages and standardizing designs and operations across countries. Finally, these teams contribute to continuous organizational learning, knowledge transfer, and adaptation on a global level.

However, building effective global teams is not easy. Cultural and language dif- ferences can create misunderstandings, and resentments and mistrust can quickly derail the team’s efforts. Many times an “us against them” mentality develops, which is just the opposite of what organizations want from global teams.66 No wonder when the executive council of CIO magazine asked global chief information officers to rank their greatest challenges, managing virtual global teams ranked as the most pressing issue.67

Managers have to invest the time and energy to enable global teams to communi- cate and collaborate effectively. For example, managers at Nokia are careful to select people who have a collaborative mindset, and they form many teams with volunteers who are highly committed to the task or project. The company also tries to make sure some members of a team have worked together before, providing a base for trusting relationships. Making the best use of technology is critical. In addition to a virtual

Chapter 6: Designing Organizations for the International Environment 231

work space that team members can access twenty-four hours a day, Nokia provides an online resource where virtual workers are encouraged to post photos and share personal information. Given that the inability of members to get to know one another is one of the biggest barriers to effective global teamwork, encouraging and support- ing social networking has paid off for Nokia. In a study of fifty-two virtual teams in fifteen leading multinational companies, London Business School researchers found that Nokia’s teams were among the most effective, even though they were made up of people working in several different countries, across time zones and cultures.68

Headquarters Planning. A second approach to achieving stronger global coordination is for headquarters to take an active role in planning, scheduling, and control to keep the widely distributed pieces of the global organization working together and moving in the same direction. In one survey, 70 percent of global companies reported that the most important function of corporate headquarters was to “provide enterprise leadership.”69 Without strong leadership, highly autonomous divisions can begin to act like independent companies rather than coordinated parts of a global whole. To coun- teract this, top management may delegate responsibility and decision-making authority in some areas, such as adapting products or services to meet local needs, while main- taining strong control through centralized systems in other areas to provide the coordi- nation and integration needed.70 Plans, schedules, and formal rules and procedures can help ensure greater communication among divisions and with headquarters, as well as foster cooperation and synergy among far-flung units to achieve the organization’s goals in a cost-efficient way. Top managers can provide clear strategic direction, guide far-flung operations, and resolve competing demands from various units.

Expanded Coordination Roles. Organizations may also implement structural solu- tions to achieve stronger coordination and collaboration.71 Creating specific orga- nizational roles or positions for coordination is a way to integrate all the pieces of the enterprise to achieve a strong competitive position. In successful international firms, the role of top functional managers, for example, is expanded to include responsibility for coordinating across countries, identifying and linking the orga- nization’s expertise and resources worldwide. In an international organization, the manufacturing manager has to be aware of and coordinate with manufacturing operations of the company in various other parts of the world so that the com- pany achieves manufacturing efficiency and shares technology and ideas across

2 It is an especially diffi cult challenge to work on a global team to coordinate one’s own activities and share new ideas and insights with colleagues in different divisions around the world.

ANSWER: Agree. The problems of different languages, locations, cultural values, and business practices make membership on an international team especially diffi cult. Global teams can be effective only if members have the patience and skills to surmount the barriers and openly share information and ideas. Global teams made up of people who are culturally astute and genuinely want to coordi- nate and communicate with their counterparts in other countries perform better.


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

Use mechanisms such as global teams, headquarters planning, and specific coordination roles to provide needed coordination and integration among far-flung international units. Emphasize information and knowledge sharing to help the organization learn and improve on a global scale.

232 Part 3: Open System Design Elements

units. A new manufacturing technology developed to improve efficiency in Ford’s Brazilian operations may be valuable for European and North American plants as well. Manufacturing managers are responsible for being aware of new developments wherever they occur and for using their knowledge to improve the organization. Similarly, marketing managers, HR managers, and other functional managers at an international company are involved not only in activities for their particular loca- tion but in coordinating with their sister units in other countries as well.

Whereas functional managers coordinate across countries, country managers coordinate across functions. A country manager for an international firm has to coordinate all the various functional activities located within the country to meet the problems, opportunities, needs, and trends in the local market, enabling the organi- zation to achieve multinational flexibility and rapid response. The country manager in Venezuela for a global consumer products firm such as Colgate-Palmolive would coordinate everything that goes on in that country, from manufacturing to HR to marketing, to ensure that activities meet the language, cultural, government, and legal requirements of Venezuela. The country manager in Ireland or Canada would do the same for those countries. Country managers also help with the transfer of ideas, trends, products, and technologies that arise in one country and might have significance on a broader scale. Some organizations also use business integrators to provide coordination on a regional basis that might include several countries. These managers reach out to various parts of the organization to resolve problems and coordinate activities across groups, divisions, or countries.

Another coordination role is that of formal network coordinator to coordinate information and activities related to key customer accounts. These coordinators would enable a manufacturing organization, for example, to provide knowledge and integrated solutions across multiple businesses, divisions, and countries for a large retail customer such as Tesco, Wal-Mart, or Carrefour.72 Top managers in suc- cessful global firms also encourage and support informal networks and relationships to keep information flowing in all directions. Much of an organization’s informa- tion exchange occurs not through formal systems or structures but through informal channels and relationships. By supporting these informal networks, giving people across boundaries opportunities to get together and develop relationships and then ways to keep in close touch, executives enhance organizational coordination.

International companies today have a hard time staying competitive without strong interunit coordination and collaboration. Those firms that stimulate and support collaboration are typically better able to leverage dispersed resources and capabilities to reap operational and economic benefits.73 Benefits that result from interunit collaboration include the following:

• Cost savings. Collaboration can produce real, measurable results in the way of cost savings from the sharing of best practices across global divisions. For exam- ple, at BP, a business unit head in the United States improved inventory turns and cut the working capital needed to run U.S. service stations by learning the best practices from BP operations in the United Kingdom and the Netherlands.

• Better decision making. By sharing information and advice across divisions, managers can make better business decisions that support their own unit as well as the organization as a whole.

• Greater revenues. By sharing expertise and products among various divisions, organizations can reap increased revenues. BP again provides an example. More than seventy-five people from various units around the world flew to China to

Chapter 6: Designing Organizations for the International Environment 233

assist the team developing an acetic acid plant there. As a result, BP finished the project and began realizing revenues sooner than project planners had expected.

• Increased innovation. The sharing of ideas and technological innovations across units stimulates creativity and the development of new products and ser- vices. McDonald’s is taking an approach called “freedom within a framework” that allows regional and national managers to develop practices and products suited to the local area. The company then makes sure international managers have plenty of both formal and informal ways to communicate and share ideas. The Big Tasty, a whopping 5.5 oz. beef patty slathered in barbeque sauce and topped with three slices of cheese, was created in a test kitchen in Germany and launched in Sweden, but as word spread, the sandwich was adopted by restau- rants in places like Brazil, Italy, and Portugal, where it became a huge hit.74


Just as social and cultural values differ from country to country, the management values and organizational norms of international companies tend to vary depending on the organization’s home country. Organizational norms and values are influenced by the values in the larger national culture, and these in turn influence the organization’s struc- tural approach and the ways managers coordinate and control an international firm.

National Value Systems

Studies have attempted to determine how national value systems influence man- agement and organizations. One of the most influential was conducted by Geert Hofstede, who identified several dimensions of national value systems that vary widely across countries.75 More recent research by Project GLOBE (Global Leadership and Organizational Behavior Effectiveness) has supported and extended Hofstede’s assessment. Project GLOBE used data collected from 18,000 managers in 62 countries to identify 9 dimensions that explain cultural differences, including those identified by Hofstede.76 These studies provide managers with an understand- ing of key cultural differences that can enhance their and their organizations’ effec- tiveness on a global scale.77 Complete the questionnaire in the “How Do You Fit the Design?” box to see how prepared you are to work internationally.

Two dimensions that seem to have a strong impact within organizations are power distance and uncertainty avoidance. High power distance means that peo- ple accept inequality in power among institutions, organizations, and people. Low power distance means that people expect equality in power. High uncertainty avoid- ance means that members of a society feel uncomfortable with uncertainty and ambiguity and thus support beliefs that promise certainty and conformity. Low uncertainty avoidance means that people have a high tolerance for the unstructured, the unclear, and the unpredictable.

The value dimensions of power distance and uncertainty avoidance are reflected within organizations in beliefs regarding the need for hierarchy, centralized deci- sion making and control, formal rules and procedures, and specialized jobs.78 In countries that value high power distance, for example, organizations tend to be more hierarchical and centralized, with greater control and coordination from the

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

Appreciate cultural value differences and strive to use coordination mechanisms that are in tune with local values. When broader coordination mechanisms are needed, focus on education and corporate culture as ways to gain understanding and acceptance.

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top levels of the organization. On the other hand, organizations in countries that value low power distance are more likely to be decentralized. A low tolerance for uncertainty tends to be reflected in a preference for coordination through rules and procedures. Organizations in countries where people have a high tolerance for uncertainty typically have fewer rules and formal systems, relying more on informal networks and personal communication for coordination.

Are you ready to negotiate a sales contract with someone from another country? Coordinate a new product for use overseas? Companies large and small deal on a global basis. To what extent do you display the behaviors below? Please answer each item as Mostly True or Mostly False for you.

Are You Typically: Mostly True

Mostly False

1. Impatient? Do you have a short attention span? Do you want to keep moving to the next topic? _____ _____

2. A poor listener? Are you uncom- fortable with silence? Does your mind think about what you want to say next? _____ _____

3. Argumentative? Do you enjoy arguing for its own sake? _____ _____

4. Not familiar with cultural specif- ics in other countries? Do you have limited experience in other countries? _____ _____

5. Placing more emphasis on the short-term than on the long-term in your thinking and planning? _____ _____

6. Thinking that it is a waste of time getting to know someone person- ally before discussing business? _____ _____

7. Legalistic to win your point? Holding others to an agreement regardless of changing circumstances? _____ _____

8. Thinking “win/lose” when negoti- ating? Trying to win a negotiation at the other’s expense? _____ _____

Scoring: Give yourself one point for each Mostly True answer. A score of 3 or lower suggests that you may have international style and awareness. A score of 6 or higher suggests low presence or awareness with respect to other cultures.

Interpretation: A low score on this exercise is a good thing. American managers often display cross- cultural ignorance during business negotiations compared to counterparts from other countries. American habits can be disturbing, such as emphasizing areas of disagree- ment over agreement, spending little time understanding the views and interests of the other side, and adopting an adversarial attitude. Americans often like to leave a negotiation thinking they won, which can be embarrass- ing to the other side. For this quiz, a low score shows better international presence. If you answered “Mostly True” to three or fewer questions, then consider yourself ready to assist with an international negotiation. If you scored six or higher “Mostly True” responses, it is time to learn more about how business people behave in other national cultures before participating in international busi- ness deals. Try to develop greater focus on other peo- ple’s needs and an appreciation for different viewpoints. Be open to compromise and develop empathy for people who are different from you.

Source: Adapted from Cynthia Barnum and Natasha Wolniansky, “Why Americans Fail at Overseas Negotiations,” Management Review (October 1989), 54–57.

Are You Ready to Fill an International Role?dy to Fill an International Role? How Do You Fit the Design?

Chapter 6: Designing Organizations for the International Environment 235

Although organizations do not always reflect the dominant cultural values, stud- ies have found rather clear patterns of different management structures when com- paring countries in Europe, the United States, and Asia.

Three National Approaches to Coordination and Control

Let’s look at three primary approaches to coordination and control as represented by Japanese, American, and European companies.79 It should be noted that companies in each country use tools and techniques from each of the three coordination meth- ods. However, there are broad, general patterns that illustrate cultural differences.

Centralized Coordination in Japanese Companies. When expanding internation- ally, Japanese companies have typically developed coordination mechanisms that rely on centralization. Top managers at headquarters actively direct and control overseas operations, whose primary focus is to implement strategies handed down from headquarters. A recent study of R&D activities in high-tech firms in Japan and Germany supports the idea that Japanese organizations tend to be more centralized. Whereas the German firms leaned toward dispersing R&D groups out into different regions, Japanese companies tended to keep these activities centralized in the home country.80 This centralized approach enables Japanese companies to leverage the knowledge and resources located at the corporate center, attain global efficiencies, and coordinate across units to obtain synergies and avoid turf battles. Top manag- ers use strong structural linkages to ensure that managers at headquarters remain up to date and fully involved in all strategic decisions. However, centralization has its limits. As the organization expands and divisions grow larger, headquarters can become overloaded and decision making slows. The quality of decisions may also suffer as greater diversity and complexity make it difficult for headquarters to understand and respond to local needs in each region.

China is a rapidly growing part of the international business environment, and limited research has been done into management structures of Chinese firms. Many Chinese-based firms are still relatively small and run in a traditional family-like manner. However, similar to Japan, organizations typically reflect a distinct hierar- chy of authority and relatively strong centralization. Hierarchy plays an important role in Chinese culture and management, so employees feel obligated to follow

3 If management practices and coordination techniques work well for a company in its home country, they probably will be successful in the company’s international divisions as well.

ANSWER: Disagree. National culture has a tremendous impact on how people in different countries feel about issues of power and control, rules and proce- dures, and every other aspect of organizational life. Management practices and coordination and control techniques that work well in a country such as the United States might be ineffective or even offensive in a country such as Japan or China. Managers have to stretch out of their familiar comfort zone to succeed internationally.


236 Part 3: Open System Design Elements

orders directed from above.81 Interestingly, though, one study found that Chinese employees are loyal not just to the boss, but also to company policies.82 As Chinese organizations grow larger, more insight will be gained into how these firms handle the balance of coordination and control.

European Firms’ Decentralized Approach. A different approach has typically been taken by European companies. Rather than relying on strong, centrally directed coordination and control as in the Japanese firms, international units tend to have a high level of independence and decision-making autonomy. Companies rely on a strong mission, shared values, and informal personal relationships for coordination. Thus, great emphasis is placed on careful selection, training, and development of key managers throughout the international organization. Formal management and control systems are used primarily for financial rather than technical or operational control. Many European managers don’t appreciate headquarters taking control over operational issues. When SAP AG tried to assert a more centralized control system to speed up development of new software and fend off growing competition, German engineers rebelled at the loss of autonomy. “They said, ‘You don’t tell us what to do—we tell you what to build,’” one former executive recalls.83

With a decentralized approach, each international unit focuses on its local mar- kets, enabling the company to excel in meeting diverse needs. One disadvantage is the cost of ensuring, through training and development programs, that managers throughout a huge, global firm share goals, values, and priorities. Decision making can also be slow and complex, and disagreements and conflicts among divisions are more difficult to resolve.

The United States: Coordination and Control through Formalization. U.S.-based companies that have expanded into the international arena have taken still a third direction. Typically, these organizations have delegated responsibility to international divisions, yet retained overall control of the enterprise through the use of sophisticated management control systems and the development of special- ist headquarters staff. Formal systems, policies, standards of performance, and a regular flow of information from divisions to headquarters are the primary means of coordination and control. Decision making is based on objective data, poli- cies, and procedures, which provides for many operating efficiencies and reduces conflict among divisions and between divisions and headquarters. However, the cost of setting up complex systems, policies, and rules for an international organi- zation may be quite high. This approach also requires a larger headquarters staff for reviewing, interpreting, and sharing information, thus increasing overhead costs. Finally, standard routines and procedures don’t always fit the needs of new problems and situations. Flexibility is limited if managers pay so much attention to the standard systems that they fail to recognize opportunities and threats in the environment.

Clearly, each of these approaches has advantages. But as international organi- zations grow larger and more complex, the disadvantages of each tend to become more pronounced. Because traditional approaches have been inadequate to meet the demands of a rapidly changing, complex global environment, many large interna- tional companies are moving toward a transnational model of organization, which is highly differentiated to address the increased complexity of the global environ- ment, yet offers very high levels of coordination, learning, and transfer of organiza- tional knowledge and innovations.

Chapter 6: Designing Organizations for the International Environment 237


The transnational model represents the most advanced kind of international organi- zation. It reflects the ultimate in both organizational complexity, with many diverse units, and organizational coordination, with mechanisms for integrating the varied parts. The transnational model is useful for large, multinational companies with subsidiaries in many countries that try to exploit both global and local advantages as well as technological advancements, rapid innovation, and global learning and knowledge sharing. Rather than building capabilities primarily in one area, such as global efficiency, national responsiveness, or global learning, the transnational model seeks to achieve all three simultaneously. Dealing with multiple, interrelated, complex issues requires a complex form of organization and structure.

The transnational model represents the most current thinking about the kind of structure needed by highly complex global organizations such as Philips NV, illustrated in Exhibit 6.10. Incorporated in the Netherlands, Philips has hundreds of operating units all over the world and is typical of global companies such as Unilever, Matsushita, or Procter & Gamble.84 General Electric is shifting toward a transnational structure as it strives to become a truly global organization. CEO Jeff Immelt is dispersing operations around the world and shifting the giant firm’s culture and training programs toward a global outlook. As Christopher Bartlett, a Harvard professor who has studied GE, said, the company’s executives are learn- ing to manage a worldwide organization “as a network, not a centralized hub with foreign appendages.”85

The units of a transnational organization network, as illustrated in Exhibit 6.10, are far-flung. Achieving coordination, a sense of participation and involvement by subsidiaries, and a sharing of information, knowledge, new technology, and cus- tomers is a tremendous challenge. For example, a global corporation like Philips, Unilever, or GE is so large that size alone is a huge problem in coordinating global operations. In addition, some subsidiaries become so large that they no longer fit a narrow strategic role defined by headquarters. While being part of a larger organi- zation, individual units need some autonomy for themselves and the ability to have an impact on other parts of the organization.

The transnational model addresses these challenges by creating an integrated network of individual operations that are linked together to achieve the multidimen- sional goals of the overall organization.86 The management philosophy is based on interdependence rather than either full divisional independence or total dependence of these units on headquarters for decision making and control. The transnational model is more than just an organization chart. It is a managerial state of mind, a set of values, a shared desire to make a worldwide learning system work, and an idealized structure for effectively managing such a system. Several characteristics distinguish the transnational organization from other global organization forms such as the matrix, described earlier.

1. Assets and resources are dispersed worldwide into highly specialized operations that are linked together through interdependent relationships. Resources and capabilities are widely distributed to help the organization sense and respond to diverse stimuli such as market needs, technological developments, or consumer trends that emerge in different parts of the world. To manage this increased complexity and differentiation, managers forge interdependent relationships among the various product, functional, or geographic units. Mechanisms such

Briefcase As an organization manager, keep this guideline in mind:

Strive toward a transnational model of organization when the company has to respond to multiple global forces simultaneously and needs to promote worldwide integration, learning, and knowledge sharing.

238 Part 3: Open System Design Elements



















































Source: Academy of Management Review by Ghoshal and Bartlett. Copyright 1990 by Academy of Management (NY). Reproduced with permission of Academy of Management (NY) in the format Other book via Copyright Clearance Center.

EXHIBIT 6.10 International Organizational Units and Interlinkages within Philips NV

Chapter 6: Designing Organizations for the International Environment 239

as cross-subsidiary teams, for example, compel units to work together for the good of their own unit as well as the overall organization. Rather than being completely self-sufficient, each group has to cooperate to achieve its own goals. Such interdependencies encourage the collaborative sharing of information and resources, cross-unit problem solving, and collective implementation demanded by today’s competitive international environment. Materials, people, products, ideas, resources, and information are continually flowing among the dispersed parts of the integrated network. In addition, managers actively shape, manage, and reinforce informal information networks that cross functions, products, divisions, and countries.

2. Structures are flexible and ever-changing. The transnational operates on a principle of flexible centralization. It may centralize some functions in one coun- try, some in another, yet decentralize still other functions among its many geo- graphically dispersed operations. An R&D center may be centralized in Holland and a purchasing center may be located in Sweden, while financial accounting responsibilities are decentralized to operations in many countries. A unit in Hong Kong may be responsible for coordinating activities across Asia, while activities for all other countries are coordinated by a large division headquar- ters in London. The transnational model requires that managers be flexible in determining structural needs based on the benefits to be gained. Some functions, products, and geographic regions by their nature may need more central control and coordination than others. In addition, coordination and control mecha- nisms will change over time to meet new needs or competitive threats. Some companies have begun setting up multiple headquarters in different countries as the organization gets too large and too complex to manage from one place. Irdeto Holdings BV, for example, now has headquarters in both Amsterdam and Beijing. U.S.-based Halliburton Company is planning to open a second corpo- rate headquarters in Dubai.87

3. Subsidiary managers initiate strategy and innovations that become strategy for the corporation as a whole. In traditional structures, managers have a strategic role only for their division. In a transnational structure, various centers and subsidiar- ies can shape the company from the bottom up by developing creative responses and initiating programs in response to local needs, then dispersing those innova- tions worldwide. Transnational companies recognize each of the worldwide units as a source of capabilities and knowledge that can be used to benefit the entire organization. In addition, environmental demands and opportunities vary from country to country, and exposing the whole organization to this broader range of environmental stimuli triggers greater learning and innovation.

4. Unification and coordination are achieved primarily through corporate culture, shared vision and values, and management style, rather than through formal structures and systems. A study by Hay Group found that one of the defining characteristics of companies that succeed on a global scale is that they success- fully coordinate worldwide units and subsidiaries around a common strategic vision and values rather than relying on formal coordination systems alone.88 Achieving unity and coordination in an organization in which employees come from a variety of different national backgrounds, are separated by time and geo- graphic distance, and have different cultural norms is more easily accomplished through shared understanding than through formal systems. Top leaders build a context of shared vision, values, and perspectives among managers who in turn cascade these elements through all parts of the organization. Selection and training of managers emphasizes flexibility and open-mindedness. In addition,

240 Part 3: Open System Design Elements

people are often rotated through different jobs, divisions, and countries to gain broad experience and become socialized into the corporate culture. Achieving coordination in a transnational organization is a much more complex process than simple centralization or decentralization of decision making. It requires shaping and adapting beliefs, culture, and values so that everyone participates in information sharing and learning.

Taken together, these characteristics facilitate strong coordination, organiza- tional learning, and knowledge sharing on a broad global scale. The transnational model is truly a complex and messy way to conceptualize organization structure, but it is becoming increasingly relevant for large, global firms that treat the whole world as their playing field and do not have a single country base. The autonomy of organizational parts gives strength to smaller units and allows the firm to be flexible in responding to rapid change and competitive opportunities on a local level, while the emphasis on interdependency enables global efficiencies and organizational learning. Each part of the transnational company is aware of and closely integrated with the organization as a whole so local actions complement and enhance other company parts.


■ This chapter examined how managers design organizations for a complex inter- national environment. Almost every company today is affected by significant global forces, and many are developing overseas operations to take advantage of global markets. Three primary motivations for global expansion are to realize economies of scale, exploit economies of scope, and achieve scarce or low-cost factors of production such as labor, raw materials, or land. One popular way to become involved in international operations is through strategic alliances with international firms. Alliances include licensing, joint ventures, and consortia.

■ Organizations typically evolve through four stages, beginning with a domestic orientation, shifting to an international orientation, then changing to a multina- tional orientation, and finally moving to a global orientation that sees the whole world as a potential market. Organizations typically use an export department, then use an international department, and eventually develop into a worldwide geographic or product structure.

■ Geographic structures are most effective for organizations that can benefit from a multidomestic strategy, meaning that products and services will do best if tailored to local needs and cultures. A product structure supports a globaliza- tion strategy, which means that products and services can be standardized and sold worldwide. Huge global firms might use a matrix structure to respond to both local and global forces simultaneously. Many firms use hybrid structures by combining elements of two or more different structures to meet the dynamic conditions of the global environment.

■ Succeeding on a global scale is not easy. Three aspects of the global organi- zational challenge are addressing environmental complexity through greater organizational complexity and differentiation, achieving integration and coor- dination among the highly differentiated units, and implementing mechanisms

Chapter 6: Designing Organizations for the International Environment 241

for the transfer of knowledge and innovations. Common ways to address the problem of integration and knowledge transfer are through global teams, stron- ger headquarters planning and control, and specific coordination roles.

■ Managers also recognize that diverse national and cultural values influence the organization’s approach to coordination and control. Three varied national approaches are the centralized coordination and control typically found in many Japanese-based firms, a decentralized approach common among European firms, and the formalization approach often used by U.S.-based international firms. Most companies, however, no matter their home country, use a combination of elements from each of these approaches.

■ Companies operating globally need broad coordination methods, and some are moving toward the transnational model of organization. The transnational model is based on a philosophy of interdependence. It is highly differentiated yet offers very high levels of coordination, learning, and transfer of knowl- edge across far-flung divisions. The transnational model represents the ultimate global design in terms of both organizational complexity and organizational integration. Each part of the transnational organization is aware of and closely integrated with the organization as a whole so that local actions complement and enhance other company parts.

consortia domestic stage economies of scale economies of scope factors of production global companies global geographic structure global matrix structure

global product structure global stage global teams globalization strategy international division international stage joint venture multidomestic

multidomestic strategy multinational stage power distance standardization transnational model uncertainty avoidance

Key ConceptsKey

1. Under what conditions should a company consider adopting a global geographic structure as opposed to a global product structure?

2. Name some companies that you think could succeed today with a globalization strategy and explain why you selected those companies. How does the globalization strategy differ from a multidomestic strategy?

3. Why would a company want to join a strategic alliance rather than go it alone in international operations? What do you see as the potential advantages and dis- advantages of international alliances?

4. Do you think it makes sense for a transnational organization to have more than one headquarters? What might be some advantages associated with two

headquarters, each responsible for different things? Can you think of any drawbacks?

5. What are some of the primary reasons a company decides to expand internationally? Identify a company in the news that has recently built a new overseas facil- ity. Which of the three motivations for global expan- sion described in the chapter do you think best explains the company’s decision? Discuss.

6. When would an organization consider using a matrix structure? How does the global matrix differ from the domestic matrix structure described in Chapter 3?

7. Name some of the elements that contribute to greater complexity for international organizations. How do organizations address this complexity? Do you

Discussion QuestionsDisc

242 Part 3: Open System Design Elements

think these elements apply to an online company such as MySpace that wants to grow internationally? Discuss.

8. Traditional values in Mexico support high power dis- tance and a low tolerance for uncertainty. What would you predict about a company that opens a division in Mexico and tries to implement global teams character- ized by shared power and authority and the lack of formal guidelines, rules, and structure?

9. Do you believe it is possible for a global company to simultaneously achieve the goals of global efficiency and integration, national responsiveness and flexibility, and the worldwide transfer of knowledge and innova- tion? Discuss.

10. Compare the description of the transnational model in this chapter to the elements of the learning organization described in Chapter 1. Do you think the transnational model seems workable for a huge global firm? Discuss.

Find three different consumer products, such as a shirt, a toy, and a shoe. Try to find out the following information for each product, as shown in the table. To find this infor- mation, use websites, articles on the company from various

business newspapers and magazines, and the labels on the items. You could also try calling the company and talking with someone there.

Chapter 6 Workbook: Made in the U.S.A.?Cha

Product What country do

materials come from?

Where is it manufactured or


Which country does the marketing and


In what different countries is the product sold?




Case for Analysis: TopDog Software*

At the age of 39, after working for nearly fifteen years at a leading software company on the West Coast, Ari Weiner and his soon-to-be-wife, Mary Carpenter, had cashed in their stock options, withdrew all their savings, maxed out their credit cards, and started their own business, naming it TopDog Software after their beloved Alaskan malamute. The two had developed a new software package for cus- tomer relationship management (CRM) applications that they were certain was far superior to anything on the market at that time. TopDog’s software was particularly effective for use in call centers because it provided a highly efficient way to integrate massive amounts of customer data and make it almost immediately accessible to call center repre- sentatives as they worked the phones. The software, which could be used as a stand-alone product or easily integrated with other major CRM software packages, dramatically expedited customer identification and verification, rapidly selected pertinent bits of data, and provided them in an eas- ily interpreted format so that call center or customer service reps could provide fast, friendly, and customized service.

The timing proved to be right on target. CRM was just getting hot, and TopDog was poised to take advantage of the trend as a niche player in a growing market. Weiner and Carpenter brought in two former colleagues as part- ners and were soon able to catch the attention of a venture capitalist firm to gain additional funding. Within a couple of years, TopDog had twenty-eight employees and sales had reached nearly $4 million.

Now, though, the partners are facing the company’s first major problem. TopDog’s head of sales, Samantha Jenkins, has learned of a new company based in London that is beta testing a new CRM package that promises to outpace TopDog’s—and the London-based company, FastData, has been talking up its global aspirations in the press. “If we stay focused on the United States and they start out as a global player, they’ll kill us within months!” Sam moaned. “We’ve got to come up with an international strategy to deal with this kind of competition.”

In a series of group meetings, off-site retreats, and one- on-one conversations, Weiner and Carpenter have gathered

What can you conclude about international products and organizations based on your analysis?

Chapter 6: Designing Organizations for the International Environment 243

opinions and ideas from their partners, employees, advisors, and friends. Now they have to make a decision—should TopDog go global? And if so, what approach would be most effective? There’s a growing market for CRM soft- ware overseas, and new companies such as FastData will soon be cutting into TopDog’s U.S. market share as well. Samantha Jenkins isn’t alone in her belief that TopDog has no choice but to enter new international markets or get eaten alive. Others, however, are concerned that TopDog isn’t ready for that step. The company’s resources are already stretched to the limit, and some advisors have warned that rapid global expansion could spell disaster. TopDog isn’t even well established in the United States, they argue, and expanding internationally could strain the company’s capabilities and resources. Others have pointed out that none of the managers has any international experi- ence and the company would have to hire someone with significant global exposure to even think about entering new markets.

Although Mary tends to agree that TopDog for the time being should stay focused on building its business in the United States, Ari has come to believe that global expansion of some type is a necessity. But if TopDog does eventually decide on global expansion, he wonders how on earth they should proceed in such a huge, complex environment. Sam, the sales manager, is arguing that the company should set up its own small foreign offices from scratch and staff them primarily with local people. Building a U.K. office and an Asian office, she asserts, would give

TopDog an ideal base for penetrating markets around the world. However, it would be quite expensive, not to men- tion the complexities of dealing with language and cultural differences, legal and government regulations, and other matters. Another option would be to establish alliances or joint ventures with small European and Asian companies that could benefit from adding CRM applications to their suite of products. The companies could share expenses in setting up foreign production facilities and a global sales and distribution network. This would be a much less costly operation and would give TopDog the benefit of the exper- tise of the foreign partners. However, it might also require lengthy negotiations and would certainly mean giving up some control to the partner companies.

One of TopDog’s partners is urging still a third, even lower-cost approach, that of licensing TopDog’s software to foreign distributors as a route to international expan- sion. By giving foreign software companies rights to pro- duce, market, and distribute its CRM software, TopDog could build brand identity and customer awareness while keeping a tight rein on expenses. Ari likes the low-cost approach, but he wonders if licensing would give TopDog enough participation and control to successfully develop its international presence. As another day winds down, Weiner and Carpenter are no closer to a decision about global expansion than they were when the sun came up.

*Source: Based on Walter Kuemmerle, “Go Global—Or No?” Harvard Business Review (June 2001), 37–49.

Case for Analysis: Rhodes Industries

David Javier was reviewing the consulting firm’s proposed changes in organization structure for Rhodes Industries (RI). As Javier read the report, he wondered whether the changes recommended by the consultants would do more harm than good for RI. Javier had been president of RI for eighteen months, and he was keenly aware of the organi- zational and coordination problems that needed to be cor- rected in order for RI to improve profits and growth in its international businesses.

Company Background Rhodes Industries was started in the 1950s in Southern Ontario, Canada, by Robert Rhodes, an engineer who was an entrepreneur at heart. He started the business by first making pipe and then glass for industrial uses, but as soon as the initial business was established, he quickly branched into new areas such as industrial sealants, coatings, and cleaners, and even into manufacturing mufflers and parts for the trucking industry. Much of this expansion occurred

by acquiring small firms in Canada and the United States during the 1960s. RI had a conglomerate-type structure with rather diverse subsidiaries scattered around North America, all reporting directly to the Ontario headquar- ters. Each subsidiary was a complete local business and was allowed to operate independently so long as it contrib- uted profits to RI.

During the 1970s and 1980s, the president at the time, Clifford Michaels, brought a strong international focus to RI. His strategy was to acquire small companies worldwide with the belief they could be formed into a cohesive unit that would bring RI synergies and profits through low cost of manufacturing and by serving businesses in international markets. Some of RI’s businesses were acquired simply because they were available at a good price, and RI found itself in new lines of business such as consumer products (paper and envelopes) and electrical equipment (switch- boards, lightbulbs, and security systems), in addition to its previous lines of business. Most of these products had local

244 Part 3: Open System Design Elements

EXHIBIT 6.11 Rhodes Industries Organization Chart

brand names or were manufactured for major international companies such as General Electric or Corning Glass.

During the 1990s, a new president of RI, Sean Rhodes, the grandson of the founder, took over the business and adopted the strategy of focusing RI on three lines of business— Industrial Products, Consumer Products, and Electronics. He led the acquisition of more international businesses that fit these three categories, and divested a few businesses that didn’t fit. Each of the three divisions had manufacturing plants as well as marketing and distribution systems in North America, Asia, and Europe. The Industrial Products division included pipe, glass, industrial sealants and coat- ings, cleaning equipment, and truck parts. The Electronics division included specialty lightbulbs, switchboards, com- puter chips, and resistors and capacitors for original equip- ment manufacturers. Consumer Products included dishes and glassware, paper and envelopes, and pencils and pens.

Structure In 2004 David Javier replaced Sean Rhodes as president. He was very concerned about whether a new organization structure was needed for RI. The current structure was based on three major geographic areas—North America, Asia, and Europe—as illustrated in Exhibit 6.11. The various

autonomous units within those regions reported to the office of the regional vice president. When several units existed in a single country, one of the subsidiary presidents was also responsible for coordinating the various businesses in that country, but most coordination was done through the regional vice president. Businesses were largely independent, which pro- vided flexibility and motivation for the subsidiary managers.

The headquarters functional departments in Ontario were rather small. The three central departments—Corporate Relations and Public Affairs, Finance and Acquisitions, and Legal and Administrative—served the corporate business worldwide. Other functions such as HR management, new product development, marketing, and manufacturing all existed within individual subsidiaries and there was little coordination of these functions across geographic regions. Each business devised its own way to develop, manufacture, and market its products in its own country and region.

Organizational Problems The problems Javier faced at RI, which were confirmed in the report on his desk, fell into three areas. First, each subsidiary acted as an independent business, using its own reporting systems and acting to maximize its own profits. This autonomy made it increasingly difficult to consolidate

President and CE0

Corporate Relations and Public Affairs

Vice President Asia

Vice President North America

Vice President Europe

Finance and Acquisitions

Legal and Administrative

Asian Subsidiaries

North American Subsidiaries

European Subsidiaries

Chapter 6: Designing Organizations for the International Environment 245

financial reports worldwide and to gain the efficiencies of uniform information and reporting systems.

Second, major strategic decisions were made to ben- efit individual businesses or for a country’s or region’s local interests. Local projects and profits received more time and resources than did projects that benefited RI worldwide. For example, an electronics manufacturer in Singapore refused to increase production of chips and capacitors for sale in the United Kingdom because it would hurt the bottom line of the Singapore operation. However, the economies of scale in Singapore would more than offset shipping costs to the United Kingdom and would enable RI to close expensive manufactur- ing facilities in Europe, increasing RI’s efficiency and profits.

Third, there had been no transfer of technology, new product ideas, or other innovations within RI. For exam- ple, a cost-saving technology for manufacturing lightbulbs in Canada had been ignored in Asia and Europe. A techni- cal innovation that provided homeowners with cell phone access to home security systems developed in Europe has

been ignored in North America. The report on Javier’s desk stressed that RI was failing to disperse important innovations throughout the organization. These ignored innovations could provide significant improvements in both manufacturing and marketing worldwide. The report said, “No one at RI understands all the products and loca- tions in a way that allows RI to capitalize on manufacturing improvements and new product opportunities.” The report also said that better worldwide coordination would reduce RI’s costs by 7 percent each year and increase market poten- tial by 10 percent. These numbers were too big to ignore.

Recommended Structure The report from the consultant recommended that RI try one of two options for improving its structure. The first alternative was to create a new international department at headquarters with the responsibility to coordinate tech- nology transfer and product manufacturing and marketing worldwide (Exhibit 6.12). This department would have a

President and CEO

Corporate Relations and Public Affairs

International Product Directors

Vice President Asia

Vice President North America

Vice President Europe

Finance and Acquisitions

Legal and Administrative

Asian Subsidiaries

North American Subsidiaries

European Subsidiaries

Asia Europe North


EXHIBIT 6.12 Proposed Product Director Structure

EXHIBIT 6.12 Proposed Product Director Structure

246 Part 3: Open System Design Elements

product director for each major product line—Industrial, Consumer, and Electronics—who would have authority to coordinate activities and innovations worldwide. Each product director would have a team that would travel to each region and carry information on innovations and improvements to subsidiaries in other parts of the world.

The second recommendation was to reorganize into a worldwide product structure, as shown in Exhibit 6.13. All subsidiaries worldwide associated with a product line would report to the product line business manager. The business man- ager and staff would be responsible for developing business strategies and for coordinating all manufacturing efficiencies and product developments worldwide for its product line.

This worldwide product structure would be a huge change for RI. Many questions came to Javier’s mind. Would the subsidiaries still be competitive and adap- tive in local markets if forced to coordinate with other subsidiaries around the world? Would business manag- ers be able to change the habits of subsidiary managers toward more global behavior? Would it be a better idea to appoint product director coordinators as a first step, or jump to the business manager product structure right away? Javier had a hunch that the move to worldwide product coordination made sense, but he wanted to think through all the potential problems and how RI would implement the changes.

EXHIBIT 6.13 Proposed Worldwide Business Manager Structure

President and CE0

Corporate Relations and Public Affairs

Worldwide Business Manager—

Industrial Products

Worldwide Business Manager— Consumer Products

Worldwide Business Manager— Electronic Products

Finance and Acquisitions

Legal and Administrative

Industrial Products Subsidiaries Worldwide

Consumer Products Subsidiaries Worldwide

Electronic Products Subsidiaries Worldwide

Text not available due to copyright restrictions

Chapter 6: Designing Organizations for the International Environment 247


1. Vanessa O’Connell, “Department Stores: Tough Sell Abroad,” The Wall Street Journal (May 22, 2008), B1; James Bandler and Matthew Karnitschnig, “Lost in Translation; European Giant in Magazines Finds U.S. a Tough Read,” The Wall Street Journal (August 19, 2004), A1, A6; David Carr, “The Decline and Fall of Business Magazines,” International Herald Tribune (May 31, 2005), 11; and Barbara Whitaker, “The Web Makes Going Global Easy, Until You Try to Do It,” The New York Times (September 2000), 20.

2. Choe Sang-Hun, “Wal-Mart Selling Stores and Leaving South Korea,” The New York Times (May 23, 2006), C5.

3. Louise Story, “Seeking Leaders, U.S. Companies Think Globally,” The New York Times (December 12, 2007), A1.

4. Phred Dvorak and Merissa Marr, “In Surprise Move, Sony Plans to Hand Reins to a Foreigner,” The Wall Street Journal (March 7, 2005), A1; Carol Hymowitz, “More American Chiefs Are Taking Top Posts at Overseas Concerns,” The Wall Street Journal (October 17, 2005), B1; Justin Martin, “The Global CEO: Overseas Experience Is Becoming a Must on Top Executives’ Resumes,” Chief Executive (January–February 2004), 24.

5. Richard Gibson, “U.S. Restaurants Push Abroad,” The Wall Street Journal (June 18, 2008), B5.

6. Steve Hamm, “IBM vs. Tata: Which Is More American?” BusinessWeek (May 5, 2008), 28.

7. Jenny Mero, “Power Shift,” Fortune (July 21, 2008), 161; Paola Hject, “The Fortune Global 500,” Fortune (July 26, 2004), 159–180; and tune/global500/2008/, accessed on September 22, 2008.

8. This discussion is based heavily on Christopher A. Bartlett and Sumantra Ghoshal, Transnational Management: Text, Cases, and Readings in Cross-Border Management, 3rd ed. (Boston: Irwin McGraw-Hill, 2000), 94–96; and Anil K. Gupta and Vijay Govindarajan, “Converting Global Presence into Global Competitive Advantage,” Academy of Management Executive 15, no. 2 (2001), 45–56.

9. Neil King Jr., “A Whole New World: Competition from China and India Is Changing the Way Businesses Operate Everywhere,” The Wall Street Journal (September 27, 2004), R1.

10. Jim Carlton, “Branching Out; New Zealanders Now Shear Trees Instead of Sheep,” The Wall Street Journal (May 29, 2003), A1, A10.

11. “Little Trouble in Big China,” FSB (March 2004), 56–61; “Trade Gap,” sidebar in Fast Company (June 2004), 42; Chris Hawley, “Aircraft Makers Flock to Mexico,” USA Today (April 6, 2008), money/industries/manufacturing/2008-04-06-aerospace_N. htm?loc=interstitialskip, accessed on April 7, 2008; Dan Morse, “Cabinet Decisions; In North Carolina, Furniture Makers Try to Stay Alive,” The Wall Street Journal (February 20, 2004), A1.

12. Keith H. Hammonds, “Smart, Determined, Ambitious, Cheap: The New Face of Global Competition,” Fast Company (February 2003), 91–97.

13. James Flanigan,“Now, High-Tech Work Is Going Abroad,” The New York Times (November 17, 2005), C6; and Sheridan Prasso, “Google Goes to India,” Fortune (October 29, 2007), 160–166.

14. Todd Zaun, Gregory L. White, Norihiko Shirouzu, and Scott Miller, “More Mileage: Auto Makers Look for Another Edge Farther from Home,” The Wall Street Journal (July 31, 2002), A1, A8.

15. Alison Stein Wellner, “Turning the Tables,” Inc. (May 2006), 55–57.

16. Ken Belson, “Outsourcing, Turned Inside Out,” The New York Times (April 11, 2004), Section 3, 1.

17. Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th ed. (Cincinnati, Ohio: South-Western, 2002); Theodore T. Herbert, “Strategy and Multinational Organizational Structure: An Interorganizational Relationships Perspective,” Academy of Management Review 9 (1984), 259–271; and Laura K. Rickey, “International Expansion—U.S. Corporations: Strategy, Stages of Development, and Structure” (unpublished manuscript, Vanderbilt University, 1991).

18. Julia Boorstin, “Exporting Cleaner Air,” segment of “Small and Global,” FSB (June 2004), 36–48.

19. Geraldo Samor, Cecilie Rohwedder, and Ann Zimmerman, “Innocents Abroad? Wal-Mart’s Global Sales Rise As It Learns from Mistakes,” The Wall Street Journal (May 16, 2006), B1.

20. Michael E. Porter, “Changing Patterns of International Competition,” California Management Review 28 (Winter 1986), 9–40.

21. William J. Holstein, “The Stateless Corporation,” BusinessWeek (May 14, 1990), 98–115.


Text not available due to copyright restrictions

248 Part 3: Open System Design Elements

22. Phred Dvorak, “Why Multiple Headquarters Multiply,” The Wall Street Journal (November 19, 2007), B1.

23. Debra Sparks, “Partners,” BusinessWeek, Special Report: Corporate Finance (October 25, 1999), 106–112.

24. David Lei and John W. Slocum, Jr., “Global Strategic Alliances: Payoffs and Pitfalls,” Organizational Dynamics (Winter 1991), 17–29.

25. O’Connell, “Department Stores: Tough Sell Abroad.” 26. Stratford Sherman, “Are Strategic Alliances Working?”

Fortune (September 21, 1992), 77–78; and David Lei, “Strategies for Global Competition,” Long-Range Planning 22 (1989), 102–109.

27. Cyrus F. Freidheim, Jr., The Trillion-Dollar Enterprise: How the Alliance Revolution Will Transform Global Business (New York: Perseus Books, 1998).

28. Pete Engardio, “Emerging Giants,” BusinessWeek (July 31, 2006), 40–49.

29. Eric Bellman and Kris Hudson, “Wal-Mart to Enter India in Venture,” The Wall Street Journal (November 28, 2006), A3; and, accessed on September 22, 2008.

30. Sparks, “Partners.” 31. Kenichi Ohmae, “Managing in a Borderless World,”

Harvard Business Review (May–June 1989), 152–161. 32. Choe Sang-Hun, “Wal-Mart Selling Stores and Leaving

South Korea”; Constance L. Hays, “From Bentonville to Beijing and Beyond,” The New York Times (December 6, 2004), C6.

33. Conrad de Aenlle, “Famous Brands Can Bring Benefit, or a Backlash,” The New York Times (October 19, 2003), Section 3, 7.

34. Cesare R. Mainardi, Martin Salva, and Muir Sanderson, “Label of Origin: Made on Earth,” Strategy & Business 15 (Second Quarter 1999), 42–53; and Joann S. Lublin, “Place vs. Product: It’s Tough to Choose a Management Model,” The Wall Street Journal (June 27, 2001), A1, A4.

35. Mainardi, Salva, and Sanderson, “Label of Origin.” 36. Julie Jargon, “Kraft Reformulated Oreo, Scores in China,”

The Wall Street Journal (May 1, 2008), B1, B7. 37. José Pla-Barber, “From Stopford and Wells’s Model

to Bartlett and Ghoshal’s Typology: New Empirical Evidence,” Management International Review 42, no. 2 (2002), 141–156.

38. Sumantra Ghoshal and Nitin Nohria, “Horses for Courses: Organizational Forms for Multinational Corporations,” Sloan Management Review (Winter 1993), 23–35; and Roderick E. White and Thomas A. Poynter, “Organizing for Worldwide Advantage,” Business Quarterly (Summer 1989), 84–89.

39. Robert J. Kramer, Organizing for Global Competitiveness: The Country Subsidiary Design (New York: The Conference Board, 1997), 12.

40. Laura B. Pincus and James A. Belohlav, “Legal Issues in Multinational Business: To Play the Game, You Have to Know the Rules,” Academy of Management Executive 10, no. 3 (1996), 52–61.

41. John D. Daniels, Robert A. Pitts, and Marietta J. Tretter, “Strategy and Structure of U.S. Multinationals: An Exploratory Study,” Academy of Management Journal 27 (1984), 292–307.

42. Hay Group Study, reported in Mark A. Royal and Melvyn J. Stark, “Why Some Companies Excel at Conducting Business Globally,” Journal of Organizational Excellence (Autumn 2006), 3–10.

43. Robert J. Kramer, Organizing for Global Competitiveness: The Product Design (New York: The Conference Board, 1994).

44. Robert J. Kramer, Organizing for Global Competitiveness: The Business Unit Design (New York: The Conference Board, 1995), 18–19.

45. Carol Matlack, “Nestlé Is Starting to Slim Down at Last; But Can the World’s No. 1 Food Colossus Fatten Up Its Profits As It Slashes Costs?” BusinessWeek (October 27, 2003), 56.

46. Based on Robert J. Kramer, Organizing for Global Competitiveness: The Geographic Design (New York: The Conference Board, 1993).

47. William M. Bulkeley, “Spinning a Global Plan,” The Wall Street Journal (February 14, 2008), B1.

48. Kramer, Organizing for Global Competitiveness: The Geographic Design, 29–31.

49. William Taylor, “The Logic of Global Business: An Interview with ABB’s Percy Barnevik,” Harvard Business Review (March–April 1991), 91–105; Carla Rappaport, “A Tough Swede Invades the U.S.,” Fortune (January 29, 1992), 76–79; Raymond E. Miles and Charles C. Snow, “The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy,” Organizational Dynamics (Spring 1995), 5–18; and Manfred F. R. Kets de Vries, “Making a Giant Dance,” Across the Board (October 1994), 27–32.

50. Matthew Karnitschnig, “Identity Question; For Siemens, Move into U.S. Causes Waves Back Home,” The Wall Street Journal (September 8, 2003), A1.

51. Gupta and Govindarajan, “Converting Global Presence into Global Competitive Advantage.”

52. Robert Frank, “Withdrawal Pains: In Paddies of Vietnam, Americans Once Again Land in a Quagmire,” The Wall Street Journal (April 21, 2000), A1, A6.

53. The discussion of these challenges is based on Bartlett and Ghoshal, Transnational Management.

54. Dvorak, “Why Multiple Headquarters Multiply.” 55. Gibson, “U.S. Restaurants Push Abroad,” and Peter Gumbel,

“Big Mac’s Local Flavor,” Fortune (May 5, 2008), 114–121. 56. Peter Koudal and Gary C. Coleman, “Coordinating

Operations to Enhance Innovation in the Global Corporation,” Strategy & Leadership 33, no. 4 (2005), 20–32; and Steven D. Eppinger and Anil R. Chitkara, “The New Practice of Global Product Development,” MIT Sloan Management (Summer 2006), 22–30.

57. Steve Hamm, “Big Blue Shift,” BusinessWeek (June 5, 2006), 108–110.

58. P. Ingrassia, “Industry Is Shopping Abroad for Good Ideas to Apply to Products,” The Wall Street Journal (April 29, 1985), A1.

59. Benson Rosen, Stacie Furst, and Richard Blackburn, “Overcoming Barriers to Knowledge Sharing in Virtual Teams,” Organizational Dynamics 36, no. 3 (2007), 259–273.

60. Based on Gupta and Govindarajan, “Converting Global Presence into Global Competitive Advantage” and Giancarlo Ghislanzoni, Risto Penttinen, and David Turnbull, “The Multilocal Challenge: Managing Cross-Border Functions,”

Chapter 6: Designing Organizations for the International Environment 249

The McKinsey Quarterly (March 2008); http://www., accessed on April 1, 2008.

61. Vijay Govindarajan and Anil K. Gupta, “Building an Effective Global Business Team,” MIT Sloan Management Review 42, no. 4 (Summer 2001), 63–71.

62. Charlene Marmer Solomon, “Building Teams across Borders,” Global Workforce (November 1998), 12–17.

63. Charles C. Snow, Scott A. Snell, Sue Canney Davison, and Donald C. Hambrick, “Use Transnational Teams to Globalize Your Company,” Organizational Dynamics 24, no. 4 (Spring 1996), 50–67.

64. Carol Saunders, Craig Van Slyke, and Douglas R. Vogel, “My Time or Yours? Managing Time Visions in Global Virtual Teams,” Academy of Management Executive 18, no. 1 (2004), 19–31.

65. Snow et al., “Use Transnational Teams to Globalize Your Company.”

66. Gupta and Govindarajan, “Converting Global Presence into Global Competitive Advantage”; and Nadine Heintz, “In Spanish, It’s Un Equipo; In English, It’s a Team; Either Way, It’s Tough to Build,” Inc. (April 2008), 41–42.

67. Richard Pastore, “Global Team Management: It’s a Small World After All,” CIO (January 23, 2008), http://www. Small_World_After_All, accessed on May 20, 2008).

68. Pete Engardio, “A Guide for Multinationals: One of the Greatest Challenges for a Multinational Is Learning How to Build a Productive Global Team,” BusinessWeek (August 20, 2007), 48–51; and Lynda Gratton, “Working Together . . . When Apart,” The Wall Street Journal (June 18, 2007), R1.

69. Robert J. Kramer, Organizing for Global Competitiveness: The Corporate Headquarters Design (New York: The Conference Board, 1999).

70. Ghislanzoni et al., “The Multilocal Challenge.” 71. Based on Christopher A. Bartlett and Sumantra Ghoshal,

Managing across Borders: The Transnational Solution, 2nd ed. (Boston: Harvard Business School Press, 1998), Chapter 11, 231–249.

72. See Jay Galbraith, “Building Organizations around the Global Customer,” Ivey Business Journal (September– October 2001), 17–24, for a discussion of both formal and informal lateral networks used in multinational companies.

73. This section and the BP examples are based on Morten T. Hansen and Nitin Nohria, “How to Build Collaborative Advantage,” MIT Sloan Management Review (Fall 2004), 22ff.

74. Gumbel, “Big Mac’s Local Flavor.” 75. Geert Hofstede, “The Interaction between National and

Organizational Value Systems,” Journal of Management Studies 22 (1985), 347–357; and Geert Hofstede, Cultures and Organizations: Software of the Mind (London: McGraw-Hill, 1991).

76. See Mansour Javidan and Robert J. House, “Cultural Acumen for the Global Manager: Lessons from Project

GLOBE,” Organizational Dynamics 29, no. 4 (2001), 289–305; and R. J. House, M. Javidan, Paul Hanges, and Peter Dorfman, “Understanding Cultures and Implicit Leadership Theories across the Globe: An Introduction to Project GLOBE,” Journal of World Business 37 (2002), 3–10.

77. Mansour Javidan, Peter W. Dorfman, Mary Sully de Luque, and Robert J. House, “In the Eye of the Beholder: Cross Cultural Lessons in Leadership from Project GLOBE,” Academy of Management Perspectives (February 2006), 67–90.

78. This discussion is based on “Culture and Organization,” Reading 2–2 in Christopher A. Bartlett and Sumantra Ghoshal, Transnational Management, 3rd ed. (Boston: Irwin McGraw-Hill, 2000), 191–216, excerpted from Susan Schneider and Jean-Louis Barsoux, Managing across Cultures (London: Prentice-Hall, 1997).

79. Based on Bartlett and Ghoshal, Managing across Borders, 181–201.

80. Martin Hemmert, “International Organization of R&D and Technology Acquisition Performance of High-Tech Business Units,” Management International Review 43, no. 4 (2003), 361–382.

81. Jean Lee, “Culture and Management—A Study of a Small Chinese Family Business in Singapore,” Journal of Small Business Management 34, no. 3 (July 1996), 63ff; Olivier Blanchard and Andrei Shleifer, “Federalism with and with- out Political Centralization: China versus Russia,” IMF Staff Papers 48 (2001), 171ff; and Javidan et al., “In the Eye of the Beholder.”

82. Nailin Bu, Timothy J. Craig, and T. K. Peng, “Reactions to Authority,” Thunderbird International Business Review 43, no. 6 (November–December 2001), 773–795.

83. Phred Dvorak and Leila Abboud, “Difficult Upgrade: SAP’s Plan to Globalize Hits Cultural Barriers; Software Giant’s Shift Irks German Engineers,” The Wall Street Journal (May 11, 2007), A1.

84. Sumantra Ghoshal and Christopher Bartlett, “The Multinational Corporation as an Inter-organizational Network,” Academy of Management Review 15 (1990), 603–625.

85. Claudia H. Deutsch, “As Sales Go Abroad for U.S. Firms, So Do Managers,” International Herald Tribune (February 15, 2008), 14.

86. The description of the transnational organization is based on Bartlett and Ghoshal, Transnational Management and Managing across Borders.

87. Phred Dvorak, “How Irdeto Split Headquarters—Move to Run Dutch Firm From Beijing Means Meeting Challenges,” The Wall Street Journal (January 7, 2008), B3; and Dvorak, “Why Multiple Headquarters Multiply.”

88. Royal and Stark, “Why Some Companies Excel at Conducting Business Globally.”

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Chapter 7

Manufacturing and

Service Technologies

Chapter 8

Using IT for Coordination

and Control

Chapter 9

Organization Size, Life

Cycle, and Decline

Part 4

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Internal Design Elements

Core Organization Manufacturing Technology Manufacturing Firms • Strategy, Technology, and Performance

Contemporary Applications Flexible Manufacturing Systems • Lean Manufacturing • Performance and Structural Implications

Core Organization Service Technology Service Firms • Designing the Service Organization

Non-Core Departmental Technology Variety • Analyzability • Framework

Department Design

Workflow Interdependence among Departments Types • Structural Priority • Structural Implications

Impact of Technology on Job Design Job Design • Sociotechnical Systems

Design Essentials


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Manufacturing and Service


Chapter 7

An auto parts factory sends engineers around the world to learn about new pro- duction methods. A team of airline employees studies the pit stop techniques used by NASCAR racing crews. A small clothing manufacturer in New York invests in a computerized German-made knitting machine. What do all these organizations have in common? They are looking for ways to provide goods and services more efficiently and effectively.

For many manufacturers in the United States, it’s a do-or-die situation. Manufacturing has been on the decline in the United States and other developed countries for years, with services becoming an increasingly greater part of the economy. A report from the U.S. Business and Industry Council indicates that more than 100 U.S.-based manufacturing industries lost a significant percentage of their domestic market to imports between 1997 and 2004, and nineteen industries lost more than half of their U.S. market during that time period.1 However, some manufacturing companies are applying new technology to gain a new competitive edge. For example, by integrating computerized production equipment and sophis- ticated information systems, American Axle & Manufacturing (AAM) dramatically improved efficiency and productivity to the point where it began winning contracts to make components in Detroit that a competitor had previously been making in China.2 Service companies also need to keep pace with changing technology and con- tinually strive for better approaches. Many service firms are fighting for their lives as global competition intensifies, and the cost of ineffective or outdated technology and procedures can be organizational decline and failure.

This chapter explores both service and manufacturing technologies. Technology refers to the work processes, techniques, machines, and actions used to transform organizational inputs (materials, information, ideas) into outputs (products and services).3 Technology is an organization’s production process and includes work procedures as well as machinery.

One important theme in this chapter is how core technology influences orga- nization structure. Understanding core technology provides insight into how an

Managing by Design Questions

1 Lean manufacturing is a super-effi cient form of manufacturing that produces products of top quality. 1 2 3 4 5


2 The best way for a company to provide good service is to have abundant and clear rules and procedures and make sure everyone follows them to the letter.

1 2 3 4 5


3 The design characteristics and management processes that are effective for a television station’s sales department probably would not work so well for the news department.

1 2 3 4 5



Before reading this chapter, please circle your opinion below for each of the following statements:

254 Part 4: Internal Design Elements

organization can be structured for efficient performance.4 An organization’s core technology is the work process that is directly related to the organization’s mission, such as teaching in a high school, medical services in a health clinic, or manufactur- ing at AAM. For example, at AAM, the core technology begins with raw materials (e.g., steel, aluminum, and composite metals). Employees take action on the raw material to make a change in it (they cut and forge metals and assemble parts), thus transforming the raw material into the output of the organization (axles, drive shafts, crankshafts, transmission parts, etc.). For a service organization like UPS, the core technology includes the production equipment (e.g., sorting machines, package handling equipment, trucks, airplanes) and procedures for delivering packages and overnight mail. In addition, as at companies like UPS and AAM, computers and new information technology have revolutionized work processes in both manufacturing and service organizations. The specific impact of new information technology on organizations will be described in Chapter 8.

Exhibit 7.1 features an example of core technology for a manufacturing plant. Note how the core technology consists of raw material inputs, a transformation work process (milling, inspection, assembly) that changes and adds value to the raw material and produces the ultimate product or service output that is sold to consum- ers in the environment. In today’s large, complex organizations, core work processes vary widely and sometimes can be hard to pinpoint. A core technology can be partly understood by examining the raw materials flowing into the organization,5

the variability of work activities,6 the degree to which the production process is mechanized,7 the extent to which one task depends on another in the workflow,8 or the number of new product or service outputs.9

Raw Material Inputs

Product or Service Outputs

Materials Handling

Milling Inspection



Core Work Processes

Human Resources Accounting R & D Marketing

Noncore Departments

Core Technolog y

EXHIBIT 7.1 Core Transformation Process for a Manufacturing Company

Chapter 7: Manufacturing and Service Technologies 255

Organizations are also made up of many departments, each of which may use a different work process (technology) to provide a good or service within an orga- nization. A non-core technology is a department work process that is important to the organization but is not directly related to its primary mission. In Exhibit 7.1, non-core work processes are illustrated by the departments of human resources (HR), accounting, research and development (R&D), and marketing. Thus, R&D transforms ideas into new products, and marketing transforms inventory into sales, each using a somewhat different work process. The output of the HR department is people to work in the organization, and accounting produces accurate statements about the organization’s financial condition.

Purpose of This Chapter

In this chapter, we will discuss both core and non-core work processes and their rela- tionship to designing organization structure. The nature of the organization’s work processes must be considered in designing the organization for maximum efficiency and effectiveness. The optimum organization design is based on a variety of elements. Exhibit 7.2 illustrates that forces affecting organization design come from both out- side and inside the organization. External strategic needs, such as environmental con- ditions, strategic direction, and organizational goals, create top-down pressure for designing the organization in such a way as to fit the environment and accomplish goals. These pressures on design have been discussed in previous chapters. However, decisions about design should also take into consideration pressures from the bottom up—from the work processes that are performed to produce the organization’s

Optimum Organization


Operational Design Needs

(work processes)

Strategic Design Needs

(environment, strategic direction)

Source: Based on David A. Nadler and Michael L. Tushman, with Mark B. Nadler, Competing by Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997), 54.

EXHIBIT 7.2 Pressures Affecting Organization Design

256 Part 4: Internal Design Elements

products or services. The operational work processes will influence the structural design associated with both the core technology and non-core departments. Thus, the subject with which this chapter is concerned is, “How should the organization be designed to accommodate and facilitate its operational work processes?”

The remainder of the chapter will unfold as follows. First, we examine how the technology for the organization as a whole influences organization structure and design. This discussion includes both manufacturing and service technologies. Next, we examine differences in departmental technologies and how the technologies influence the design and management of organizational subunits. Third, we explore how interdependence—flow of materials and information—among departments affects structure.


Manufacturing technologies include traditional manufacturing processes and con- temporary applications, such as flexible manufacturing and lean manufacturing.

Manufacturing Firms

The first and most influential study of manufacturing technology was conducted by Joan Woodward, a British industrial sociologist. Her research began as a field study of management principles in south Essex. The prevailing management wis- dom at the time (1950s) was contained in what were known as universal principles of management. These principles were “one best way” prescriptions that effective organizations were expected to adopt. Woodward surveyed 100 manufacturing firms firsthand to learn how they were organized.10 She and her research team vis- ited each firm, interviewed managers, examined company records, and observed the manufacturing operations. Her data included a wide range of structural characteris- tics (span of control, levels of management), dimensions of management style (writ- ten versus verbal communications, use of rewards), and the type of manufacturing process. Data were also obtained that reflected commercial success of the firms.

Woodward developed a scale and organized the firms according to technical complexity of the manufacturing process. Technical complexity represents the extent of mechanization of the manufacturing process. High technical complexity means most of the work is performed by machines. Low technical complexity means work- ers play a larger role in the production process. Woodward’s scale of technical com- plexity originally had ten categories, as summarized in Exhibit 7.3. These categories were further consolidated into three basic technology groups:

• Group I: Small-batch and unit production. These firms tend to be job shop operations that manufacture and assemble small orders to meet specific needs of customers. Custom work is the norm. Small-batch production relies heavily on the human operator; it is thus not highly mechanized. One example of small-batch production is Hermes International’s Kelly handbag, named for the late actress Grace Kelly. Craftsmen stitch the majority of each $7,000 bag by hand and sign it when they finish.11 Another example comes from Rockwell Collins, which makes electronic equipment for airplanes. Although sophisticated computerized machinery is used for part of the production process, final assembly requires highly skilled human operators to ensure absolute reliability of products used

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

Use the categories developed by Woodward to diag- nose whether the pro- duction technology in a manufacturing firm is small batch, mass production, or continu- ous process. Use a more organic struc- ture with small-batch or continuous-process technologies and with new flexible manufac- turing systems. Use a mechanistic structure with mass-production technologies.

Chapter 7: Manufacturing and Service Technologies 257

by aerospace companies, defense contractors, and the U.S. military. The com- pany’s workforce is divided into manufacturing cells, some of which produce only ten units a day. In one plant, 140 workers build Joint Tactical Information Distribution Systems, for managing battlefield communications from a circling plane, at a rate of ten a month.12

• Group II: Large-batch and mass production. Large-batch production is a manu- facturing process characterized by long production runs of standardized parts. Output often goes into inventory from which orders are filled, because custom- ers do not have special needs. Examples include traditional assembly lines, such as for automobiles.

• Group III: Continuous-process production. In continuous-process production, the entire process is mechanized. There is no starting and stopping. This rep- resents mechanization and standardization one step beyond those in an assem- bly line. Automated machines control the continuous process, and outcomes are highly predictable. Examples would include chemical plants, oil refineries, liquor producers, pharmaceuticals, and nuclear power plants.

1. Production of single pieces to customer orders

2. Production of technically complex units one by one

3. Fabrication of large equipment in stages

4. Production of pieces in small batches

5. Production of components in large batches subsequently assembled diversely

6. Production of large batches, assembly line type

7. Mass production

8. Continuous process production combined with the preparation of a product for sale by large-batch or mass production methods

9. Continuous process production of chemicals in batches

10. Continuous flow production of liquids, gases, and solid shapes



Technical Complexity

Group II Large-batch and mass production

Group III Continuous process production

Group I Small-batch and unit production

Source: Adapted from Joan Woodward, Management and Technology (London: Her Majesty’s Stationery Office, 1958). Used with permission of Her Britannic Majesty’s Stationery Office.

EXHIBIT 7.3 Woodward’s Classification of 100 British Firms According to Their Systems of Production

258 Part 4: Internal Design Elements

Using this classification of technology, Woodward’s data made sense. A few of her key findings are given in Exhibit 7.4. The number of management levels and the manager-to-total personnel ratio, for example, show definite increases as technical complexity increases from unit production to continuous process. This indicates that greater management intensity is needed to manage complex technology. The direct-to-indirect labor ratio decreases with technical complexity because more indi- rect workers are required to support and maintain complex machinery. Other char- acteristics, such as span of control, formalized procedures, and centralization, are high for mass-production technology because the work is standardized, but low for other technologies. Unit-production and continuous-process technologies require highly skilled workers to run the machines and verbal communication to adapt to changing conditions. Mass production is standardized and routinized, so few excep- tions occur, little verbal communication is needed, and employees are less skilled.

Overall, the management systems in both unit-production and continuous- process technology are characterized as organic, as defined in Chapter 4. They are more free-flowing and adaptive, with fewer procedures and less standardization. Mass production, however, is mechanistic, with standardized jobs and formalized procedures. Woodward’s discovery about technology thus provided substantial new insight into the causes of organization structure. In Joan Woodward’s own words, “Different technologies impose different kinds of demands on individuals and orga- nizations, and those demands had to be met through an appropriate structure.”13

Strategy, Technology, and Performance

Another portion of Woodward’s study examined the success of the firms along dimensions such as profitability, market share, stock price, and reputation. As indi- cated in Chapter 2, the measurement of effectiveness is not simple or precise, but Woodward was able to rank firms on a scale of commercial success according to whether they displayed above-average, average, or below-average performance on strategic objectives.

EXHIBIT 7.4 Relationship between Technical Complexity and Structural Characteristics


Unit Mass Continuous Structural Characteristic Production Production Process

Number of management levels 3 4 6 Supervisor span of control 23 48 15 Direct/indirect labor ratio 9:1 4:1 1:1 Manager/total personnel ratio Low Medium High Workers’ skill level High Low High Formalized procedures Low High Low Centralization Low High Low Amount of verbal communication High Low High Amount of written communication Low High Low Overall structure Organic Mechanistic Organic

Source: Joan Woodward, Industrial Organization: Theory and Practice (London: Oxford University Press, 1965). Used with permission.

Chapter 7: Manufacturing and Service Technologies 259

Woodward compared the structure–technology relationship against commercial success and discovered that successful firms tended to be those that had comple- mentary structures and technologies. Many of the organizational characteristics of the successful firms were near the average of their technology category, as shown in Exhibit 7.4. Below-average firms tended to depart from the structural character- istics for their technology type. Another conclusion was that structural character- istics could be interpreted as clustering into organic and mechanistic management systems, as defined in Chapter 4. Successful small-batch and continuous process organizations had organic structures, and successful mass-production organizations had mechanistic structures. Subsequent research has replicated her findings.14

What this illustrates for today’s companies is that strategy, structure, and technol- ogy need to be aligned, especially when competitive conditions change.15 For exam- ple, some years ago, when Dell created a business model to build personal computers faster and cheaper, other computer manufacturers had to realign strategy, structure, and technology to stay competitive. Dell made PCs to order for each customer and sold most of them directly to consumers without the expense of distributors or retail- ers. Manufacturers such as IBM that once tried to differentiate their products and charge a premium price switched to a low-cost strategy, adopted new technology to enable them to customize PCs, revamped supply chains, and began outsourcing manufacturing to other companies that could do the job more efficiently.

Today, many U.S. manufacturers farm production out to other companies. Printronix, a publicly owned company in Irvine, California, however, has gone in the opposite direction and achieved success by carefully aligning technology, struc- ture, and management processes to achieve strategic objectives.

Printronix makes 60 percent of the electro- mechanical line printers used in the world’s factories and warehouses. To maintain the reliability that makes Printronix prod- ucts worth $2,600 to $26,000 each, the company does almost everything in-house—from design, to making hundreds of parts, to final assembly, to research on new materials. Printronix began in the 1970s by making a high-speed line printer that could run with the minicomputers then being used on factory floors.

The company started as a traditional mass-production operation, but managers faced a tremendous challenge in the late 1980s when factories began switching from minicomputers to personal computers and servers. Within two years, sales and profits plunged, and founder and CEO Robert A. Kleist realized Printronix needed new ideas, new technology, and new methods to adapt to a world where printers were no longer stand-alone products but parts of emerging enterprise networks. One change Kleist made was to switch from mass producing printers that were kept in inventory to a small-batch or unit production system that built print- ers to order. Products were redesigned and assembly work reorganized so that small groups of workers could configure each printer to a customer’s specific needs. Many employees had to be trained in new skills and to take more responsibility than they had on the traditional assembly line. Highly skilled workers were needed to make some of the precision parts needed in the new machines as well. Besides internal restructuring, Kleist decided to pick up on the outsourcing trend and go after the computer industry’s factory printer business, winning orders to produce under the labels of IBM, Hewlett-Packard, and Siemens. Kleist doubled the research and development (R&D) budget to be sure the company kept pace with

Briefcase As an organization manager, keep this guideline in mind:

When adopting a new technology, realign strategy, structure, and management pro- cesses to achieve top performance.




260 Part 4: Internal Design Elements

new technological developments. In 2000, Printronix began building thermal printers as well as specialized laser printers that print adhesive bar-code labels at lightning speed.

By making changes in technology, design, and management methods, Printronix has continued to meet its strategic objective of differentiating its products from the competition. “The restructuring made us a stronger company in both manufacturing and engineering,” says Kleist.16 ■

Failing to adopt appropriate new technologies to support strategy, or adopting a new technology and failing to realign strategy to match it, can lead to poor performance.

Dateline: Paris, France, July 25, 2000. Less than two min- utes after Air France Concorde Flight 4590 departs Charles DeGaulle Airport, something goes horribly wrong. Trailing fire and billowing black smoke, the huge plane rolls left and crashes into a hotel, killing all 109 people aboard and four more on the ground. It’s just one of the technological disas- ters James R. Chiles describes in his book, Inviting Disaster: Lessons from the Edge of Technology. One of Chiles’s main points is that advancing technology makes possible the cre- ation of machines that strain the human ability to understand and safely operate them. Moreover, he asserts, the margins of safety are drawing thinner as the energies we harness become more powerful and the time between invention and use grows shorter. Chiles believes that today, “for every twenty books on the pursuit of success, we need a book on how things fly into tiny pieces despite enormous effort and the very highest ideals.” All complex systems, he reminds us, are destined to fail at some point.

HOW THINGS FLY INTO PIECES: EXAMPLES OF SYSTEM FRACTURES Chiles uses historical calamities such as the sinking of the Titanic and modern disasters such as the explosion of the space shuttle Challenger to illustrate the dangers of sys- tem fracture, a chain of events that involves human error in response to malfunctions in complex machinery. Disaster begins when one weak point links up with others.

• Sultana (American steamboat on the Mississippi River near Memphis, Tennessee), April 25, 1865. The boat, designed to carry a maximum of 460 people, was carry- ing more than 2,000 Union ex-prisoners north—as well as 200 additional crew and passengers—when three of the four boilers exploded, killing 1,800 people. One of the boilers had been temporarily patched to cover a

crack, but the patch was too thin. Operators failed to compensate by resetting the safety valve.

• Piper Alpha (offshore drilling rig in the North Sea), July 6, 1988. The offshore platform processed large volumes of natural gas from other rigs via pipe. A daytime work crew, which didn’t complete repair of a gas-condensate pump, relayed a verbal message to the next shift, but workers turned the pump on anyway. When the temporary seal on the pump failed, a fire trapped crewmen with no escape route, killing 167 crew and rescue workers.

• Union Carbide (India) Ltd. (release of highly toxic chemi- cals into a community), Bhopal, Mahdya Pradesh, India, December 3, 1984. There are three competing theories for how water got into a storage tank, creating a vio- lent reaction that sent highly toxic methyl isocyanate for herbicides into the environment, causing an estimated 7,000 deaths: (1) poor safety maintenance, (2) sabotage, or (3) worker error.

WHAT CAUSES SYSTEM FRACTURES? There is a veritable catalog of causes that lead to such disas- ters, from design errors, insufficient operator training, and poor planning to greed and mismanagement. Chiles wrote this book as a reminder that technology takes us into risky locales, whether it be outer space, up a 2,000-foot tower, or into a chemical processing plant. Chiles also cites examples of potential disasters that were averted by quick thinking and appropriate response. To help prevent system fractures, managers can create organizations in which people through- out the company are expert at picking out the subtle signals of real problems—and where they are empowered to report them and take prompt action.

Inviting Disaster: Lessons from the Edge of Technology, by James R. Chiles, is published by HarperBusiness.

Inviting Disaster: Lessons from the Edge of Technology By James R. Chiles


Chapter 7: Manufacturing and Service Technologies 261

Today’s increased global competition means more volatile markets, shorter product life cycles, and more sophisticated and knowledgeable consumers; and flexibility to meet these new demands has become a strategic imperative for many companies.17 Manufacturing companies can adopt new technologies to support the strategy of flexibility. However, organization structures and management processes must also be realigned, as a highly mechanistic structure hampers flexibility and prevents the company from reaping the benefits of the new technology.18 Managers should always remember that the techno- logical and human systems of an organization are intertwined. This chapter’s Book Mark provides a different perspective on technology by looking at the dangers of failing to understand the human role in managing technological advances.


In the years since Woodward’s research, new developments have occurred in manu- facturing technology. The factory of today is far different from the industrial firms Woodward studied in the 1950s. In particular, computers have revolutionized all types of manufacturing—small batch, large batch, and continuous process. At the Marion, North Carolina, plant of Rockwell Automation’s Power Systems Division, for example, highly trained employees can quickly handle a build-on-demand unit of one thanks to computers, wireless technology, and radio-frequency identification (RFID) systems. In one instance, the Marion plant built, packaged, and delivered a replacement bearing for installation in an industrial air conditioning unit in Texas only 15 hours after the customer called for help.19 An example in continuous process manufacturing comes from BP’s Texas City, Texas, petrochemical plant. Technicians who once manually monitored hundreds of complex processes now focus their energy on surveying long-term production trends. Controlling the continuous production of petrochemicals today is handled faster, smarter, more precisely, and more economi- cally by computer. Productivity at the Texas City plant has increased 55 percent. The plant uses 3 percent less electricity and 10 percent less natural gas, which amounts to millions of dollars in savings and fewer CO2 emissions.


Mass production manufacturing has seen similar transformations. Two signifi- cant contemporary applications of manufacturing technology are flexible manufac- turing systems and lean manufacturing.

Flexible Manufacturing Systems

Most of today’s factories use a variety of new manufacturing technologies, including robots, numerically controlled machine tools, RFID, wireless technology, and com- puterized software for product design, engineering analysis, and remote control of machinery. The ultimate automated factories are referred to as flexible manufacturing systems (FMS).21 Also called computer-integrated manufacturing, smart factories, advanced manufacturing technology, agile manufacturing, or the factory of the future, FMS links together manufacturing components that previously stood alone. Thus, robots, machines, product design, and engineering analysis are coordinated by a single computer system.

The result has revolutionized the shop floor, enabling large factories to deliver a wide range of custom-made products at low mass-production costs.22 Flexible manufacturing is typically the result of three subcomponents:

• Computer-aided design (CAD). Computers are used to assist in the drafting, design, and engineering of new parts. Designers guide their computers to draw

262 Part 4: Internal Design Elements

specified configurations on the screen, including dimensions and component details. Hundreds of design alternatives can be explored, as can scaled-up or scaled-down versions of the original.23

• Computer-aided manufacturing (CAM). Computer-controlled machines in materials handling, fabrication, production, and assembly greatly increase the speed at which items can be manufactured. CAM also permits a production line to shift rapidly from producing one product to any variety of other products by changing the instruction tapes or software codes in the computer. CAM enables the production line to quickly honor customer requests for changes in product design and product mix.24

• Integrated information network. A computerized system links all aspects of the firm—including accounting, purchasing, marketing, inventory control, design, production, and so forth. This system, based on a common data and informa- tion base, enables managers to make decisions and direct the manufacturing process in a truly integrated fashion.

The combination of CAD, CAM, and integrated information systems means that a new product can be designed on the computer and a prototype can be pro- duced untouched by human hands. The ideal factory can switch quickly from one product to another, working fast and with precision, without paperwork or record keeping to bog down the system.25

Some advanced factories have moved to a system called product life-cycle management (PLM). PLM software can manage a product from idea through development, manufacturing, testing, and even maintenance in the field. The PLM software provides three primary advantages for product innovation. PLM (1) stores data on ideas and products from all parts of the company; (2) links product design to all departments (and even outside suppliers) involved in new product development; and (3) provides three-dimensional images of new products for testing and maintenance. PLM has been used to coordinate people, tools, and facilities around the world for the design, development, and manufacture of products as diverse as roller skates produced by GID of Yorba Linda, California, product packaging for Procter & Gamble consumer products, and Boeing’s new 787 Dreamliner passenger jet.26

Automakers provide good examples of the benefits of flexible manufacturing. Ford’s Kansas City, Missouri, plant, one of the largest manufacturing facilities in the world, produces around 490,000 F-150s, Ford Escapes, and Mazda Tributes a year. With just a little tweaking, the assembly lines can be programmed to manufacture any kind of car or truck Ford makes. Robots in wire cages do most of the work, while people act as assistants, taking measurements, refilling parts, and altering the system if something goes wrong. Assembly is synchronized by computers, right down to the last rearview mirror. Ford’s flexible manufacturing system is projected to save the company $2 billion over the next 10 years.27 Honda has achieved an even greater degree of flexibility at its plant in East Liberty, Ohio. Considered the most flexible auto manufacturer in North America, the Honda plant can switch from making Civic compacts to making the longer, taller CR-V crossover in as little as five min- utes. Most of the company’s vehicles are designed to be put together the same way, even if their parts are different. All that’s needed to switch assembly from one type of vehicle to another is to put different “hands” on the robots to handle different parts. The ability to quickly adjust inventory levels of different types of vehicles has

Chapter 7: Manufacturing and Service Technologies 263

been a key strategic advantage for Honda in an era of volatile gasoline prices and shifting vehicle popularity.28

Lean Manufacturing

Flexible manufacturing reaches its ultimate level to improve quality, customer ser- vice, and cost cutting when all parts are used interdependently and combined with flexible management processes in a system referred to as lean manufacturing. Lean manufacturing uses highly trained employees at every stage of the production pro- cess, who take a painstaking approach to details and problem solving to cut waste and improve quality. In a recent survey by Industry Week and the Manufacturing Performance Institute asking 745 manufacturers which improvement programs they used, lean manufacturing was by far the most common answer, with more than 40 percent reporting the use of lean manufacturing techniques.29

Lean manufacturing incorporates technological elements, such as CAD/CAM and PLM, but the heart of lean manufacturing is not machines or software, but people. Lean manufacturing requires changes in organizational systems, such as decision-making processes and management processes, as well as an organizational culture that supports active employee participation, a quality perspective, and focus on the customer. Employees are trained to attack waste and strive for continuous improvement in all areas.30 One lesson of lean manufacturing is that there is always room for improvement. Consider the example of Matsushita Electric Industrial Company’s factory in Saga, Japan.

To an outsider, Matsushita Electric Com- pany’s Saga plant looked pretty lean. Over a four-year period, the facility had doubled productivity and could pump out cordless phones, security cameras, and fax machines in record time. But for plant managers Hitoshi Hirata and Hirofumi Tsuru, that wasn’t good enough.

So, the plant recently ripped out miles of conveyor belts and replaced them with clusters of robots, controlled by software that synchronizes production so that there’s no downtime. If one robot breaks down, work can quickly be routed to another. One outcome is a dramatic increase in speed. “It used to be 2½ days into a production run before we had our first finished product. But now the first is done in 40 minutes,” says Hirata. The Saga plant can churn out 500 phones, for example, every eight-hour shift, which means it produces twice as many phones per week as it could before the changes. That also significantly cuts inventory costs because components spend less time in the factory waiting to be used.

Are Saga’s plant managers satisfied with the reinvention? Well, sort of. They know their factory is at the forefront of Matsushita’s efforts to counter low-cost rivals by doing things better, faster, and cheaper. But they’re also continually striving to take efficiency to new heights. “Next year,” says Hirata, “we’ll try to shorten the cycle even more.”31 ■

Japanese companies such as Matsushita have long been global leaders in lean manu- facturing. Another Japanese company, Toyota Motor Corporation, is often considered the premier manufacturing organization in the world. The famed Toyota Production System combines techniques such as just-in-time inventory, product life-cycle

Matsushita Electric Industrial Company


264 Part 4: Internal Design Elements

management, continuous-flow production, quick changeover of assembly lines, con- tinuous improvement, and preventive maintenance with a management system that encourages employee involvement and problem solving. Any employee can stop the production line at any time to solve a problem. In addition, designing equipment to stop automatically so that a defect can be fixed is a key element of the system.32

Many North American organizations have studied the Toyota Production System and seen dramatic improvements in productivity, inventory reduction, and quality. “We’re not trying to be Toyota,” says Kristen Workman, manufacturing engineering manager at Schneider Electric’s Peru, Indiana, facility, “but we can take their ideas and try to make them work in our own way.” Since implementing lean ideas, Schneider’s Peru operations have reduced waste significantly and increased productivity by 30 percent. Even with 85 percent of the 2,200 or so lighting and power panelboards the plant assembles and ships each day being custom orders, the facility has a 97 percent on-time delivery rate.33

Lean manufacturing and flexible manufacturing systems have paved the way for mass customization, which refers to using mass-production technology to quickly and cost-effectively assemble goods that are uniquely designed to fit the demands of individual customers.34 Mass customization has been applied to products as diverse as farm machinery, water heaters, clothing, computers, and industrial detergents.35

Oshkosh Truck Company has thrived during an industrywide slump in sales by offer- ing customized fire, cement, garbage, and military trucks. Firefighters often travel to the plant to watch their new vehicle take shape, sometimes bringing paint chips to customize the color of their fleet.36 Auto manufacturers, too, are moving toward mass customization. Sixty percent of the cars BMW sells in Europe are built to order.37

Performance and Structural Implications

The awesome advantage of flexible manufacturing is that products of different sizes, types, and customer requirements freely intermingle on the assembly line. Computerized machines can make instantaneous changes—such as putting a larger screw in a different location—without slowing the production line. A manufacturer can turn out an infinite variety of products in unlimited batch sizes, as illustrated in Exhibit 7.5. In traditional manufacturing systems studied by Woodward, choices were limited to the diagonal. Small batch allowed for high product flexibility and custom orders, but because of the “craftsmanship” involved in custom-making

1 Lean manufacturing is a super-effi cient form of manufacturing that produces products of top quality. ANSWER: Agree. Lean manufacturing techniques have been implemented in hundreds of organizations all over the world and have led to dramatic improve- ments in quality, productivity, and effi ciency. Lean manufacturing continues to be an important tool for manufacturing fi rms, and smart managers in service fi rms are also learning to benefi t from lean thinking.



Chapter 7: Manufacturing and Service Technologies 265

products, batch size was necessarily small. Mass production could have large batch size, but offered limited product flexibility. Continuous process could produce a sin- gle standard product in unlimited quantities. Flexible manufacturing systems allow plants to break free of this diagonal and to increase both batch size and product flexibility at the same time. When taken to its ultimate level, FMS allows for mass customization, with each specific product tailored to customer specification. This high-level use of FMS has been referred to as computer-aided craftsmanship.38

Studies suggest that with FMS, machine utilization is more efficient, labor pro- ductivity increases, scrap rates decrease, and product variety and customer satisfac- tion increase.39 Many U.S. manufacturing companies are reinventing the factory using FMS and lean manufacturing systems to increase productivity.

Research into the relationship between FMS and organizational characteristics has discovered the organizational patterns summarized in Exhibit 7.6. Compared with traditional mass-production technologies, FMS has a narrow span of control,

Mass production

Small batch Flexible manufacturing


Continuous process






Mass customization







Source: Based on Jack Meredith, “The Strategic Advantages of New Manufacturing Technologies for Small Firms,” Strategic Management Journal 8 (1987), 249–258; Paul Adler, “Managing Flexible Automation,” California Management Review (Spring 1988), 34–56; and Otis Port, “Custom-made Direct from the Plant,” BusinessWeek/21st Century Capitalism (November 18, 1994), 158–159.

EXHIBIT 7.5 Relationship of Flexible Manufacturing Technology to Traditional Technologies

266 Part 4: Internal Design Elements

few hierarchical levels, adaptive tasks, low specialization, and decentralization, and the overall environment is characterized as organic and self-regulative. Employees need the skills to participate in teams; training is broad (so workers are not overly specialized) and frequent (so workers are up to date). Expertise tends to be cogni- tive so workers can process abstract ideas and solve problems. Interorganizational relationships in FMS firms are characterized by changing demand from customers— which is easily handled with the new technology—and close relationships with a few suppliers that provide top-quality raw materials.40

Technology alone cannot give organizations the benefits of flexibility, qual- ity, increased production, and greater customer satisfaction. Research suggests that FMS can become a competitive burden rather than a competitive advantage unless organizational structures and management processes are redesigned to take advantage of the new technology.41 When top managers make a commitment to implement new structures and processes that empower workers and support a learning and knowledge-creating environment, FMS can help companies be more competitive.42


Another big change occurring in the technology of organizations is the growing ser- vice sector. A large percentage of the U.S. workforce is employed in services, such as hospitals, hotels, package delivery, online services, or telecommunications. Service

EXHIBIT 7.6 Comparison of Organizational Characteristics Associated with Mass Production and Flexible Manufacturing Systems

Source: Based on Patricia L. Nemetz and Louis W. Fry, “Flexible Manufacturing Organizations: Implications for Strategy Formulation and Organization Design,” Academy of Management Review 13 (1988), 627–638; Paul S. Adler, “Managing Flexible Automation,” California Management Review (Spring 1988), 34–56; and Jeremy Main, “Manufacturing the Right Way,” Fortune (May 21, 1990) 54–64.

Characteristic Mass Production FMS

Structure Span of control Wide Narrow Hierarchical levels Many Few Tasks Routine, repetitive Adaptive, craftlike Specialization High Low Decision making Centralized Decentralized Overall Bureaucratic, mechanistic Self-regulating, organic Human Resources Interactions Standalone Teamwork Training Narrow, one time Broad, frequent Expertise Manual, technical Cognitive, social Solve problems Interorganizational Customer demand Stable Changing Suppliers Many, arm’s length Few, close relationships

Chapter 7: Manufacturing and Service Technologies 267

technologies are different from manufacturing technologies and, in turn, require a different organization design.

Service Firms

Definition. Whereas manufacturing organizations achieve their primary purpose through the production of products, service organizations accomplish their primary purpose through the production and provision of services, such as education, health care, transportation, banking, and hospitality. Studies of service organizations have focused on the unique dimensions of service technologies. The characteristics of service technology are compared to those of manufacturing technology in Exhibit 7.7.

The most obvious difference is that service technology produces an intangible output, rather than a tangible product, such as a refrigerator produced by a manu- facturing firm. A service is abstract and often consists of knowledge and ideas rather than a physical product. Thus, whereas manufacturers’ products can be inventoried for later sale, services are characterized by simultaneous production and consump- tion. A client meets with a doctor or attorney, for example, and students and teach- ers come together in the classroom or over the Internet. A service is an intangible product that does not exist until it is requested by the customer. It cannot be stored, inventoried, or viewed as a finished good. If a service is not consumed immediately upon production, it disappears.43 This typically means that service firms are labor

Service Technology 1. Intangible output 2. Production and consumption take place

simultaneously 3. Labor- and knowledge-intensive 4. Customer interaction generally high 5. Human element very important 6. Quality is perceived and difficult to

measure 7. Rapid response time is usually necessary 8. Site of facility is extremely important

Manufacturing Technology 1. Tangible product 2. Products can be inventoried for later

consumption 3. Capital asset-intensive 4. Little direct customer interaction 5. Human element may be less important 6. Quality is directly measured 7. Longer response time is acceptable 8. Site of facility is moderately important

Service Airlines Hotels

Consultants Health care Law firms

Product and Service Fast-food outlets

Cosmetics Real estate

Stockbrokers Retail stores

Product Soft drink companies

Steel companies Automobile manufacturers

Mining corporations Food processing plants

Source: Based on F. F. Reichheld and W. E. Sasser, Jr., “Zero Defections: Quality Comes to Services,” Harvard Business Review 68 (September–October 1990), 105–111; and David E. Bowen, Caren Siehl, and Benjamin Schneider, “A Framework for Analyzing Customer Service Orientations in Manufacturing,” Academy of Management Review 14 (1989), 75–95.

EXHIBIT 7.7 Differences between Manufacturing and Service Technologies

268 Part 4: Internal Design Elements

and knowledge intensive, with many employees needed to meet the needs of cus- tomers, whereas manufacturing firms tend to be capital intensive, relying on mass production, continuous process, and flexible manufacturing technologies.44

Direct interaction between customer and employee is generally very high with services, while there is little direct interaction between customers and employees in the technical core of a manufacturing firm. This direct interaction means that the human element (employees) becomes extremely important in service firms. Whereas most people never meet the workers who manufactured their cars, they interact directly with the salesperson who sold them their Honda Civic or Ford F-150. The treatment received from the salesperson—or from a doctor, lawyer, or hairstylist— affects the perception of the service received and the customer’s level of satisfaction. The quality of a service is perceived and cannot be directly measured and compared in the same way that the quality of a tangible product can. Another characteristic that affects customer satisfaction and perception of quality service is rapid response time. A service must be provided when the customer wants and needs it. When you take a friend to dinner, you want to be seated and served in a timely manner; you would not be very satisfied if the host or manager told you to come back tomorrow when there would be more tables or servers available to accommodate you.

The final defining characteristic of service technology is that site selection is often much more important than with manufacturing. Because services are intan- gible, they have to be located where the customer wants to be served. Services are dispersed and located geographically close to customers. For example, fast-food franchises usually disperse their facilities into local stores. Most towns of even mod- erate size today have two or more McDonald’s restaurants rather than one large one, for example, in order to provide service where customers want and need it.

In reality, it is difficult to find organizations that reflect 100 percent service or 100 percent manufacturing characteristics. Some service firms take on charac- teristics of manufacturers, and vice versa. Many manufacturing firms are placing a greater emphasis on customer service to differentiate themselves and be more competitive. In addition, manufacturing organizations have departments such as purchasing, HR, and marketing that are based on service technology. On the other hand, organizations such as gas stations, stockbrokers, retail stores, and restaurants belong to the service sector, but the provision of a product is a significant part of the transaction. The vast majority of organizations involve some combination of products and services. The important point is that all organizations can be classified along a continuum that includes both manufacturing and service characteristics, as illustrated in Exhibit 7.7. This chapter’s “How Do You Fit the Design?” question- naire will give you some insight into whether you are better suited to be a manager in a service organization or a manufacturing firm.

New Directions in Services. Service firms have always tended toward providing customized output—that is, providing exactly the service each customer wants and needs. When you visit a hairstylist, you don’t automatically get the same cut the styl- ist gave the three previous clients. The stylist cuts your hair the way you request it. However, customer expectations of what constitutes good service are rising. Service companies such as the Ritz-Carlton Hotels, Vanguard, and Progressive Insurance use new technology to keep customers coming back. All Ritz-Carlton hotels are linked to a database filled with the preferences of half a million guests, allowing any desk clerk or bellhop to find out what your favorite wine is, whether you’re allergic to feather pillows, and how many extra towels you want in your room.45

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

Use the concept of service technology to evaluate the produc- tion process in non- manufacturing firms. Service technologies are intangible and must be located close to the customer. Hence, service organi- zations may have an organization structure with fewer boundary roles, greater geo- graphical dispersion, decentralization, highly skilled employ- ees in the technical core, and generally less control than in manufacturing organizations.

Chapter 7: Manufacturing and Service Technologies 269

At Vanguard, customer service reps teach customers how to effectively use the company’s website. That means customers needing simple information now get it quickly and easily over the Web, and reps have more time to help clients with complicated questions. The new approach has had a positive impact on Vanguard’s customer retention rate.46

The expectation for better service has also pushed service firms in industries from package delivery to health care to take a lesson from manufacturing.47 Japan Post, under pressure to cut a $191 million loss on operations, hired Toyota’s Toshihiro Takahashi to help apply the Toyota Production System to the collection, sorting, and delivery of mail. In all, Takahashi’s team came up with 370 improvements and reduced the post office’s person-hours by 20 percent. The waste reduction is expected to cut costs by around $350 million a year.48 Numerous other service

The questions that follow ask you to describe your behavior. For each question, check the answer that best describes you.

1. I am usually running late for class or other appointments: a. Yes b. No

2. When taking a test I prefer: a. Subjective questions (discussion or essay) b. Objective questions (multiple choice)

3. When making decisions, I typically: a. Go with my gut—what feels right b. Carefully weigh each option

4. When solving a problem, I would more likely: a. Take a walk, mull things over, then discuss b. Write down alternatives, prioritize them, then pick

the best

5. I consider time spent daydreaming as: a. A viable tool for planning my future b. A waste of time.

6. To remember directions, I typically: a. Visualize the information b. Make notes

7. My work style is mostly: a. Juggle several things at once. b. Concentrate on one task at a time until complete

8. My desk, work area, or laundry area are typically: a. Cluttered b. Neat and organized

Scoring: Count the number of checked “a” items and “b” items. Each “a” represents right-brain processing, and each “b” represents left-brain processing. If you scored 6 or higher on either, you have a distinct processing style. If you checked fewer than 6 for either, you probably have a balanced style.

Interpretation: People have two thinking processes— one visual and intuitive in the right half of the brain, and the other verbal and analytical in the left half of the brain. The thinking process you prefer predisposes you to certain types of knowledge and information—technical reports, analytical information, and quantitative data (left brain) vs. talking to people, thematic impressions, and personal intuition (right brain)—as effective input to your thinking and decision making. Manufacturing organizations typically use left-brain processing to handle data based on physical, measurable technology. Service organizations typically use right-brain processing to interpret less tangible situations and serve people in a direct way. Left-brain processing has been summarized as based on logic; right-brain processing has been summarized as based on love.

Source: Adapted from Carolyn Hopper, Practicing Management Skills (Houghton Mifflin, 2003); and Jacquelyn Wonder and Priscilla Donovan, “Mind Openers,” Self (March 1984).

Manufacturing vs. Serviceng vs. Service How Do You Fit the Design?

270 Part 4: Internal Design Elements

firms, in the United States as well as in other countries, have also applied lean prin- ciples in recent years.

Designing the Service Organization

The feature of service technologies with a distinct influence on organizational struc- ture and control systems is the need for technical core employees to be close to the customer.49 The differences between service and product organizations necessitated by customer contact are summarized in Exhibit 7.8.

The impact of customer contact on organization structure is reflected in the use of boundary roles and structural disaggregation.50 Boundary roles are used exten- sively in manufacturing firms to handle customers and to reduce disruptions for the technical core. They are used less in service firms because a service is intangible and cannot be passed along by boundary spanners, so service customers must interact directly with technical employees, such as doctors or brokers.

A service firm deals in information and intangible outputs and does not need to be large. Its greatest economies are achieved through disaggregation into small units that can be located close to customers. Stockbrokers, doctors’ clinics, con- sulting firms, and banks disperse their facilities into regional and local offices. Manufacturing firms, on the other hand, tend to aggregate operations in a single area that has raw materials and an available workforce. A large manufacturing firm can take advantage of economies derived from expensive machinery and long production runs.

Service technology also influences internal organization characteristics used to direct and control the organization. For one thing, the skills of technical core employees typically need to be higher. These employees need enough knowledge and awareness to handle customer problems rather than just enough to perform mechanical tasks. Employees need social and interpersonal skills as well as tech- nical skills.51 Because of higher skills and structural dispersion, decision making often tends to be decentralized in service firms, and formalization tends to be low. Although some service organizations, such as many fast-food chains, have set rules and procedures for customer service, employees in service organizations typically

EXHIBIT 7.8 Configuration and Structural Characteristics of Service Organizations versus Product Organizations

Structural Characteristic Service Product

1. Separate boundary roles Few Many 2. Geographical dispersion Much Little 3. Decision making Decentralized Centralized 4. Formalization Lower Higher

Human Resources 1. Employee skill level Higher Lower 2. Skill emphasis Interpersonal Technical

Chapter 7: Manufacturing and Service Technologies 271

have more freedom and discretion on the job. Managers at Home Depot have learned that how employees are managed has a great deal to do with the success of a service organization.

Home Depot grew to the world’s largest home improvement retailer largely on the strength of its employees. Many people hired to work in the stores were former plumbers, carpenters, or other skilled tradesmen who understood the products and took pride in help- ing do-it-yourselfers find the right tools and supplies and know how to use them.

However, to cut costs in recent years, the company began hiring more part-time employ- ees and instituted a salary cap that made jobs less appealing to experienced workers. As a further way to reduce costs, managers began measuring every aspect of the stores’ produc- tivity, such as how long it took to unload shipments of goods or how many extended warran- ties each employee sold per week. What got overlooked, though, was how well employees were providing service. Customers began complaining that they could never find anyone to assist them—and even when they did, many employees didn’t have the knowledge and experience to be of much help. Some customers took their business elsewhere, even if it meant going to small shops where they would pay higher prices but get better service.

Now managers are working hard to get things back on track. The stores are hiring more full-timers again, instituting new training programs, and looking for other ways to make sure employees are knowledgeable and helpful. The CEO even reached out to the company’s founders, Bernie Marcus and Arthur Blank, for advice on how to put the shine back on Home Depot’s customer service reputation.52 ■

Managers at Home Depot can use an understanding of the nature of service technology to help them align strategy, structure, and management processes and make the retailer more effective. Service technologies require structures and systems that are quite different from those for a traditional manufacturing technology. For example, the concept of separating complex tasks into a series of small jobs and exploiting economies of scale is a cornerstone of traditional manufacturing, but researchers have found that applying it to service organizations often does not work so well.53 Some service firms have redesigned jobs to separate low– and high– customer-contact activities, with more rules and standardization in the low-contact jobs. High-touch service jobs, like those on the Home Depot sales floor, need more freedom and less control to satisfy customers.

Home Depot Inc.


2 The best way for a company to provide good service is to have abundant and clear rules and procedures and make sure everyone follows them to the letter.

ANSWER: Disagree. Service employees need good interpersonal skills and a de- gree of autonomy to be able to satisfy each customer’s specifi c needs. Although many service organizations have some standard procedures for serving cus- tomers, service fi rms are typically low on both centralization and formalization. Abundant rules can take away both personal autonomy and the personal touch.


272 Part 4: Internal Design Elements

Now let’s turn to another perspective on technology, that of production activi- ties within specific organizational departments. Departments often have character- istics similar to those of service technology, providing services to other departments within the organization.


This section shifts to the department level of analysis for departments not necessar- ily within the technical core. Each department in an organization has a production process that consists of a distinct technology. A company such as Tenneco, a maker of auto parts, for example, might have departments for engineering, research and development, human resources, marketing, quality control, finance, and dozens of other functions. This section analyzes the nature of departmental technology and its relationship with departmental structure.

The framework that has had the greatest impact on the understanding of depart- mental technologies was developed by Charles Perrow.54 Perrow’s model has been useful for a broad range of technologies, which made it ideal for research into departmental activities.


Perrow specified two dimensions of departmental activities that were relevant to organization structure and process. The first is the number of exceptions in the work. This refers to task variety, which is the frequency of unexpected and novel events that occur in the conversion process. Task variety concerns whether work processes are performed the same way every time or differ from time to time as employees transform the organization’s inputs into outputs.55 When individuals encounter a large number of unexpected situations, with frequent problems, vari- ety is considered high. When there are few problems, and when day-to-day job requirements are repetitious, technology contains little variety. Variety in depart- ments can range from repeating a single act, such as on a traditional assembly line, to working on a series of unrelated problems, such as in a hospital emer- gency room.


The second dimension of technology concerns the analyzability of work activities. When the conversion process is analyzable, the work can be reduced to mechanical steps and participants can follow an objective, computational procedure to solve problems. Problem solution may involve the use of standard procedures, such as instructions and manuals, or technical knowledge, such as that in a textbook or handbook. On the other hand, some work is not analyzable. When problems arise, it is difficult to identify the correct solution. There is no store of techniques or pro- cedures to tell a person exactly what to do. The cause of or solution to a problem is not clear, so employees rely on accumulated experience, intuition, and judgment. The final solution to a problem is often the result of wisdom and experience and not the result of standard procedures. For example, Philippos Poulos, a tone regulator at

Chapter 7: Manufacturing and Service Technologies 273

Steinway & Sons, has an unanalyzable technology. Tone regulators carefully check each piano’s hammers to ensure they produce the proper “Steinway sound.”56 These quality-control tasks require years of experience and practice. Standard procedures will not tell a person how to do such tasks.


The two dimensions of technology and examples of departmental activities on Perrow’s framework are shown in Exhibit 7.9. The dimensions of variety and ana- lyzability form the basis for four major categories of technology: routine, craft, engineering, and nonroutine.

Categories of Technology. Routine technologies are characterized by little task vari- ety and the use of objective, computational procedures. The tasks are formalized and standardized. Examples include an automobile assembly line and a bank teller department.

Craft technologies are characterized by a fairly stable stream of activities, but the conversion process is not analyzable or well understood. Tasks require extensive training and experience because employees respond to intangible factors on the basis of wisdom, intuition, and experience. Although advances in machine technologies

Departmental Technologies





Performing arts


Fine goods manufacturing

University teaching

General management







Tax accounting

General accounting

Strategic planning

Social science research

Applied research Low







E — NO



Performing arts


Fine goods manufacturing

University teaching

General management







Tax accounting

General accounting

Strategic planning

Social science research

Applied research Low






Departmental Technologies





Source: California Management Review by Daft and Macintosh. Copyright 1978 by California Management Review. Reproduced with permission of California Management Review via Copyright Clearance Center.

EXHIBIT 7.9 Framework for Department Technologies

274 Part 4: Internal Design Elements

seem to have reduced the number of craft technologies in organizations, craft technologies are still important. For example, steel furnace engineers continue to mix steel based on intuition and experience, pattern makers at fashion houses such as Louis Vuitton, Zara, or H&M convert rough designers’ sketches into salable gar- ments, and teams of writers for television series such as House or Grey’s Anatomy convert ideas into story lines.

Engineering technologies tend to be complex because there is substantial variety in the tasks performed. However, the various activities are usually handled on the basis of established formulas, procedures, and techniques. Employees normally refer to a well-developed body of knowledge to handle problems. Engineering and accounting tasks usually fall in this category.

Nonroutine technologies have high task variety, and the conversion process is not analyzable or well understood. In nonroutine technology, a great deal of effort is devoted to analyzing problems and activities. Several equally acceptable options typically can be found. Experience and technical knowledge are used to solve prob- lems and perform the work. Basic research, strategic planning, and other work that involves new projects and unexpected problems are nonroutine. The blossoming biotechnology industry also represents a nonroutine technology. Breakthroughs in understanding metabolism and physiology at a cellular level depend on highly trained employees who use their experience and intuition as well as scientific knowledge.57

Routine versus Nonroutine. Exhibit 7.9 also illustrates that variety and analyzabil- ity can be combined into a single dimension of technology. This dimension is called routine versus nonroutine technology, and it is the diagonal line in Exhibit 7.9. The analyzability and variety dimensions are often correlated in departments, meaning that technologies high in variety tend to be low in analyzability, and technologies low in variety tend to be analyzable. Departments can be evaluated along a single dimension of routine versus nonroutine that combines both analyzability and vari- ety, which is a useful shorthand measure for analyzing departmental technology.

The following questions show how departmental technology can be analyzed for determining its placement on Perrow’s technology framework in Exhibit 7.9.58

Employees normally circle a number from 1 to 7 in response to each question.

Variety: 1. To what extent would you say your work is routine? 2. Does most everyone in this unit do about the same job in the same way most of

the time? 3. Are unit members performing repetitive activities in doing their jobs?

Analyzability: 1. To what extent is there a clearly known way to do the major types of work you

normally encounter? 2. To what extent is there an understandable sequence of steps that can be fol-

lowed in doing your work? 3. To do your work, to what extent can you actually rely on established procedures

and practices?

If answers to the preceding questions indicate high scores for analyzability and low scores for variety, the department would have a routine technology. If the oppo- site occurs, the technology would be nonroutine. Low variety and low analyzability

Chapter 7: Manufacturing and Service Technologies 275

indicate a craft technology, and high variety and high analyzability indicate an engi- neering technology. As a practical matter, most departments fit somewhere along the diagonal and can be most easily characterized as routine or nonroutine.


Once the nature of a department’s technology has been iden