7974290 Organizational Theory Design and Change Chapter 01

CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS

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PART 1: LECTURE OUTLINES CHAPTER 1 ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS TEACHING OBJECTIVES 1. To define an organization and explain how it creates value in three stages: input, conversion, and output. (1.1) 2. To discuss why organizations exist and how they achieve goals collectively. (1.1) 3. To describe organizational theory, how organizations function, and relate to organizational structure, culture, and design. (1.2) 4. To show how organizational design helps a company gain a competitive advantage, deal with contingencies, manage diversity, increase efficiency, increase innovation, and effectively manage change. (1.2) 5. To illustrate the consequences of poor organizational design and loss of control over structure and culture. (1.2) 6. To discuss the three approaches of evaluating organizational effectiveness: external resource, internal

systems, and technical approach. (1.3) 7. To distinguish between official goals and operating goals. (1.3)

CHAPTER SUMMARY This chapter discusses organizations, organizational theory, and the importance of organizational design. An organization is a tool for individuals or groups to accomplish goals. An organization creates value at three stages: input, conversion, and output. Organizations exist because people working together to produce goods and services create more value than those working alone. Organizations may exist to increase specialization and the division of labor, to use large-scale technology, to manage the external environment, to economize on transaction costs, and to exert power and control over employees.

Organizational effectiveness should be measured according to a manager’s methods of control, innovation, and efficiency. The external resource, internal systems, or technical approach measure effectiveness and official and operative goals. Difficulties arise in measuring effectiveness even if stakeholders have shared goals. An organization must select the best way to achieve goals. Organizations are affected by the environment, technology, and processes. The technological environment entails innovations in production processes and new products.

CHAPTER OUTLINE 1.1

What Is an Organization?

An organization is intangible; it cannot be touched or felt. Thinking of an organization evokes its product or service. The name Anheuser-Busch evokes the word beer, not why the company provides beer or how it controls employees. An organization groups people and resources to provide goods and services to

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The components of organizational theory are structure, culture, and design and change. Organizational design helps a company gain a competitive advantage, deal with contingencies, manage diversity, increase efficiency, and increase innovation. Poor organizational design results in company decline, including layoffs and difficulty in attracting resources.

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satisfy a need. Entrepreneurs begin with the idea of satisfying a need then collect resources to meet that need.

Focus on New Information Technology: Amazon.com, Part 1 Amazon.com shows how Jeff Bezos saw a need and created an organization to meet it. Q. What prodded Jeff Bezos to start Amazon.com? A. Recognizing the opportunity to build an online bookstore, Bezos started Amazon.com to meet the needs of computer owners. An online bookstore could offer a larger and more diverse selection, an online catalogue, an easy search capability, and book reviews. Bezos organized resources to meet the need for a new bookstore.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ How Does an Organization Create Value? The value creation process includes input, conversion, and output. (Fig. 1.1) Q: What are some inputs a company needs to provide a product or service? A. Inputs include human resources, raw materials, capital, money, and information. The value created depends on how a company selects and acquires inputs. Inputs are transformed into outputs at the conversion stage. The value created depends on the quality of an organization’s skills and its ability to learn from the environment. The conversion process results in an output, a finished good, or a service. Sales revenue buys more inputs, so the value creation cycle continues. The value creation cycle is used for nonprofit and manufacturing organizations and service companies. Q. What are the inputs, conversion processes, and outputs at McDonald’s? (Fig. 1.2) A. The inputs include meat, fries, employees, and capital, such as cooking equipment. The conversion process entails cooking the food. The outputs are sandwiches and fries.

Organizations exist: To Increase Specialization and the Division of Labor In an organization, individuals concentrate on areas of expertise and become more specialized. An engineer concentrates on one part of the engine and this specialization creates value. To Use Large-Scale Technology Technology enables organizations to achieve economies of scale, cost savings through large-volume production, and economies of scope and cost savings when underutilized resources are shared. To Manage the External Environment An organization has the resources to monitor and manage the external environment, economic, political, and social factors plus suppliers and the market.

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Why Do Organizations Exist? People working together to produce goods and services create more value than people working alone. (Fig. 1.3)

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To Economize on Transaction Costs An organization can reduce transaction costs and expenses associated with negotiating, monitoring, and governing exchanges between people and can control exchanges. To Exert Power and Control Organizations exert pressure on employees to conform to task requirements through employment, promotions, and rewards. Employees who fail to meet organizational needs can be fired. These factors create stability, allow skills to develop, and increase value creation. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

1.2

What Is Organizational Theory?

Organizational theory is the study of how organizations work and how they impact and are impacted by the environment. Organizational theory relates to organizational structure, culture, and design. (Fig. 1.4) Organizational structure is the formal setup of task and authority relationships. Structure controls the coordination of activities and employee motivation to attain goals. Structure must be continually evaluated. Organizational culture, a set of shared values and norms, shapes and controls behavior in an organization. Q: What determines culture? A. People, ethics, rights, and structure of the organization develop culture, which can vary widely among organizations that provide similar goods in the same environment. Coca-Cola promotes cooperation and has loyal employees, whereas Pepsi has a competitive culture and high turnover among managers. Organizational design is the process by which managers select and manage aspects of structure and culture so that an organization can achieve its goals.

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Organizational Insight 1.1: Opposite Organizing Approaches at Apple and Dell Computer People who start new organizations may lack the skills necessary to effectively design the organization. The Apple Computer example illustrates this well. Q. How do these two examples illustrate the importance of proper organizational design?

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Organizational change is the process by which organizations move from their present state to some desired future state to increase their effectiveness.

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A. Although Jobs stated he had little desire to manage the day-to-day operations of Apple Computer, he desired more power as the organization grew and began intervening in the day-to-day operations, which caused problems. Michael Dell, on the other hand, understood how important a well designed organization was, and created a structure centered on participative management, involving employees in decision making, and was not as hands-on as Jobs. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ The Importance of Organizational Design and Change Organizational design helps a company deal with contingencies, achieve competitive advantage, manage diversity, and increase its efficiency and ability to innovate goods and services. Dealing with Contingencies A contingency is an event that might occur and must be considered in planning. An organization can design its structure to increase environmental control. Structure and culture are tools to respond to the complex global environment and changing technology. Structure can make employees aware of the environment. Gaining Competitive Advantage Good organizational design offers a competitive advantage. Competitive advantage emerges from core competencies, value creating skills, and abilities. Managers formulate strategies, specific decisions, and actions that use core competencies to create a competitive advantage. Organizational design implements an organization’s strategy and serves as a core competency because it is difficult to imitate. Although technology can be duplicated, structure and culture develop over time, making them hard to imitate. Organizational design must be continually evaluated.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

Promoting Efficiency, Speed, and Innovation Organizational design can increase efficiency. Companies must compete with low-cost producers globally and market new products and processes. Organizational design makes a firm more innovative. An entrepreneurial culture fosters innovation. The Consequences of Poor Organizational Design Organizational design affects company performance, yet employee roles are often neglected until a crisis hits. One reason for decline is a loss of control over organizational structure and culture. Talented employees leave, acquiring resources becomes difficult, and the value creation process slows down. Managers are forced to change elements of structure and culture that derail strategy.

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Managing Diversity The workforce has become more diverse with people of many national origins working for the same company. The workforce is aging. An organization must design its structure to maximize its diverse talents and to develop a culture that fosters cooperation.

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 2 here to emphasize the connection between organizational theory and structure, design, change, and culture. _________________________________________________________________________________ _________________________________________________________________________________

Organizational Insight 1.2: Redesigning AOL Time Warner This shows the difficulty in trying to merge two organizations that have very different structures. In addition, it shows that regardless of the structure, environmental factors often play a role in the success of an organization, as evidenced by the implosion of the dot.coms. Q. How were the two organizations different from a structure standpoint? A. Time Warner was very hierarchical in nature, while AOL was used to the fast-changing environment of the IT industry. Q. What did Pitman do to try and reorganize the two companies? A. He created teams of both AOL and Time Warner managers, but made AOL managers responsible for taking the lead, as they were more accustomed to brining new products to market quickly.

1.3

How Do Managers Measure Organizational Effectiveness?

Researchers see primary management tasks as control, innovation, and efficiency. Control means dominating the external environment, attracting resources, and using political processes. Innovation entails developing skills to discover new products and processes and designing adaptable structures and cultures. Efficiency involves developing modern plants for rapid, low-cost production, fast distribution, and high productivity.

Q. What indicators evaluate control over the environment? A. Indicators include stock price, profitability, return on investment, and the quality of a company’s products. An important factor is management’s ability to perceive and respond to environmental change. Stakeholders value aggressiveness and an entrepreneurial spirit.

Organizational Insight 1.3: Ups and Downs at Mattel This case illustrates the importance of both understanding customer needs, and adapting the organization to meet those needs. Q. What mistake did Mattel make in trying to satisfy customer needs?

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The External Resource Approach: Control Using the external resource approach, managers evaluate a firm’s ability to manage and control the external environment.

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A. The skills needed to rapidly develop new products was not present in the company that they purchased. They also underestimated the need to update their core products. The Internal Systems Approach: Innovation Using the internal systems approach, managers evaluate organizational effectiveness. Structure and culture should foster flexibility and rapid response to market changes. Flexibility fosters innovation. Q. How is innovation measured? A. Innovation is measured by the time needed for decision making, production, and coordinating activities. The Technical Approach: Efficiency The technical approach is used to evaluate efficiency. Effectiveness is measured by productivity and efficiency (ratio of outputs to inputs). Productivity gains include increased production or cost reduction. Productivity is measured at all stages of production. Q. What productivity measures could a service company use? A. Service companies could measure sales per employee or the ratio of goods sold to goods returned. Employee motivation is an important factor in productivity and efficiency.

Organizational Insight 1.4: Improving Efficiency at FedEx and UPS This case is a good illustration of the importance of continuously evaluating and updating technology. A good class discussion can revolve around the positive benefits of advanced technology. Consider for example, the increased efficiency of these two companies as they affect consumers.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 3 here to emphasize the approaches to evaluating effectiveness. ____________________________________________________________________________________ ____________________________________________________________________________________

1.4

The Plan of This Book

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Measuring Effectiveness: Organizational Goals Organizational effectiveness is evaluated by both official and operative goals. Official goals are the formal mission of an organization. Operative goals are specific long-term and short-term goals that direct tasks. Managers use operative goals to measure effectiveness. To measure control, managers examine market share and costs; to measure innovation, they review decision-making time. To measure efficiency, they use benchmarking to compare the company to competitors. A company may be effective in one area and ineffective in another. Operative goals must be consistent with official goals.

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Figure 1.5 shows how the various chapters fit together and provide a model of the components involved in organizational design and change. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ The Organizational Environment. The main source of uncertainty is the environment. An organization must design its structure to handle relationships with stakeholders in the external environment. Chapter 3 presents models that reveal why the environment is a major source of uncertainty. Organizational Design. Chapters 4 through 8 examine the principles on which organizations operate and the choices available for designing and redesigning their structures and cultures to match the environment. The same basic problems occur in all work settings, and the purpose of design is to develop a structure that will respond effectively to these challenges. Organizational Change. The third part of the book deals with the many different issues involved in changing and redesigning organizations. Included in this are different change processes, such as restructuring, reengineering, and innovation management.

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DISCUSSION QUESTIONS AND ANSWERS 1. How do organizations create value? What is the role of entrepreneurship in this process?

2.

What is the relationship among organizational theory, organizational design and change, and organizational structure and culture?

Organizational theory is the study of how organizations function, impact, and are impacted by employees and society. Organizational theory deals with the whole organization. Organizational design entails decisions about structure and culture. Structure is the formal set of task and authority relationships. Culture is a set of shared values that influence behavior.

3.

What is organizational effectiveness? Discuss three approaches to evaluating effectiveness and the problems of each approach.

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Value is created at the input, conversion, and output stages. At the input stage, value depends on how an organization selects and obtains the inputs; certain inputs create more value than others. At the conversion stage, value is a function of employees’ skills, including learning from and responding to the environment. Output creates value if it satisfies a need. Entrepreneurship is important to value creation by recognizing a need, gathering inputs, and transforming them into a product or service. The value creation cycle will continue if customers are satisfied; profits will generate inputs and improve the conversion process.

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Organizational effectiveness is the ability to use resources to create value; it includes control, innovation, and efficiency. The external resource approach evaluates a company’s ability to obtain scarce resources and valued skills. Indicators include stock prices, return on investment, and market share. These indexes are compared to competitors’ indexes. However, this approach fails to consider organizational culture and structure. The internal approach reviews the organization’s ability to innovate and respond to the environment quickly. Some measures include the length of time to get a product to market, decision-making speed, and coordination time. This approach does not consider costs or the external environment. The technical approach reviews an organization’s ability to use skills and resources efficiently. This approach considers neither the environment nor structure and culture. It is important to evaluate an organization in all three areas—control, innovation, and efficiency. 4.

Draw up a list of effectiveness goals that you would use to measure the performance of (a) a fastfood restaurant and (b) a school of business.

A fast-food restaurant’s goals will differ from a business school’s goals because a school is a nonprofit organization. (a) Some goals used to measure effectiveness at a fast-food restaurant are as follows: • Lower the cost of meat, fries, and drinks • Lower the cost of labor • Improve the quality of the food and the skills of employees • Increase profits, stock price, and market share • Satisfy government requirements on sanitation and fair labor laws • Reduce employee conflict • Speed up the time it takes a customer to get served • Find more efficient ways to produce the food • Increase employee motivation by offering bonuses • Increase the quality of the food by ensuring that it is not too greasy and that it is hot when customers receive it • Minimize the number of wrong orders (b) A business school’s goals may be the following: • Attract top-quality faculty and students • Maximize revenue from tuition and fees • Offer scholarships • Attract revenue from organizations and alumni • Gain the support of the local community • Reduce conflict • Ensure that students are prepared for jobs • Respond to changes in the environment by constantly updating the curriculum • Encourage coordination among faculty from different departments

ORGANIZATIONAL THEORY IN ACTION

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Answers may vary slightly.

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Practicing Organizational Theory: Open Systems Dynamics Small groups of students design an organization from an open systems perspective: (1) They determine the input, conversion, and output processes. (2) They identify environmental factors with the greatest impact. (3) They determine the best measures to evaluate the organization’s effectiveness.

The Ethical Dimension This exercise will be found at the end of each chapter. The purpose is to help students understand the many ways in which organizations can help or harm people in the environment. The first example asked students to examine doctors and hospitals, and the role of ethics in this environment. 1

List examples of these ethical and unethical behaviors.

This is a complicated question because there are so many different systems in the health-care environment. Students may draw upon their own experiences with doctors, good or bad, or the discussion could shift to how insurance companies, Medicare, or the local community play a role in the ethical behavior of doctors and hospitals. 2. How do these behaviors relate to the attempts of doctors and nurses to increase organizational effectiveness in the ways discussed in the chapter? Or, to attempts to pursue their own self-interest? This question serves as a good example of why organizations exist. Make sure the students understand that all organizations attempt to increase their effectiveness, not just for-profit corporations. Another interesting discussion might revolve around defining and discussing what “pursuing their own selfinterest” really means from both an ethical and a practical standpoint.

Making the Connection Also at the end of every chapter; this exercise encourages students to look through newspapers and magazines to find an example of a company that is dealing with some of the issues in the chapter. The assignment for this chapter is to find a company that has helped or harmed a stakeholder group.

Each student selects a company to study throughout the semester. Each module requires the student to collect and analyze company information for a report to be submitted at the end of the semester. Students can choose an organization like IBM or GM and find articles in magazines, on the Internet, or contact a local company. The report answers the following questions: what is the organization, what does it do, how does it create value, who are its stakeholders, what are its major problems, and how does it measure effectiveness? Other issues such as technology or competition may be included.

CASE FOR ANALYSIS Kinko’s New Operating Structure Kinko’s Inc. was the largest retailer of copying stores, but it had to change its operating structure in response to competitive pressures from Quick Copy and OfficeMax. Kinko’s had an informal management process and difficulty managing growth. The founder, Orfalea, used franchising to launch

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ANALYZING THE ORGANIZATION

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growth, but this approach did not assist Kinko’s in controlling costs or improving customer service. Consultants recommended centralized control and a set of internal authority relationships. 1.

What were the problems facing Kinko’s managers?

Kinko’s structure was too decentralized, making it difficult for top managers to implement changes rapidly. The structure was informal with decisions left up to Kinko’s franchisees, and no sharing of ideas on customer service. 2.

What steps did managers take to solve these problems?

Kinko’s centralized operating systems such as purchasing and finance to reduce costs. Kinko’s developed a more formal organizational structure. It may take time for the store owners to relinquish control, but this structure should help Kinko’s to respond more quickly to competition and develop consistent procedures and services to meet customer needs.

TEACHING SUGGESTIONS

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1. Ask students to explain the models in the chapter and give examples. Models can be assigned in advance. 2 Use discussion questions during the class by dividing students into small groups or pairs and allowing 5–7 minutes to prepare answers, which are then shared with the class. 3. Use role play to measure organizational effectiveness using the three approaches. One student is a manufacturing manager who evaluates performance using the technical approach. One student is an R&D manager who uses the internal systems approach. The third is a corporate manager who uses the external resource approach. Stress that performance is evaluated based on control, innovation, and efficiency. 4. Ask students to look the at the Amazon.com web site (http://www.amazon.com) and discuss how Amazon satisfies a need. Have them compare this to competitors that have surfaced, such as Barnes & Noble (http://www.barnesandnoble.com). 5. To make sure students appreciate why organizations exist, have them give examples in class of when organizations have not served them well. Common examples include long lines at the grocery store, poor service at a restaurant, etc. Try to help them re-frame their examples in the context of the course material, such as specialization or the conversion process. This is a good method for getting the students to understand the overall value of the material throughout the semester.

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CHAPTER 2 STAKEHOLDERS, MANAGERS, AND ETHICS TEACHING OBJECTIVES 1. To discuss an organization’s stakeholder groups, including shareholders, employees, local communities, and unions. (2.1) 2. To examine difficulties in meeting stakeholders’ goals: competing goals, allocating rewards, and long-term effectiveness. (2.2) 3. To review and examine how top management is structured, and the role of authority in making decisions (2.3). 4. To understand agency theory, and how it explains the relationship between top management and the board of directors (2.3). 5. To understand the role that ethics plays in top management (2.4). 6. To examine how to create an ethical organization (2.4).

CHAPTER SUMMARY This chapter examines the role that managers and stakeholders play in the organization. Every company has two main groups of stakeholders: (1) inside stakeholders—shareholders, managers, and the workforce; and (2) outside stakeholders—customers, suppliers, the government, trade unions, local communities, and the general public. Although stakeholders have competing interests, an organization must minimally satisfy them all. Satisfying stakeholders creates problems due to competing goals, allocating rewards, and choosing a time frame to measure effectiveness. Difficulties arise in measuring organizational effectiveness even if stakeholders have shared goals. An organization must select the best way to achieve goals. Agency theory explains the relationship between top management and the board of directors. Ethics and ethical behavior is discussed, including the sources of ethics, moral hazard, and how to create an ethical organization.

CHAPTER OUTLINE Organizational Stakeholders

Organizations create value for stakeholders—those with an interest, claim, or stake in the organization. Stakeholders are motivated to participate in an organization if they receive inducements or rewards that exceed their contributions. Organizational stakeholders include inside and outside stakeholders. (Table 2.1) Inside stakeholders are closest to an organization and have a direct claim on organizational resources. Q: Name some inside stakeholder groups. A. Inside stakeholders include shareholders, managers, and employees. Shareholders are company owners who buy stock to earn dividends and stock appreciation. They can withdraw support if inducements fall below contributions.

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2.1

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Organizational Insight 2.1: The Increasing Power of Institutional Investors Large institutional investors have increased the power of shareholders in dealing with management. The California Public Employees Retirement System (Calpers), the largest American public sector pension fund, manages $65 billion for over 1,000,000 members. Q. How do large investors monitor managers? A. Calpers watches managers and boards to guard against the pursuit of personal interests at shareholders’ expense. They block provisions that prevent shareholder benefits and decision making and control managers’ escalating salaries and bonuses. Managers coordinate resources to meet organizational goals and strive to invest shareholder money profitably. Top managers are indirectly appointed by shareholders through a board of directors. Managers contribute skills to receive compensation and satisfaction. Managers often leave an organization if contributions exceed inducements. The workforce includes nonmanagerial employees who contribute through the performance of assigned duties. Motivation is related to the rewards and punishments that influence performance. Employees decrease performance or leave if contributions exceed inducements. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Outside stakeholders neither own nor work for the company but have an interest in it. Q. Who are outside stakeholders?

Customers are the largest outside stakeholder group. The money paid for a product is a customer’s contribution to the organization. Unless they get value, customers withdraw monetary support, and the company loses a stakeholder.

Organizational Insight 2.2: Southwest Airlines Satisfies Its Customers Q. How does Southwest satisfy stakeholders? A. Southwest focuses on customer satisfaction. It sends birthday cards to frequent fliers, answers letters, and gets feedback from customers on service. Southwest treats employees well; they own 13 percent of the stock. If employees (one stakeholder group) are treated well, they feel motivated to treat customers (another stakeholder group) well.

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A. Outside stakeholders include customers, suppliers, the government, trade unions, local communities, and the general public.

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Suppliers provide raw materials and parts and directly affect company efficiency. Suppliers indirectly attract customers because high-quality inputs lead to high-quality products. U.S. automakers are imitating the Japanese, whose cars have high-quality parts, by creating strong ties with suppliers to improve quality. The government wants companies to compete fairly and comply with laws pertaining to employee pay, safety, discrimination, and other issues. The government contributes to organizations by standardizing rules. Trade unions directly impact a company’s productivity and effectiveness, but union demands can conflict with shareholder demands. Local communities: The economics of a community, including real estate and employment, depend on local businesses. The general public: The wealth of a nation is tied to the success of its businesses. The public wants corporations to behave in a socially responsible way. The public was upset in 1992 when the president of United Way misused funds. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to discussion question 1 here to highlight the potential controversy between shareholders and managers. _________________________________________________________________________________ _________________________________________________________________________________ •

Organizational Effectiveness: Satisfying Stakeholder’s Goals and Interests

Organizations are coalitions of stakeholders who bargain to balance inducements with contributions. An organization must minimally satisfy the interests of all stakeholders who often have conflicting goals. To win stakeholder approval, the organization faces the problems of competing goals, allocating resources, and balancing short- and long-term goals. Competing Goals Shareholders own the company, thus managers should maximize shareholder wealth. Yet ownership and control are separated because managers control the company and can pursue personal interest. They may focus on short-term profits instead of long-term growth or avoid risk taking because they control their own salaries. Allocating Rewards Reward allocation is important because it motivates stakeholders, yet it is difficult to determine the distribution of excess rewards. Which criteria should measure effectiveness, short-term profit, growth, or

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2.2

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long-term wealth maximization? Should employees receive short-term bonuses or lifetime employment? Should shareholders receive dividends or have profits reinvested?

Organizational Insight 2.3: Should Doctors Own Stock In Hospitals? There is a trend for medical doctors to become stockholders in the hospitals in which they work. Q. Is this a conflict of interest between doctors and patients? A. As owners, doctors might have the incentive to give patients minimum standards of care to cut costs or overcharge patients to increase hospital profits. There are potentially competing goals for doctors as shareholders and caregivers. Still, doctors see themselves as professionals and feel there is no reason to assume they lack integrity. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Managing Stakeholder Interests Satisfying stakeholders such as customers, employees, and the government reaches the ultimate goal of satisfying managers and shareholders.

2.3

Top Managers and Organizational Authority

Shareholders are the legal owners of the corporation, and they are represented by a board of directors, who act as trustees. The board has the legal authority to hire, fire, and discipline top management. However, the responsibility of using organizational resources to create value is delegated to managers. Authority is the power to hold people accountable for what they do. Figure 2.1 shows the reporting relationships of a large company.

The Chief Executive Officer The CEO is at the top of the hierarchy and can influence organizational effectiveness and the decision making process in the following five ways:

2. The CEO chooses key executives to fill top-level positions in the hierarchy. 3. The CEO determines top management’s rewards and incentives. 4. The CEO controls the allocation of scarce resources among an organization’s functions and divisions. 5. The CEO’s actions and reputation influence inside and outside stakeholders opinions of the organization and impact the organizations ability to attract resources from its environment.

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1. The CEO is responsible for setting an organization’s goals and designing its structure.

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The Top-Management Team The president is the person who has a position directly below the CEO and generally is called the chief operating officer (COO). In most companies the president takes responsibility for managing the organization’s internal operations, and the CEO takes responsibility for managing the organization’s relationship with external stakeholders and for formulating a long-range business plan. Executive vice presidents are directly below the president. They oversee a company’s most important line and staff functions. Q. What is the difference between a line role and a staff role? A manager who has a line role is directly responsible for the production of goods and services, such as a production manager. A manager who has a staff role has no direct responsibility for production and is in an advisory role. R&D and sales managers have staff roles. The president and executive vice president constitute a company’s top-management team and are part of corporate management. The topmanagement team is a critical part of an organization, because they make many important decisions, such as what strategy the organization should pursue.

Other Managers Other corporate managers include senior vice presidents and vice presidents. Vice presidents report to senior vice presidents, who report to executive vice presidents. Companies may also have general managers or divisional managers. These managers are present only in companies that are organized into separate business divisions. For example, a person could be in charge of the Frito-Lay Division of Pepsi-Cola. These managers are divisional management and not corporate management and they determine policies for the divisions that they run instead of objectives for the organization as a whole. Divisional managers generally report to a member of the topmanagement team. Managers at the next level are called functional managers; these managers are in charge of a certain function, like marketing or finance. Functional managers are responsible for developing capabilities in their area that lead to core competences.

Agency theory is useful for understanding the relationships between various levels of management. A relationship exists when one party (the principle) delegates decision making authority or control to another (the agent). The agency problem is that of accountability, both because one party may have more information than the other, but also the parties may have different goals. Moral hazard occurs when the agent has more information than the principle and the agent has an incentive to pursue his or her own self-interests. To solve the agency problem, governance mechanisms must be put in place, which are some forms of control which align the interests of the principles and agents. Q. How does the agency problem make managing difficult?

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An Agency Theory Perspective

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The theory is typically used to describe relationships that could exist when managers don’t have a clear picture of or understanding of the job at hand. Consider a job such as a delivery driver. They are basically on the road with little supervision, so they have more information than their managers do regarding the day-to-day requirements of the job. If that is combined with incentive to pursue selfinterests, the situation is such that bad things are possible. For example, a delivery driver may decide to spend company time running personal errands, because it is in his best interests, and management will not find out. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

2.4

Top Managers and Organizational Ethics

Ethics are the moral principles or beliefs about what is right or wrong. These principles help guide managers when the best course of action is not clear, or when different stakeholders have different needs. Because management decisions are often difficult, it is useful to understand the frameworks that individuals use in making ethical decisions. Table 2.2 discusses three models that are relevant for management, the utilitarian model, the moral rights model, and the justice model.

Organizational Insight 2.4: The Use of Animals in Cosmetic Testing Gillette believes that the only safe way to test its products is to use animals, and it defends its position by responding to every letter of protest, and even telephoning children at home to explain. Q. Is using animals ethical? A. Answers will vary dramatically. Instead of letting the students “argue” about the merits of each position, try to frame their answers into the utilitarian, moral rights, and justice perspectives so that they get a feel for why people can come to different conclusions.

Sources of Organizational Ethics Ethics come from three sources, society, group or professional, and individual.

These include such things as the legal system, customs in a society or culture, and in the norms and values that people use to interact with each other.

Organizational Insight 2.5: Is it Right to Use Child Labor? Many low-cost foreign suppliers employ young children to produce their products. Q. Is it ethical for U.S. companies to purchase products from these companies? A. Again, answers will vary, and the two positions are detailed in the case, but try and frame the discussion around the thought processes that managers might use in making this decision.

Professional Ethics

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Societal Ethics

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These are the moral values and rules that a specific group relies on, such as doctors or lawyers. A good example is athletics. In football or basketball, it is acceptable and not considered cheating to try and sneak something by an official. Players don’t call penalties on themselves. However, in golf, the ethical standards are such that players are expected to call infractions on themselves.

Individual Ethics These are the personal and moral standards that individuals use to structure their interactions with people.

Why do ethical rules develop? Because individuals when left to their own devices tend to pursue their own goals at the expense of the common good. The “Tragedy of the Commons” example illustrates this well. Ethical rules and laws emerge to control this type of behavior.

Why Does Unethical Behavior Occur? Unethical behavior occurs due to lapses in personal ethics, self-interest, and outside pressure.

Lapses in Personal Ethics Individuals may believe that any help to the organization is acceptable, even if it harms others.

Self-Interest Individuals face ethical issues when they weigh personal interests against the impact of their actions on others. Research suggests that individuals with high stakes are more likely to behave unethically. Companies with financial problems are more likely to commit unethical and illegal acts (price fixing).

Outside Pressure The probability of unethical behavior increases when outsiders pressure individuals to perform.

2.5

Creating an Ethical Organization

Ethical people create an ethical organization. An employee decision is ethical if it falls within acceptable standards in the organization’s environment, is communicated to all affected parties and is approved by those with whom the decision maker has significant personal relationships. An unethical decision hurts stakeholders in a manner that is unacceptable in the organization’s environment. Top managers influence a company’s ethical culture. As a figurehead, a manager models the company position on ethics and promotes ethical behavior through employee incentives. A manager informs customers and stakeholders about values and allocates resources to social causes.

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Designing an Ethical Structure and Control System Structure and culture can be designed to encourage ethical behavior. Authority relationships and rules can be designed to foster ethical behavior. The mission statement can direct employees towards ethical decisions. If employees feel helpless to prevent an unethical act or are afraid to discuss ethical concerns, they may confide in an outside person or agency. These are whistle-blowers. An organization can take the following actions to make whistle-blowing acceptable: 1. Allow subordinates to discuss ethical concerns with upper-level managers. 2. Create an ethics officer to investigate claims and inform employees about ethics. 3. Create an ethics committee to make formal ethical judgments.

Creating an Ethical Culture Ethics are part of an organization’s culture, and top management impacts ethics. Ethical top managers foster an ethical culture, but unethical top managers make an ethical culture difficult to establish.

Supporting the Interests of Stakeholder Groups Although shareholders want high profits, they don’t want increased profits through unethical behavior. Unethical behavior makes a company a riskier investment, hurts a company’s reputation, and lowers its stock price. Outside stakeholders such as the government can create rules to promote ethical behavior. Outside regulation can help establish societal ethics. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS

A good way to illustrate this is to have the students imagine that an organization has much more profit at the end of the year than originally forecasted. What would each stakeholder group want to do with the profits. For example, employees would want a bonus, shareholders would want a dividend, customers would like to see reduced prices, etc. This is a good way to illustrate how different groups will view the same issue. 2.

What is the role of the top management team? Make sure that students understand that top management has specific duties. Too often, we expect top management to know everything that goes on in their organization, when their job may involve staffing, budgeting, or designing the strategic mission. You might also compare what a top management team does in a small company versus a large company.

3.

What is the agency problem? What steps can be taken to solve it?

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1. Give some examples of how the interests of different stakeholder groups may conflict.

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The main focus of this is to understand the problems that can occur when individuals that need to work together have different goals, and have the opportunity and motivation to pursue their own self interests. The solution is to make sure systems are in place that keep everyone focused on the same goals. 4.

Why is it important for managers and organizations to behave ethically? Because society is better off, and the organization is better off in the long-term. Look at the longterm benefits of Johnson & Johnson’s decision as compared to Dow Corning. Look at Arthur Andersen. The point is, there are financial reasons to behave ethically as opposed to it just “being the right thing to do.”

5.

Ask a manager to describe an instance of ethical behavior that she or he observed and an instance of unethical behavior. What caused these behaviors, and what were the outcomes? Make sure the focus is on the long-term outcomes, so that students can see the real value of ethical behavior.

6.

Search business magazines such as Fortune or Business Week for an example of ethical or unethical behavior, and use the material in the chapter to analyze it.

. This is easy to do, because most management decisions have an ethical component.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory Small groups of students are designing a code of ethics for a large supermarket chain. First they need to discuss what ethical dilemmas employees will face, and then design a code of conduct that is most appropriate. Use the 3 questions on page 38 as a guide for the students to assess the code. Also, you might discuss which stakeholders are affected most by the code of conduct.

This one asks the student to think about the last time they either were treated unethically or saw someone else being treated unethically. Make sure they understand the difference between ethics and “bad behavior.” It is easy to think that everything wrong in society is an ethical dilemma, but in management, it means something different.

Making the Connection Students are looking for managers that have pursued their own self-interest at the expense of other stakeholders. This is a good exercise for illustrating agency theory and moral hazard, and how this applies to organizations.

ANALYZING THE ORGANIZATION

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The Ethical Dimension

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This module focuses on having students identify the stakeholders of their chosen organization, identify its top management structure, and try to look at what their ethical stances are. CASE FOR ANALYSIS

Kinko’s New Operating Structure Kinko’s Inc. was the largest retailer of copying stores, but it had to change its operating structure in response to competitive pressures from Quick Copy and OfficeMax. Kinko’s had an informal management process and difficulty managing growth. The founder, Orfalea, used franchising to launch growth, but this approach did not assist Kinko’s in controlling costs or improving customer service. Consultants recommended centralized control and a set of internal authority relationships. 1. Why did the managers at the two organizations have different ethical stances towards their customers? (Hint go to J&J’s website and look at its Code of Ethics). It is clear from looking at J&J’s credo that they really focus on stakeholders and making ethical decisions. The credo can be viewed at http://www.jnj.com/our_company/our_credo/index.htm. It might be worthwhile to either print this out or bring up the website during class. In contrasting the stance, you might discuss how at Dow Corning, the management behavior seemed “out of character.” What this shows is that organizations must put forth effort to manage ethically, it does not just come naturally to so called “good managers.” Johnson and Johnson does this, and this is illustrated quite well by their credo. 2. Outline a series of steps Dow Corning’s directors and managers should have taken to have prevented this problem. The point is that they should have had some sort of ethical system in place to help guide them in making decisions. Had they had a system like J&J, this would have never happened.

1. In small groups, have the students identify all of the stakeholders of a well known organization, such as their local gas station, church, or electric company. Have them make a list of all of the stakeholders, and discuss what their interest or “claim” in the organization is. This helps them to relate the theory to actual practice. 2. A role play can be used to encourage a discussion on ethics. The setting will be a government warehouse. One student will be a warehouse worker who overhears the supervisor, another volunteer, make a deal with a distributor, a third volunteer. The distributor comes to the warehouse, which contains cleaning supplies, and says to the supervisor: “This warehouse has thousands of items. If you will bypass procurement procedures, I can sell you brooms at a lower price and give you a 5% commission on the deal.” The supervisor states that he or she is tired of paperwork and that will be fine. The supervisor does not know that the worker overheard the conversation. Discuss what the worker should do. Use the utilitarian, moral rights, and justice models to compare solutions from different perspectives. 3. In light of the recent corporate scandals, make sure the students really understand the value of behaving ethically. Point out that huge companies like Arthur Andersen really can’t afford to have a

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TEACHING SUGGESTIONS

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bad image. The global economy is too competitive, and consumers have too many choices. Point out that a few bad decisions at Arthur Andersen effectively shut the company down. 4. Visit the Johnson & Johnson website and look at their credo. Discuss with the class how simple, yet profoundly effective this philosophy is. 5. The organizational insights in this chapter are very useful for classroom discussion. For example, using Insight 2.4, split the class into two groups based upon their initial opinion of using animals in cosmetic testing. You can then have a mini-debate in class on the issues, remembering to keep the focus on how managers must make decisions.

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CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. 2. 3. 5. 6. 7. 8.

To define the organizational environment and organizational domain. (3.1) To distinguish between the specific and general environment. (3.1) To discuss the sources of uncertainty in the environment: complexity, dynamism, and richness. (3.1) To review resource dependence theory. (3.2) To examine strategies for managing symbiotic resource interdependencies. (3.4) To examine strategies for managing competitive interdependencies. (3.5) To review transaction cost theory. (3.6)

CHAPTER SUMMARY An organization’s domain includes its goods and services and its customers. An organization must cope with forces in the specific and general environments. Specific environmental forces include outside stakeholder groups that directly impact the ability to obtain resources: customers, distributors, unions, the government, competitors, and suppliers. General environmental forces include: economic, international, technological, demographic and cultural, political, and environmental forces. Complexity, dynamism, and richness determine the extent of environmental uncertainty. A simple, stable, rich environment has some uncertainty, but a complex, dynamic, poor environment is highly uncertain. The global marketplace makes the environment highly uncertain.

Transaction cost theory considers the costs of interorganizational linkage mechanisms. An organization should choose the linkage that provides the greatest transaction cost savings at the lowest bureaucratic costs. Sources of transaction costs include: environmental uncertainty, bounded rationality, need to prevent opportunism, and risk involved with specific asset investments. Because formal linkage mechanisms increase bureaucratic costs, an organization should use informal linkages when transaction costs are low. Mechanisms to minimize transaction costs and avoid bureaucratic costs include: keiretsu, franchise, and outsourcing.

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How can the environment be managed? Resource dependence theory states that an organization should minimize its dependence on scarce resources. In the specific environment, organizations have symbiotic and competitive interdependencies. Strategies for managing symbiotic resource interdependencies include: developing a good reputation; co-optation; strategic alliances to include long-term contracts, networks, minority ownership, and joint ventures; and mergers and takeovers. Strategies for managing competitive interdependencies include: collusion and cartels; third-party linkage mechanisms; strategic alliances; and mergers and takeovers.

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CHAPTER OUTLINE 3.1

What Is the Organizational Environment?

The resources surrounding an organization, such as raw materials and skilled workers, comprise the organizational environment, and an organization conducts transactions to obtain these resources for production. Resource procurement is impacted by competition, changes in technology, and input prices. The organizational domain refers to the goods and services offered and the customers and other stakeholders served; an organization designs transactions to enlarge its domain. An organization operates in both specific and general environments. One way to enlarge the domain is to expand internationally. The specific environment contains outside stakeholder groups who have a direct effect on obtaining resources. Changes in the kinds of customers or in consumer tastes affect an organization. Strategies to attract customers change to meet new customer needs. (Fig. 3.1) Outside stakeholder groups include customers, distributors, suppliers, unions, competitors, and the government. An organization deals with each group to attain resources for survival, protection, and enlargement of its domain. The general environment contains forces that affect all organizations and shape the specific environment. Q. Name the forces in the general environment. A. Technological forces, including new production methods, impact operations. Political and environmental forces impact government policy toward business and stakeholders, and affect production costs. Demographic, cultural, and social forces, including birthrates, age, and lifestyle of a nation’s people influence demand. By managing these environments effectively, a firm gains resources and the domain grows. Poor environmental management shrinks a firm’s domain.

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Refer to discussion question 1 here to give an example of the specific and general environments.

Organizational Insight 3.1 GE’s U.S. Managers Stumble in Hungary This case illustrates the complexities associated with expanding globally. In this case, there were dramatically different expectations between workers and managers. This case also illustrates how important it is to manage both the specific and general environmental forces in order to take advantage of the global marketplace.

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Sources of Uncertainty in the Organizational Environment Because all organizations face uncertainty, managers cannot predict resource supply. Uncertainty stems from complexity, dynamism, and richness of the environment. (Fig. 3.2) Environmental complexity is a function of the strength, number, and interconnectedness of specific and general forces. The greater the number and differences among them, the more complex, uncertain, and difficult to manage is the environment. Managing 100 suppliers is easier than 1,000. Producing different products for different customers increases complexity. The more interconnected the forces in specific and general environment, the more uncertainty a firm faces. Environmental dynamism is determined by how much and how fast specific and general environmental forces change. Q. When is an environment stable? A. Stability means that environmental forces affect resource supply in a predictable way. Q. When is an environment unstable and dynamic? A. Dynamism means that environmental forces change quickly and unpredictably. Environmental richness depends on the quantity of resources available for an organization’s domain. Q When is an environment rich? A. Rich means abundant resources and low uncertainty. Q. What makes an environment poor? A. A poor environment is not only located in a poor country or region, but faces intense competition and battles for resources. Uncertainty is low in a simple, stable, and rich environment and high in a complex, unstable, and poor environment. After determining its environmental forces, an organization plans environmental management.

A. In most industries, the global marketplace makes the environment more complex, dynamic, and rich. Notes____________________________________________________________________________

Focus on New Information Technology: Amazon.com, Part 2 Amazon.com changed the whole nature of the bookselling environment. Q. Describe the traditional environment for booksellers.

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Q. How do global markets affect environmental stability?

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A. Before Amazon, book publishers sold indirectly to wholesalers, who supplied small bookstores or large chains like Barnes & Noble. In this stable, simple, and rich environment, uncertainty was low, and large and small companies were profitable. Q. How has Amazon.com changed the global environment? A. By offering quick access to all books in print at a discount, Amazon created a higher level of industry competition and made the industry environment poorer. Direct negotiation with publishers led to increased environmental complexity because publishers, wholesalers, stores, and customers became more closely linked. Information technology made the environment more unstable and resources harder to secure. Small bookstores have closed, large bookstores compete online, and online bookstores do battle in price wars, making the environment more uncertain and competitive. •

Refer to discussion question 2 here for examples of environmental uncertainty.

Managerial Implications: Analyzing the Environment Managers should analyze the organizational environment and identify sources of uncertainty. They should chart these forces in the specific and general environments and plan how to deal with contingencies.

3.2

Resource Dependence Theory

Resource supply is contingent on the complexity, dynamism, and richness of the environment. A poor environment faces scarce resources. Resource dependence theory proposes that an organization’s goal is to minimize its reliance on other organizations for the supply of scarce resources. Two facets of resource dependence must be managed: An organization must exert influence to get resources and respond to the needs and demands of others in its environment. Q. What causes dependence on another organization for a specific resource?

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A. Dependence is contingent on two factors: how essential the input is to survival and the degree to which others control the resource. An organization is more dependent if the resource is critical to survival and tightly controlled.

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Organizational Insight 3.2: Mighty Microsoft Microsoft dominates the operating system market, a valuable input in producing effective applications software. This makes Microsoft extremely powerful, and the company was found to have an unfair advantage in a court of law. Q. How does Microsoft manage resource dependence? A. Microsoft is not dependent on others for resources. It controls the development of computer operating systems, so companies depend on Microsoft. The control of this resource has increased Microsoft’s market share. Notes_________________________________________________________________________

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3.3

Refer to discussion question 3 to review resource dependence theory. _________________________________________________________________________________ _________________________________________________________________________________

Interorganizational Strategies for Managing Resource Dependencies.

The specific environment contains symbiotic and competitive interdependencies. Symbiotic interdependencies occur when the outputs of one organization serve as the inputs for another, an organization and its suppliers. Q. What companies have symbiotic interdependencies? A. Intel supplies chips for computer manufacturers such as Compaq. Auto manufacturers distribute cars through dealers.

Notes_______________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________ 3.4

Strategies for Managing Symbiotic Resource Interdependencies

Cooperation is greater if strategy is formal. Four strategies for managing symbiotic resource interdependencies include: developing a good reputation, co-optation, strategic alliance, and merger and takeover. (Fig. 3.3)

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Competitive interdependencies exist among organizations that compete for scarce resources. An organization manages interdependencies through interorganizational strategies. Linkage mechanisms connect companies and require coordinated actions, with a loss of freedom for independent action. A contract requires compliance even if a firm can negotiate a better offer. The best interorganizational strategy reduces uncertainty and provides the least loss of control.

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Developing a Good Reputation An organization can build a good reputation in the eyes of customers and suppliers through fairness and honesty, high-quality goods and services, and prompt payment of bills. A dishonest company will be unsuccessful in the long term. Developing a good reputation is the most frequently used linkage mechanism for managing symbiotic interdependencies. Co-optation is used to counter problematic forces in the specific environment. An organization brings adversaries inside the organization. Q. How can outsiders be brought inside the organization? A. In many countries bribery is used, but it illegal in the United States. Some use an interlocking directorate, a linkage whereby a director from one company sits on the board of another. Strategic alliances, sharing of resources by several companies, are popular for managing interdependencies. Alliances include: long-term contracts, networks, minority ownership, and joint venture. The more formal agreements provide stronger linkages and tighter control over joint activities. As environmental uncertainty increases, companies rely on formal alliances. (Fig. 3.4) Long-term contracts reduce costs by sharing resources or spreading the risk associated with activities such as marketing and R&D. Contracts, both written or verbal, are the most informal kind of alliance, because the only connection is the agreement. A network is a group that coordinates activities via contract. A network is more formal than a contract because more ties connect members who share competencies such as R&D skills with partners. Partners use those skills to increase efficiency and reduce the core organization’s costs and size. A company can perform design work and have partners produce the product.

Toyota is a capital keiretsu with a minority stake in suppliers; Toyota works with suppliers to improve quality. A financial keiretsu is an interlocking directorate with members serving on the bank’s board. At the Fuyo keiretsu. Fuji Bank is the center with members such as Nissan, Hitachi, and Canon. Members have other companies with minority ownership in suppliers. (Fig. 3.5) Joint ventures are formal strategic alliances among two or more companies to establish and share ownership in a new business; a formal legal agreement defines rights and responsibilities. Each organization sends managers to the new company. (Fig. 3.6) Q. Name the advantages of joint ventures. A. Participants can pool distinctive competences, design a new structure, keep parent companies small, and reduce the difficulty of managing parent company interdependencies.

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Minority Ownership occurs when organizations buy a stake in each other, forming a more formal alliance. The Japanese keiretsu is a group of organizations, each of which owns shares in the other organizations and works to further group interests. Japan has two types of keiretsu: Capital keiretsu to manage input and output linkages and financial keiretsu for linkages among different companies, usually with a bank at the center.

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Mergers and takeovers are the most formal strategies for managing interdependencies. A merger or takeover results in resource exchanges within organizations and prevents control by a powerful supplier or customer. However, mergers and takeovers are costly, and problems arise in managing a new business. This strategy is used if a company must control a critical resource or manage a significant interdependency. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

3.5

Strategies for Managing Competitive Resource Interdependencies

Competition increases uncertainty, but organizations can use strategies to manage competitive resource interdependencies: collusion and cartels; third-party linkage mechanisms; strategic alliances; and mergers and takeovers. A more formal strategy is an explicit attempt to coordinate a competitor’s activities. Some strategies are illegal in the United States. (Fig. 3.7)

Collusion and Cartels Collusion, a secret pact among competitors to share data for an illegal purpose, reduces competitive uncertainty. A cartel, a group that coordinates activities, increases the stability and richness of an organization’s environment and reduces uncertainty. Q. Give an example of a cartel. A. The OPEC cartel controls the price of oil. Although collusion and cartels are illegal in the United States, competitors still plot to coordinate activities. Q. How do companies collude in the United States? A. Collusion includes: setting industry standards on pricing and product specifications; making artificially high prices industry standards (a leader sets the price and competitors conform); and signaling, a cue to competitors about price hikes and strategies through announcements.

An indirect way to coordinate activities is through a third-party linkage mechanism, a regulatory body such as a trade association that shares information and governs competitive practices. Advantages: Interaction decreases the concern about deceptive organizational practices. The association can lobby the government for favorable industry policies. Third-party linkages assist in managing resource interdependencies and reducing uncertainties. An increased information flow allows an easier response. These linkage mechanisms let companies co-opt themselves and benefit from coordination. Strategic alliances manage both symbiotic and competitive interdependencies. By cooperating in a joint venture, competitors save money, deter new entrants, or harm competitors (e.g., developing technology and obtaining a patent).

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Third-Party Linkage Mechanisms

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Mergers and takeovers strengthen a competitive position by increasing a firm’s domain and ability to broaden its product range. Some companies use mergers to become the sole player in the marketplace, a monopoly, which is illegal in the United States and most other developed countries. Q. Why are cartels, collusion, and other anticompetitive practices bad for companies? A. Competitors enter the industry due to changes in technology or government policies, and because monopolies have faced no competition, their tall, mechanized structures make it hard to compete in a dynamic environment. Q. What companies faced this problem? A. GM controlled its environment for a long time and then suffered greatly when the environment changed. IBM and Xerox are similar examples. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Managerial Implications: Resource Dependence Theory Managers should study each resource transaction and decide how to manage it. Managers should aim for an informal linkage mechanism yet identify the purpose and problems of a strategic alliance to choose between a formal or informal linkage mechanism. Transaction cost theory is useful for identifying the costs and benefits of each linkage mechanism.

3.6

Transaction Cost Theory

Interorganizational strategies provide control over forces in the specific and general environments, and large companies use them for environmental change. Transaction cost theory addresses why and when organizations choose and change strategies.

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Transaction costs are associated with negotiating, monitoring, and governing exchanges between people. Transaction cost theory proposes that organizations should aim to minimize transaction costs for inside dealings and outside transactions. Transaction costs reduce productivity; time spent monitoring and negotiating exchanges could have created value.

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Sources of Transaction Costs Environmental uncertainty and bounded rationality: People have a limited ability, known as bounded rationality, to process data and understand their environment. Bounded rationality makes it costly to manage transactions in uncertain environments. To reduce transaction costs, organizations use formal linkage mechanisms like minority ownership. Opportunism and small numbers: The potential for opportunism is high when relying on one supplier or a few trading partners. So, organizations increase transaction costs by using resources to enforce agreements for protection. Risk and specific assets: Investing in specific assets, one exchange relationship, is risky. After the company invests, a customer may buy products at a lower price. Transaction Costs and Linkage Mechanisms Interorganizational linkage mechanisms depend on transaction costs. Transaction costs are low when nonspecific goods and services are exchanged, uncertainty is low, and many exchange partners exist. Companies use informal linkage mechanisms, such as reputation and unwritten contracts. Transaction costs increase when more specific goods and services are exchanged, uncertainty increases, and potential exchange partners decrease. Companies do not trust each other, so they use formal linkages, such as contracts. A rise in transaction costs leads to more formal linkage mechanisms to gain control. Joint venture partners favor activities that create value for both parties. Merger partners seek mutual success, because one firm owns the other. Transaction cost theory attributes the move from less to more formal linkage to reducing transaction costs.

Using Transaction Cost Theory to Choose an Interorganizational Strategy Transaction cost theory considers the costs of linkage mechanisms and forecasts when and why a strategy should be selected. When choosing a strategy, managers must: Identify the sources of and level of transaction costs; estimate the savings from using different linkage mechanisms; estimate the bureaucratic costs, and select the linkage that achieves cost savings at the lowest level of bureaucratic costs.

Organizational Insight 3.3: Ekco and its Suppliers The Ekco Group offers a wide product range, including bakeware products, kitchen tools, household plastic products, and pest control devices. Q. How does Ekco Group manage interorganizational relationships? A. The Ekco Group reduces customer transaction costs by offering a wide range of products, so customers save by dealing with one supplier. Ekco has a new computer system that provides a just-intime inventory service to retailers that simplifies ordering and inventory tracking.

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Bureaucratic Costs Formal linkage mechanisms reduce transaction costs but may not be used because internal or bureaucratic transaction costs are still incurred. Integration and communication are costly, whereas time spent in a meeting could have created value.

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Transaction cost theory suggests that formal linkage mechanisms are appropriate when transaction costs are high. Otherwise, informal mechanisms with lower bureaucratic costs should be selected. Three mechanisms minimize transaction costs while avoiding bureaucratic costs: Keiretsu offers the benefits of ownership without the costs. Toyota has a minority interest in its suppliers for control and reduced uncertainty, but without ownership and the management costs. Franchising allows for marketing a company’s products in a particular area. Q. How does a franchise reduce transaction costs without incurring bureaucratic costs? A. The franchiser gives a franchisee the rights to use resources in exchange for a flat fee or a percentage of the profits. The franchiser provides the inputs to the franchisee, who makes exchanges with the customer. The relationship is symbiotic. Franchisers give rights to franchisees because the bureaucratic costs of managing their businesses are too high. An organization considers transaction costs when deciding on product distribution. For a complex product, a company will have formal control over franchisees or distribution outlets. Auto manufacturers control franchised auto repair dealers, but products such as groceries require less control and can be sold through retailers. Outsourcing, buying a specialized service, is another strategy for managing interdependencies. The decision to make or outsource products depends on whether value exceeds bureaucratic costs. The transaction cost approach considers why and how organizations choose different linkage mechanisms. The optimal mechanism minimizes transaction and bureaucratic costs.

Organizational Insight 3.4: Li & Fung’s Global Supply Chain Management This insight, in addition to illustrating transaction cost theory, really shows how complex the global environment is. It also illustrates how organizations operating in the global environment really need to specialize and be very efficient at what they do.

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Refer to discussion question 5 here to review transaction cost theory. _________________________________________________________________________________ _________________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS 1. Pick an organization, such as a local travel agency or supermarket. Describe its organizational domain; then draw a map of the forces in its general and specific environments that affect the way it operates.

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Answers will vary. For a local supermarket, the domain includes neighborhood customers. Specific environmental forces include customers, unions, competitors, suppliers, and the government. Customer preference influences store offerings. Unions ensure fair wages and good working conditions. Suppliers must provide high-quality items. The government ensures that FDA, employment, and safety requirements are met. General environmental forces are economic, technological, demographic and cultural, and environmental. High unemployment dictates low-margin items. Technology facilitates convenience and fast checkout. Demographic and cultural forces determine the food offered (baby food, ethnic food). Environmental issues ensure recycling plastic bags. 2.

What are the major sources of uncertainty in the environment? Discuss how these sources of uncertainty affect a small biotechnology company and a large carmaker.

Sources of environmental uncertainty include complexity, dynamism, and richness. An organization is complex and uncertain if there are many, strong, interrelated outside stakeholders. The environment is dynamic and uncertain if forces change significantly or quickly. It is poor and uncertain in a poor country or where resource competition is high. Answers will vary. A small biotechnology firm has low complexity because of few stakeholder groups, no union, a few suppliers, and a few customers. In the growth stage, competition is not intense and competitors are small. The environment is dynamic as forces change. (Technology may change. Health care regulation could affect operations.) General uncertainties affect specific outside stakeholders such as suppliers and customers. This company has a rich environment in large cities with supplies of scientists and a medium level of uncertainty. It can obtain resources without high complexity, but operates in a dynamic environment. A large carmaker has high complexity because of the relationship between many, different outside stakeholders, including a union, the government, competitors, suppliers, and distributors. The environment is stable because forces affect resources predictably. The industry is mature, with changes foreseen, but recession reduces demand. International forces are strong. The environment is poorer due to competition, but resources are secured by managing outside stakeholders. The carmaker is complex and operates in stable environment, between rich and poor. Uncertainty is kept low by managing complex relationships with outside stakeholders. According to resource dependence theory, what motivates organizations to form interorganizational linkages? What is the advantage of strategic alliances as a way of exchanging resources?

Resource dependence theory states that interorganizational linkages minimize dependence on other organizations for scarce resources and influence them to make resources available. Strategic alliances allow for symbiotic and competitive interdependencies and ensure a supply of high-quality, low-cost inputs. Strategic alliances require resource sharing, reducing risks and costs. Partners can pool distinctive competences to produce a competitive product. 4.

According to transaction cost theory, what motivates organizations to form interorganizational linkages? Under what conditions would a company prefer a more formal linkage mechanism to a less-formal one?

Transaction cost theory states that interorganizational linkages minimize transaction and bureaucratic costs. An organization chooses a more formal linkage mechanism as transaction costs increase. Formal linkage mechanisms should be used when the transaction cost savings outweigh bureaucratic costs.

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3.

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5. What interorganizational strategies might work most successfully as a company expands globally? Why? The key to this question is to make sure that students understand that to manage the environment, they must match the strategy needed with the level of complexity in the environment. For example, a starting point for expanding globally is to build a good reputation. A more complex situation may call for something much more complex, such as a long-term contract or a joint venture.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Protecting Your Domain Small groups of students are entrepreneurs who have marketed a new kind of root beer. Each group wants to widen its geographical regions. Students decide how to protect and expand the company’s domain. Students consider the types of strategic alliances and recommend a way to carve a niche in the soda market.

The Ethical Dimension This case deals with organizations that purchase products from organizations that employ women and children is sweatshops. They generally work long hours for only a few dollars per day. This was also dealt with in Chapter 2 (Insight 2.5). Have students debate and discuss this again, but make the basis for discussion the environmental principles discussed in this chapter, such as resource dependency. 1. When and under what conditions is it right for companies to buy their inputs from suppliers that do employ women and children? This is a complex question. On the surface it seems easy to simply not do business with these types of organizations. When students say this, start a discussion about competition and remaining competitive in a global economy. In other words, if an organization refuses to do business with these sweatshops, and then can’t remain competitive, has the right decision been made? 2. What kinds of interorganizational strategies could U.S. companies use to enforce any ethical codes that they develop?

Making the Connection Students find an example of a company using a specific interorganizational strategy, such as a joint venture, and explain why the company selected the mechanism, using resource dependence theory or transaction cost theory.

ANALYZING THE ORGANIZATION Students define their organization’s domain, analyze the factors of uncertainty, and determine if the structure is designed to reflect environmental uncertainty. They list the interorganizational linkage

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This also is a complex question because each culture has different norms and values. A good example to use is Johnson and Johnson and their ethics credo (from Chapter 2).

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mechanisms and use resource dependence theory and transaction cost theory to explain why the mechanisms were chosen.

CASE FOR ANALYSIS How Ford Manages Its Environment This case illustrates the various ways in which Ford has managed its environment over the years. 1.

List the various ways in which Ford has attempted to manage its environment over time.

This is a good illustration of the many different ways that the environment can be managed. Early on, Ford used contracts. As the environment got more complex, they began producing their own parts. This is a good application of resource dependency theory in that they managed their environment by reducing their dependency on suppliers. When the environment became even more complex in the 1980s, Ford developed some keiretsu-type arrangements in order to manage this. 2.

Why did Ford change the methods it used to manage the environment?

The key here is to make sure students understand that the management strategy needs to fit the environmental situation. They didn’t just change from contracts to keiretsu’s because it was a new management technique, but rather they did this in response to the environment, or, in this case, the competition. To manage these environments, AT&T participated in strategic alliances and engaged in acquisitions; it eventually split into three divisions.

1.

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The class is divided into three groups who work for a grocery store, a telecommunications company, and a large auto manufacturer. Each group defines its organizational domain and lists the forces in its specific and general environments. Co-optation can manage symbiotic forces as seen in a role play with four students. Three students form a management team of a manufacturing plant. One is the local union president who complains about rules, wages, and benefits and tries to influence employee opinions. What can the management team do? It can bring the union president inside the organization through a joint union-management discussion committee. In five groups, students represent organizations that vary in size and complexity. Each group selects an interorganizational strategy and explains its choice of strategy. Group I: A small grocery store with products from two or three suppliers. This group manages relationship through trust; owners know suppliers well. Group II: A medium-sized pharmaceutical manufacturer with many distributors. This company needs long-term contracts or networks. Joint ventures and mergers may be too costly. Group III: A large telecommunications company. This company forms joint ventures and alliances to share risks and costs of developing new technology. Group IV: A company that wants rapid growth but lacks capital or resources to run its organizations. This company considers franchising.

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TEACHING SUGGESTIONS

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Group V: A hotel with competition. This hotel joins a trade association to manage its competitive interdependencies.

Groups must weigh the cost of the strategy against the benefits.

5.

6.

7.

Students review the strategies that allow organizations to minimize transaction costs without incurring bureaucratic costs: keiretsu; franchising; and outsourcing. Point out that Japanese stakeholders take a long-term view and deal with people they know and trust. Ford has developed long-term relationships with suppliers and has other companies, such as a rental car company, in its network. Students can compare the business environment of the 1970s with that of today. The auto industry is a good example because of both the dramatic changes that occurred, and the fact that we all drive autos. Have students look at Ford’s web site and assess changes in its organizational environment.

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4.

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CHAPTER 4 BASIC CHALLENGES OF ORGANIZATIONAL DESIGN TEACHING OBJECTIVES 1. To explain how differentiation occurs and why it is a design challenge. (4.1) 2. To review the five functions that accomplish organizational goals: support, production, maintenance, adaptive, and managerial. (4.1) 3. To examine interlocking roles that are differentiated vertically based on a hierarchy, and horizontally based on functional groups and divisions. (4.1) 4. To discuss the balance between differentiation and integration and examine the seven integrating mechanisms. (4.2) 5. To explain the differences between liaison and integrating roles and between task forces and teams. (4.3) 6. To illustrate the design challenge of balancing centralization and decentralization. (4.3) 7. To illustrate the design challenge of balancing standardization and mutual adjustment. (4.4) 8. To show that standardization or mutual adjustment results from organizational goals. (4.4) 9. To show the importance of the informal organization. (4.4) 10. To outline the difference between a mechanistic and organic structure. (4.5) 11. To show how the contingency approach tailors organizational structure to environmental uncertainties. (4.5)

CHAPTER SUMMARY This chapter addresses four challenges of organizational design: 1. Determining the level of differentiation 2. Deciding how to coordinate activities 3. Determining who will make decisions 4. Deciding how tightly the organization will control employee activities

The second design challenge is balancing differentiation and integration. As an organization becomes differentiated, more complex integrating mechanisms coordinate activities. The following seven integrating mechanisms, listed from simplest to most complex, are reviewed: 1. Hierarchy of authority 2. Direct contact 3. Liaison role 4. Task force 5. Team 6. Integrating role 7. Integrating department The integrating mechanism must facilitate communication and coordination for effectiveness, but unnecessary mechanisms are costly.

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Differentiation is the process of dividing labor. The first design challenge is to determine the level of vertical and horizontal differentiation. In an organization individuals are assigned specific responsibilities; those with similar skills are grouped into functions, with two or more functions grouped into a division. As organizations grow, they differentiate into five functional roles: support, production, maintenance, adaptive, and managerial. Each role has a horizontal and a vertical dimension. Horizontal differentiation groups people into subunits. Vertical differentiation designs a hierarchy of authority and establishes reporting relationships to connect subunits.

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The third design challenge is the balance between centralization and decentralization, each with advantages and disadvantages. Distributing decision-making authority influences employee behavior. Centralization results in predictability whereas decentralization fosters innovation. The fourth design challenge is balancing standardization and mutual adjustment. Standardization is facilitated through formalization, written rules, norms, and informal behavioral expectations. Socialization is the process of learning and internalizing norms. Standardization results in predictable behavior. Mutual adjustment relies on judgment rather than formalized rules for problem solving. If an organization desires predictability, it is highly centralized and relies on standardization. For innovation, an organization is decentralized and relies on mutual adjustment. A mechanistic structure is appropriate in a predictable, stable environment. An organic structure is appropriate in an uncertain, changing environment requiring flexibility. In reality, most organizations are a combination of the two. The contingency approach tailors organizational structure to the sources of uncertainty.

CHAPTER OUTLINE 4.1

Differentiation

The first design challenge determines how to control and coordinate value creation. An organization must manage differentiation, the process of creating and controlling the division of labor. In a simple organization, division of labor is low with few coordination problems. Growth makes the organization complex with high division of labor and high differentiation. (Fig. 4.1) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Organizational Insight 4.1: The B.A.R. and Grille Restaurant Growth increases division of labor and differentiation. Two people started the restaurant and performed all the tasks; through growth, they hired 22 people. The owners opened two more restaurants, which increased differentiation.

A. Initially they performed all tasks, but as business increased Amanda took control of the dining room and Bob managed the kitchen. They hired people to perform specific tasks such as bartending and a manager to oversee maintenance. Bob and Amanda opened two other restaurants and centralized support functions such as purchasing, marketing, and training. Organizational Roles Every position in an organization requires certain behaviors. Task-related behaviors, called organizational roles, determine relationships. As division of labor increases, managers specialize in some roles and hire employees to specialize in others to develop core competences. Because a restaurant manager holds waiters responsible for behavior, the manager has authority. Clearly defined roles and authority relationships give organizations the control to facilitate goal achievement. The relationships between managers and waiters ensure effective customer service.

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Q: How did Bob and Amanda manage the increasingly complex activities?

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Subunits: Functions and Divisions Those with similar skills or shared resources are grouped into functions; chefs form the kitchen function. Two or more functions are grouped into a division; each restaurant division consists of the dining room and kitchen. Larger organizations have many divisions, and the number of functions and divisions indicates an organization’s complexity—the extent of differentiation. (Fig. 4.1) As organizations grow, they differentiate into five functional roles: 1. Support functions handle a company’s relationship with its environment and its stakeholders. Support functions include purchasing, sales and marketing, and public relations and legal affairs. 2. Production functions improve organizational efficiency. They include production operations, production control, and quality control. 3. Maintenance functions keep an organization in operation. Maintenance functions include personnel, engineering, and janitorial services. 4. Adaptive functions allow for organizational responses to changes in the environment. Adaptive functions include research and development, market research, and long-range planning. 5. Managerial functions expedite departmental control and coordination. Managers at all levels have roles: top managers formulate strategy; middle managers use resources to meet goals; and lower-level managers direct workers. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Differentiation at the B.A.R. and Grille Q: What roles did the B.A.R. and Grille develop? A: The services manager handled advertising and bought supplies, a support role. Dividing labor between the kitchen and dining room facilitated production. The accountant, cashiers, and cleaning staff performed maintenance roles. Bob and Amanda ensured good customer service, an adaptive role, and created task and functional relationships, a managerial role.

A. The B.A.R. and Grille differentiated into divisions as additional restaurants were added. The three restaurant divisions had centralized support functions. Large companies have self-contained divisions, each with its own set of five basic functions to offer a competitive advantage. Vertical and Horizontal Differentiation Each role at the restaurant has a vertical and horizontal dimension. (Fig. 4.2) Organizational roles are vertically differentiated according to the hierarchy of authority. Vertical differentiation creates reporting relationships to connect organizational roles and subunits. Lower levels report to higher levels; waiters report to managers. Vertical differentiation provides control over activities. Roles are horizontally differentiated according to tasks, creating a division of labor and grouping into subunits. Busboys and waiters are grouped into functions.

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Q. When did the restaurant differentiate into divisions?

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Design Challenges The first design challenge is selecting the levels of horizontal and vertical differentiation to reach organizational goals. Other design challenges include: balancing differentiation and integration; balancing centralization and decentralization; balancing standardization and mutual adjustment; and coordinating the formal and informal organizations.

Managerial Implications: Differentiation Managers should draw an organizational chart to identify the distribution of authority and division of labor. Managers should analyze each person’s role and relationships between roles. Managers should analyze relationships between departments to make sure the division of labor creates value.

4.2

Balancing Differentiation and Integration

The second design challenge is to balance differentiation and integration. Horizontal differentiation creates subunits to facilitate specialization; however, subunit orientations, perceiving one’s role as a subunit member, emerge as an organization becomes complex. Integration and Integrating Mechanisms Subunit orientations make communication and coordination difficult. Integration or coordinating tasks, functions, and divisions, improves coordination and communication. (Table 4.1) The seven integrating mechanisms, from simplest to complex, include: Hierarchy of Authority specifies reporting relationships. Direct Contact requires managers from different functions to meet to coordinate activities. Liaison Role requires a manager to coordinates with other subunit managers. Task forces create a temporary cross-functional committee. Teams require different functional managers to coordinate activities. Integrating roles coordinate two or more functions or divisions. Integrating Departments coordinate functions or divisions.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Refer to discussion question 3 here to show how integrating mechanisms facilitate communication and coordination. _________________________________________________________________________________ _________________________________________________________________________________

Organizational Insight 4.2: Integration at Amgen Amgen has been successful with its new drugs Epogen (an anemia drug) and Neupogen (an immune system stimulant). Growth has led Amgen to adopt two integration mechanisms: product development teams and task forces. However, employees feel more loyalty to their teams than to their regular jobs.

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1. 2. 3. 4. 5. 6. 7.

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Q. How can Amgen improve communication and coordination? A. Amgen needs to integrate its teams into a hierarchy of authority to provide control so that teams coordinate with functions. As companies become large and complex, communication barriers increase. An organization can create an integrating role, a full-time position to improve communication between divisions. This differs from a liaison role, which is only part-time. An organization with many integrating roles can establish an integrating department. Differentiation versus Integration Managers must fit integration to the level of differentiation. Q. What was the level of differentiation and integration at the B.A.R. and Grille? A. Initially, differentiation was low, so the owners ran the restaurant with little integration. More integration is needed as the organization grows, but excessive differentiation or integration increases costs (more managers) and time spent coordinating activities. In balancing integration and differentiation, managers must develop core competences and select integrating mechanisms that foster subunit cooperation.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 4.3

Balancing Centralization and Decentralization

The third design challenge determines how much decision-making authority to centralize and decentralize. One criticism of the hierarchy of authority is that employees are risk-averse and give tough problems to supervisors; this slows decision making and leads to missed opportunities.

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Centralization versus Decentralization of Authority When top managers make decisions, authority is centralized. When lower-level managers make decisions, authority is decentralized.

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Q. What are the advantages and disadvantages of centralization? A. Centralization keeps a company focused on goals, but managers become involved in day-to-day decisions and lose sight of strategic or long-term decision-making. Q. What are some advantages and disadvantages of decentralization? A. Decentralization offers flexibility and responsiveness, making managers accountable, risk-takers. The chance to demonstrate skills and competencies motivates managers. Yet, decentralization makes planning and coordination difficult, and the company may lose control of decision-making.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4.3: Centralize or Decentralize? Decentralization can be a disadvantage. United Way suffered from the perception that donations were used for overhead not for the needy. Q. Should United Way centralize or decentralize? A. Consultants felt that the best way to save money and increase efficiency was to reduce the number of local organizations and centralize business functions. United Way had not found the right balance between centralization and decentralization. Waste Management Inc. gave its subsidiary, Chemical Waste Management, a disposer of hazardous waste, complete authority to make operating decisions. Waste Management Inc. was interested only in the profits. Q. What problems did Waste Management incur due to its balance of decentralization and centralization?

Managers must select a balance between centralization and decentralization. The optimal balance occurs when middle managers make some decisions, and top managers make strategic decisions. The distribution of authority controls how workers behave; the army discourages risk-taking and maximizes control, so the structure is highly centralized. Q. What types of companies decentralize authority? A. High-tech companies encourage innovation and risk-taking, so they decentralize authority. Evaluating the balance of authority is ongoing.

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A. The failure to control decision making and the pressure to increase profits led employees to deliberately mishandle waste. Pollution-monitoring equipment was turned off to save disposal costs, and managers were accused of mislabeling containers to avoid disposal costs. The decentralized management style was blamed because there was little involvement from top managers.

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Balancing Standardization and Mutual Adjustment

The fourth design difficulty balances standardization and mutual adjustment. Standardization is the process of following rules and standard operating procedures (SOPs). Mutual adjustment allows for judgment rather than rules to solve problems. Standardization makes actions predictable, and mutual adjustment provides flexibility for responding creatively. Formalization: Written Rules The use of written rules and procedures to standardize operations is known as formalization. If formalization and standardization are extensive, there is no room for mutual adjustment. Employees are held accountable for following rules. Q. What companies use formalization extensively? A. The military, UPS, and Federal Express use formalization. Q. Are those companies highly centralized or decentralized? A. Highly formalized companies are generally highly centralized. Companies with a high level of mutual adjustment are highly decentralized.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

Standardization versus Mutual Adjustment It is challenging to balance control through standardization with employee problem solving for mutual adjustment. Some functions, like accounting, require standardization, but others, like R&D, require risk taking. Integrating mechanisms such as task forces and teams increase mutual adjustment. Complex, uncertain tasks rely on mutual adjustment. An appropriate balance between standardization and mutual adjustment promotes creative and responsible behavior.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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Socialization: Understood Norms Rules are formal statements that specify methods for goal attainment, and norms are informal, internalized standards of behavior. Some norms promote effectiveness, and others reduce it. When production workers select a work rate and “ratebusters” violate the norm by working too fast, they face reprisals. If the norm is to make no changes, managers hesitate to suggest changes. Even if rules changes, behavior is unchanged because rules become internalized norms. Socialization means learning norms and unwritten rules.

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Refer to discussion question 4 here to emphasize the role of goals and the environment in balancing centralization vs. decentralization and standardization vs. mutual adjustment.

___________________________________________________________________________ ___________________________________________________________________________ Focus on New Information Technology: Amazon.com, Part 3 Design choices were driven by the need to ensure that Amazon’s software effectively linked customers to the web site. Customer service was the most important element. Q. How did Jeff Bezos structure Amazon.com? A. The desire for good customer service led to a decentralized structure, with empowered employees to meet customers’ needs. For efficient book distribution and shipping, information systems were standardized, but mutual adjustment improved customer responsiveness. Q. How does Amazon.com coordinate and motivate employees? A. Socialization is the vehicle for coordinating and motivating employees. They learn organizational roles from members of their functions and the norm of providing excellent customer service. Employees receive company stock as a motivator.

Managerial Implications: The Design Challenges Managers should create a map of the principal integrating mechanisms and determine which levels in the hierarchy have responsibility for specific decisions. Managers should list their principal tasks and responsibilities and be aware of the informal norms and values that influence group members.

4.5

Mechanistic and Organic Organizational Structures

Design choices produce mechanistic and organic structures. (Fig. 4.6) Mechanistic structures influence people to behave in a predictable manner. Decision-making is highly centralized and roles clearly defined. (Fig. 4.7a)

A. The primary integrating mechanism is the hierarchy. Standardization and formal rules facilitate control and coordination. Emphasis on the hierarchy makes the informal organization aware of status. Promotion is slow and one’s career path outlined. This rigid structure is appropriate in stable, unchanging environments. Organic structures encourage flexibility and decentralize decision-making. Roles are loosely defined. Employees perform many tasks and work with people from various functions. (Fig. 4.7b) Q. What integrating mechanisms are used? A. This structure requires complex integrating mechanisms such as task forces and teams. Status is based on leadership ability not a formal position in the hierarchy. Organic structures respond quickly to change.

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Q. What is the major integrating mechanism?

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Notes_________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4.4: Sony’s Magic Touch Sony uses its organic structure to motivate and coordinate employees. Q. What characterizes Sony’s structure? A. Sony’s organic structure encourages innovation. Engineers can join any project if they can make a contribution. Sony has 23 groups with hundreds of development teams that encourage communication and innovation. Engineers who take successful risks are promoted and gain control of resources. Top management interferes only if groups duplicate efforts. Authority is decentralized, roles loosely defined, and mutual adjustment preferred to standardization. This structure has allowed Sony to introduce innovative products. An organic structure is not always appropriate; the military needs a mechanistic structure. The Contingency Approach to Organizational Design Contingencies shape organizational design. The contingency approach customizes structure to the sources of uncertainty. Mechanistic and organic structures are ideals, useful for understanding the effect of structure on behavior, but in reality, organizations mix both structures. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Lawrence and Lorsch analyzed three industries with three levels of uncertainty—plastics, food processing, and container manufacturing. They selected companies and measured: (1) differentiation in production, R&D, and sales departments; (2) differences in subunit or functional orientations, and (3) differences in integrating mechanisms. (Table 4.2) Research findings: 1. In complex, unstable environments, attitudes vary significantly. Each department creates its own response to environment issues. 2. In unstable, uncertain environments, informal and decentralized organizations using mutual adjustment are more effective. 3. In stable, certain environments, centralization, formalization, and standardization are more effective. 4. Effective companies match levels of integration with levels of differentiation. Highly differentiated companies have complex integrating mechanisms.

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Lawrence and Lorsch on Differentiation, Integration, and the Environment The number and size of an organization’s functions reflect the need to manage exchanges with environmental forces. (Fig. 4.9)

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To be effective, an organization must adapt its structure to match its environment; Burns and Stalker strengthen this conclusion.

Burns and Stalker on Organic versus Mechanistic Structures and the Environment Burns and Stalker found that companies with organic structures were more effective in unstable and changing environments. Companies with mechanistic structures were more effective in a stable environment. Q. Why is an organic structure more effective in a dynamic environment? A. A flat, decentralized structure increases communication, information sharing, and customer responsiveness. A stable environment makes complex decision-making unnecessary; transactions are managed easily, and centralized authority is more effective. Burns and Stalker proposed that structure be designed to match the dynamism of the environment. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 4.5: McDonald’s Changing Environment McDonald’s environment is becoming more uncertain. Specific forces of uncertainty include changed consumer tastes and increased competition. General forces include environmental issues such as safe packaging. Q. How has McDonald’s responded to its changing environment and what is the role of structure? A. McDonald’s environment is more uncertain, so it views its domain differently, offering new products to new customers. McDonalds’ mechanistic structure based on formalization ensured standardization, but an uncertain environment has led to an organic structure. Franchisees can tailor menus and decor to local customers. McDonald’s challenge is to make its structure organic to promote flexibility yet maintain centralization to ensure standards of quality and cleanliness.

Organizational Insight 4.6: Wal-Mart’s Race to the Top Wal-Mart has achieved a balance between a mechanistic and organic structure. The vertical operating structure has a defined hierarchy, but store managers and employees make some decisions. Q. How is Wal-Mart mechanistic? How is it organic? A. In a clearly defined hierarchy, regional vice presidents are in charge of district managers, who are in charge of store managers. Decision-making is centralized at the store manager level, and operations are standardized. Wal-Mart’s structure is organic because store managers make decisions. This facilitates mutual adjustment. Wal-Mart employees, called associates, make suggestions that are implemented. Wal-

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Mart has informal norms and values that foster responsive behavior. To coordinate, Wal-Mart uses task forces and teams. Notes_________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS 1. Why does differentiation occur in an organization? Distinguish between vertical and horizontal differentiation. Differentiation occurs because as organizations grow and become more complex, they establish a division of labor. Complex organizations must control and coordinate activities to achieve goals. Vertical differentiation is a hierarchy of authority with reporting relationships established to connect organizational roles and subunits. Horizontal differentiation groups roles according to task responsibilities, establishes division of labor, and forms subunits. 2. Draw an organizational chart of your business school or college. Outline the major roles and functions. How differentiated is it? Do you think the distribution of authority and division of labor are appropriate? Answers will vary. The hierarchy from top to bottom is president; vice presidents; dean of the business school; department heads from each of the functional departments—finance, management, marketing, accounting, and information systems. Under department heads are faculty members, then student assistants and workers. Horizontally there are five functions and specializations within each function. Vertically the hierarchy has several layers. 3.

When does an organization need to use complex integrating mechanisms? Why?

4.

What factors determine the balance between centralization and decentralization and between standardization and mutual adjustment?

The balance depends on organizational goals and the environment. To discourage risk-taking, the structure is centralized with control through standardization. To encourage risk-taking, the structure is decentralized with control through mutual adjustment. Centralization and standardization promote predictability; decentralization and mutual adjustment promote innovation. Centralization and standardization fit a stable, unchanging environment, whereas decentralization and mutual adjustment fit a changing, uncertain environment.

5.

Under what conditions is an organization likely to prefer (a) a mechanistic structure, (b) an organic structure, or (c) elements of both?

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As organizations become differentiated, subunit orientations emerge, leading to poor communication and coordination. Complex and highly differentiated organizations, such as those with several divisions, use complex integrating mechanisms to facilitate communication and coordination. In large organizations, division managers never meet, so integrating roles promote communication and coordination.

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a. An organization prefers a mechanistic structure to encourage predictable behavior in a stable environment. If technology doesn’t change and the tasks are simple, a mechanistic structure is preferable. A mechanistic structure is preferred when formalized rules must be followed. b. An organization prefers an organic structure to foster innovation in a changing, uncertain environment, or if a project requires cross-functional coordination. If technology changes and a company has skilled workers, it needs an organic structure. c. Most organizations adopt both a mechanistic and organic structure and simply lean more toward one. The military has a mechanistic structure, but remains flexible, faced with uncertainties on the battlefield. An organization can have rules and centralized decision making, but still decentralize some decisions. A balance between mechanistic and organic structures results in a competitive advantage.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Growing Pains In small groups, students have founded the Zylon Corp., a rapidly growing Internet software company. An informal structure has worked, but now employees do not feel rewarded for performance, and managers do not listen to their ideas. Students review the organizational structure and propose design choices to solve these problems.

Making the Connection Students will find examples either in business publications or online of a company facing one of the design challenges discussed in the chapter and explain how the company has handled the challenge.

The Ethical Dimension Using the design challenges, students examine the ethical implications of various structures. The key point based upon Contingency Theory is that structures must fit the environment. When they don’t, the situation is more likely to produce wrong decisions, which, in turn, could be viewed as unethical. For example, a nuclear power plant that should be very mechanistic may operate very poorly, and make bad decisions if they are structured in an organic format. Safety concerns would most likely be a high ethical concern. Likewise, a creative software company that has a mechanistic structure would also be ineffective, and employees might get frustrated and behave unethically.

Students will describe differentiation, core competences, and design challenges in their company. They will determine whether their company is decentralized or centralized and whether it uses standardization or mutual adjustment. They will describe the role of the informal organization and identify integrating mechanisms.

CASE FOR ANALYSIS Where Should Decisions Be Made?

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ANALYZING THE ORGANIZATION

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Until 1995, decision-making at Procter & Gamble was decentralized; managers in each country made their own decisions. This structure impeded managers of similar divisions from cooperating. Thus, top management divided global operations into North America, Europe, the Middle East, and Asia; each area was assigned a global executive vice president. Vice presidents were responsible for cooperation among divisions; authority was centralized. The balance between centralization and decentralization can be changed to make better use of resources. 1.

Why did Procter & Gamble move to centralize control?

Top managers believed that highly decentralized global decision-making prevented cooperation in similar divisions in different counties (soap and detergent divisions) and in different divisions in the same country or world regions. This new structure reduced costs and allowed for rapid innovation. This change was made in 1995, and in 1996 P&G earned record operating profits on record global sales. 2.

When would managers realize that they had gone too far and “centralized” control too much?

When P&G does not respond to customers as quickly as competitors, it will need more innovation and move towards decentralization. Decentralization promotes flexibility and responsiveness by allowing lower-level managers to make on-the-spot decisions. Managers can demonstrate their personal skills and will be more motivated.

1. Use the four design challenge questions as a guide for this chapter. These questions really put a practical spin on the basic principles of design. 2. Have students bring real organizational charts from their organizations. An organizational chart can illustrate the difference between vertical and horizontal differentiation. In a vertical authority relationship, employees report to a supervisor, who reports to a manager, who reports to a vice president. The chart shows that task responsibilities are horizontal; functions such as manufacturing, sales, and R&D are on the same level. 3. Ask students which of the six design challenges their organization faces regularly. A good follow up discussion concerns restructuring, and why it does not always occur when faced with these design challenges. 4. Have students debate the advantages and disadvantages of centralization and decentralization. 5. Have students distinguish between rules, formal written statements, and norms, or informal standards of behavior. 6. Have students discuss when formalization has “failed” them. Examples might include a retail store’s return policy, or a video-rental store’s late-fee policy. The key point is that high levels of formalization are efficient, because employees require less training and don’t have to make as many decisions, but tend to break down when customers have unusual requests or requirements. This is a good way for students to understand how the efficiencies of formalization must be balanced with customer needs.

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TEACHING SUGGESTIONS

CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL

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CHAPTER 5 DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL TEACHING OBJECTIVES 1. To examine how the hierarchy emerges and how most companies limit hierarchical levels. (5.1) 2. To address the problems associated with tall hierarchies: communication, motivation, and bureaucratic costs. (5.1) 3. To consider Parkinson’s Law and the minimum chain of command principle. (5.1) 4. To demonstrate how an increased span of control can prevent a hierarchy from becoming too tall. (5.1) 5. To review the factors that affect the shape of the hierarchy: horizontal differentiation, centralization, and standardization. (5.2) 6. To examine Max Weber’s six principles for a bureaucratic structure. (5.3) 7. To consider the advantages and disadvantages of a bureaucracy. (5.3) 8. To consider the importance of the informal organization. (5.4) 9. To discuss the trends toward empowerment, self-managed teams, cross-functional teams, and contingent workers. (5.5)

CHAPTER SUMMARY To protect shareholders goals, managers must constantly analyze organizational structure. This chapter examines the vertical dimension of structure—the hierarchy of authority created to control an organization’s members.

Factors shape the hierarchy: horizontal differentiation, centralization, standardization, and the informal organization. These design decisions can ensure that a hierarchy remains flat so the organization can control activities. Horizontal differentiation controls employees when an organization cannot increase its hierarchical levels. Horizontal differentiation keeps the hierarchy flat, as each function has its own hierarchy. Decentralizing authority improves communication and coordination due to less direct supervision, affecting the size of the hierarchy. Standardization reduces direct supervision, because employees follow rules, standard operating procedures (SOPs), and norms. The informal organization can increase control. The chapter outlines Max Weber’s six principles of bureaucratic structures and reviews the advantages of bureaucratic structure. Authority should be based on rational legality, clearly defined roles, competence, and rules. A bureaucratic structure controls interactions among organizational members, reduces transaction costs, provides stability, and increases core competences. Managers must prevent the

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How and why does vertical differentiation occur? The hierarchy emerges when an organization faces coordination and motivation problems due to increased horizontal differentiation. A hierarchy is tall if it has many levels relative to organizational size and flat if it has few levels relative to size. Most large companies do not exceed 9 or 10 levels and do not increase the number of managers, because tall hierarchies have problems with communication, motivation, and high bureaucratic costs. Parkinson’s Law demonstrates how hierarchies get too tall. The minimum chain of command principle is explained. Increasing the span of control can substitute for increasing hierarchical levels. Span of control is based on the complexity and interrelatedness of tasks. Simple and less interrelated tasks call for a wider span of control.

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hierarchy from becoming too tall and centralized. If the hierarchy is neglected, organizational costs rise, the decision-making process slows, and the company becomes unresponsive to stakeholders. Restructuring and downsizing are a trend to reduce costs. Coupled with this trend is the use of empowerment and self-managed teams. Another cost-saving measure is the use of contingent workers.

CHAPTER OUTLINE 5.1

Authority: How and Why Vertical Differentiation Occurs

Determining the level of vertical differentiation is a basic design challenge. Managers must determine the shape of the hierarchy, the number of levels, and the span of control (the number of subordinates a manager oversees). The shape of the hierarchy, plus the balance between centralization and decentralization, establish the extent of vertical differentiation. The Emergence of the Hierarchy As an organization grows, differentiation and the division of labor increase, which lead to coordination and motivation problems. At this point the hierarchy emerges to coordinate and motivate members by increasing the number of managers and organizational levels. Managers choose between a flat hierarchy with few levels relative to company size and a tall hierarchy with many levels relative to size. (Fig. 5.1) Size and Height Limitations Research on size and height of the hierarchy shows that a firm of 1000 has 4 levels, one with 3,000 has 7 levels, and one with up to 100,000 employees stays at 9 or 10 levels. (Fig. 5.2) Organizations actively restrict the number of managers and the number of levels as they grow. So, most organizations have a pyramid structure (Fig. 5.3a), not a bloated structure (Fig. 5.3b). Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Problems with Tall Hierarchies

A. Tall hierarchies face problems. Communication Problems. As the chain of command extends, communication takes longer, which slows decision-making. Information is distorted, accidentally or deliberately, as it goes up and down the hierarchy. Q. How can information be distorted? A. A long chain of command leads to misinterpretation of the message. Self-serving managers give selective information to decision-makers. Subordinates tell superiors what they want to hear. Distortion leads to poor decisions, because decision-makers have incorrect information.

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Q. Why is the number of hierarchical levels and managers limited?

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Organizational Insight 5.1: The Shake-up at Du Pont Du Pont is one of America’s largest chemical companies. Recently, the CEO attributed slowing sales and earnings to an increase in the number of top levels of management. He believed that too many managers were slowing down the recognition and reaction to problems. Q. How did Du Pont’s structure contribute to its problems? A. When organizations get too tall, they cannot respond as well or as quickly to the marketplace, which is what happened to Du Pont. This was fixed by flattening the structure so that the organization could respond better to customer needs. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Motivation Problems. The taller the organization, the less managerial authority and responsibility there are. Tall hierarchies decrease motivation because managers, with less authority and responsibility, are less motivated. In a flat structure, managers have more responsibility and are more motivated. Accountability in a tall structure decreases, making it easy for managers to shirk responsibility. Bureaucratic Costs. Tall hierarchies have high bureaucratic costs; a company pays a middle manager an average $300,000 a year, so a cut of 1,000 extra managers saves $300 million. Layoffs become necessary if management pays no attention to its hierarchy. A company grows and hires managers without considering long-term costs. When the company matures, growth ceases, and cost reduction becomes necessary. To avoid layoffs, a company must continually evaluate its hierarchy. The Parkinson’s Law Problem Parkinson observed that from 1914 to 1928, while the British Navy decreased the number of ships by 68 percent, it increased the number of dockyard officials by 40 percent and top managers by 79 percent. Q. Why did this occur?

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

The Ideal Number of Hierarchical Levels: The Minimum Chain of Command Managers should base hiring decisions on whether the value added exceeds the cost. The minimum chain of command principle states that a company should choose the minimum number of hierarchical levels needed for goal achievement.

Organizational Insight 5.2: Using the Hierarchy to Promote Creativity and EMI EMI is a record company that gradually lost its creativity because it was managed by a top heavy team of executives who did not recognize the entrepreneurial ability of their subordinates.

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A. Parkinson’s theory is that managers want to increase the number of subordinates, not rivals, so they make work for each other. In other words, “Work expands so as to fill the time available.”

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This is very similar to what happened in the Du Pont insight, which makes a good point that this issue is common as organizations grow. These issues illustrate aspects of Parkinson’s law, and make a good discussion topic. Span of Control To avoid becoming too tall, an organization can increase the span of control, the number of subordinates a manager directly oversees. Different companies have different spans of control. A manager’s span of control is limited to the number of subordinates that can be adequately supervised. An increase in subordinates exponentially increases the subordinate relationships to be managed. A manager with two subordinates manages three relationships, but a manager with three subordinates manages six (Figs. 5.6a–b). If the span of control becomes too wide, a manager loses control over subordinates. Q. What determines an effective span of control? A. Complexity. For complex, dissimilar tasks, the span of control can be narrow. For routine, similar tasks, the span of control can be wider. A research supervisor has a narrow span of control, but a production supervisor has a wide span of control. Interrelatedness. Interrelated tasks require a narrow span of control because horizontal relationships must be managed. Horizontal relationships are less important if tasks are not interrelated. Most organizations have a pyramid shaped hierarchy, as tasks are complex and interrelated at the top.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 5.2

Control: Factors Affecting the Shape of the Hierarchy

An effective span of control must be limited, thus organizations use other design challenges to control activities: horizontal differentiation, centralization, standardization, and the informal organization.

Q. Why does manufacturing have many levels? A. Manufacturing must exercise tight control over subordinates and control costs. Sales has fewer levels because it relies on standardization, not direct supervision. R&D has fewer levels because complex tasks are difficult to supervise. R&D often uses project teams, a narrow the span of control, and informal norms and values to control behavior. (Fig. 5.8) Horizontal differentiation allows an organization to remain flat because hierarchies are developed in subunits. Q. What problems are caused by horizontal differentiation?

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Horizontal Differentiation When vertical differentiation cannot be increased, an organization maintains control by increasing horizontal differentiation and establishing specialized functions or divisions. Each subunit also has a hierarchy. (Fig. 5.7)

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A. Horizontal differentiation causes coordination and motivation problems that are controlled through centralization, standardization, and the informal organization. Centralization The communication and coordination problems of a tall company make a manager’s job one of monitoring and supervising, causing an organization to lose sight of its goals. One solution is to reduce the number of managers by decentralizing decision-making to lower levels. Decentralization keeps the organizational structure flat.

Organizational Insight 5.3: Union Pacific Decentralizes The centralized structure of Union Pacific was designed to reduce costs. Regional managers were responsible for ensuring the smooth flow of freight through their regions, but changes in the competitive environment also meant that this efficiency needed to be balanced with being responsive to customers. This was done be decentralizing authority and giving regional managers the authority to make operational decisions in the field. This case illustrates how both centralization and decentralization have their advantages and disadvantages, and organization must continuously evaluate the environment and respond to changes.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Standardization Another way to flatten the hierarchy is through standardization. Tasks are controlled through rules, standard operating procedures (SOPs), and norms, so a wide span of control is used; rules eliminate direct supervision, and managers can delegate responsibility because subordinates know the rules . Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Managers must assure that the hierarchy matches organizational needs and is not too tall or centralized. If the hierarchy provides too little control, managers must maintain adequate supervision over people and resources. Managerial teams should review the hierarchy’s design. Notes_______________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________ 5.3

The Principles of Bureaucracy

Max Weber (1864–1920), a German sociologist, developed an organizational structure to improve operations. He developed the bureaucracy, a structure in which people follow rules and are accountable

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Managerial Implications: Authority and Control

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for their actions. Weber’s six principles of bureaucracy distribute responsibilities and authority to maximize company’s effectiveness. Principle One: A bureaucracy is founded on the concept of rational-legal authority, a person’s authority is due to position in the organization. Power should be separate from personality. Principle Two: Organizational roles are determined by technical competence, not social status, kinship, or heredity. This principle requires managers to see all potential job candidates objectively. Principle Three: A role’s task responsibility and decision-making authority and its relationship to other roles in the organization should be clearly specified. A clear pattern of vertical and horizontal differentiation is necessary for effectiveness. Role conflict, conflicting demands on a subordinate, and role ambiguity (fear of responsibility because of unclear tasks) should be eliminated. Principle Four: The organization of roles in a bureaucracy is such that each lower office in the hierarchy is under the control and supervision of a higher office. People know the chain of command. Principle Five: Rules, standard operating procedures, and norms should be used to control the behavior and the relationship between roles in an organization. Rules are formal written standards of behavior, whereas norms are unwritten.

Organizational Insight 5.4: Never Underestimate the Power of Rules General Mills opened a chain of Chinese restaurants that had early success. In an attempt to open many restaurants quickly, they lost control of the food quality due to the lack of training and standard preparation procedures. Although they did implement procedures, it was too late to save the restaurant, as word had already spread that they had poor quality and poor service. In addition to illustrating the value of rules and standard operating procedures, this case also serves as an excellent example of the power of the reputation effect. Although the fixed the quality problem, it was too late in this case to save the organization. Principle Six: Administrative acts, decisions, and rules should be formulated and put in writing. When written down, rules become official guidelines that can be used even when people leave. Written documents ensure that people can be held accountable.

Q. What are the advantages of a bureaucratic structure? A. Advantages: 1. Rules for designing the hierarchy 2. Increased accountability and reduced transaction costs 3. Reduced costs of monitoring subordinates 4. Increased integration 5. Decreased costs of performance evaluation and of rule enforcement 6. The position separated from the person 7. Guidelines and skills able to be passed on to successors 8. Stability needed for employees to take long-term perspectives

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The Advantages of Bureaucracy A bureaucratic structure exists when an organization implements Weber’s six principles.

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Despite these advantages, bureaucracies have negative connotations. Q. What causes this negative thinking? A. Disadvantages: 1. Slowed decision-making and increased costs due to a tall and centralized hierarchy 2. Failure to meet stakeholders’ needs due to too many rules Management by Objectives This system provides a framework to both evaluate and to monitor progress towards the achievement of organizational goals. It consists of three steps: 1. Specific goals and objectives are established at each level of the organization. 2. Managers and their subordinates together determine the subordinates’ goals. 3. Managers and their subordinates periodically review the subordinates’ progress towards meeting the goals.

Managerial Implications: Using Bureaucracy to Benefit the Organization For organizational effectiveness, managers and employees should follow bureaucratic principles. They do not own their positions and must benefit stakeholders. Managers should make hiring, promoting, and rewarding decisions fairly. Reporting relationships should be periodically reviewed to ensure clarity. Managers and employees should adopt a “questioning attitude” toward the organization. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

5.4

The Influence of the Informal Organization

At all organizational levels, decision-making and coordination occur outside formally designed channels. Rules and norms emerge out of the informal organization, the network of personal relationships that develop over time.

A. The informal organization affects the way the “formal” hierarchy works.

Organizational Insight 5.5: Wildcat Strikes in the Gypsum Plant Gypsum, a mineral for making wallboard, is mined and processed by the General Gypsum Company. Workers could take wallboard for personal use and have excessive absenteeism until a new plant manager reactivated rules that had never been enforced. The workers initiated strikes and only went back to work when authority was defined and rules established for settling disputes. Q. What is the role of the informal organization?

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Q. Why should managers understand the informal organization?

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A. Managers must consider how the informal organization affects both individual and group behavior when making organizational changes. Altering the formal structure disrupts the informal norms that make the organization work. The informal organization can enhance organizational performance because many accomplishments occur through the informal network in ways not revealed by the formal hierarchy. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

5.5

Refer to discussion question 2 here to emphasize how the informal organization affects the shape of the organization. ________________________________________________________________ ______________________________________________________________________________

IT, Empowerment, and Self-Managed Teams

Information technology is making it much easier for organizations to cost-effectively design a structure based upon empowerment and teams. The trend towards decentralization is largely due to technology that allows this to be done cost effectively, without losing many of the benefits of centralization. Therefore, organizations today are making use of self-managed teams and cross-functional teams as opposed to the traditional bureaucracy. As organizations become flatter, another trend is to employ contingent workers. This allows organizations to both reduce costs and stay flexible. Q. Will decentralization abolish the hierarchy? A. Some suggest that more lateral relations will emerge. Others contend that even a team-based company composed of empowered workers needs a hierarchy and a minimum set of rules and SOPs to control activities. The challenge is to achieve the proper mix of mechanistic and organic structure. Q. What are the advantages and disadvantages to using contingent workers?

Still, an estimated 20 percent of the U.S. workforce is comprised of contingent workers. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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A. Contingent workers cost less because they receive no benefits and are only hired as needed. Such employees may have coordination and motivation problems, as there is no promotion or job security. Contingent workers do not help a company develop core competences.

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DISCUSSION QUESTIONS AND ANSWERS 1.

Choose a small organization in your city, such as a restaurant or school, and draw a chart showing its structure. Do you think the number of levels in its hierarchy and the span of control at each level are appropriate? Why or why not?

Answers will vary. One possibility is a locally owned restaurant with a four-level hierarchy that includes owner, manager, three assistant managers, and waiters, cooks, and kitchen help. The number of levels is appropriate because four levels is the minimum number for effectiveness. The span of control is appropriate. The manager oversees three assistant managers, who oversee 12 people. The tasks of waiters, cooks, and busboys are simple, so a wide span of control is appropriate. 2.

In what ways can the informal organization and the norms and values of its culture affect the shape of an organization?

An organization can use the informal organization, norms, and values to increase control. The informal links can augment the formal authority relationships. Norms and values standardize behavior. The informal organization and norms provide control, so the company can add fewer levels to the hierarchy and hire fewer managers as the company grows. 3.

What factors determine the appropriate authority and control structure in (a) a research and development laboratory, (b) a large department store, or (c) a small manufacturing company?

a. An R&D lab has a flat hierarchy and a narrow span of control. This structure is appropriate because complex tasks make it difficult to monitor employees. The lab uses norms and values to control behavior. Teams could facilitate mutual adjustment. b. A large department store has a flat hierarchy, and lower-level managers have a wide span of control: a manager, department heads, assistant managers, and salespeople. The store relies on standardization, rules, and procedures instead of a tall hierarchy. This structure is appropriate because tasks are simple and similar, so lower-level managers have a wide span of control.

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c. A small manufacturer needs to exert tight controls and monitor employees to control costs. Therefore it has a taller hierarchy and a smaller span of control. Direct supervision ensures that employees are performing tasks appropriately and that costs are minimized.

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How can the principles of bureaucracy help managers design the organizational hierarchy?

The principles of bureaucracy ensure that an organization’s structure is effective. It instructs managers on the following: a. The basis of authority. Authority should be based on rational-legal authority, determined by the position not the person. b. Assigning roles. Roles should be based on competence, not status or kinship. c. Defining tasks. Tasks and decision-making authority should be clearly defined. d. Controlling authority. Each lower office in the hierarchy should report and be responsible to a higher office. e. Controlling behavior. Rules, standard operating procedures, and norms can control behavior. f. Ensuring future effectiveness. Put rules in writing. 5.

When does bureaucracy become a problem in an organization? What can managers do to prevent bureaucratic problems from arising?

Bureaucracy becomes a problem when managers fail to control growth, resulting in a tall and centralized hierarchy, which stifles innovation, slows decision making, and increases operating costs. If members rely solely on rules, they become unresponsive to stakeholder needs. Managers can avoid problems by controlling the hierarchy, even during growth. An organization needs the minimum number of levels for achieving goals. To prevent an unnecessary increase in managers, a higher-level officer should approve hiring decisions. If managers follow Weber’s six bureaucratic principles, problems can be prevented.

ORGANIZATIONAL THEORY IN ACTION Organizational Theory Exercise: How to Design a Hierarchy Students form small groups of managers assigned to restructure a division by abolishing 25 percent of managerial positions. Students discuss how to cut positions, how to obtain adequate supervision with fewer managers, and how to make downsizing less painful for employees.

The Ethical Dimension

Ask students for their personal experiences, as many families or individuals have experienced this situation firsthand.

Making the Connection Instruct students to find an example of a company that has recently changed its hierarchy of authority or its top-management team and ask them to explain why changes were made.

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Students examine which workers should be terminated during a restructuring of middle managers. This is a difficult exercise, because regardless of the methods used, somebody needs to be terminated when IT replaces the need for workers. This is a good exercise to relate the issue of satisfying stakeholders needs to the ethical processes encountered during a typical restructuring.

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ANALYZING THE ORGANIZATION Students will draw an organization chart of their company’s top management and describe the topmanagement team. They will discuss their company’s use of bureaucracy, centralization, standardization, and horizontal differentiation. They must evaluate the hierarchy (tall or flat) and the span of control (narrow or wide).

CASES FOR ANALYSIS A New Approach at Hewlett-Packard This case demonstrates how organizational structure becomes a critical focus when a company begins to decline or lose its market share to competitors. HP was not able to keep up with competitors who were able to introduce new products much quicker than it could, and much of this was attributed to the structure. 1.

What kind of changes did Fiorino make to its structure to help HP increase the speed of innovation?

She flattened the hierarchy by cutting two layers of management, created cross-functional teams instead of centralized decision making, and she assigned each team to its own sales staff in order to speed the introduction of the products to market. 2.

How should Fiorino make use of new kinds of information technologies to help its hierarchy of authority work better?

The key point is that this is a continuous process. She is already taking advantage of technologies by creating teams and flattening the structure. In general, this is possible because of technology.

1.

2.

3.

4. 5. 6.

Use a role-play to illustrate the problems with tall hierarchies. Ten students work for a computer company. Student one has an idea for a fax modem and tells a supervisor who checks with a superior. The idea goes through the chain of command. By the tenth person, the idea is distorted. The person is unlikely to suggest other ideas. Another competitor introduces a fax modem, and the company loses out due to the tall hierarchy and unwillingness to promote innovation. Use a role-play to demonstrate how span of control depends on the complexity of the tasks. Three students are research scientists looking for a cure for cancer. These tasks are complex, thus the span of control is narrow. Conversely, have one student supervise 20 production workers. The work is simple, so it is easier to supervise more people. Hierarchies tend to be pyramid shaped because work at top levels is more complex. As an out-of-class assignment, students will look at business publications and on the Internet http://www.cnn.fn. and find current examples about structural changes: mergers, acquisitions, or downsizing. Invite a CEO from a local company to describe the organizational structure of the company. Ask students to discuss the advantages and disadvantages of working for an organization that implements Weber’s bureaucracy. Would they enjoy working under this system? Why or why not? Use the principles of management by objectives in the classroom. That is, the instructor is the manager, and the students are subordinates. Role play how this might work based upon their objectives in the classroom.

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TEACHING SUGGESTIONS

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7. Notice how most of the Organizational Insights and cases in this chapter had a similar theme. Ask students what this them is, and discuss. This is in reference to many organizations having a structure that inhibits change.

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CHAPTER 6 DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION TEACHING OBJECTIVES 1. To show how to group and coordinate tasks and how an effective organizational design leads to core competences and a competitive advantage. (6.1) 2. To demonstrate that grouping tasks by function is the foundation of horizontal differentiation. (6.1) 3. To illustrate that moving from a functional to a more complex structure increases vertical differentiation, horizontal differentiation, and integration. (6.2) 4. To stress that structure must be evaluated periodically and may need to be changed. (6.2) 5. To show the differences among the three types of product structures: product division, multidivisional, and product team. (6.3) 6. To explain the geographic and market structures. (6.4./6.5) 7. To outline the advantages and disadvantages of a matrix structure. (6.6) 8. To explain the concept of a multidivisional matrix structure. (6.6) 9. To discuss the emerging trends toward network organizations, outsourcing, and the boundaryless organization. (6.7)

CHAPTER SUMMARY Company tasks are organized to provide customers with goods and services. The functional structure stands as the foundation of horizontal differentiation by creating a division of labor that leads to core competences. Functional structures face control problems as an organization grows and becomes more complex: lack of communication, inability to measure performance, and lack of customer responsiveness. To resolve these issues, a company adopts a more complex structure by increasing vertical differentiation, horizontal differentiation, and integration. The source of control problems, the product, geography, or the customer, determines the type of structure. Three product structures (product division, multidivisional, and product team) are discussed, highlighting both advantages and disadvantages. The geographic structure and the market structure are examined with their advantages and disadvantages.

Trends in structure include network organizations, outsourcing, and the boundaryless organization, each with advantages and disadvantages. A key issue in organizational design is how to group tasks and coordinate activities to create a competitive advantage. Organizational structure fosters coordination, motivation, and control. The appropriate structure depends on the complexity of activities, the amount of coordination needed, the number of products marketed, the geographical location, and the customer served. Reengineering an organization can increase performance.

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The matrix structure is appropriate when a high level of coordination and a rapid development time are necessary. The advantages and disadvantages of the matrix are reviewed as well as the difference between the matrix and the product team structures. The multidivisional matrix structure offers a high level of coordination among divisions. Structures may need to be changed over time, so managers should continually evaluate the cost/benefit ratio of company structure.

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CHAPTER OUTLINE 6.1

Functional Structure

Functional structure is the bedrock of horizontal differentiation, which begins when one person assumes a functional task. As others assume specialized roles, a functional structure emerges, with people placed in groups based on common skills or common use of resources. The B.A.R. and Grille grouped waiters and busboys into the dining area function and chefs and kitchen staff into the kitchen function. Q. How does the functional structure help a company reach its goals? A. A company organizes jobs into functional areas to offer consumers high-quality products at reasonable prices. As functional abilities increase, a company can attain a core competence and competitive advantage. •

Refer to The B.A.R. and Grille example above for a good working example of how and why an organization would group by function.

___________________________________________________________________________ ___________________________________________________________________________ Focus on New Information Technology: Amazon.com, Part 4 Jeff Bezos achieved success due to the functional structure that effectively allowed Amazon.com’s Internet software to link employees to customers. Q. Describe Amazon’s functional structure. A. First, Bezos created R&D to develop and improve in-house software. Then he established the information systems department to implement these systems and interact with customers. Finally, a financial department and strategic planning department were added. By focusing on the best way to divide the total task into functions and recruiting experienced managers, Bezos developed core competences that made Amazon.com competitive.

Advantages of a Functional Structure 1. People with common skills share information for problem solving or accomplishing a task. Learning from peers increases skills and abilities. 2. People can supervise each other and meet work schedules. Peer supervision is key if work is complex because supervision from above is difficult. 3. Working closely, peers develop norms and values that increase their effectiveness and loyalty. Control Problems in a Functional Structure

A functional structure controls people and resources and develops core competences. As a company grows and becomes more complex, each function tries to maintain the company’s

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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position. Increased demand may strain manufacturing to produce products fast enough or in sufficient quantity. Control problems arise. Q. What problems do functional structures face? A. Communication Problems. Functions communicate poorly because of subunit orientation. Measurement Problems. Evaluating the cost and contribution of each function to a product is difficult. Location Problems. With regional offices, a company must balance decision-making between centralized functions and regional managers. Customer Problems. New types of customers require customized products to meet their needs. Strategic Problems. Solving daily coordination problems prevents top managers from focusing on longterm strategic issues, resulting in a loss of strategic direction.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Reengineering Functional Structure to Solve Control Problems Before adopting a more complex and costly structure, a company may solve control problems through integrating mechanisms. Marketing and sales have functional hierarchies. Some companies consolidate departments to resolve coordination problems. (Fig. 6.2).

6.2

From Functional Structure to Divisional Structure

A functional structure best serves a company that produces a few, similar products at a few production sites and markets to one type of customer. When production expands to more products at more locations and to several types of customers, a company requires a complex structure.

Managerial Implications: Functional Structure For an entrepreneur, division of labor within a function and between functions is a vital design task. A diagram of task relationships shows if the organization is obtaining the advantages of a functional structure or experiencing disadvantages. Reengineering the design of the functional structure can increase effectiveness.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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This move entails three design choices: Increasing vertical differentiation, increasing the levels in the hierarchy, centralizing decision-making, and increasing control with rules. Increasing horizontal differentiation, product teams or divisions to overlay a functional grouping. Increasing integration, using integrating mechanisms such as task forces and teams to improve coordination between subunits and motivation. (Fig. 6.3)

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Moving to a Divisional Structure A divisional structure groups people from different functions to provide customers with goods or services. This structure makes subunits easier to manage as a company grows. The type of divisional structure depends on the source of control problems. If many, complex products cause problems, a product structure fits best. If multiple locations cause problems, a geographic structure fits best. If different customer types cause problems, a market structure fits best.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 6.3

Divisional Structure I: Three Kinds of Product Structure

As the number of products and/or services increase, tasks are grouped by product and function. A product structure groups products into separate divisions. A company must determine the difference and complexity of products and coordination methods between support functions and product divisions. Support functions can be centralized at the top or grouped for each product division. These decisions determine a company’s product division, multidivision, or product team structure. Product Division Structure A product division structure with centralized support functions is appropriate when products are similar and target the same market. Q. What types of companies generally meet this criteria? A. Food processors, furniture makers, and paper companies fit a product division structure. H. J. Heinz has product divisions with manufacturing facilities and a manager who coordinates with support functions like marketing. Vertical differentiation is increased and support functions centralized at the top. (Fig. 6.4)

Multidivisional Structure A multidivisional structure is appropriate if products are different and are sold in many markets. Divisions are self-contained, each with their own support functions and control. Because products differ, centralized support functions at the top is infeasible. An automaker doesn’t know how to market a computer. The multidivisional structure has a corporate headquarter, organized functionally and responsible for overseeing division managers. Staff members facilitate integration to share information quickly among divisions. Unlike a product division structure, a multidivisional structure can control many businesses. (Fig. 6.6) •

Refer to discussion question 2 here to distinguish between a product division and multidivisional structure. _________________________________________________________________________________ _________________________________________________________________________________

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Each support function is grouped into a product-oriented team. (Fig. 6.5) Sharing of skills and resources increases a function’s ability to create value across product divisions.

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Q. What companies should use the multidivisional structure? A. Most Fortune 500 companies, like General Motors, have a multidivisional structure because it permits growth and retention of control. There are three management levels: corporate, divisional, and functional. Advantages of a Multidivisional Structure 1. Increased organizational effectiveness, due to a division of labor between corporate and divisional managers. 2. Increased control, because corporate managers monitor divisional managers and make comparisons. 3. Profitable growth, because capital can be allocated to divisions with the greatest potential return on investments. 4. An internal labor market, because good divisional managers are promoted to corporate management.

Organizational Insight 6.1: Creating GM’s Multidivisional Structure Alfred Sloan took over GM’s 25 product divisions in 1923 when Ford was highly centralized and achieved economies of scale by producing one model. Sloan developed a multidivisional structure with diversity in R&D, design, and marketing skills, but centralized control for economies of scale, cost control, and strategic planning. Divisional managers made decisions, and corporate managers evaluated performance and created strategic plans. In 1984 competition forced GM to consolidate divisions, but centralized control resulted in look-alike cars, and layers of hierarchy slowed decision-making. So GM returned design control to the divisions, but kept R&D and purchasing centralized. Q. How was GM’s structure different from a product division structure? Evaluate GM’s structure. A. GM’s structure had self-contained divisions and a corporate headquarters staff. GM’s structure had several benefits: 1. The ability to measure each division’s performance and to allocate resources better 2. Improvement in employee morale due to divisional decision-making 3. Sufficient time for corporate managers to focus on strategic issues 4. Sharing of divisional information to compare profitability and product development time

Disadvantages of a Multidivisional Structure 1. Determining what authority to centralize or decentralize from the corporate to the divisional level 2. Coordination problems from uncooperative divisions competing for resources 3. Determining transfer pricing, the price of a product or service sold by one division to another 4. Higher bureaucratic costs 5. Distorted information, resulting in communication problems Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Product Team Structure A hybrid of the product division and the multidivision structures, the product team structure customizes products, speeds development time, and reduces costs. The poor communication leading to slow development in the multidivisional structure is avoided. Functional specialists serve on self-contained,

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Still costs soared due to duplication of functions.

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product division teams. A team manager oversees design and manufacturing activities, and employees become loyal to product not function. Decentralization and integration facilitate rapid decision-making. (Fig. 6.9)

Organizational Insight 6.2: Iacocca Pioneers Chrysler’s Team Structure To develop a car, Chrysler traditionally created a product division, responsible for acquiring inputs. This ineffective method was successfully replaced by Chrysler’s product platform teams. Q. Why did Chrysler change to a product team approach? What benefits did this structure provide? A. The functional approach was ineffective; development time was seven to eight years compared to Toyota’s three, quality was poor, and costs were high. The product team structure was successfully tested for a new sports car, with a development time of three years, good quality, and low costs. Customer demand was high. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

6.4

Divisional Structure II: Geographic Structure

As a company expands into different regions, it needs to organize its core competences to meet the needs of different regional customers. The geographic divisional structure permits some functions to be centralized and others to be decentralized. (Fig. 6.9) This structure increases both horizontal and vertical differentiation. A regional hierarchy is added.

Organizational Insight 6.3 Wal-Mart Goes National Then Global Wal-Mart found the right balance between a mechanistic and organic style of operating and has prospered. (Organizational Insight 4.6) Q. What structural problems did Wal-Mart face? A. Wal-Mart had to choose a structure complex enough to operate its growing empire and still maintain its mechanistic/organic balance.

A. Wal-Mart selected a geographic structure. Store operations are divided into regions, including international operations, giving managers input into their region’s product mix to maximize sales. As it expands globally, Wal-Mart will further divide up its international division to meet customer needs. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Q. Describe Wal-Mart’s structure.

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Divisional Structure III: Market Structure

The customer is the focus in a market structure: commercial, consumer, corporate, and government customers. Each division develop products for its customers but uses centralized support functions. This structure permits a quick response to market changes. (Fig. 6.11)

Organizational Insight 6.4: Tailoring Structure to Customers Mellon Bank used a product structure, organizing divisions by CDs, insurance, and credit cards. Managers competed for customers, divisions did not coordinate, and sales fell. Mellon Bank reorganized. Q. What were the advantages of a market structure? A. Communication among divisions improved, because managers were not competing for customers or resources. Centralizing support functions (advertising, market research, and computers) saved the bank $2 million.

Managerial Implications: Changing Organizational Structure Functional structures may require change to improve control. For production of many similar products, a divisional structure is appropriate, for dissimilar products, a multidivisional structure. To reduce development time through more integration, use a product development team structure. To customize products for different regions; use a geographic structure; to coordinate among different customer types, use a market structure. Structural changes should increase effectiveness. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

6.6

Matrix Structure

Role and authority relationships are ambiguous. Control is exerted horizontally via teams. A matrix is an organic structure. Although both a product team and matrix structure use teams, matrix team members have two bosses and team membership is not fixed. Advantages of a Matrix Structure 1. Functional barriers and subunit orientation are reduced. 2. Cross-functional communication allows members to learn and develop skills. 3. Employee skills are utilized. 4. Employees are concerned about both cost and quality. Q. What are the drawbacks of a matrix structure? A. Disadvantages of a Matrix Structure 1. Lack of bureaucratic structure leads to role ambiguity and role conflict.

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The matrix structure includes both functional and product responsibility. It is used for a high level of group coordination to respond to changing conditions. The matrix structure is flat with decentralized authority. Functional employees remain under a functional head, but work under a product manager. The product manager leads the team whose members are responsible to both functional and product managers. (Fig. 6.12)

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Teams may fight over resources. Members often refuse transfers to stay with peers. Informal hierarchies emerge in response to uncertainty. Unmet expectations lead managers to increase control resulting in a taller, bureaucratic structure.

The Multidivisional Matrix Structure A matrix design can enhance a multidivisional structure when placed at the company’s top to increase integration between corporate and division managers. Corporate specialists analyze divisional performance and design action plans. Division heads and corporate executives exchange information and coordinate activities. (Fig. 6.13) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

6.7

Refer to discussion question 3 here to compare the product structure and the matrix structure. _________________________________________________________________________________ _________________________________________________________________________________

Network Structure and the Boundaryless Organization

Companies are moving towards network structures, a group of organizations which coordinate activities via contracts not a hierarchy. Companies are using outsourcing, transferring activities to outside organizations such as suppliers, manufacturers, and distributors. Network structures are becoming complex. Nike keeps R&D in-house but outsources other functions to companies around the world. Advantages of Network Structures 1. Production costs reduced through partners with lower costs 2. High bureaucratic costs avoided with a flat structure 3. Organic organizational behavior 4. Partners replaced for unmet performance expectations 5. Access to low cost foreign sources of inputs and expertise

The Boundaryless Organization The boundaryless organization connects people by computers, faxes, video teleconferencing, and computer aided design systems. Functional experts join an organization to meet a contract and then go to another project, but unlike members of a matrix structure, they are not part of the organization. Outsourcing offers increased flexibility and reduced costs. Designing organizational structure is an increasingly complex management activity. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Disadvantages of Network Structures 1. Coordination problems emerge, followed by lack of cost reduction and improved quality 2. Difficulty in replacing partners and keeping proprietary information from competitors 3. Difficulty in obtaining ongoing learning to build core competences

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DISCUSSION QUESTIONS AND ANSWERS 1.

As organizations grow and differentiate, what problems can arise with a functional structure?

As a company grows, it encounters control problems: lack of communication, inability to measure performance, location issues, customer concerns, and neglect of strategic matters. Functions develop hierarchies, become remote, and make coordination difficult. Determining the contribution and cost that each function brings to a product is difficult. Balancing control between corporate and regional offices is difficult. A functional design makes product customization difficult. Top managers spend time on operational and coordination issues, neglecting long-term strategic concerns. 2.

How do the product division structure and the multidivisional structure differ?

There are structural differences: • The divisions in a multidivisional structure are independent with their own support functions; product structure divisions share centralized support functions. • A multidivisional structure has a corporate headquarters staff. • A multidivisional structure permits a company to run many businesses; a product division structure is appropriate for one business. • In a multidivisional structure, various divisions can have different structures. 3.

Why might an organization prefer to use a product team structure rather than a matrix structure?

A product team structure allows employees to report to only one boss, the team manager, not two. This reporting structure reduces role conflict and role ambiguity, making responsibilities clear. Because of a clearly defined hierarchy, a product team structure avoids conflicts over resources. Established procedures are used because team membership is fixed; in a matrix, people rotate and feel unstable. Employees may create their own structure, which leads to more bureaucracy and a taller hierarchy. What are the principal differences between a functional structure and a multidivisional structure? Why does a company change from a functional to a multidivisional structure?

A functional structure is simpler and is used for one business. A multidivisional structure has more integration, more horizontal and vertical differentiation. Corporate headquarters is a level with a division of labor between corporate and divisional managers. Control increases because corporate managers oversee and measure divisional performance. An internal labor market allows for the promotion of divisional managers to corporate positions. A company adopts a multidivisional structure because the number and complexity of different products cause control issues. 5.

What are the advantages and disadvantages associated with network structures?

Advantages: 1. Production costs reduced through partners with lower costs 2. High bureaucratic costs avoided with a flat structure 3. Organic organizational behavior 4. Partners replaced for unmet performance expectations 5. Access to low-cost foreign sources of inputs and expertise

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4.

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Disadvantages: 1. Coordination problems emerge, followed by lack of cost reduction and improved quality 2. Difficulty in replacing partners and keeping proprietary information from competitors

ORGANIZATIONAL THEORY IN ACTION Organizational Theory Exercise: Which New Organizational Structure? Small groups examine how to move from a functional structure to one suited for an organization trying to expand into different regions of the country. Make sure they understand that each structural option has its pros and cons, and they need to apply all of the principles discussed in previous chapters to determine the most effective structure.

The Ethical Dimension Students examine the ethical issues surrounding outsourcing. There are two basic positions. The first is that outsourcing to other countries costs the U.S. jobs, and is unethical. The other position is that the consumer benefits in the long run by organizations running more efficiently.

Making the Connection Ask students to find an example of a company that has changed its horizontal differentiation.

ANALYZING THE ORGANIZATION Students will analyze the structure and problems of their companies.

CASE FOR ANALYSIS A New Caterpillar Emerges Caterpillar was a low-cost manufacturer in the construction equipment industry, but competition from the Japanese threatened its position. Caterpillar’s functional approach was outdated, and structural changes were needed to remain globally competitive. By observing Japanese manufacturers, the CEO saw that their success resulted from cross-functional teams, decentralized control, and updated factories.

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What were the problems with Caterpillar’s old organizational structure?

Decision-making process was highly centralized; department heads such as manufacturing made decisions and sent them down the hierarchy. Decisions were removed from those making the product, and functional managers coordinated poorly. The result was higher costs, slow development time, and lower productivity. These problems eroded Caterpillar’s market share. 2.

How did Fites change Caterpillar’s structure to improve its effectiveness?

Fites created 4 centralized support divisions and 14 product divisions. Each was a profit center with responsibility for profits and losses, and return-on-investment goals. Each division had cross-functional

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Caterpillar had slow decision-making, high costs, and a long production time. Caterpillar restructured into 14 product and 4 support divisions, making managers responsible for all activities and coordination with centralized support functions. R&D teams were assigned to specific products, but shared information, as products were related. This structure was more effective.

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product teams responsible for marketing, product design, and manufacturing to increase productivity. Requiring marketing, engineering, and manufacturing to work together reduced product development time by 50 percent. Marketing decisions were decentralized to the regional level for rapid response time. Manufacturing upgraded its facilities, used product teams, and increased productivity 30 percent. These changes made Caterpillar compete more effectively.

TEACHING SUGGESTIONS 1. To illustrate control problems with a functional structure, divide students into finance, production,

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4. 5. 6. 7.

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and marketing functions of a company that manufactures ice cream. Marketing wants to offer many flavors. Production says it can produce only three flavors, and finance is concerned with costs. This exercise should shows control problems associated with a functional structure. If the company also offered yogurt, it could attract more customers. Management is too busy resolving coordination problems to determine strategy. Students will suggest a more appropriate structure. To make this even more realistic, separate the functions geographically by using several classrooms. Students get a better flavor of how difficult it is to coordinate activities when they are not all in the same room. A role-play demonstrates the problems with a matrix structure. Ask for three students to volunteer. One student will be a financial specialist who works on a certain product team and reports to the finance manager and to the product manager. Show how role ambiguity and role conflict arise. The product manager wants speed and low costs, and the functional manager wants quality. A good discussion topic is how the matrix structure violates Weber’s bureaucratic principles. Ask students what they think of this, and what their experiences are with working with multiple bosses. In small groups, students are assigned a structure and will list its advantages and disadvantages and give examples. Structures: functional, divisional (product geographic, market), matrix, and network. Look up General Motors on the Internet and report to the class about GM’s structure. To illustrate the value of a proper structure, have students design a really inefficient structure, such as a restaurant that is organized by product instead of function. Show them how this would make the restaurant very inefficient because it would need wait staff and cooks from multiple departments in order to serve the customer. Although this would be very costly and a poor dining experience for the customer, it is a good example to show how important structure really is in an organization.

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CHAPTER 7 CREATING AND MANAGING ORGANIZATIONAL CULTURE TEACHING OBJECTIVES 1. To explain that organizational culture is a set of values that controls behavior and impacts the way members make decisions and interpret the organization’s environment. (7.1) 2. To distinguish between terminal values and instrumental values. (7.1) 3. To discuss the methods used to transmit organizational culture to members. (7.2) 4. To examine the sources of organizational culture: characteristics of the people, organizational ethics, property rights, and organizational structure. (7.3) 5. To explain the interaction of the four sources of culture. (7.4) 6. To discuss the various stances organizations can take on corporate social responsibility. (7.5)

CHAPTER SUMMARY This chapter examines organizational culture, which includes ethics. Organizational culture controls behavior and plays a role in organizational effectiveness.

The sources of culture include the characteristics of the people (particularly the founder), organizational ethics, property rights, and structure. Organizational ethics is a product of societal, professional, and individual ethics. Property rights outline the rights and responsibilities of stakeholder groups. Shareholders enjoy the greatest property rights. Rights given to managers include: a golden parachute, stock options, large salaries, and control over organizational resources. Rights given to employees include long-term employment, pension and benefits, and employee stock ownership. Structure impacts culture; a mechanistic structure produces a predictable culture. An organic structure encourages an innovative culture. Managers must examine the interaction of all four sources. Social responsibility refers to a manager’s duty to make decisions regarding the welfare and well-being of the stakeholders and society. The strength of an organization’s commitment to social responsibility is on a continuum. It has been shown that managers who behave in a socially responsible fashion will, in the long run, most benefit all stakeholders including shareholders.

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Organizational culture is the set of values that controls behavior, determines how organizational members interpret the environment, and helps achieve a competitive advantage. An organization has two types of values: terminal and instrumental. Members learn values indirectly or through a formal socialization process. Van Mannen and Schein’s model of socialization tactics distinguishes between institutionalized and individualized role orientations. For newcomers to develop an institutionalized orientation, company tactics include: collective, formal, sequential, fixed, serial, and divestiture. For an individualized orientation, company tactics include: individual, informal, random, variable, disjunctive, and investiture. Cultural values are transmitted through stories, ceremonies, language, and four rites: passage, integration, enhancement, and degradation.

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CHAPTER OUTLINE 7.1

What Is Organizational Culture?

People are a company’s most valuable resource. A company can control and motivate its people through organizational culture. Q. What is organizational culture? A. Organizational culture is the set of shared values that control interactions among company members and with external stakeholders. An organization usually has two types of values: terminal and instrumental. (Fig. 7.1) Q. What is the difference between a terminal and an instrumental value? A. A terminal value is a desired outcome or end state, whereas an instrumental value is a desired behavior; instrumental values accomplish terminal values. Employee risk-taking (an instrumental value) helps achieve innovation (a terminal value). Terminal values are written in the mission statement and official goals, but instrumental values are conveyed through rules, norms, and standard operating procedures (SOPs). The most influential values are unwritten and reflected in shared beliefs and norms, acceptable standards of behavior. Over time, rules, SOPs, and norms are internalized.

Organizational Insight 7.1: How Global Culture Affects Organizational Culture This insight discusses how a U.S. organization and a Mexican organization formed a joint venture that failed due to cultural differences. Q. How can a country’s culture influence the culture of the organization?

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Organizational Insight 7.2: Mergers and Culture After BankAmerica and Security Pacific merged, they discovered dramatic differences in the way that each organization conducted business. BankAmerica was much more conservative in its decisionmaking style, and believed that its culture was the one that the organization should adopt. Q. How did BankAmerica go about changing the culture of the new organization? A. Because it was the dominant organization, it stripped authority from Security Pacific’s managers and took control of the new organization, all within a couple of weeks after the merger.

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A. The two are very much intertwined. Look at how the Mexican culture’s work schedule differs from the U.S. culture’s. This would very much affect the success of the joint venture, as this case shows. The terminal and instrumental values of each culture was very different, causing problems that were not able to be solved.

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

7.2

How Is an Organization’s Culture Transmitted to Its Members?

The method of conveying values influences the culture to motivate employees and increase organizational effectiveness. Q. How can culture can be communicated to new organizational members? A. Newcomers learn values from formal socialization and informal stories, ceremonies, and language. Socialization and Socialization Tactics Newcomers become insiders when they internalize organizational values. Q. How does a newcomer learn values? A. Watching existing members and determining appropriate behavior lets newcomers learn indirectly, but they also learn unacceptable practices. Socialization, the process of learning and internalizing norms, assures that members learn appropriate values. A socialization model by Van Mannen and Schein, suggests that structuring socialization teaches newcomers key values. Role orientation is the characteristic way newcomers respond to a situation. (Table 7.1) Q. Name two types of role orientations.

Differences between the two include: 1. Collective vs. Individual. Collective tactics consist of common experiences to generate standard responses. Individual tactics allow newcomers to learn new responses. 2. Formal vs. Informal. Formal tactics separate newcomers during learning; informal tactics encourage learning on the job. 3. Sequential vs. Random. Sequential tactics establish a sequence for activities; random tactics are based on newcomer interests and needs. 4. Fixed vs. Variable. Fixed tactics provide a specific timetable for each stage; variable tactics set no timetable. 5. Serial vs. Disjunctive. Serial tactics use existing members as role models and mentors; disjunctive processes develop individual behavior. 6. Divestiture vs. Investiture. Divestiture gives members negative social support (neglect) until they conform to norms. Investiture gives positive support immediately. These tactics influence role orientation; military-style socialization leads to an institutional orientation.

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A. Institutionalized role orientation. Newcomers respond the same way as existing members do. Individualized role orientation. Newcomers respond creatively and experiment with changing norms and values.

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Q. What are the dangers of institutionalized socialization? A. It produces sameness among members, making it hard to adapt to changes. An organization chooses institutionalized or individualized tactics based on goals. For predictability and standardization, institutionalized tactics fit; for innovation, individualized tactics fit. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Stories, Ceremonies, and Organizational Language Stories, ceremonies, and organizational language convey cultural values. (Table 7.2) There are four organizational rites: 1. Rites of passage signify entry to, promotion in, and departure from the organization. 2. Rites of integration build bonds between members (an office party or cookout). 3. Rites of enhancement are public recognition of employees (news releases and awards dinners). 4. Rites of degradation denote involuntary departure, allowing a change or reaffirmation of values.

Organizational Insight 7.3: Triad Systems Builds a Culture Based on Success Triad Systems, a computer company, uses rites to enhance its culture. Triad has won a national quality award, and its sales have exceeded forecasts every quarter. Q. What does Triad do to enhance culture? A. Triad uses rites of integration and rites of enhancement. At its annual trade show, the company rewards almost half of its 1,500 employees for focus, innovation, and teamwork. The show serves as a rite of integration because the employees’ shared experiences encourage teamwork. These rites foster a cooperative and innovative culture.

Stories, ceremonies, and organizational language communicate cultural values. Stories and language reveal the type of behaviors the company values and those that are frowned upon. Language includes not only speech, but also what people wear, their offices, their company cars, and a formal manner of addressing each other. Technical language facilitates mutual adjustment (sports team). Q. What company evokes conservative values, and how are those values conveyed? A. The military, Arthur Andersen, and EDS have strict dress codes, nice offices, and nice company cars and speak formally. Q. What company evokes innovation, and how are those values conveyed? A. Microsoft and 3M are more informal, have a casual dress code, and use technical language.

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Organizational Insight 7.4: siteROCK’s Military Management Culture A high-tech, dot-com organization goes against the norm and implements a culture similar to that of a military organization. This has resulted in an organization that provides high levels of customer service. Q. How did siteROCK develop an institutionalized role orientation? A. All processes and procedures are in writing. They also implemented “two-man” norms that allowed co-workers to work with a partner in solving problems. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Symbols also reveal an organization’s values; office size, location, and luxury communicate images about an organization’s values. Isolating the corporate office conveys the image of a hierarchical and status-conscious organization. A building design can be a symbol; Team Disney Building has offices, a restaurant, and a patio connected to a garden to show the value Disney places on imagination and creativity. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Managerial Implications: Analyzing Organizational Culture Managers need to study the culture to identify terminal and instrumental values. Are goals, norms, and rules effectively transmitted? Managers should examine socialization methods and look for ways to improve the process. Managers should develop ceremonies to teach values and enhance commitment.

7.3

Where Does Organizational Culture Come From?

Characteristics of People within the Organization Companies attract, hire, and retain people with different values, personalities, and ethics. People are drawn to companies with values similar to their own. As people and values become more similar, organizational culture becomes more unique. The founder impacts the culture by setting the initial values and hiring the first employees.

Organizational Insight 7.5: Proctor & Gamble’s Culture is Hard to Change Proctor & Gamble (P&G), the well-known soap and detergent company, has a distinct and insular culture with a strong and homogeneous set of values. Q. What were the problems with P&G’s culture? A. The values and norms of consensus and obedience to the hierarchy and respect for authority made employees sound alike, think alike, and look alike. P&G had become a bureaucratic nightmare!

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Organizations have different cultures due to the interaction of four factors: people, ethics, property rights given to employees, and structure. (Fig. 7.2)

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Q. How did the new CEO change the culture? A. To instill a new entrepreneurial spirit with risk-taking, the CEO fired 15,000 employees and made “stretch, innovation, and speed” the new terminal and instrumental values. Rewards are now based on the ability to increase P&G’s value. Organizational Ethics The cultural values of the founder and the top managers are beyond an organization’s control. Yet an organization can cultivate ethical values to control employees through guidelines for appropriate behavior. Ethical values are an inseparable part of organizational culture.

Organizational Insight 7.6: Apple Juice or Sugar Water? In the 1980s, Beech-Nut, a maker of baby foods, selected a low-cost supplier to save $250,000 a year. An R&D specialist revealed that the concentrate contained corn syrup, sugar, and malic acid, but managers sold it as pure apple juice. The Food and Drug Administration (FDA) investigated and fined the company over $2 million. Q. What ethical values were violated? A. Beech-Nut violated societal ethics codified in law. To reduce costs, Beech-Nut broke the law and threatened consumer health. Top management failed to instill ethical values. Personal ethics influence organizational ethics. Personal ethics stem from societal ethics and an individual’s upbringing. Property Rights Cultural values arise from property rights, the rights given to stakeholders to receive and use organizational resources. Shareholders have the greatest property rights, because they own the resources and share in profits. (Table 7.3) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

A. Managers receive golden parachutes, stock options, large salaries, control over resources, and decision-making authority. Employees receive notification of layoffs, severance payments, lifetime or long-term employment, pension and benefits, stock ownership plans, and decision-making opportunities. Employees’ rights may be limited to wages, health insurance, and pensions. Property rights shape employee behavior and determine organizational effectiveness. Strong property rights at Southwest Airlines’ result in employee loyalty.

Organizational Insight 7.7: A Clash of Two Cultures General Motors (GM) bought Electronic Data Systems (EDS) in 1987, and a clash emerged over property rights. Q. Why did GM’s divisional managers refuse to sign contracts with EDS to benefit GM as a whole?

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Q. Name the property rights given to managers and employees.

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A. GM’s managers had different behavioral expectations. They received straight salaries without performance based rewards, whereas EDS’s employees received stock options based on contract profits. GM’s managers refused to have EDS’s managers, also GM employees, benefit from markups on contracts with them. Top Management and Property Rights Top managers determine their own property rights: terms of their employment, salaries, benefits, pension, and termination agreements. Because top managers decide how property rights are distributed to others, they influence culture.

Organizational Insight 7.8: Bimba Changes Its Property Rights System The property rights system changes an organization’s culture. Bimba Manufacturing Company, a producer of aluminum cylinders, had a rigid culture in which employees followed orders. Cultural changes in 1987 increased sales by 70 percent and the workforce by 79 percent. Q. What did Bimba do to change its culture? A. Bimba changed its property rights system. The owner created an employee stock ownership (ESOP) plan in 1987, sold 90 percent of the company to employees, and instituted a more cooperative culture. Employees tried to increase quality to meet customer needs. Cross-functional teams including managers shared concerns and met with customers. Managers functioned as advisors not bosses. Teams hired and socialized their own members. Can Property Rights Be Too Strong? Property rights affect performance positively but can also be too strong. IBM had a conservative culture because employees had the rights of lifetime employment. Employees feel ownership for their position, resulting in conflict and power struggles. Organizations must assign property rights based on performance and continually evaluate the property rights system.

Q. What terminal values will a mechanistic structure achieve? A. A mechanistic structure results in predictability and stability. Q. What terminal values will an organic structure achieve? A. An organic structure leads to innovation and flexibility. Structure can promote cooperative norms and values that improve integration and coordination. Teams in a product team or matrix structure have shared cultural values, thus product development time is short. The choice between centralization and decentralization promotes different cultural values.

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Organizational Structure Organizational structure, the formal system of rules and task and authority relationships, is a source of culture. Different structures lead to different cultures.

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Q. What values does decentralization promote? What values does centralization promote? A. Decentralization promotes creativity and innovation; centralization promote obedience, stability, and accountability. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

7.4

Can Organizational Culture Be Managed?

Managers must examine the interaction of the sources of culture: the characteristics of organizational members, organizational ethics, the property rights system, and organizational structure. These factors interact, and only major modifications change values, making cultural change difficult. An organization might need to change its structure, its people, or its property rights system. A larger and more complex organization with a successful culture can decrease effectiveness. To avoid negative cultural change, managers must design a structure to handle control problems. •

Refer to discussion question 3 here to emphasize the fit between organizational culture and design.___________________________________________________________________________ _________________________________________________________________________________

Managerial Implications: Designing Organizational Culture A manager should identify the source of cultural values and norms and analyze the effects of people, ethics, property rights, and structure on culture. A manager should produce a plan including all four factors to redesign culture to improve effectiveness. Developing ethical values should be a top priority. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

7.5

Corporate Social Responsibility

The Obstructionist Approach Managers choose to behave unethically and illegally, and do all they can to prevent knowledge of their behavior from reaching stakeholders. The Defensive Approach Defensive managers stay within the law, but make no attempt beyond this to behave socially responsibly. The Accommodative Approach Accommodative managers recognize the need to behave responsibly, and focus on balancing the interests of the many different stakeholders.

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An organization can take several approaches to social responsibility. The following approaches are on a continuum from low to high.

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The Proactive Approach Proactive managers go out of their way to learn about the needs of the different stakeholder groups, and are willing to utilize organizational resources to benefit all stakeholder groups, not just shareholders.

Organizational Insight 7.8: Ben & Jerry’s Ethical Culture Ben & Jerry’s Homemade Inc., a producer of super premium ice cream, has a culture instilled by founders Ben and Jerry that adopts a broad stance on social responsibility. Q. Describe Ben & Jerry’s view of social responsibility. A. The founders are socially conscious and contribute 7.5 percent of pretax profits as grants to support social activities. Employees are evaluated on their participation in the social mission. Ben & Jerry’s sponsors local concerts and film festivals, offer free ice cream at charitable events, and has renovated a New York subway station. Employees remain focused on the company’s social mission. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 4 here to consider the pros and cons of social responsibility. ______________________________________________________________________________ ______________________________________________________________________________

Why be Socially Responsible? The answer to this seems clear in that all stakeholders benefit from responsible, ethical behavior. The other perspective on this is that businesses that focus on things other than increasing profits is a deterrent from the overall mission of the organization. Consider, for example, that managers need to spend resources determining which social issues they will respond to, which could deter from customer service or build products of high quality.

DISCUSSION QUESTIONS AND ANSWERS

Organizational culture arises from four sources: (1) the characteristics of its people, (2) organizational ethics, (3) property rights, and (4) organizational structure. The people within an organization are the primary source of culture; companies attract those with similar values, and over time culture becomes more distinct. The founder establishes culture by setting values and hiring the first members. The second source of culture is ethics, a product of societal, professional, and individual ethics. Ethics can control behavior. The third source is property rights, given to members to receive and use organizational resources. The distribution of property rights motivates employees. Organizational structure influences culture. A mechanistic structure promotes a conservative, stable culture, and an organic structure promotes an innovative culture. Each company’s pattern of interaction among these four variables sets its culture apart.

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1. What is the origin of organizational culture? Why do different organizations have different cultures?

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2. How do newcomers learn the culture of an organization? How can an organization encourage newcomers to develop (a) an institutionalized role orientation and (b) an individualized role orientation? Newcomers learn culture indirectly by observing existing members and determining appropriate behavior. Values are conveyed through stories, ceremonies, and language, but a company instills values through socialization, the way members learn and internalize values. a. To develop an institutionalized role orientation, a company uses several tactics: collective, formal, sequential, fixed, serial, and divestiture. Collective tactics provide common learning experiences to encourage standardized responses. Formal tactics separate newcomers from existing members. Sequential procedures offer a sequence of activities. Fixed tactics provide a timetable. Serial methods provide role models and mentors. Divestiture offers negative support, neglect, or taunting until newcomers conform. b. To develop an individualized role orientation, a company employs socialization tactics: individual, informal, random, variable, disjunctive, and investiture. Individual tactics involve viewing each learning experience as unique. Informal tactics include on-the-job training in a team. Random and variable tactics use no set sequence and no timetable, with training tailored to individual needs. Disjunctive procedures require newcomers to develop behavior. Investiture tactics provide immediate positive support. 3.

In what ways can organizational culture increase organizational effectiveness? Why is it important to obtain the right fit between organizational structure and culture?

Culture increases effectiveness through motivation. Culture motivates employees because norms and values encourage behavior for goal achievement. Culture uses incentives to reward behavior resulting in core competences and a competitive advantage. Culture improves structure. Structure and culture must fit because different structures promote different behaviors. Structure can help achieve terminal values. A mechanistic structure, tall and centralized, is appropriate for a company that desires predictability. An organic structure fits innovation and flexibility.

“An organization should always adopt a broad stance on social responsibility.” Explain why you agree or disagree with this statement.

The answer to this question will vary. Some will argue that an organization should examine every situation from a moral perspective. An organization should act to produce the greatest good for its stakeholders, whether or not laws exist. For clear-cut situations, there is the golden rule. In ambiguous situations, a company should act to produce the greatest benefit for the majority. Supporters of the broad stance argue that ethical and moral behavior pays off long-term and that employees should use judgment instead of relying solely on laws and standards. Others may disagree and state that sometimes moral actions reduce profits. They will not support unethical behavior, but state that a company is responsible only for complying with laws and conforming to society’s ethical customs and practices. Organizations are free to do as they wish if they obey the law.

ORGANIZATIONAL THEORY IN ACTION

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Practicing Organizational Theory: Developing a Service Culture In small groups, students are the owners of a new five star hotel in Florida. They are to determine how to develop a culture that will focus on high-quality service.

The Ethical Dimension Students examine how in certain companies the culture becomes so strong that individuals begin to act unethically and pursue their own short run interests. The discussion should focus on how culture and structure contribute to this problem, and the steps organizations can take to help prevent the problem.

Making the Connection Ask students to find an example of a company that has been trying to change its culture and to explain why the old culture is no longer effective.

ANALYZING THE ORGANIZATION Students analyze the culture of their organization, discuss the characteristic ways in which members interact, and identify the organization’s ethical stance.

CASE FOR ANALYSIS A Tale of Two Cultures Values, determined in part by the CEO, impact effectiveness. To achieve excellent customer service, a terminal value, Southwest Airlines maintains a flat structure, and managers cooperate with employees. Value Line under CEO Jean Buttner monitors employees closely and gives meager raises because being frugal is the main instrumental value. 1. List the reasons why Southwest’s and Value Line’s cultures differ so sharply. Southwest’s culture is marked by good customer service and management cooperation with employees. A flat, informal structure encourages innovation, and the stock ownership system rewards employees for company performance. On the other hand, Value Line’s culture fosters employee turnover and customer dissatisfaction. Management does not cooperate with employees; CEO Jean Buttner values frugality so much that employees sign in every day and raises are limited. Managers file daily reports on the neatness of employees’ desks.

Although Value Line could certainly benefit from copying Southwest’s culture, it is not as simple as changing CEOs. Culture becomes entrenched and is very difficult to change, so a new CEO would have to be patient and accept that change would come over a long period of time.

TEACHING SUGGESTIONS 1.

A role-play illustrates how socialization tactics encourage an institutionalized orientation. Two volunteers are new military recruits, one volunteer is a drill sergeant, and others refuse to help the recruits. The two recruits are in the same platoon (a collective tactic). Newcomers are separated (a formal procedure). Boot camp (a fixed procedure), lasts six weeks; the drill sergeant trains newcomers to march and do specific drills (sequential procedures). The drill sergeant is a role

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2. Could Value Line’s next CEO copy Southwest’s culture?

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2.

Students will debate the pros and cons of social responsibility.

3.

As an outside assignment, students will read a work by Milton Friedman, who opposes social responsibility. Compare and contrast the two perspectives.

4.

Students will look at Ben & Jerry’s web site to find out about their current projects to improve society. Students will report to the class.

5.

Students can search the web for examples of organizations that behave in a socially responsible fashion. Organizations like Enron and Arthur Andersen tend to make us think that most organizations behave irresponsibly if given the opportunity.

6.

Using Table 7.4, have students come up with their own examples of social responsibility based upon organizations in their own community.

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model (a serial procedure). The drill sergeant is hard on the recruits and others call them names (divestiture tactics). These tactics result in conformity and obedience to military’s norms.

CASE FOR ANALYSIS Levi Strauss’s Goes Global This case demonstrates how a company can pursue a transnational strategy. Levi Strauss has located production facilities around the globe and customizes its products to local tastes. Foreign subsidiaries are responsible for marketing. It is also transferring knowledge abroad. To implement its strategy, Levi’s established a network structure. Design is performed in the U.S. and foreign partners produce and distribute products. 1. What global strategy is Levi Strauss pursuing? Is it effective? Levi Strauss is pursuing a transnational strategy. Levi’s is seeking to both reduce costs and provide customer responsiveness. Production facilities are located around the world to take advantage of low cost foreign labor. However, Levi’s wants to tailor its jeans to local customers; foreign subsidiaries are responsible for marketing. For example, Asia may offer more smaller size jeans. Other countries desire various colors. Moreover, Levi’s transfers knowledge to its subsidiaries. For example, marketing knowledge learned on Decker’s in the U.S. was transferred to Europe. 2. What structure does Levi Strauss use to implement its strategy? To implement its transnational strategy, Levi Strauss uses a network structure. Design is performed in the U.S. and foreign partners produce and distribute products. A partner will be replaced if it doesn’t meet Levi’s standards.

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Analyzing the Organization Students will examine the domain that the organization serves, the market that it competes in, and the strategies used to create value for its stakeholders.

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CHAPTER 9 ORGANIZATIONAL DESIGN, COMPETENCES, AND TECHNOLOGY TEACHING OBJECTIVES 1. To define technology as the combination of skills, knowledge, machines, and other equipment used to convert inputs into outputs. (9.1) 2. To show that technology is used at all stages in the value creation process: input, conversion, output. (9.2) 3. To consider how technology can improve organizational effectiveness using three approaches: external resource, internal systems, and technical. (9.2) 4. To examine Joan Woodward’s theory that technical complexity differentiates technologies. (9.3) 5. To analyze how technical complexity affects organizational structure. (9.3) 6. To review the technological imperative and the Aston Studies. (9.3) 7. To examine Charles Perrow’s theory that differences between routine and nonroutine tasks result from task variability and task analyzability. (9.4) 8. To review the structural characteristics of routine and nonroutine tasks. (9.4) 9. To examine James D. Thompson’s theory that task interdependence affects technology and structure. (9.5) 10. To consider the costs of intensive technology and cost reduction through specialism. (9.5) 11. To review the major elements of traditional mass production: dedicated machines, fixed workers, and inventory stockpiles. (9.6) 12. To examine innovations in materials technology: computer-aided design (CAD), computer-aided materials management (CAMM), just-in-time (JIT) inventory, and computer-integrated manufacturing (CIM). (9.7)

CHAPTER SUMMARY

Three models examine the effect of technology on organizational design. Technical complexity, routine and complex tasks, and task interdependence are reviewed. According to Joan Woodward, technical complexity, the extent to which the production process can be controlled, differentiates technologies. Three types of technology, in order of complexity include: small-batch and unit, mass production and large-batch, and continuous-process. Small-batch and continuous-process technology have organic structures, whereas mass production has a mechanistic structure. The concept that strategy determines structure is called the technological imperative. The Aston Studies found that size determines structure more than technology. Charles Perrow distinguished between routine and nonroutine tasks according to task variability and task analyzability. These two dimensions classify four types of technology: routine manufacturing, craftswork, engineering production, and nonroutine research. As tasks become more complex, an organization moves from a mechanistic to an organic structure.

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Technology is the combination of skills, abilities, machines, computers, and other tools used to transform inputs into outputs. Technology exists at three levels: individual, functional, and organizational. It creates value and increases effectiveness at all three stages: input, conversion, and output. The external resource approach uses technology to help manage and control outside stakeholders. The internal systems approach uses technology to increase innovation and reduce design and production time. The technical approach uses technology to improve efficiency and quality while reducing costs.

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In the third model, James D. Thompson considers task interdependence, mediating technology and pooled interdependence, long-linked technology and sequential interdependence, and intensive technology and reciprocal interdependence. The strategy of specialism reduces the costs associated with intensive technology. Technology relates to culture, so a change in technology impacts culture. Sociotechnical theory is explained. Mass production has moved toward advanced manufacturing technology. Traditional mass production uses dedicated machines and fixed workers to facilitate economies of scale and a low-cost advantage. New technologies allow for flexibility and cost control. Advanced manufacturing technology (AMT) consists of innovations in materials technology and in knowledge. Innovations in materials technology involve machinery and computers. Traditionally, organizations stockpiled inventory to protect the conversion process, but AMT coordinates input, conversion, and output activities. Computer-aided design (CAD), computer-aided materials management (CAMM), justin-time (JIT) inventory systems, and computer-integrated manufacturing (CIM). CAD and CAMM coordinate the input and conversion stages. CPA uses robots in the conversion stage. These technologies increase technical complexity and task interdependence and make tasks more nonroutine, achieving flexibility at little or no cost increase. Changes have affected both structure and culture.

CHAPTER OUTLINE 9.1

What Is Technology?

Technology is the combination of skills, abilities, techniques, materials, machinery, and other equipment that people use to transform inputs into outputs. It also applies to services. Technology exists at three levels: individual, personal skills and individual knowledge; functional or departmental, group techniques to perform work and create value; and organizational, the way inputs are converted into outputs (i.e., mass production and craftswork). Mass-production technology involves using conveyor belts and a standardized assembly process to produce goods. Craftswork involves skilled workers interacting to make a customized product.

Henry Ford manufactured cars using craftswork, but in 1913 he opened a “progressive manufacture” or mass-production plant, which reduced car prices by two-thirds and created a mass market. Yet, workers hated their jobs and were constantly monitored. Q. Describe the system of progressive manufacture.

A. Work was delivered via conveyor belts and performed sequentially (i.e., tasks built on preceding tasks); tasks were broken down into simple components, and parts were interchangeable; vertical integration controlled inputs. Q. Why was the new manufacturing process so efficient?

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Organizational Insight 9.1: Progressive Manufacture at Ford

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] A. The process was so controllable and predictable that direct supervision was eliminated and the span of control widened. Mass-production technology simplified tasks, reduced the need for skilled workers, and created specialization and division of labor. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

9.2

Technology and Organizational Effectiveness

Q. Describe the three stages of the value creation process. A. Technology is used at all three stages in the value creation process—input, conversion, and output. (Fig. 9.1) The input stage uses technology, such as skills and procedures, to manage relationships with outside stakeholders, the organization’s specific environment. The finance department obtains money at a favorable interest rate. Q. Describe technology at the conversion stage. A. The conversion stage combines machines, techniques, and procedures to transform inputs into outputs. To improve efficiency, employees learn time management techniques. The output stage uses technology for distribution to external stakeholders (e.g., procedures for quality testing, selling and marketing, and managing after-sales service). Q. What approaches measure and increase effectiveness using technology?

Because each function develops technologies to create value, the organizational structure must maximize the effectiveness of technology. Technology influences structure. Three theories consider the relationship between technology and design. Managers should understand technical complexity, the differences between complex and routine tasks, and task interdependence. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

9.3

Refer to discussion question 1 here to review three approaches for measuring effectiveness using technology. _________________________________________________________________________________ _________________________________________________________________________________

Technical Complexity: The Theory of Joan Woodward

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A. External resource approach for managing and controlling outside stakeholders. Internal systems approach for innovation, product development, and reduced development time. Technical approach for increasing efficiency and quality, and reducing costs.

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When standardized procedures transform inputs into outputs, making work predictable, technology is programmed; the more difficult the program, the more difficult the control. Technical complexity refers to the extent of programming, controlling, and predictability. Researcher Joan Woodward argues that technical complexity is the dimension that distinguishes technologies. High technical complexity occurs when conversion processes, programmed in advance and fully automated, make work standardized and predictable. Low technical complexity occurs when the conversion process relies mainly on individual skills, not machines. Low technical complexity makes quality and consistent production difficult. Woodward associated 10 levels of technical complexity with three types of technology: small-batch and unit technology, large-batch and mass-production technology, and continuous-process technology. Small-batch and unit technology produce customized products or small quantities. The technology has low technical complexity, because personal skills are more important than machines. Q. Give examples of small-batch technology. A. Hospital surgical teams and customized furniture makers Q. What advantages does small-batch offer? A. This technology offers the flexibility for a wide range of products tailored to individuals. It is costly but ideal for new or complex products. Large-batch and mass-production technology use machines to increase technical complexity and efficiency. Large volumes of standardized products are produced with tasks programmed into machines, resulting in standardized work and controlled production. Q. Give examples of companies with mass-production technology. A. Ford, Gillette, and Coca-Cola

A. Lower production costs lead to lower prices. Ford used mass production to decrease production costs and create a mass market. Mass production is generally connected with automated equipment, but people perform assembly operations when labor costs are low. •

Refer to discussion question 2 here to review small-batch and mass-production technology. _________________________________________________________________________________ _________________________________________________________________________________

Continuous-process technology is the height of technical complexity because production is almost totally automated and mechanized. Employees only handle exceptions in the work process, such as machine breakdowns. (Fig. 9.2)

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Q. What are the advantages?

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Q. What companies use continuous-process technology? A. Oil producers, such as Exxon; chemical companies, such as DuPont; and brewing companies, such as Anheuser-Busch Q. What are the advantages? A. Continuous production, little variation, greater technical efficiency, more predictability in production, and lower costs Woodward found that an increased use of machines decreased costs. Automating production is not always practical. Research for new drugs cannot be programmed in advance. Many customers will pay a premium price for customized products. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Technical Complexity and Organizational Structure Because technology affects structure, Woodward developed a model showing the structure of each type of technology. Increased technical complexity makes organizations taller with a wider span of control. First-line supervisors have narrow span of control in small-batch technology, wide in mass production technology, and small in continuous-process technology. (Fig. 9.3) Small-batch technology needs a flat, three-leveled hierarchy, with decentralized decision-making and a narrow span of control for supervisors (23 employees). Decisions are managed as they occur, so mutual adjustment is needed. An organic structure fits small-batch technology. Mass production technology can program tasks for a standardized manufacturing process. Q. Describe the hierarchy and span of control for mass production.

Continuous-process technology uses programmable tasks and a predictable work process, but breakdowns are possible, so close monitoring to prevent disasters makes the hierarchy eight levels. Supervisors have a narrow span of control and use mutual adjustment, as teams deal with unanticipated events. The need for quick responses makes an organic structure fits continuous-process technology. Researcher Charles Perrow argues that unpredictable events happen when technical complexity is extremely high (e.g., nuclear plants use continuous-process technology), making it impossible to solve all problems. He implies that nuclear power stations should be closed, but others argue that continuousprocess technology can be operated safely if a balance of centralized and decentralized control is attained.

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A. The structure is taller and wider, the hierarchy increased to four levels, and decision-making centralized. The first-line supervisor’s span of control increases to 48, because rules and procedures coordinate activities. A mechanistic structure fits mass production.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] The technological imperative suggests that technology determines structure, so an organization must fit its structure to its technology. Others observed that Woodward studied small firms, 82 percent having less than 500 employees, and that the sample biased her results. They conceded that technology affects structure in small organizations, but far less in large organizations, such as GM and IBM. The Aston Studies on technology and structure concluded that size determines structure more than technology. The structure of large organizations may result from other factors that cause growth and differentiation. Q. What causes organizational growth? A. Strategy can cause growth. An organization may decide to produce a wider range of products and enter new markets. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

9.4

Routing Tasks and Complex Tasks: The Theory of Charles Perrow

Charles Perrow asserts that the difference between routine and nonroutine technologies is task variability and task analyzability. Task variability is the number of new or unexpected situations faced while performing a task. Exceptions at any stage in the value-creation process and new situations make task variability high, whereas standardization and repetition make task variability low. Task analyzability is the need for search activity to solve problems. Procedures make routine tasks easier to analyze, whereas nonprogrammed tasks make analysis difficult. Serving fast food is easier to analyze than research and development tasks. Perrow considered technology according to task variability and analyzability. (Fig. 9.4) Perrow identified four types of technology: 1. Routine manufacturing has low task variability and high task analyzability. New situations are few, and an exception does not require much search activity to correct it.

A. Mass production is routine manufacturing with inputs standardized and standard procedures followed to handle exceptions. Tasks low in variability and high in analyzability offer a low-cost advantage. 2. Craftswork has low task variability and analyzability. Exceptions rarely occur, but new situations take time to resolve by adapting existing procedures to new situations. Craftswork is a form of small-batch technology. 3. Engineering production has high task variability and analyzability. An employee encounters exceptions but handles them with standard procedures; existing procedures make many types of products. Because people develop problem-solving procedures, engineering is a form of small-batch technology.

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Q. Give an example of routine manufacturing.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] 4. Nonroutine research has high task variability and low task analyzability, making it the most complex and least routine in the classification. Q. Why is nonroutine research so complex? A. The number of unexpected situations is large, and each exception requires search activity. Nonroutine research includes high-tech R&D, such as finding a cure for diseases and the activities of top management team, such as planning and forecasting. Routine Technology and Organizational Structure Perrow’s types of technology affect structure. Perrow and others have proposed that an organization should move from a mechanistic to an organic structure as tasks become more complex and less routine. With routine technology, employees perform clearly defined tasks, and the work process is standardized. (Table 9.1) Q. What is the best structure for routine technology? A. A tall structure with centralized decision-making fits. Because decisions are made at the top, organizations with routine technology simplify jobs by using machines for complex tasks and minimizing the judgment needed by employees. A mechanistic structure fits. Nonroutine Technology and Organizational Structure Complex tasks need a structure that facilitates quick responsiveness. Q. What is the best structure for nonroutine technology? A. A flat structure with decision-making decentralized is best, using mutual adjustment through teams and task forces. An organic structure fits. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

9.5

Refer to discussion question 4 here for examples of task complexity. _________________________________________________________________________________ _________________________________________________________________________________

Task Interdependence: The Theory of James D. Thompson

James D. Thompson looked at the relationship among tasks, task interdependence, and the impact on technology and structure. People and departments who work independently have low task interdependence. Those who rely on each another have high task interdependence. Thompson identified three types of technology: mediating, long-linked, and intensive, each associated with a different type of task interdependence. (Fig. 9.5) Mediating Technology and Pooled Interdependence Mediating technology is a work process in which input, conversion, and output can be performed independently. It is based on pooled task interdependence. Each part of the organization contributes independently to performance. Because individuals do not work with others, task interdependence is low.

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Q. Give an example of mediating technology at the department and organizational levels. A. The sales department uses mediating technology because one salesperson does not affect another, but each person’s performance affects the department’s total sales. Mediating technology exists when little integration between departments is required. In a franchise, the performance of one store has no effect on another, but collectively, the stores determine organizational performance. Q. What are the advantages of mediating technology? A. Monitoring, controlling, and evaluating performance are easier by measuring outputs objectively. Costs are low because of control through standardization. Computers facilitate mediating technology to coordinate production. Companies using mediating technology may use outsourcing. Long-Linked Technology and Sequential Interdependence Long-linked technology is based on sequential interdependence, which means that one person’s actions affect another’s; activities are performed in a series. Mass-production technology is founded on sequential task interdependence, which requires coordination. Errors at the beginning of production are enlarged later. Q. How are sequentially interdependent activities coordinated? A. Program conversion processes standardize procedures. Planning and scheduling manage connections between input, conversion, and output. Slack resources and extra resources handle unexpected situations. Vertical integration acquires a supplier or distributor. Coordination costs are higher, yet long-linked technology has the advantages of specialization and division of labor to increase productivity. Sequential interdependence simplifies tasks, reduces task variability, and increases task analyzability, making tasks routine. Repetition of routine tasks increases efficiency. Organizing tasks sequentially and controlling the work pace result in cost savings.

A. Employees do not become skilled and have no opportunity for skill enhancement because they adhere to designated procedures. Sequential interdependence uses outputs to serve as inputs for another department, so each department affects the next. Manufacturing depends on material management to secure quality inputs in a timely fashion. Global competition increases interdependence, so firms are adopting a product team structure. Interdepartmental coordination results in more product innovation and efficiency.

Organizational Insight 9.2: USAA: Improving the Delivery of Intangible Services The United States Automobile Association (USAA) changed from mediating to long-linked technology. Q. How did USAA improve customer service? How did the new methods affect structure?

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Q. What are the disadvantages?

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] A. With mediating technology, there was no interdepartmental communication to solve problems. Decision-making was centralized. Poor customer responsiveness encouraged the move to more interdependent departments. Policy-writing and service departments were joined, then divided into five groups and evaluated on the number of complaints. Technology resulted in a flatter hierarchy with decentralized decision-making. Intensive Technology and Reciprocal Interdependence Intensive technology is based on reciprocal task interdependence, the work of all people and departments is inseparable, making tasks impossible to program. More complex and nonroutine tasks decrease technical complexity. Hospitals and R&D departments use intensive technology. Because the task sequence cannot be preset, much coordination is required, making intensive technology more costly. Mutual adjustment is the means of coordination. Q. What structures fit intensive technology? A. Product team and matrix structures provide coordination and decentralized control to operate intensive technology. These structures are flat, promote mutual adjustment, and permit a firm to capitalize on new developments.

Organizational Insight 9.3: A New Approach at Hewlett-Packard In 1989 Hewlett-Packard (HP) lagged behind competitors in introducing products to market. The CEO moved to reciprocal interdependence. Q. How did HP improve development time and change structure? A. HP increased departmental interdependence. The sequential process required new projects to go to each department and for committee approval. Slow decision-making increased development time. HP reorganized several functions into cross-functional teams, eliminated two layers in the hierarchy, decentralized control, and abandoned the committee structure. This organic structure reduced new product development time. Q. Why would a company avoid intensive technology?

Organizations can reduce costs through specialism, producing only a narrow range of outputs. A hospital can specialize in cancer treatment. This strategy uses resources efficiently and decreases coordination problems. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 4 here for examples of task interdependence. _________________________________________________________________________________ _________________________________________________________________________________

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A. Intensive technology is expensive, so organizations reduce task interdependence to coordinate activities. They return to long-linked technology, which is easier to control and predict. Hospitals forecast the resources needed for patient demands.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Managerial Implications: Analyzing Technology Managers should analyze the input-conversion process, the level of technical complexity, task variety, task analyzability, and task interdependence of an organization or department. Then managers should evaluate the fit between technology and structure. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

9.6

From Mass Production to Advanced Manufacturing Technology

A company can maximize gains from economies of scale and division of labor by using dedicated machines, standardized processes, and avoiding slowdowns. Dedicated machines perform one operation at a time and produce a narrow range of low-cost products. Retooling a dedicated machine can take days, and it takes long production runs to maximize efficiency and minimize costs. An assembly line and fixed workers, performing standardized procedures, increase control over production. An organization decreases costs by protecting conversion processes from environmental uncertainty. Q. How can environmental uncertainty be reduced? A. Inventories of raw materials and semi finished components are stockpiled to avoid shortages that slow production. Finished goods are kept in inventory to respond quickly to customer demands. An organization might advertise to sustain customer demand. Vertical integration protects access to inputs and to customers. (Fig. 9.6a) Q. What is the disadvantage of mass production? A. Mass production, characterized by high technical complexity, routine tasks, and sequential task interdependence, is inflexible and often termed fixed automation. Dedicated machines, fixed workers, and large inventories make it difficult to change production when a customer needs change.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

9.7

Advanced Manufacturing Technology (AMT): Innovations in Materials Technology

Innovations in materials technology, machinery, computers, and other equipment are based on a new perspective of input, conversion, and output. AMT increases integration and coordination between these activities. Inventory is no longer stockpiled.

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New technologies have facilitated customer responsiveness at a low cost: flexible manufacturing, lean production, and computer-aided production.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Innovations coordinate input and conversion activities: computer-aided design (CAD), computer-aided materials management (CAMM), and just-in-time (JIT) inventory systems. Computer-integrated manufacturing (CPA) is an innovation in the conversion stage. Computer-Aided Design Design costs represent a large portion of mass production’s total costs and explain the production of large quantities of few products. More complex products, like cars, have higher design costs. Designing new parts requires building prototypes and scale models. Now, computer-aided design (CAD) simplifies this process and designs detailed prototypes according to a computer program and redesigns quickly. Q. Name the advantages of CAD. A. Reduced design costs, a low cost, and a differentiation advantage; improved manufacturing efficiency; easier selling and servicing with improvements made during design; risk of failure reduced by solving problems during design; competitive advantage and reduced costs through quality; increased flexibility and lower-cost, customized product design; and quick response to environmental changes. Computer-aided materials management manages the flow of resources in the conversion process, using computers to make decisions. Computer-aided materials management (CAMM) can manage the flow of raw materials and parts, develop manufacturing production schedules, and control inventory. In mass production, materials are pushed into the conversion process according to a predetermined plan. With CAMM, the flow of input materials is regulated by customer demand for finished goods. Thus inputs are pulled from the output stage, not pushed from the input stage. Mass production has independent stages, so conversion workers take inventory without coordination from input workers. CAMM combines activities and increases task interdependence. Output workers inform input workers about supplies. Technical complexity increases because combined activities create a continuous process, linking raw materials to the customer. Coordination requires an organic structure. Like CAD, CAMM allows for a low-cost or a differentiation strategy. Controlling the flow of materials avoids the costs of carrying excess inventory and is flexible enough for quick response.

Just-in-time Inventory Systems A. A just-in-time inventory system, developed from the Japanese kanban (card) system, requires inputs and components to be transferred as needed. Components are stored in bins, and empty bins are returned to the supplier for refilling. CAMM links an organization to suppliers, making JIT function effectively. Links to suppliers facilitate the quick transfer of information. A just-in-time system works for raw materials and components, but increases task interdependence. Mass production has boundaries between stages, and only the conversion stage has sequential activities. JIT systems diminish these barriers and cause the entire process to become one chain of sequential activities. This continuous process increases technical complexity. Q. Name the advantages of JIT.

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Q. Describe just-in-time inventory.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] A. Increased efficiency and flexibility to customize products, obtaining the benefits of small-batch technology JIT requires coordination and management of relationships with suppliers. Buying a minority stake in suppliers is an option. Yet, ownership increases costs, so long-term contracts with suppliers is another alternative. JIT systems, CAMM, and CAD coordinate the input and conversion stages. Flexible Manufacturing Technology and Computer-Integrated Manufacturing Dedicated machines placed in a series are called transfer machines and perform one operation on a component and quickly transfer it to the next machine, making mass production more like continuousprocess production. Technical complexity and quality increase as costs decrease. Yet, transfer machines are expensive to retool, and a change in one machine requires a change in others, which reduces flexibility. Flexible manufacturing allows for many kinds of components to be made at no extra cost. Each machine performs many operations, and the machines in a series perform more than one task, which increases flexibility. Computer-integrated manufacturing (CPA) keeps costs down by using software to control changes of operation, eliminating retooling. Computer-controlled machines produce a wide range of components and are controlled by a master computer. Computers give the machines components, assemble the product, transfer it to a different machine, and unload the final product. Robots are used and quickly programmed for different operations. Reprogramming robots costs less than retooling transfer machines.

Organizational Insight 9.4: Motorola’s Factory of the Future Motorola, a company that operates in the competitive information technology market, uses AMT to focus on customers. It has a futuristic factory in which a series of robots can respond to individual orders within hours.

A. Motorola, a company that makes cellular telephones and pagers, uses AMT to increase customer responsiveness. Salespeople are placed at the top of the organization, and a futuristic factory quickly customizes products. A salesperson sends an order to the factory electronically, using bar codes, which are scanned by a computer with design software, and robots perform the conversion operations. Finished products are tested and sent to customers. Motorola has a differentiation advantage because customers pay more for customization. CIM increases technical complexity and efficiency by speeding up the production process, making mass production like continuous-process production. These four innovations in materials technology—CPA, JIT inventory systems, CAMM, and CAD—offer flexibility and diminish barriers by combining input, conversion, and output activities. They reduce the need for expensive inventory and increase product reliability by increasing automation and technical complexity. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Q. How does Motorola use AMT, and what are the benefits?

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DISCUSSION QUESTIONS AND ANSWERS 1. How can technology increase organizational effectiveness? The external resource approach measures effectiveness using technology to manage and control outside stakeholders. New technological developments, such as customization, improve customer service. The internal systems approach uses technology to innovate and to reduce product development time. Mass production enabled Ford to make cars for the mass market. The technical approach uses technology to improve efficiency and quality while reducing costs. Mass production produced better-quality, lowerpriced cars. 2.

How does small-batch technology differ from mass production technology?

Small-batch technology makes customized products or small quantities relying on employee skills and knowledge not machines. Mass production produces large volumes of standardized products and relies on machines. Mass production has more technical complexity than small-batch technology. Machines control the work in mass production, so tasks are programmed and costs are reduced. Small-batch technology facilitates customer responsiveness, and many are willing to pay a higher price for customized products. 3. Why is technical complexity greatest with continuous-process technology? How does technical complexity affect organizational structure? Continuous-process technology has an automated conversion process. Employees are not involved in production, but monitor the machinery and manage exceptions, such as machine breakdowns. Technical complexity increases the levels in the hierarchy: small-batch technology needs three levels; mass production, four levels; and continuous-process, six levels. Span of control is narrow for small-batch technology with decision-making decentralized and wide for mass production with decision-making centralized. Span of control is narrow for continuous-process technology with decision-making centralized. Small-batch or continuous-process technology need organic structures whereas mass production needs a mechanistic structure.

Task complexity depends on task variability and task analyzability. Task variability is the number of new or unexpected situations or exceptions that an employee encounters while performing a task. Task analyzability is the degree to which search activity is required to solve a problem. Low task variability and analyzability implies that tasks that are easy to analyze, routine, and less complex. GM uses routine manufacturing, mass production, to make cars. Roto-Rooter, a plumbing company that adapts techniques to each house, uses craftswork. An architecture firm uses engineering production technology. Merck uses nonroutine research to discover new drugs. 5. What level of task interdependence is associated with the activities of (a) a large accounting firm, (b) a fast-food restaurant, and (c) a biotechnology company? What different kinds of structure are you likely to find in these organizations? Why?

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4. What makes some tasks more complex than others? Give an example of an organization that uses each of the four types of technology identified by Perrow.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] (a) Task interdependence is low in an accounting firm, which has pooled interdependence. People perform tasks independently, but organizational success depends on collective efforts. The structure is flat and organic, because activities are controlled through standardization. (b) Task interdependence is medium in a fast-food restaurant, which has sequential interdependence. The actions of one employee affect the actions of others. The structure is tall and centralized; tasks are routine and programmed in advance. (c) Task interdependence is high in a biotechnology company, which has reciprocal interdependence. The activities of each person affect others. This organization needs a flat, organic structure to facilitate mutual adjustment. 6. Find an organization in your city and analyze how its technology works using the concepts discussed in this chapter: technical complexity, nonroutine tasks, and task interdependence. In a movie theater, technical complexity is low because people are more important than machines; a person operates the movie reel. Task variability is low and task analyzability is high. New situations rarely arise and tasks are routine; people buy a ticket and standard procedures are available for exceptions. Long-linked technology is used and task interdependence is sequential. The cashier takes the money and issues a ticket. The usher then takes the ticket and directs customers, and another employee turns on the movie. 7. .Discuss how AMT and innovations in materials technology and in knowledge technology have increased task interdependence and the technical complexity of the work process. How have these innovations changed the structure of organizations operating a mass-production technology? Innovations in materials technology increased technical complexity as machines replace humans to perform tasks. Computer-aided design (CAD) physically produces a part, eliminating a worker from retooling a machine. Computer-aided materials management (CAMM) uses computers to track inventories eliminating much manual work. Task interdependence increases as these techniques make value creation a continuous process. The output side coordinates with the input side.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Choosing a Technology In small groups, students are investors in a large computer store. Each group analyzes the level of technical complexity, task variability, and task analyzability and recommends the type of task interdependence appropriate for their strategy. Students then discuss the type of technology to be used in the store.

The Ethical Dimension Students examine the ethical issues regarding an organization’s ability to monitor and control employees. One relevant theory that you can use to frame the issue is Agency Theory from Chapter 2. You might

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Mass production sequences activities only for the conversion process. Innovations in knowledge technology increase task interdependence, as functional members cooperate to develop products. Crossfunctional teams replace fixed workers, who perform sequential activities. These changes require a flat, decentralized, organic structure with mutual adjustment and low formalization for control. A product team structure is appropriate.

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] discuss with the students the ethical issues associated with not allowing the workers to socialize on the factory floor.

Making the Connection Ask students to find an example of a company using one of the technologies described in this chapter and to identify the technology. Students will explain why it is being used and how it affects the organization’s structure.

CASE FOR ANALYSIS The Shape of Things to Come Japanese companies used mass production but realized that there was excessive handling time. Thus, they adopted production forms called “cell layouts.” Layouts provide for customer responsiveness. 1. How do the new “cell” designs change the level of technical complexity, task variability and task analyzability, and task interdependence? Cell designs are small-batch rather than mass-production technology. They have lower technical complexity because processes are not programmed in advance and workers have more skills. Task variability is higher, and task interdependence increases from sequential to reciprocal because workers perform more tasks. Task analyzability is lower because tasks are nonroutine, and less search time is needed to handle exceptions. 2. Based on this analysis, what type of technology discussed in the chapter does the new system remind you of? This system is similar to small-batch technology with lower costs. 3. What are the advantages associated with the use of the new technology? Reduced handling time, handling costs, and inventory costs are achieved due to faster production and employee motivation. The cell layout enables organizations to be responsive to customer needs by making production of small quantities feasible.

Students determine the role of technology in their organization and the level of technical complexity. They analyze task variability, task analyzability, and task interdependence. They determine how technology affects their organization’s structure.

TEACHING SUGGESTIONS 1. To illustrate how technology can affect organizational structure, divide the class into five groups. Each group is assigned a company and must determine the type of technology used, using Woodward’s classifications of technical complexity and/or Perrow’s classifications based on task variability and task analyzability. Each group determines the structure.

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ANALYZING THE ORGANIZATION

PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Group 1: A customized furniture maker that uses craftswork and small-batch technology and has low technical complexity, low task variability, and low task analyzability. It uses an organic structure. • Group 2: A standard refrigerator manufacturer that uses mass production and has high technical complexity, low task variability, and high task analyzability. It uses a mechanistic structure. • Group 3: A beer manufacturer that uses continuous-process technology and has a tall, centralized, mechanistic structure. • Group 4: An architectural firm that specializes in customized houses, uses engineering production, a type of small-batch technology, and has low technical complexity, high task variability, and high task analyzability. Its structure is organic. • Group 5: A biotechnology company that uses nonroutine research and has high task variability, low task analyzability, and an organic structure. A role-play illustrates that intensive technology causes decreased technical complexity and increased task complexity. Work processes cannot be programmed in advance. The organization is a hospital. You are the administrator and six students volunteer. Divide the class into departments: radiology, cardiology, labor and delivery, and clinical labs. On day one, two students come in to have babies, so send them to labor and delivery; and one student has fainting spells, so send that student to clinical labs. Note that radiology and cardiology do nothing. On day two, two students have broken bones, so send them to radiology; and one student has heart problems and is sent to cardiology. Note that labor and delivery and clinical labs do nothing. Intensive technology costs money. The class determines how to reduce hospital costs. Forecasting can tell what resources will meet patient demands. The hospital can pursue the strategy of specialism and provide a narrow range of services, such as the treatment of cancer. Use Figure 9.4 to show Perrow’s classification of four technologies: routine manufacturing, craftswork, engineering production, and nonroutine research. Divide the class into two groups to explain and give examples of craftswork and mass production. Craftswork has low task variability and task analyzability; plumbing has low task variability, but exceptions take time to resolve. Existing technology needs to be adapted to solve the unique situation. Engineering production has high task variability and high task analyzability; an architect who builds customized houses faces new situations, but exceptions require little search because of standard procedures. Discuss mediating technology and pooled interdependence, long-linked technology and sequential interdependence, and intensive technology and reciprocal interdependence. Use Figure 9.5 to illustrate the differences between the three levels of task interdependence. Students will give examples of each. A consulting firm has pooled interdependence. Mass production has sequential interdependence, and a biotechnology company has reciprocal interdependence. Students will look at Ford’s web site and determine what changes in technology are on the horizon. Students will report their findings to the class. It is helpful to clarify the difference between push and pull strategies. With traditional mass production, the plan is preset; inputs move down the assembly line, and large volumes are produced to achieve economies of scale. With CAMM, production is determined by customer demand. Inputs are pulled into the system; salespeople submit orders that are electronically transferred to manufacturing. JIT inventory is the responsibility of the materials management function to control inputs. In JIT, inputs arrive as they are needed, keeping inventories at a minimum. A JIT system needs CAMM to operate successfully. Figure 10.2 demonstrates how a JIT system works. CIM is used by the manufacturing function and involves using robots. Use role-play to distinguish between JIT inventory systems and traditional mass production systems. Four students volunteer to do a simple task, such as collating and stapling training instructions for new workers. A stockpile of paper exists. Worker one piles up the raw materials, sheets of instructions. Worker two grabs from the pile and collates the pages. Worker three staples the pages.

2.

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5. 6.

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Worker four places the product in a bin. With JIT, no inventories are needed. Copies are produced on demand. Workers one and four are no longer needed. Worker two receives an order, receives the pages directly from the supplier, and collates them. Worker three continues to staple and hands the product to marketing, instead of a stockpiler.

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CASE FOR ANALYSIS The Body Shop Gets Middle Aged The Body Shop, founded in 1976 by Anita Roddick, grew to over 700 stores by 1993 but did not franchise in the United States as it did in Europe. The owner wanted to maintain control over U.S. stores. 1.

What strategy did the Body Shop use to grow in Europe?

The Body Shop developed natural cosmetics and grew rapidly throughout Europe using franchising and alliances. 2. What strategy did the Body Shop use in the United States, and what problems did it encounter?

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In the United States, the owner decided to maintain control over the stores, so the Body Shop missed out on the rapid growth achieved through franchising. Large U.S. cosmetic companies like Estee Lauder imitated the Body Shop and had more name recognition. These competitive threats propelled Roddick to franchise in the U.S.

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CHAPTER 13 MANAGING INNOVATION AND CHANGE TEACHING OBJECTIVES 1. To define innovation as the process of developing new products, production or operating systems. (13.1) 2. To discuss the product life cycle, and how it affects the rate of innovation. (13.1) 3. To discuss the role of intrapreneurs in organizations. (13.1) 4. To explain various techniques used to manage the innovation process, including project management and the stage gate funnel. (13.2) 5. To review the ways to foster an innovative culture: organizational structure, people, and property rights. (13.2) 6. To discuss the role that information technology has on innovation and creativity. (13.3)

CHAPTER SUMMARY This chapter examines innovation and creativity. This is the process of developing new products, services, or procedures to better serve the needs of customers. Innovation brings about technological change. Quantum technological change, which results in quantum innovations, is distinguished from incremental technological change, which results in incremental innovations. Incremental innovations build on quantum innovations. The product life cycle is discussed with emphasis on how the rate of technological change in an industry and the role of fad and fashion play on the level of innovation and creativity that is needed in an industry. Intrapreneurs are entrepreneurs that are innovative employees of the organization. They recognize and implement either quantum or incremental product improvements. The chapter then discusses ways to manage the innovation process. Attention is given to the tools and processes associated with project management. The stage-gate development funnel is discussed as a model used to promote innovation.

The chapter concludes with a discussion of how information technologies creates synergies and efficiencies in the organization, thus enhancing creativity and innovation.

CHAPTER OUTLINE 13.1

Innovation and Technological Change

Innovation is the development of new products or production systems. There is a link between innovation and technological change. Technology is the skills, tools, and experience used to design and produce goods and services. Changes in technology are prevalent and significantly affect an organization.

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In managing innovation in high-tech organizations, cross-functional cooperation is key. Although product team and matrix structures promote innovation, organizations need more complex integrating mechanisms: Team managers and product champions, “skunk works,” new venture divisions, and joint ventures. A focus on structure, people, and property rights fosters an innovative culture.

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Two types of technological change are quantum and incremental change. Quantum technological change is a basic transformation that reforms the way products are made. Personal computers (PCs) and genetic engineering are examples. Products that use a quantum technological advance, such as Intel’s first microprocessor, are called quantum innovations. Such innovations force companies to change. Incremental technological change is an improvement of base technology; products that use these refinements, such as Intel’s newer microprocessors are called incremental innovations. Anderson and Tushman call quantum innovations “technological discontinuities.” In the model of innovation, a technological discontinuity creates fierce competition to become the leader. After the dominant design appears, companies improve base technology through incremental change. (Fig. 13.1) Companies like Microsoft and Intel have gained from technological change, but others like IBM have experienced market decline. Technological change is both an opportunity and a threat. Creating new products makes others obsolete. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 1 here to review quantum and incremental change. _________________________________________________________________________________ _________________________________________________________________________________

The Product Life Cycle The life cycle represents the changes in demand for a product that occur over time. The rate of technological change determines how important it is for managers to innovate. The life cycle is represented by four stages: Embryonic- Customers are unsure what the product has to offer, and it has yet to gain widespread acceptance. Growth- Many consumers are entering the market and purchasing the product for the first time (for example: PDAs)

Decline- Occurs when demand falls. This is often because of obsolescence (VCRs) The length of the life-cycle depends upon the rate of technological change and the role of fads and fashions to the particular industry or market.

Organizational Insight 13.1: Innovation at the Gap In an effort to increase innovation, The Gap clothing chain decentralized many product development duties to the store level. This caused problems because the store managers did not have the ability to predict trends, fads, or fashions. He fixed the problem by centralizing control at the top. Q. Why does decentralization of innovation work in some industries but not others?

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Maturity- Consumers are buying replacement products (cars, telephones, PCs) as opposed to first time buyers.

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A. In some industries such as clothing, fads and fashion change so quickly that a lower-level manager can’t keep up with the trends. Other industries operate in a much more stable environment, and managers can keep up. This is a good illustration of why decentralized authority does not always work. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Innovation, Intrapreneurship, and Creativity Intrapreneurs are entrepreneurs inside an organization who are responsible for the success or failure of a project. These would include managers, scientists, or researchers employed by a specific company. Many times, they get frustrated with the internal workings of the organization, and start their own companies. Creativity can simply be defined as going beyond the current boundaries. Examples include generating new ideas, combining or synthesizing two or more previously unrelated ideas, or modifying a product or process in order to make it better. A knowledge creating organization is one where such innovation is going on at all levels and in all areas of the organization.

13.2

Managing the Innovation Process

High-tech companies use several tools to increase innovation: Project management, stage-gate development funnel, team leadership, “skunk works,” and new ventures. Project Management A project is a subunit whose goal centers on developing a product or service on time, within budget, and in compliance with certain specifications. Project management is the process of managing the project. The involves a variety of management skills and tools, especially for large projects.

Stage-Gate Development Funnel If resources are spread too thin by funding too many projects, no project receives the required resources to make it successful. Managers need a plan for approving projects, such as a stage-gate funnel. (Fig. 13.4) Stage 1, the wide mouth of the funnel, fosters innovation by requesting new product ideas. Rewards may be offered for ideas. Companies like 3M, allow research scientists time to develop their projects. New ideas are given to an evaluating team to determine the idea’s feasibility and its match to company strategy. Once these criteria are met, the proposal goes to stage 2, a new product development plan with all the pertinent information including resource requirements. A cross-functional team prepares the plan, using customer needs assessment surveys.

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Some tools that project managers use include PERT/CAM networks or GANTT charts. The Critical Path Method shows what these models are trying to achieve, which is to determine which tasks are critical to the completion of the task, and what the sequence of the tasks should be. (Fig. 13.3)

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A senior management committee at gate 2 determines if the plan is beneficial based on resource requirements. Projects are rejected, revised, or moved to development, stage 3. The time for stage 3 varies according to industry and product type. Using Cross Functional Teams and a Product Team Structure Successful innovation depends on the coordination between R&D and other departments. Subunit orientations make coordination difficult. Q. What functions must coordinate with R&D? A. R&D must cooperate with product engineering, process engineering, materials management, manufacturing, and marketing. R&D and engineering groups must ensure that research results are efficiently transformed into product design. Coordinating with manufacturing assures reliable products at a reasonable cost. Coordinating with marketing assures that the products are customer driven. Product development teams need representatives from marketing, engineering, and manufacturing; they are usually made up of three to six people. Members are responsible for one project at a time. Q. What structures best manage high-tech innovation? A. The product team structure and matrix structure are appropriate for high-tech organizations, because cross-functional teams develop products from the idea through the sales stage. These structures promote understanding and reduce communication problems. Because authority is decentralized to teams, members must cooperate on the project. A team structure may be incapable of solving coordination issues, so organizations can adopt other integration mechanisms: team leaders and project champions, “skunk works,” new venture divisions, and joint ventures.

Heavyweight leaders act as product champions by assuming “ownership,” solving problems, resolving conflicts, and giving the team informal leadership. Although some leaders are assigned to projects, a product champion may emerge informally.

Organizational Insight 13.2: Championing the Mustang Engineer Don Frey championed the Ford Mustang, and Lee Iacocca, a vice president and general manager, supported the idea. Q. How did the product champion bring the Mustang to market? A. Don Frey, an R&D engineer, realized the importance of incremental R&D and used customer complaints as a guide. Once on the top planning committee, he championed the Mustang. Ford did not support his idea, so he used other funds for a prototype. Top management refused to support the Mustang because of money lost on the Edsel. The idea would have died had Lee Iacocca not become Ford’s

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Team Leadership A leader needs a cross-functional perspective and a certain level of authority and power. A lightweight team leader has a lower rank than a functional department head, no control over resources, and can only handle minor modifications. This lack of authority impedes cross-functional coordination. A heavyweight team leader controls resources and may overrule functional heads. Heavyweight leaders are more effective for new product development or project management.

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general manager. Iacocca risked his reputation for the project, and the Mustang was a huge success. A product champion and a manager willing to take a risk achieved this innovation. “Skunk Works” and New Venture Divisions A “skunk works” is a task force established to facilitate new product design by coordinating various functions. Members from various functions are placed at a separate facility, offering a small-organization setting to encourage innovation and motivation for rapid product development. Task force members are intrapreneurs, internal entrepreneurs, responsible for the project’s success or failure. A skunk works disbands when the product is brought to the market. A new venture division is responsible for commercializing the product. It is an independent division and contains the functions to manage a project from start to finish. Project members head the division’s functions and manage the functional structure. One challenge is to balance control between corporate headquarters and the division. Corporate headquarters has concerns about profit potential, as resources are allocated to the division. If corporate headquarters intervenes, the division loses autonomy, leading to a decline in the division’s entrepreneurial culture.

Organizational Insight 13.3: Too Much Innovation at Lucent Lucent created venture divisions in an attempt to increase innovation. The problems that resulted were enormous communication and coordination problems in that the managers in each division had no idea what managers in the other divisions were doing. Q. Is it possible to have too much innovation? A. Make sure students understand that innovation is industry specific. Not all industries need to be on the cutting edge in order to be successful. Lucent’s problem centered around an ineffective structure. This is a good illustration of so many concepts in the entire text. In this case, the structure was ineffective, and thwarted the goals of the organization. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Creating a Culture for Innovation Culture plays an important role in shaping and promoting innovation. See Figure 7.2 from Chapter 7. Organizational structure: Organizational size and age impede innovation. A large organization with a large hierarchy slows decision-making; as bureaucracy increases, employees are unwilling to take risks. Organizations become inflexible as they age. It is hard for people to remain entrepreneurial throughout their careers. Age and size lead to stability. Additional hierarchical levels keep intrapreneurs, internal entrepreneurs, from having authority over projects. When skills are spread across subunits, coordination is difficult. Q. What structures overcome these problems?

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Joint ventures allow for pooling of resources and sharing R&D risks. A new organization is created.

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A. An organic structure emphasizes cross-functional communication. Product team and matrix structures provide the autonomy necessary for innovation. The informal organization is key. 3M lets scientists use resources for chosen projects, which are separate from formal projects. People: Organizations hire those with similar values, and individuals are attracted to companies with similar values. To promote innovation, a high-tech organization needs diversity in scientists. An organization needs people committed to innovation, as well as those who pursue it in diverse ways. Property rights: The performance of R&D scientists is difficult to evaluate, as innovation is a complex process that often takes years to yield results. Scientists often take their ideas and start companies. Q. How can a company retain talented scientists? A. It can create career paths for R&D employees and let successful scientists lead projects. Scientists should have the option of managing areas such as manufacturing. Cross-functional experience will qualify scientists to serve as project managers. An organization must establish strong property rights such as bonuses and stock options proportionate to the profits generated by their efforts. Individual and group performance can be tied to bonuses. An innovative culture centers on property rights, people, and organizational structure. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 4 here to review methods to make a culture innovative. _________________________________________________________________________________ _________________________________________________________________________________

Managerial Implications: Innovation Research and development activities must be integrated into other functions for innovation. Employees need autonomy and resources to encourage new product development. Top management should create a culture to support innovation and reward employee contributions to success.

Innovation and Information Technology

The cost and time savings that occur when technology allows individuals to perform their jobs better is called information efficiency. By improving the initial base of knowledge and having the technology to circulate knowledge rapidly through the organization, IT can dramatically facilitate creativity. Innovation and Information Synergies Synergies occur when two or more individuals or subunits are able to pool their resources and collaborate across subunit boundaries. IT also allows for more boundary spanning activities, which consist of units interacting with individuals outside of the organization to obtain knowledge about the environment.

Focus on New Information Technology: Amazon.com, Part 6 Amazon used innovation to sell books over the Internet.

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13.3

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Q. Characterize innovation at Amazon. A. Selling books over the Internet is a quantum innovation because it is a first. However, incremental innovations continue to take place at Amazon. In addition to books, Amazon now offers CDs, gifts, a free greeting card service, and online auctions in conjunctions. Incremental changes have changed Amazon from an “online book seller” to a “leading Internet product provider.”

IT and Organizational Structure and Culture IT has allowed organizations to decentralize decision-making authority. This is because IT gives lowerlevel employees more information than they previously could have. It also creates information synergies because it facilitates increased communication and coordination between decentralized decision makers. This typically means that fewer managers are needed to solve problems and make decisions.

DISCUSSION QUESTIONS AND ANSWERS 1. What is the relationship between quantum and incremental technological change? Quantum change is a dramatic shift that results in quantum innovations. Innovations result in environmental changes and require operational changes. Incremental change builds on quantum changes; incremental innovations refine quantum innovations. The first Intel microprocessor was a quantum innovation; the successors are incremental innovations. Another quantum innovation occurs and restarts cycle. 2.

What is the relationship between creativity, intrapreneurship and innovation?

They are very similar concepts. Creativity and innovation can simply be defined as going beyond the current boundaries, including generating new ideas, combining or synthesizing two or more previously unrelated ideas, or modifying a product or process in order to make it better. Intrapreneurs are entrepreneurs inside an organization who actually engage in the process. They are generally attracted to organizations that have an innovative culture that allows them to develop new products and services. What is project management? How should managers decide which projects to pursue?

Project management is the application of specific management techniques designed to help members in organizations complete a project. Managers often try to take on too many projects at once. They need to develop a process to evaluate proposals and deciding which ones to reject. The stage-gate funnel is a good tool for determining whether or not a project or product has a market, is profitable, and fits in with the organization’s goals and objectives. 4. What steps would you take to create (a) a structure and (b) a culture congenial to innovation in a high-tech organization? (a) A high-tech organization needs organic structures to promote decentralization, mutual adjustment, and cross-functional cooperation; product team and matrix structures create cross-functional teams to develop products from the idea to the sales stage. These structures promote cross-functional understanding and reduce communication problems. Because authority is decentralized to teams, members must cooperate on the project. The informal organization can deal with obstacles associated

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with the formal structure. Other integration mechanisms can promote innovation: team leaders and product champions, “skunk works,” new venture divisions, and joint ventures. (b) A high-tech organization should focus on structure, people, and property rights for an innovative culture. See (a) for structure. People committed to innovation when maintaining diversity must be hired. Strong property rights are imperative with bonuses tied to individual and group performance. Innovative employees should receive bonuses and stock options proportionate to their contributions to profits. Career paths for scientists within R&D and between R&D and other functions lead to innovation.

ORGANIZATIONAL THEORY IN ACTION Making the Connection Each small group of students represents top managers of a chain of stores selling high-priced, highquality clothing. Students discuss ways to revitalize the product development process. 1. Using the chapter material, outline the way you will create a program to increase creativity and intrapreneurship at the store and corporate level. For example, how will you encourage input from employees and customers, and who will be responsible for managing the program? 2. How will you make use of IT and organizational structure to facilitate the innovation process?

The Ethical Dimension Students examine the ethical issues surrounding who should benefit when intrapreneurs make discoveries that result in millions of dollars in profit. Who should share in the profits?

Making the Connection Students will find an organization that is trying to promote its level of innovation, and examine how it is doing this.

CASE FOR ANALYSIS Big Changes at Boeing Boeing faced competitive forces that made increased quality and reduced costs necessary. Boeing responded to change by altering its structure and culture.

Boeing shifted to a product team structure and established cross-functional teams. Employees from engineering and production were given responsibilities. Boeing had traditionally been secretive about its designs; with the 777, Boeing invited representatives from 18 suppliers and 8 airlines to meet with the product development team. Making customers an integral part of the innovation process was a dramatic change for Boeing. The 777 was the first airliner to be designed completely by a computer. Boeing engineers developed a 3D computer aided design technology to design and test parts, and shortened development time from six to four years. 2. How easy would it be for other organizations to follow Boeing’s lead? It would not be easy for others to make changes in structure and culture to compete in the fierce battle of commercial jet aircraft. Others would have to realize that technological changes and innovation are

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1. Chart the major steps that Boeing took to encourage innovation and new-product development.

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related. Boeing changed its technology and operating systems to raise the speed of new product innovation to develop a product that customers wanted.

Analyzing the Organization Students examine the extent to which their organization has been involved in efforts to promote innovation.

TEACHING SUGGESTONS

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1. Assign the models in the chapter to individuals or groups to explain to the entire class using examples. 2. Have students identify organizations that they consider innovative or creative. Go to the organization’s web site and determine from a structure, culture, or people standpoint what makes them so creative. Try and see if any patterns emerge. 3. In small groups, have students brainstorm about an idea that they have or a business they would like to start. This can be as simple as a new restaurant idea, or as complex as an entirely new product. After the small groups settle on the most innovative idea, have them draw the structure of the organization, and also have them identify what types of technology they will use. 4. Compare and contrast how far IT has come in the last decade or so. Do this using a process that everyone is familiar with, such as the registration process in college. For example, in the 1980s, I had an assembly line system at my college in which we went from station to station to build a schedule. Today, registration is all web-based. 5. Building upon the previous, ask them how this technology allows front-line workers to be more creative.

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CHAPTER 14 MANAGING CONFLICT, POWER, AND POLITICS TEACHING OBJECTIVES 1. To explain that conflict is inevitable, because stakeholders compete for resources and their goals often conflict. (14.1) 2. To examine Pondy’s model of conflict and its five stages: latent, perceived, felt, manifest, and conflict aftermath. (14.2) 3. To consider ways to manage conflict by making changes in structure, increasing integration, and clearly defining authority relationships. (14.3) 4. To discuss how conflict can be managed by changing attitudes, attitudinal structuring, a procedural system, a third-party negotiator, and employee rotation. (14.3) 5. To explain how power enables individuals or subunits to resolve a conflict in their favor. (14.4) 6. To examine the seven sources of power: authority, control over resources, control over information, nonsubstitutability, centrality, control over uncertainty, and control over decision-making premises. (14.5) 7. To consider how organizational politics can increase power. (14.6) 8. To address the costs and benefits of organizational politics. (14.6)

CHAPTER SUMMARY This chapter examines conflict, power, and politics in the organizational setting. Although stakeholders cooperate to contribute resources, they compete for resources. Conflict arises when one group pursues its goals at the expense of another. Research shows that some conflict is good to overcome inertia, but beyond a certain point, conflict hurts organizational effectiveness.

Power influences how conflicts are resolved. There are seven sources of organizational power: authority, control over resources, control over information, nonsubstitutability, centrality, control over uncertainty, and unobtrusive power. Organizational politics increase power. There are tactics for playing politics: increasing indispensability by increasing nonsubstitutability and centrality, associating with powerful managers, building and managing coalitions, and influencing decision-making by controlling the agenda and bringing in outside consultants. An organization must manage the balance of power to ensure that power and politics are beneficial, not harmful.

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Pondy’s model of conflict consists of five sequential stages: latent conflict, perceived conflict, felt conflict, manifest conflict, and conflict aftermath. The potential for conflict exists due to interdependence, subunit orientations, bureaucratic factors, incompatible performance criteria, and competition for scarce resources. Conflict should be managed before it reaches the manifest conflict stage. Conflict is manifest by either open or passive aggressiveness. Manifest conflict reduces communication and leads to poor conflict aftermath. Conflict can be managed by structural changes, increasing integration, establishing a procedural system for grievances, attitudinal structuring, and using a third-party negotiator.

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CHAPTER OUTLINE 14.1

What Is Organizational Conflict?

Stakeholders compete for the resources that an organization produces. Shareholders want dividends, employees want raises. An organization must manage both cooperation and competition among stakeholders to grow and survive. All stakeholders have a common goal of organizational survival, but not all goals are identical. (Fig. 14.1) Organizational conflict occurs when a stakeholder group pursues its interests at the expense of other stakeholders. Given the different goals of stakeholders, organizational conflict is inevitable. Conflict is associated with negative images, such as unions getting angry and violent, but some conflict can improve effectiveness. When conflict passes a certain point, it hurts an organization. (Fig. 14.2) Q. How can conflict improve effectiveness? A. Conflict can overcome inertia and introduce change, because conflict requires an organization to reassess its views. Different views are considered, and the quality of decision-making is improved. Beyond a certain point, conflict hurts the organization and causes decline. Managers spend time bargaining, rather than making decisions. An organization in decline cannot afford to spend time on decision-making, because it needs a quick response to recover its position. Groups battle for their interests, no agreement is reached, and the organization floats along, falling prey to inertia. Organizations need to control conflict. Notes________________________________________________________________________________ ____________________________________________________________________________________ ___________________________________________________________________________________ Refer to discussion question 1 here to discuss the beneficial aspects of conflict. _________________________________________________________________________________ _________________________________________________________________________________

14.2

Pondy’s Model of Organizational Conflict

Pondy’s model shows five sequential stages of conflict: latent conflict, perceived conflict, felt conflict, manifest conflict, and conflict aftermath. (Fig. 14.3) Stage 1: Latent Conflict No conflict is present, but the potential for conflict exists due to the nature of operations. Pondy contends that all conflict emerges due to subunit orientations. There are five potential sources of conflict among subunits: 1. Interdependence: As organizations grow and differentiate, subunits want autonomy. Marketing wants to design advertising. Desires for autonomy conflict with the organization’s aspirations for cooperation. As task interdependence increases—that is, moves from pooled to sequential to reciprocal—the potential for conflict increases. Conflict occurs at the individual, functional, and

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divisional levels. If functions were not interdependent, conflict would not exist. Functions would simply perform their tasks. Manufacturing would not care what engineering did. 2. Differences in goals and priorities exist among different functions. Manufacturing wants to lower costs. Marketing wants to increase sales. Incompatible goals create conflict.

Organizational Insight 14.1: Conflict Causes Slow Change at Kodak Kodak experienced declining performance and hired Christopher Steffen, who had successfully turned around Chrysler and Honeywell, as Chief Operating Officer. Q. Why did Steffen resign from Kodak? A. Steffen resigned from Kodak because his problem-solving approach conflicted with the top managers’. He favored a revolutionary approach with radical changes, such as large layoffs. The CEO and his team favored an evolutionary approach and incremental changes. Kodak’s team defeated Steffen, so he resigned. 3. Bureaucratic factors: Status inconsistencies can result in conflict. Line functions often clash with staff functions. Q. Distinguish between line and staff functions. Why do they conflict? A. A line function, such as production, is directly responsible for producing the outputs. Staff functions, such as accounting and human resources, support the line function. Conflict arises when line employees consider themselves more important than staff employees, putting their own interests first. 4. Incompatible performance criteria for subunits lead to conflict. If an organization rewards cost control, engineering does not comply with marketing’s request for a new product design.

Organizational Insight 14.2: How Rewards Produced Conflict at CS First Boston A merger between First Boston and Credit Suisse resulted in conflict. There was no synergy to capitalize on transatlantic investment banking. Conflict led to high management turnover.

A. First Boston tolerated conflict, because each unit had no effect on the other. Task interdependence was low. Conflict escalated when the American unit achieved record profits but no bonuses, because the London division lost money. This unfair decision prompted senior managers to leave First Boston and work for competitors, like Merrill Lynch. 5. Competition for scarce resources leads to conflict. Subunits compete for their share of resources. Increased funding allows a division to grow. Stage 2: Perceived Conflict When a subunit perceives its goals to be obstructed, conflict enters the second stage. Each group seeks the source of the conflict and finds reasons for problems. Marketing blames poor sales on poor manufacturing quality. Manufacturing says that marketing is not advertising effectively. Conflict escalates as subunits fight over the origin of the problem.

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Q. Why didn’t CS First Boston manage the conflict? What caused the conflict to escalate?

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Stage 3: Felt Conflict Subunits develop polarized attitudes of us-versus-them. Cooperation between subunits declines as well as organizational effectiveness. Conflict escalates as subunits argue, and small problems escalate to huge, difficult-to-manage, conflicts. Stage 4: Manifest Conflict Subunits deliberately impede other subunits. People aggressively promote their own interests at the expense of others. Once conflict is manifest, coordination between managers and subunits deteriorates, resulting in a decline in effectiveness. Managers should prevent conflict from reaching the manifest stage to avoid a communication breakdown and a poor conflict aftermath. Stage 5: Conflict Aftermath Every conflict has a conflict aftermath that influences conflict resolution in the future. If resolved before the manifest stage, conflict will result in a positive aftermath. If conflict resolution takes a long time or doesn’t occur, future relationships and the culture will be damaged. Q. What organizational conflicts have you experienced that went through all five stages. Did anyone experience open aggression? How did the organization’s structure contribute to the problem? A. Answers will vary. Open aggression leaves bad impressions, but amicable solutions promote good relations. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 2 here for an example of conflict in an R&D laboratory. _________________________________________________________________________________ _________________________________________________________________________________

14.3

Managing Conflict: Conflict Resolution Strategies

Conflict management techniques depend on problem source. CS First Boston needed a changed rewards system. Kodak needed a changed top-management team. An organization reduces conflict by structural and attitudinal changes. Acting at the Level of Structure Managers can resolve conflict by changing task relationships: 1. An organization may change organizational structures. A functional structure causes problems, such as communication and measurability problems.

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Managing conflict is a priority, because conflict impairs organizational culture. Culture is an important way to control behavior. Organizations must balance the need for conflict to overcome inertia and promote learning with the prevention and escalation of harmful conflict.

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Q. What structure is appropriate to assign overhead costs more accurately? What structure reduces product development time? A. A product structure assigns overhead costs more accurately. A functional structure does not reflect the contributions of various functions to a product. A product team structure speeds up product development. 2. Increasing integration can overcome conflicts over resources and subunit orientations. Integrating mechanisms include task forces, teams, and integrating roles. 3. Flattening the hierarchy and decentralizing authority give employees decision-making power and makes them accountable. Authority relationships must be defined. Conflict is reduced because employees know their superiors. In a tall hierarchy, 10 people may need to sign off on a proposal. Acting at the Level of Attitudes and Individuals Different divisions and functions have different ideas about accomplishing organizational goals. Managers can prevent the us-versus-them attitudes. Q. What can managers do? A. They can establish procedures to voice complaints. Procedures play a large role in managing conflicts between managers and unions. Bargaining consists of attitudinal structuring, a process to convince management and labor they have much in common. A third-party negotiator, such as a senior manager in an integrating role or an outside consultant, can mediate. Rotating employees, a tool used by the Japanese, manages conflict by changing attitudes. Long held attitudes may necessitate a change in those mired in conflict through transfer, promotion, or firing. Top-management may be replaced to overcome inertia and change attitudes. The CEO influences attitudes by setting the values and culture, influencing the attitudes of other managers, and having the power to resolve subunit conflict.

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Refer to discussion question 5 here to discuss the effects of structure on power. _________________________________________________________________________________ _________________________________________________________________________________

Managerial Implications: Conflict Managers should analyze structure to identify potential sources of conflict and redesign it. If conflict cannot be eliminated, a manager should intervene quickly to resolve the conflict. Managers should choose a way of handling the conflict that matches the source of conflict to achieve a good conflict aftermath. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Strong CEOs listen to opinions and build consensus. Weak CEOs fail to manage conflict, so strong coalitions fight for their goals at the expense of the weaker subunits. As fighting escalates, conflict becomes harmful.

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What Is Organizational Power?

Organizational power is the tool used to resolve the conflict. It is the ability to defeat the opposition in accomplishing a goal. Marketing gets production to run an extra batch of goods; production would not have run this batch, so an element of coercion is involved. The power of different coalitions to influence decision-making determines how conflict gets resolved and which subunits benefit. Conflict and power are interrelated. Conflict arises because groups need to cooperate but compete for resources. Groups use power to resolve conflict in their favor. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •

Refer to discussion question 3 here to discuss the importance of maintaining a balance of power. _________________________________________________________________________________ ________________________________________________________________________________

14.5

Sources of Organizational Power

Individuals, groups, and divisions seek power to influence others. There are seven sources of power: authority; control over resources; control over information; nonsubstitutability; centrality; control over uncertainty; controlling the premises of decision-making, and unobtrusive power. (Fig. 14.4) Authority is the most obvious source of power. Because it is legitimate power stemming from an organization’s legal and cultural foundations, it is the ultimate source of power. The legal charter permits the board of directors, the agent of shareholders, to grant a CEO the power to use resources to create value. The CEO has the power to grant authority to other managers, who give power to subordinates. Employees accept the legal right of the organization to control their behavior. Authority is distributed differently in various organizations. Centralization has top managers retain authority, and decentralization delegates authority to lower levels. Q. If centralization discourages coalitions, why would an organization decentralize?

Many managers try to retain control. Out of fear of losing authority, the manager limits information to subordinates, making it hard for them to make decisions. Decentralizing authority does not mean a loss of authority, because the supervisor is still responsible for subordinates. Intentional decentralization is called empowerment, giving employees decision-making freedom and motivating them to create value. Organizations need to empower both individuals and divisions. Control over resources gives subunits power. At a pharmaceutical company, R&D scientists have power. Money is the ultimate resource, as it buys other resources. Top managers have ultimate power because they allocate resources. The ability to generate resources also increases power. Divisions that produce revenue have power.

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A. A highly centralized organization makes few significant decisions, because everyone is afraid to take responsibility. Employees just agree with superiors, which hurts organizational effectiveness.

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Control over information, access to and control over the information flow, is a source of power. By choosing the information others receive, an individual influences their opinions. Those who select information are called “gatekeepers.” People in specialized roles have power stemming from the control over information. Patients take the word of doctors. Nonsubstitutability means that no one else can perform an individual or subunit task, giving power. Centrality refers to those who make decisions and functions needed for resource flows. Centrality is a source of power. An organization’s strategy determines which subunit is central. Q. Which function is central for a low-cost strategy? How about a differentiation strategy? A. The manufacturing function is central for a low-cost strategy. For differentiation, R&D or marketing is central. Control over uncertainty: A subunit with control over the primary source of contingencies has power. Doctors have power in hospitals because they treat patients, the major source of uncertainty. Contingencies change over time, causing functions to rise and fall. Right after World War II, manufacturing was the most important function, as firms concentrated on developing production techniques. Once manufacturing became routine, companies had to sell products, so marketing became important in the 1960s. With the 1970s came a recession, so finance became important. Unobtrusive Power: Controlling the Premises of Decision-Making A dominant coalition has the power to control decision-making to resolve conflict in their favor. This is known as unobtrusive power, because other subunits do not know the coalition has influence. A coalition’s power stems from the ability to control the assumptions, goals, and norms to evaluate alternatives. If marketing is the dominant coalition, cost cutting will not get much attention. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to discussion question 4 here to review the concept of unobtrusive power. _________________________________________________________________________________ _________________________________________________________________________________

14.6

Using Power: Organizational Politics

Managers try to gain power to use it to their advantage. Organizational politics is the process of acquiring power and using it to overcome opposition for a desired outcome. To strengthen power, subunits engage in politics. Many have negative images about politics, like politicians campaigning and not keeping promises. Politics are an inevitable part of an organization. It is important to understand how politics work to recognize a skillful politician who gets visible and prestigious assignments. Tactics for playing politics enable individuals and subunits to attain power to accomplish goals. Such political tactics, which stem from sources other than authority, include:

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1. Increasing indispensability. Q. What tactics increase indispensability? A. Increasing nonsubstitutability and centrality increase indispensability. Individuals with specialized skills in an area of concern to an organization are indispensable. Centrality rises by accepting assignments with visibility and developing a network of contacts. 2. Associating with powerful managers. Individuals can work with managers on their way to the top in hopes of ascending the corporate ladder with them. Top managers become mentors, because succession planning is an important responsibility. Q. How can you identify powerful managers? A. Signs of power include reputation, ability to influence decision-making, and control of important resources. Symbols of prestige, such as access to corporate jets, indicate power. Taking advantage of common ties, such as graduating from the same school, is a way of associating with powerful individuals and becoming indispensable. Q. Is this political tactic ethical? A. Answers will vary, but it does creates visibility and individuals won’t ascend the corporate ladder solely on their political ability; talent counts. Politics offers the opportunity to display talent. 3. Building and managing coalitions. Subunit can join to increase power. Coalitions require a trade-off: Manufacturing supports finance if finance supports manufacturing. Top managers must establish good relationships with shareholders and the board. A CEO will fall without board support. Managers need long-term relationships with stakeholders, such as customers, banks, and suppliers. External linkages give top managers political power. Internal linkages increase the chance for promotions. Coalitions change, so managers need to develop coalition-building skills. Co-optation is a way to manage coalitions, making the opposition part of decision-making.

Tactics to make decisions seem like a promotion of organizational interests include controlling the agenda and bringing in an outside expert. Controlling the agenda allows for issues to be addressed by significant decision makers. Conflict stays in the latent or felt stage, because dissenters miss the opportunity to state their views. Managers can bring in a supposedly neutral outsider, but actually the outside consultant represents the dominant coalition and recommends its solution. Opposing groups agree because they think the outsider is objective. The Costs and Benefits of Organizational Politics Coalitions lobby for their interests because the stakes are high. Stakes include control over resources. Politics play a role in strategy and structure choices. Politics can improve decision-making, yet more time could be spent fighting than in making and implementing decisions.

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4. Influencing decision-making. To be successful at politics, power must be coupled with knowing when and how to use it. Unobtrusive power is the most effective, because people do not realize their help in accomplishing another group’s goals.

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To achieve the benefits of politics, an organization must create a balance of power in which all parties recommend solutions and dissenting views are considered. (Fig. 14.5) The benefit of politics is improved decision-making because coalitions engage in a productive debate over alternatives. When resources are allocated to groups that can manage contingencies, value is created. Benefiting from politics assumes that power is conferred on those who can provide the most benefit. Power constantly moves through an organization as unsuccessful managers lose power to successful managers. Q. What is wrong with this assumption? A. Unsuccessful managers may retain their power despite poor performance due to control over property rights. A top-management team can hold all important roles on committees and choose supporters as members. Some CEOs serve as chairmen of the board, which allows for board control. Other top managers centralize decision-making and deny promotions to dissenters.

Organizational Insight 14.3: Power Struggles and Corporate Greed at WorldCom This insight details how the board members at WorldCom failed in their oversight role, costing shareholders billions of dollars. The board members resigned voluntarily and cannot be replaced until the next general meeting. Q. Why do CEOs and directors try to keep their positions? What role do large institutional shareholders play in the balance of power? A. CEOs and directors want to keep their power and strong property rights. They receive millions of dollars in salaries, bonuses, and stock options plus private planes and chauffeured cars. Large institutional shareholders, angry at abuses of power, influence boards to oust ineffective CEOs. They recommend outside directors less likely to reward poor performance with generous stock options. They want authority to monitor top managers and create a more equitable balance of power. When powerful managers silence dissenters, debate declines, checks and balances dwindle, conflict escalates, inertia increases, and effectiveness declines. The balance of power among stakeholders determines whether power and politics benefit or harm an organization.

Managers should understand the effect of politics on decision-making. Managers should develop a personal power base to influence decision-making and associate with powerful managers and a mentor to obtain power. Managers should seek to maintain a power balance between individuals or subunits to preserve organizational decision-making.

DISCUSSION QUESTIONS AND ANSWERS 1. Why and under what conditions can conflict be good or bad for an organization? Would you expect a higher level of conflict in a mechanistic or an organic structure? Why? Conflict can be good for an organization by overcoming inertia. Because different managers and stakeholders present different views, conflict can improve decision-making and use resources better.

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Managerial Implications: Power and Politics

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Without agreement on priorities and resource allocation, conflict causes performance to decline. Bargaining over decisions keeps decisions from being made. Conflict is higher in a mechanistic structure because a tall organization loses control over its hierarchy. Loss of control results in conflict; people have decision-making responsibility, but lack authority and require approval from others. A flatter organic structure gives lower-level employees decision-making and promotes mutual adjustment. An organic structure has integrating mechanisms to promote cross-functional cooperation. 2. You have been appointed to manage a large R&D laboratory. You find a high level of conflict between scientists in the unit. Why might this conflict be arising? How will you try to resolve it? This conflict results from task interdependence. R&D scientists have reciprocal interdependence; the actions of one affect the actions of others. Different groups of scientists have different goals and compete for scarce resources, such as funding. I would implement an organic structure, such as a product team structure, with decentralized authority and clearly defined authority relationships. Integration should be increased between groups. I would change attitudes by allowing opinions to be aired. 3. Why is it important to maintain a balance of power between different groups of organizational stakeholders? A balance of power is necessary to manage politics and obtain its benefits. This allows for alternative and dissenting views. A balance helps allocate resources to those who can create the most value. A group with dominant power can misuse it. Opposing views are suppressed, checks and balances disappear, conflict escalates, and inertia increases. Effectiveness declines. A balance of power helps achieve the benefits of power and politics. 4. What is unobtrusive power? Why is it so important? Unobtrusive power stems from the ability to control the premises of decision-making. Subunits with similar interests build coalitions to pursue common goals and use their power to influence decisionmaking. Unobtrusive power is important because the coalition controls the assumptions, goals, and norms used to evaluate alternatives. A coalition in favor of differentiation will not consider cost-cutting. Unobtrusive power is important because others think they are promoting organizational goals, but they are being manipulated.

Structure and culture give some subunits more power through control over resources, information, and centrality. An organization controls resources if it generates resources. In a pharmaceutical company, R&D generates resources, so it has power. Structure dictates which subunits receive information. Control over information can lead to influence over opinions. A subunit is powerful if it is central to the organization. In a low-cost culture, manufacturing is central. 6. Discuss how you, as manager of the R&D function in a cosmetic products company, might try to increase your power and the power of your subunit to control more resources in a battle with marketing and manufacturing. I would increase the indispensability of the R&D function by increasing nonsubstitutability and centrality. I would ensure that the function had special knowledge, such as the ingredients to a successful product. I would make contacts with functions to build a network of supporters. I would be visible to powerful managers and build a coalition to influence decision-making by controlling the agenda.

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5. How can the design of the organization’s structure and culture give some subunits more power?

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ORGANIZATIONAL THEORY IN ACTION Each small group consists of top managers at a large reputable pharmaceutical company. The company faces pressures from competition and the government to reduce costs and speed product development. Groups will discuss how the implementation of cross functional teams will affect the relative power of each division. They will discuss the conflict that will likely emerge and make recommendations on how to manage the conflict.

The Ethical Dimension Students debate the ethical implications of CEOs appointing directors who will be evaluating their performance. Use the WorldCom case to show what can happen under these conditions.

Making the Connection Students will find an example of a conflict that occurred between the managers of a company or between the managers and other stakeholders. They will identify the source of conflict and how managers are using their power to influence the decision-making process.

CASE FOR ANALYSIS The Shakeup in GM’s Hierarchy Tall hierarchies have problems. With too many levels and managers, GM experienced communication and motivation problems, leading to conflict and high operating costs. Top management impacts organizational effectiveness, so top managers were replaced in 1992 with individuals who made tough design decisions. Under the new CEO, GM laid off 74,009 workers. Jack Smith flattened the hierarchy by eliminating levels and cutting managers. GM will lay off 50,000 hourly and 24,000 salaried workers. Decisions will be made by managers close to customers. GM hopes to speed up decision-making, increase responsiveness to customers, and reduce bureaucratic costs.

The main source of power in this case is authority. The board has full authority to act in the shareholders’ best interests, which is what they did in this case. They were able to succeed by empowering managers better, which meant that decisions were made much quicker and with the customer in mind.

2. How could organizations better achieve a balance of power at the top of the organization to ensure that politics benefits, rather than harms an organization? The main issue is that when an organization gets too tall, it is easy to lose sight of what the customer really wants. When too much power is concentrated at the top, it is often difficult for the organization to effectively respond to the customer.

ANALYZING THE ORGANIZATION

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1. What kind of power did GM’s board use to oust the company’s old management team? Why were they able to succeed?

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Students analyze power and politics in their organization. They identify sources of power and the subunits that have power from those sources. They determine if politics has been used to resolve conflicts.

TEACHING SUGGESTIONS 1. Point out that some conflict is good, but becomes bad after a certain point. How can a firm tell what is the appropriate amount of conflict? Conflict ceases to be good when so much time is spent negotiating decisions that few actual decisions are made and implemented. An organization can avoid such conflict by maintaining a balance of power. 2. Review the idea that bureaucracy increases conflict. A flatter structure has more clearly defined authority relationships because a tall hierarchy has a long chain of command and a smaller span of control. In a tall, mechanistic structure, people have responsibility for decisions but no actual authority. They get frustrated by having to seek approval from ten people. A flatter structure allows people to make decisions and holds them accountable for their actions. 3. To illustrate how conflict can arise, consider a role-play. You will be the CEO of a consumer electronics company with a functional structure. Ask 16 students to volunteer. Four students are in marketing, four in engineering, four in finance, and four in manufacturing. These four functions each have different goals and compete for resources, but they need each other to bring a product to market. Marketing is the dominant function, so manufacturing’s views were ignored. Show how long time it takes to decide what product to produce. Q. What can this company do to manage conflict? A. It can move to a product team structure, increase integration, and set up a procedural system. 4. To review the sources of power, divide the class into seven groups. The organization is a pharmaceutical company, trying to produce new drugs and has an organic structure. Assign each group one of the sources of power: authority, control over resources, control over information, nonsubstitutability, centrality, control over uncertainty, and control over decision-making premises. Each group makes a suggestion as to what subunit or stakeholder has power stemming from each source. The CEO has authority and control over resources. R&D controls resources, because it generates resources. R&D scientists control information and have nonsubstitutability. R&D has centrality and control over uncertainty. R&D has built a coalition to control decision-making.

A. Functions can increase indispensability by increasing their centrality. They can increase nonsubstitutability, associating with powerful managers, building coalitions, and influencing decisionmaking by controlling the agenda. Students should apply these tactics to specific functions, such as manufacturing, marketing, and finance. 5. To further illustrate the some conflict is good, have students recall a time when a conflict actually made the situation better. We can often relate to this when we consider how a conflict in a personal relationship or a heated discussion with a co-worker actually improved things. This is a good way to understand the benefits and the dynamics of conflict as it applies to organizations. 6. Discuss with students how to effectively play politics. They need to understand that although it has a negative connotation, things like being well connected and saying the proper things at a meeting are all a

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Q. What can weaker functions do to increase power?

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part of organizational life. One can’t say, “I don’t play politics” and expect to get too far in most organizations. Discuss how to play ethically and morally.

CHAPTER 8 ORGANIZATIONAL DESIGN AND STRATEGY IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. To define organizational strategy and examine the sources of core competences. (8.1) 2. To discuss the four levels of strategy: functional, divisional, corporate, and global. (8.1) 3. To explain how each function creates value through lower cost or differentiated products. (8.2) 4. To illustrate that interorganizational strategies achieve core competences. (8.2) 5. To review the importance of structure and culture to functional-level strategy. (8.2) 6. To discuss the four strategies that enlarge the organizational domain. (8.3) 7. To explain that structure should match strategy. (8.3) 8. To demonstrate how corporate-level strategies use core competences in new domains. (8.4) 9. To analyze vertical integration, related and unrelated diversification, and the interorganizational strategies to achieve benefits without costs. (8.4) 10. To discuss how to implement strategy across countries. (8.5)

Strategy is an action plan for developing core competences to reach long-term goals and gain a competitive advantage. Core competences stem from specialized resources possessed by functional personnel, organizational resources, and coordination abilities. Strategies that create value and achieve competitive advantage are formulated at four levels: functional, business, corporate, and global. Achieving a competitive advantage at the functional level means gaining a low-cost or a differentiation advantage. Interorganizational strategies, such as long-term contracts, develop functional resources and coordination abilities, which strengthen core competences. Contingency theory examines differences in structural design among the R&D, manufacturing, and sales functions. Culture also affects functional-level strategy. Business-level strategy combines functional level core competences to protect the organizational domain. Two business-level strategies are differentiation and low cost. Four strategies enlarge the organizational domain: market penetration, product development, market development, and diversification. Focus strategy is reviewed. Organizational structure and culture must match business-level strategy. With only a few products, a low-cost organization uses a functional, mechanistic structure. A differentiator needs an organic structure. Other structures include: product, market, geographic, product team, and matrix. A low-cost organization needs cultural values of economy, whereas a differentiator needs values of innovation and quality.

PHAM HOANG HIEN, MBA, PG. (CSU)

CHAPTER SUMMARY

Corporate strategy uses core competences attained at the business level to expand into new domains. Corporate-level strategies are considered with advantages and disadvantages: vertical integration, global expansion, related diversification, and unrelated diversification. Structure and culture must match corporate-level strategies. Unrelated diversifiers use the conglomerate structure, whereas diversifiers use either the multidivisional or the multidivisional matrix structure. Related diversifiers foster cooperative values, and unrelated diversifiers promote economical values. Interorganizational strategies, such as strategic alliances, increase value without the bureaucratic costs associated with vertical integration, related diversification, and unrelated diversification.

Matching strategy, structure, and culture is difficult. Managers overestimate the benefits of a strategy and underestimate costs. Although the environment is uncertain, managers must forecast the value created from a strategy, control bureaucratic costs, and link strategies at all four levels. 8.1

Strategy and the Environment

Organizational strategy is a plan to use core competences to achieve competitive advantage and outperform competitors. Core competences are skills and abilities in value creation activities that lead to superior efficiency, quality, innovation, or customer responsiveness. Q. Name some core competences. A. Manufacturing, marketing, materials management, R&D Q. Why do organizations have strategies? A. Strategies use existing competences to develop new competences to outperform competitors and compete for resources. Resources permit reinvestment in new resources for core competences. The process is a cycle. (Fig. 8.1) Sources of Core Competences

PHAM HOANG HIEN, MBA, PG. (CSU)

There are four strategies for managing the international environment: multidomestic, international, global, and transnational. Company structure should match strategy, which is influenced by the control and coordination required. Vertical differentiation and the need for integration are considered. A global geographic structure, relatively flat and decentralized, is appropriate for a multidomestic strategy, because the need for integration is low. The global product group structure, tall and centralized, is appropriate for international or global strategies, which require a medium to high level of integration. A global matrix or “matrix in the mind” is appropriate for a transnational strategy, which requires a high level of integration. This structure is flat to ensure fast responsiveness and centralization and decentralization of decision-making,

A competitive advantage comes from functional and organizational resources. Functional resources stem from the skills of functional employees, such as R&D scientists. Organizational resources stem form a company’s features, including management skills, reputation, equipment, land, and brand name. Both offer a competitive advantage if they are unique and hard to copy. Coordinating resources is a source of core competences. Q. Name some coordination abilities. A. Coordination activities include using control systems, decentralizing or centralizing authority, and promoting shared values. Structure and culture coordinate activities at functional and organizational levels. Functional coordination strengthens core competences, and coordinating activities leads to competitive advantage. Coordination abilities are difficult to imitate. Global Expansion and Core Competences Global expansion creates value by transferring and enhancing core competences, establishing a network, and gaining resources and skills. (Fig. 8.2)

Establishing a global network entails organizing task and reporting relationships among managers, functions, and divisions that connect value creation activities. Q. How can a company lower costs? A. Production can occur in a country with low labor costs. The costs of labor, land, taxes, and raw materials are factor costs. A global network connects activities from various countries and links distributors who sell and service products. Sales volume increases, creating economies of scale that enhance a low-cost advantage. Gaining access to global resources and skills gives an organization a competitive advantage. U.S. companies have Japanese divisions to benefit from total quality management and lean production. Using Global Learning to Enhance Core Competences New skills learned abroad are transferred to the United States and improved; enhanced competences are sent back to foreign operations. After World War II, Japanese companies learned production methods from the United States, improved them, and used this competence to compete globally. Four Levels of Strategy

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Transferring Core Competences Abroad Creating value by transferring core competences to a foreign market facilitates low-cost or differentiated products and a competitive advantage.

Strategy formulation occurs at the functional, business, corporate, and global levels. Creating value at one level impacts the others. Functional-level strategy is a plan to create core competences to enhance functional and organizational resources, and coordination abilities. Functional managers analyze the functional environment to be aware of activities surrounding the company’s domain. (Fig. 8.2) Merging functional core competences to achieve competitive advantage is businesslevel strategy. The top-management formulates business-level strategy by positioning the company to compete for resources. Functional- and business-level strategies protect and enlarge the existing domain, but corporate-level strategies expand into new domains. Corporate-level managers combine value creation skills to improve the company and divisional competitive position. Strategies create more value collectively than independently.

8.2

Functional-Level Strategy

Each function aims to create a core competence for a competitive advantage, achieved by performing activities at a cost lower than competitors’ or providing unique products. Strategies to Lower Costs or Differentiate Products Q. How can functions add value by lowering costs? A. Manufacturing can develop flexible manufacturing. Human resources can reduce turnover and absenteeism. Materials management can use just-in-time inventory and develop long-term relationships with customers and suppliers. Sales and marketing can increase demand, which lowers production costs. R&D can improve manufacturing efficiency. (Table 8.1) A. How can functions add value through differentiation? Q. Manufacturing can improve product quality and reliability. Human resources can hire and train skilled personnel. Materials management can develop long-term relationships to ensure high-quality inputs. Sales and marketing can promote brands and target customer groups. R&D can create new and improved products. (Table 8.1)

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Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________

Functional-Level Strategy and Structure Structure and culture are important to functional-level strategy because coordination abilities, leading to core competence, result from structure. Lawrence and Lorsch found that functional differentiation and integration impact performance. Each department develops an orientation specific to its tasks and responds to its particular environment. Contingency theory proposes that each function creates a structure to match its resources. (Fig. 8.3) Q. Describe the best structure for R&D. A. R&D needs an organic structure, flat and decentralized with mutual adjustment to facilitate innovation. Norms and values are based on self-control and team control. American manufacturing uses a mechanistic structure, a tall hierarchy with centralized decision-making; work is controlled by the speed of the production line and standardization achieved through rules. Q. Has this structure led to a core competence?

Q. Describe the structure of the sales function. A. Sales has a flat, decentralized hierarchy, because it uses incentive pay and standardization to control salespeople. Mutual adjustment is unimportant because salespeople work alone. This structure is less mechanistic than for manufacturing, but more than for R&D. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Functional-Level Strategy and Culture Q. Why is culture important for functional-level strategy? A. Culture, shared values that control behavior, is significant because it is hard to copy, making it a competitive advantage. Structure can be duplicated, but culture becomes ingrained in employee behavior. To achieve core competence, firms must select property rights, functional structure, and functional managers that improve coordination ability. R&D uses a flat structure and

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A. No. Japan, a country with a core competence in manufacturing, has a more organic structure and allows workers to participate in decision-making and make incremental improvements.

small teams to stress cooperation. Employees can be given the property right of profit sharing, and people with similar values can be hired. Q. How does culture affect coordination abilities in manufacturing? A. In the U.S., emphasis is on reducing the skill level, giving managers control, and creating a mechanistic hierarchy. This structure fosters a culture that decreases production costs. Empowering workers and promoting cooperative values give Japanese companies improved product quality. Culture develops core competences. Managerial Implications: Functional-Level Strategy A functional manager should identify functional resources or coordination abilities that lead to a core competence. Managers should study competitors to see what methods are used to control functional activities. Managers should consider how functional structure and culture affect resources and abilities. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Business-Level Strategy

Business-level strategists combine functional core competences to seek environmental opportunities. They choose and manage the domain in which the company uses its core competences for a competitive advantage, which in turn allows the firm to protect and enlarge its domain. Strategies to Lower Costs or Differentiate Products After selecting its domain, an organization positions itself to compete, using low cost or differentiation. Low-cost value creation provides customers with low-priced goods or services. Differentiation provides unique products for customers who are willing to pay top prices. Q. What companies pursue a low-cost strategy? A. Taco Bell, Wal-Mart, and Nucor Q. What companies pursue a different ion strategy? A. Neiman-Marcus and the Ritz-Carlton Hotel The strategy selected determines direct competitors. Wal-Mart pursues a low-cost strategy and directly competes with K-mart. Some organizations pursue both strategies, but achieving both low costs and differentiation requires strong core competences. Focus on New Information Technology: Amazon.com, Part 4

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8.3

Jeff Bezos used Internet information technology to sell books online, making it possible to develop both a low-cost and differentiation strategy and outperform existing bookstore competitors. Q. Describe Amazon’s differentiation strategy. A. The ability of a computerized online catalogue to describe and make available every book in English offered customers a selection that could not be rivaled, even by large bookstores. Q. Describe Amazon’s low-cost strategy. A. The use of information technology to interface inexpensively with book publishers, distributors, and customers, allowed Amazon to offer customers books at discounted prices.

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _3_ _h_e_r_e_ _f_o_r_ _e_x_a_m_p_l_e_s_ _o_f_ _c_o_m_p_a_n_i_e_s_ _u_s_i_n_g_ _l_o_w_-_c_o_s_t_ _a_n_d_ _d_i_f_f_e_r_e_n_t_i_a_t_i_o_n_ _s_t_r_a_t_e_g_i_e_s_._ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ____________________________ Strategies to Enlarge the Organizational Domain (Fig. 8.4) 1. Market penetration uses current products to increase market share in the existing domain. Q. How can a firm sell more existing products to current customers? A. It can increase advertising, marketing, or the number of retail outlets. Competitors use this strategy to increase uncertainty for those without a low-cost or differentiation strategy. The environment becomes poorer, more complex, and more dynamic, and competitors battle for resources. Dominant organizations use interorganizational strategies to merge or take over competitors.

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Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________

Q. What interorganizational strategies are used? A. Forming alliances with suppliers gains control over inputs. Weak competitors form alliances to develop core competences. 2. A product development strategy uses core competences to provide new products for its existing domain. Improved products attract customers and cost less. 3. A marketing development strategy involves finding new domains for existing products. Q. What companies pursue a market development strategy? A. Arm & Hammer promotes noncooking uses of baking soda. Honda sells cars in foreign markets. Q. What interorganizational strategies help enter new markets? A. Strategic alliances

Focus strategy, another business-level strategy, uses resources to concentrate on one market segment. Q. What companies pursue a focus strategy? A. Rolls Royce and Pizza Hut Q. What are the advantages of a focus strategy? A. A company increases customer responsiveness and avoids direct competition with large low-cost or differentiated companies. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _2_ _h_e_r_e_ _t_o_ _g_i_v_e_ _e_x_a_m_p_l_e_s_ _o_f_ _s_t_r_a_t_e_g_i_e_s_ _t_o_ _e_n_l_a_r_g_e_ _a_ _f_i_r_m__ s_ _d_o_m_a_i_n_._ ______________________________________________________________________ ______________________________________________________________________ _______________________

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4. A diversification strategy entails entering a new domain with new products. Diversifying offers new competitors in a new environment.

______________________________________________________________________ ______________________________________________________________________ ___________ _ _Organizational Insight 8.1: PepsiCo Chooses a New Structure To battle against Coca-Cola, PepsiCo decided to change its strategy and structure. Q.

Describe the changes at PepsiCo.

A. It spun off the restaurant business to focus on the soft-drink business. The CEO decided to reengineer the company with a new pattern of horizontal differentiation, instead of a geographic structure, with customers in each region serviced by representatives from bottling operations. Q. What new structural additions were made? A. PepsiCo created a marketing research and development function responsible for coordinating all marketing activities throughout all regions. Bottling follows the lead of marketing. Decisions are centralized, yet the new structure is flatter and more streamlined. As a result, profits have increased.

A differentiation strategy requires the skills for unique products, developed and marketed ahead of competitors. Q. What structure does a differentiator have? A. An organic structure permits decentralization and cross-functional teams. A low-cost strategy monitors functional activities to decrease product development costs. Manufacturing and materials management are central functions. Other functions tailor skills to the goal of low-cost production. New or improved products are developed when customers demand it; low-cost producers stay behind differentiators to reduce costs. Q. Describe the structure of a low-cost organization. A. It has a mechanistic structure with centralized decision-making for control over functional activities and costs. A mechanistic structure offers adequate coordination as rapid response is unnecessary. Q. Which type of company operates in an uncertain environment?

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Business-Level Strategy and Structure Using core competences to achieve a competitive advantage depends on structural design. (Fig. 8.5)

A. Differentiators compete in a complex, dynamic, uncertain environment, whereas lowcost companies compete in a stable environment. Differentiators have a higher level of differentiation and integration. Because integration and differentiation are expensive, low-cost companies use the simplest structure possible. Three factors affect structural choice: 1. Offering a wide product range requires more control over product development, marketing, and production. 2. Attracting new customer groups requires a structure able to meet customer needs. 3. Increasing new product development requires a structure with increased functional coordination. Low-cost companies concentrate on a few products and imitate differentiators, so they need the simplest structure possible, a functional structure. Differentiators produce many products to satisfy many customer groups, so they need a structure that facilitates cross-functional cooperation, a product structure.

A. A market or geographic structure is appropriate to meet customer needs. For rapid product development and quick customer responsiveness, a product team or matrix structure is appropriate. Business-level strategy must match structure to use resources for a competitive advantage. Business-Level Strategy and Culture At the business level a company needs values and specific norms and rules to use resources effectively. Different functions have subunit orientations, yet values bridge communication and coordination issues. Q. What are the values of a low-cost company? A. Emphasis is on frugality and economy, and goals would reflect these values. Marketing would attract new customers efficiently. Q. What values would a differentiator have? A. Values would foster innovation, quality, and excellence with product development and marketing as key functions. Notes_________________________________________________________________ ______________________________________________________________________

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Q. What type of structure satisfies many customer groups?

______________________________________________________________________ ___________________________________________ Organizational Insight 8.2: How Culture Derailed the Merger between AHP and Monsanto Two pharmaceutical companies, American Home Products (AHP) and Monsanto, were to merge but the cultures were too different. Q. Why did AHP want to buy Monsanto? A. Industry analysts felt that the merger would provide important differentiation and lowcost advantages for the combined firm. Specifically, the product range would be broader. Q. Why did the merger fail?

Managerial Implications: Business-Level Strategy Members of different functions should examine interactions to reduce costs or develop differentiation. Managers should look for opportunities to protect and enlarge the firm’s domain. Managers should assure that structure and culture are congruent with strategy. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _____________________________________ _ _·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _1_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _d_esigning a structure and culture for core competence. ______________________________________________________________________ ______________________________________________________________________ ______________________

8.4

Corporate-Level Strategy

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A. AHP has a culture characterized by a short-term focus on bottom-line profits. Managers are cost conscious and invest in products with a short-term payoff. Monsanto has a long-term orientation driven by a desire to produce innovative products, which only pay off in the long run.

Corporate-level strategy searches for new domains to use low-cost or differentiation core competences. Existing competences are employed in new domains, so corporatelevel strategy builds on business-level strategy. (Figs. 8.7 and 8.8) Vertical integration involves entering new domains that overlap the core domain as an input or output. Q. Name the advantages of acquiring suppliers or distributors. A. Profits retained when earned by suppliers; lower production costs; control over reliability and quality; control over inputs for product uniqueness; and opportunism avoided faced with few suppliers. Controlling distribution results in lower costs or differentiation. Q. Name the disadvantages of vertical integration. A. Bureaucratic costs rise, and a larger, vertically integrated company experiences communication and coordination problems.

A. There are interorganizational strategies such as minority ownership, strategic alliances, and long-term contracts to manage supplier and distributor relationships. The benefits from any strategy should outweigh costs. Related diversification creates value by using an existing core competence to create a low-cost or differentiation advantage in a domain related to the core domain. The B.A.R and Grille opened up a pizza restaurant. Unrelated diversification takes advantage of one specific core competence: a management team’s ability to control a group of organizations. Inefficient companies are restructured to create value. Designing an efficient structure is crucial because poor performance can result from high bureaucratic costs. Unrelated diversification involves managing from a profit perspective; businesses are bought and sold based on return on investment. Seeking ways to enter new domains, companies pursue all three corporate-level strategies: vertical integration, related diversification, and unrelated diversification. When pursuing opportunities, companies expand and digress from the original domain. Corporate-Level Strategy and Structure Corporate-level strategies must be tied to the right structure. Operating in more than one domain requires a multidivisional structure, self-contained divisions and a corporate headquarters staff. Variants of this structure fit related and unrelated diversification.

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Q. What are alternatives to vertical integration?

Conglomerate Structure and Unrelated Diversification Unrelated diversification does not involve managers in routine operations. After restructuring, management monitors each company’s performance, acts only when necessary, and uses a conglomerate structure. A conglomerate structure makes each business a self-contained division with a small headquarters staff because activities between divisions need no coordination. Communication flows from top down and pertain to bureaucratic costs. (Fig 8.8) Structures for Related Diversification Related diversification involves sharing resources, requiring a high level of coordination and integration. Information flows laterally between divisions and vertically between corporate headquarters and divisions; more complex integrating mechanisms, such as integrating roles and teams, are needed. Coordination is difficult, because of conflict over resources. To achieve gains, the organization needs a large corporate headquarters staff to coordinate interdivisional activities.

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _5_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _s_t_r_a_t_e_g_i_e_s_ _f_o_r_ _e_n_t_e_r_i_n_g_ _n_e_w_ _d_o_m_a_i_n_s_._ _ ________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________________ _ _O_r_g_a_n_izational Insight 8.3: Hitachi Ltd. Hitachi, a major computer company, has 28 related divisions, which depend on electronic and computer technology. Each division has R&D and decision-making authority. Hitachi believes that the benefits of related diversification outweigh the high bureaucratic costs. Q. How does Hitachi manage related diversification? A. Hitachi uses integrating mechanisms to coordinate activities. Executives in integrating roles control information among divisions, and a corporate R&D keeps divisional R&D labs informed. Telecommunications and teleconferencing allow

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Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________

scientists to share information. The company has a strong culture based on cooperation and teamwork. Related diversifiers may choose a multidivisional matrix structure by coordinating divisions and corporate headquarters. Related diversification requires coordination, so bureaucratic costs are much higher. Bureaucratic costs associated with unrelated diversification are low, because divisions do not coordinate. Corporate-Level Strategy and Culture Culture can reduce bureaucratic costs, and values can help manage corporate strategy. A company pursuing unrelated diversification values economy. Q. What values help manage related diversification? A. Related diversifiers promote cooperation, and divisions use common corporate language with each other. Each division has a culture, but the corporate culture overcomes differences. Q. How can a company achieve an innovative and cooperative culture?

Interorganizational strategies allow for gains from related diversification and vertical integration without bureaucratic costs. A joint venture allows two companies to share resources without bureaucratic costs. Long-term contracts provide the benefits of vertical integration. Managerial Implications: Corporate-Level Strategy Managers must analyze the environment to protect existing domains and exploit the firm’s core competences. Managers should evaluate costs and benefits associated with entering a new domain and the costs and benefits of various strategies. Managers must match the firm’s structure and culture to strategy. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 8.5

Implementing Strategy Across Countries

Four basic strategies are used to enter and compete in the international environment: multidomestic, international, global, and transnational. Each takes a different approach

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A. Members can be socialized to the innovative culture through promotions. Managers who share resources can be rewarded. Culture must reinforce strategy and structure. A common corporate culture would not fit a conglomerate structure, as no exchanges among divisions occur, but it would fit a multidivisional matrix structure.

to creating value. These strategies are classified on two dimensions: pressures for local responsiveness and pressures for global integration. (Fig. 8.3) Multidomestic strategy is a reaction to high pressures for local responsiveness; products are tailored to meet customer needs in each country of operation. Wholly owned foreign divisions are created, and core competences are transferred from the home country. Each division has value creation activities, including manufacturing, product design, and marketing, and each has strategic control. Transferring profits and dividends is often the only link between a foreign division and the parent company. Q. Name the advantages of a multidomestic strategy. A. Advantages: Access to resources and skills; a differentiation advantage through combined core competences; becoming the dominant competitor; increased profits; and reduced bureaucratic costs. Disadvantages: Lack of global learning due to little interaction among divisions; missed opportunities for long-term value creation.

Q. Name the disadvantages of an international strategy. A. Limited local responsiveness; higher production costs because manufacturing is located in many countries; no global learning; no access to foreign resources and skills because core competences are exported; and higher bureaucratic costs because resource transfers are coordinated. This strategy, used by U.S. leaders in mass production and marketing, leads to low-cost and differentiation advantages. Environmental change has brought about new value creating strategies—a global and a transnational strategy. Global strategy responds to pressures for global integration. A standardized product is manufactured at a few low-cost locations and sold globally with limited customization. Q. Describe the advantages of this strategy. A. Economies of scale with decreased costs and prices, and the competitive advantage of a high quality product; and a network with value creation functions established in lowcost markets plus long-term contracts with low-cost suppliers Q. Describe the disadvantages of this strategy.

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International strategy does not respond to high pressures for local responsiveness or global integration. It merely duplicates domestic operations abroad. Core competences in manufacturing and distribution are transferred; R&D, product development, and marketing are centralized. Foreign divisions do not customize products, so customers get a standardized product. Coca-Cola uses this strategy.

A. High bureaucratic costs because of centralization; controlled resource transfers by corporate headquarters; lack of local responsiveness, decreasing product demand; no learning to differentiate products; no differentiation Transnational strategy responds to pressures for global integration and local responsiveness, combining the advantages of global strategy (value creation activities located in countries with low factor costs) and multidomestic strategy (value creation activities located in foreign countries for customization). Low-cost and differentiation advantages are achieved by transferring core competences to countries with low-cost and differentiation advantages and by creating a network for skill transfer among domestic and foreign divisions. Divisions build on skills received and transfer improved products and processes. Global coordination results in low-cost, high-quality products. Q. What are the disadvantages? A. Higher bureaucratic costs, complex design structure and control systems due to a high level of coordination and customization

Multidomestic strategies typically use global-geographic structures. (Fig.8.9). International strategies typically use global product group structures with a product group headquarters. (Fig. 8.10) Global strategies typically use global product group structures. (Fig. 8.10) Transnational strategies typically use a global matrix structure. (Fig. 8.10)

DISCUSSION QUESTIONS AND ANSWERS 1. How should an organization design its structure and culture to obtain a core competence in manufacturing and in research and development? Successful R&D requires skills to be used in innovative ways; coordination is needed to develop new products. Obtaining a core competence in R&D requires a flat, decentralized, organic structure with mutual adjustment among teams. The culture should promote self-control, team control, cooperation, and innovation.

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Implementing Strategies There are various structures suitable to each strategy (Table 8.1)

A core competence in manufacturing requires cost control, so a tall, centralized, mechanistic structure is typical, with standardization for control. Still, a more organic structure allows workers to participate in decision-making, improves quality, and reduces costs, leading to a core competence. The company could use performancebased pay. 2. Pick an organization like a restaurant or a department store and analyze how it might pursue (a) a market penetration strategy (b) a product development strategy, and (c) a market development strategy. Answers will vary. A restaurant offers American food, such as chicken, in a nice atmosphere. a. This restaurant decides on a market penetration strategy by increasing advertising and promotion. It offers buy-one-get-one-free coupons to attract customers. b. This restaurant chooses a product development strategy by improving the food. It offers new items, such as spicier chicken, to retain its customers and improves service. c. This restaurant chooses a market development strategy by expanding into new regions. The restaurant is popular in the Southwest and might expand to the Midwest and to Mexico.

A low-cost strategy uses core competences for low-cost products targeted at customers who want low prices. New products are developed according to consumer demand. A differentiation strategy uses core competences for products with unique features for customers who value uniqueness and pay top price. Differentiation requires strong competences in development and marketing and entails rapid innovation to introduce products in advance of competitors. To maintain its differentiated advantage, a biotechnology company needs a flat, decentralized, organic structure with mutual adjustment as the primary integrating mechanism. The culture should foster cooperation, innovation, and quality and reward employees for teamwork and new ideas. To maintain its cost advantage, a low-cost fast-food restaurant needs a mechanistic structure to control costs with standardization. The culture should foster economy and frugality and reward employees for lowering costs. 4. Compare the competitive advantages enjoyed by a large restaurant chain, such as Steak and Ale or Red Lobster, and the sources of competitive advantages enjoyed by a small, local restaurant.

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3. What is the difference between a low-cost strategy and a differentiation strategy? How should a differentiated biotechnology organization and a low-cost fast-food organization design their structures and cultures to promote their respective competitive advantages?

Red Lobster’s competitive advantage is based on differentiation, with a core competence in marketing to achieve name recognition. Costs are controlled through volume buying. All functions contribute to this differentiation. Cooks ensure high quality food. Human resources hires and trains competent personnel. Marketing targets seafood lovers. Red Lobster has the resources to introduce new products. A small local restaurant’s competitive advantages stem from quick response to customers. By pursuing a small market segment, the restaurant remains close to customers and has the flexibility to change the menu and decor. A large restaurant conforms to company standards. The restaurant avoids direct competition with large differentiators or low-cost competitors by focusing on one market segment. 5. Why would an organization choose a corporate-level strategy to expand its value-creation activities beyond its core domain? Discuss how an organization’s structure and culture might change as the organization begins to enter new domains.

6. How and why do bureaucratic costs increase as a company goes from a multidomestic to an international to a global to a transnational strategy? Bureaucratic costs depend on pressures for global integration and local responsiveness. A multidomestic strategy has low bureaucratic costs due to lack of coordination among divisions and headquarters. With an international strategy, costs rise to coordinate activities with divisions. With a global strategy, costs rise more due to centralized decision-making and resource transfers in the global network. The transnational strategy has the highest bureaucratic costs because of coordinating resources and customizing products. Coordinating activities require a complex structure with costly complex integrating mechanisms. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: What Kind of Supermarket? In small groups, a team of investors is planning to open a new supermarket. Each group lists the current supermarket chains, their strategies, and functional strengths and weaknesses. Each group recommends a strategy. The Ethical Dimension

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Expanding makes sense if more value creation cannot occur in the core domain, and resources are available to enter new domains. In new domains, a firm needs a complex structure such as the multidivisional structure. Structure and culture depend on the strategy pursued. Unrelated diversification fosters economic values; related diversification fosters cooperation. Expansion increases bureaucratic costs, resulting in a taller structure that could stifle innovation. Structure and culture must be reevaluated as a firm changes strategies.

Students examine the issue of bribery, and why the U.S. adopts the stance that it is illegal, even if other cultures accept this as a norm. Making the Connection Students will find an example of a company pursuing a business-level or a corporatelevel strategy and explain why the strategy was chosen. They will determine whether or not the strategy created value and describe the effects of the strategy on structure and culture. CASE FOR ANALYSIS

1. What global strategy is Levi Strauss pursuing? Is it effective? Levi Strauss is pursuing a transnational strategy. Levi’s is seeking to both reduce costs and provide customer responsiveness. Production facilities are located around the world to take advantage of low cost foreign labor. However, Levi’s wants to tailor its jeans to local customers; foreign subsidiaries are responsible for marketing. For example, Asia may offer more smaller size jeans. Other countries desire various colors. Moreover, Levi’s transfers knowledge to its subsidiaries. For example, marketing knowledge learned on Decker’s in the U.S. was transferred to Europe. 2. What structure does Levi Strauss use to implement its strategy? To implement its transnational strategy, Levi Strauss uses a network structure. Design is performed in the U.S. and foreign partners produce and distribute products. A partner will be replaced if it doesn’t meet Levi’s standards. Analyzing the Organization Students will examine the domain that the organization serves, the market that it competes in, and the strategies used to create value for its stakeholders. TEACHING SUGGESTIONS 1. To illustrate how each function is responsible for developing core competences, divide the class into the five functions: manufacturing, human resource management, materials management, sales and marketing, and research and development. These functions work for a fast-food restaurant that specializes in hamburgers and is pursuing a low-cost strategy. Each develops core competences that lead to a low-cost competitive advantage. (Table 8.1 ) Students should give specific examples such as selling hamburgers for 49 cents.

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Levi Strauss’s Goes Global This case demonstrates how a company can pursue a transnational strategy. Levi Strauss has located production facilities around the globe and customizes its products to local tastes. Foreign subsidiaries are responsible for marketing. It is also transferring knowledge abroad. To implement its strategy, Levi’s established a network structure. Design is performed in the U.S. and foreign partners produce and distribute products.

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2. Combining competences can protect or enlarge a company’s domain. The class is divided into four groups; each group works for a low-cost fast-food restaurant and uses one of the four strategies to enlarge its domain: market penetration, market development, product development, and diversification. Each group lists a specific way to enlarge its domain (e.g., market penetration through increased advertising). 3. In six groups, functional, product division, product team, geographic, conglomerate, and multidivisional, students match structure to strategy. The groups must be specific. If the strategy is differentiation, each states how the company differentiates (e.g., products or customers). 4. Invite a manager from a local company to speak to the class about the company’ strategies, culture and structure. If the company is large, have students get information from the company web site before the presentation (consider FedEx, UPS, or Wal-Mart). 5. A role-play with five students demonstrates the difficulties of a transnational strategy. One student is the CEO of the parent company and stresses divisional cooperation, low costs, and local responsiveness. One student is a foreign manager for France and one for England. One student is a product manager for Europe and one an individual business division manager. The product manager expects the division manager to coordinate resources globally. The manager for England wants to do what is good for England. England refuses to cooperate with France. This conflict prevents the organization from achieving the benefits of a transnational strategy, yet this structure increases bureaucratic costs. What can the company do? The class explains that an international culture and manager network could remedy the situation. 6. The class is divided into eight groups to show that strategies are chosen to respond to pressures for global integration and local responsiveness, and that structure and culture matched strategies. There are four companies, each assigned to two groups. Each group de_t_e_r_m_i_n_e_s_ _t_h_e_ _m_o_s_t_ _a_p_p_r_o_p_r_i_a_t_e_ _s_t_r_a_t_e_g_y_,_ _s_t_r_u_c_t_u_r_e_,_ _a_n_d_ _c_u_l_t_u_r_e_ _f_o_r_ _i_t_s_ _c_o_m_p_a_n_y_._ _ _ _·ð _T_h_e_ _f_i_r_s_t_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _a_ _f_a_i_r_l_y_ _s_t_a_b_l_e_ _i_n_d_u_s_t_r_y_,_ _b_u_t_ _f_o_r_e_i_g_n_ _c_u_s_t_o_m_e_r_s_ _d_e_m_a_n_d_ _r_e_s_p_o_n_s_e_ _t_o_ _l_o_c_a_l_ _c_o_n_d_i_t_i_o_n_s_ _(_a_ _m_u_l_t_i_d_o_m_e_s_t_i_c_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _g_e_o_g_r_a_p_h_i_c_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _s_e_c_o_n_d_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _a_n_ _i_n_d_u_s_t_r_y_ _i_n_ _w_h_i_c_h_ _c_o_m_p_e_t_i_t_i_o_n_ _i_s_ _f_i_e_r_c_e_ _a_n_d_ _g_l_o_b_a_l_ _(_g_l_o_b_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _p_r_o_d_u_c_t_ _g_r_o_u_p_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _t_h_i_r_d_ _c_o_m_p_a_n_y_ _w_a_n_t_s_ _t_e_c_h_n_o_l_o_g_y_ _t_o_ _t_r_a_n_s_f_e_r_ _t_o_ _f_o_r_e_i_g_n_ _d_i_v_i_s_i_o_n_s_ _(_a_n_ _i_n_t_e_r_n_a_t_i_o_n_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _p_r_o_d_u_c_t_ _s_t_r_u_c_t_u_r_e_)_._ _·ð _T_h_e_ _f_o_u_r_t_h_ _c_o_m_p_a_n_y_ _o_p_e_r_a_t_e_s_ _i_n_ _m_a_n_y_ _c_o_u_n_t_r_i_e_s_ _a_n_d_ _i_n_ _a_ _d_y_n_a_m_i_c_,_

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_c_o_m_p_e_t_i_t_i_v_e_ _i_n_d_u_s_t_r_y_;_ _c_u_s_t_o_m_e_r_s_ _w_a_n_t_ _t_a_i_l_o_r_e_d_ _p_r_o_d_u_c_t_s_ _(_a_ _t_r_a_n_s_n_a_t_i_o_n_a_l_ _s_t_r_a_t_e_g_y_ _a_n_d_ _a_ _g_l_o_b_a_l_ _m_a_t_r_i_x_ _s_t_r_u_c_t_u_r_e_)_._ _7_._ _S_t_u_d_e_n_t_s_ _w_i_l_l_ _l_o_o_k_ _a_t_ _t_h_e_ _w_e_b_ _s_i_t_e_s_ _f_o_r_ _A_T_&_T_,_ _C_o_c_a_-_C_o_l_a_,_ _a_n_d_ _Dell Computers. How do these companies handle foreign operations? Report findings to the class.

CHAPTER 10 TYPES AND FORMS OF ORGANIZATIONAL CHANGE TEACHING OBJECTIVES 1. To define organizational change as the process by which organizations reach their desired goals. (10.1) 2. To examine the various targets of change. (10.1) 3. To discuss both the forces for change and the resistances to change. (10.2) 2. To contrast the revolutionary and evolutionary approaches to change. (10.3) 4. To explain Lewin’s Force Field Theory of Change. (10.4) 5. To explain and apply the basic steps of action research. (10.4) 6. To examine the various components of Organizational Development. (10.5) CHAPTER SUMMARY

Several forces for change plus resistances to change are examined. The major forces for change are competitive, economic, political, global, demographic, social, and ethical forces. The major resistances to change at the organizational level are structure, culture, and strategy. Resistances at the functional level are differences in subunit orientation and power and conflict struggles. Resistances at the group level are norms, cohesiveness, and groupthink. Resistances at the individual level are cognitive biases, uncertainty and insecurity, selective perception and retention, and habit. Evolutionary change is distinguished from revolutionary change. Reengineering, downsizing, restructuring, and TQM are discussed as methods for change. Included in this are the use of flexible workers and flexible work teams. Change is also viewed through Lewin’s Force Field Theory of Change. The concepts and steps associated with action research are detailed to show how organizations reach a desired future state. Various concepts associated with organizational development are discussed as a tool to help both the organization and the individuals in the organization maximize their effectiveness and achieve their goals. CHAPTER OUTLINE 10.1

What Is Organizational Change?

Organizational change occurs when an organization restructures resources to increase the ability to create value and improve effectiveness. A declining company seeks ways

PHAM HOANG HIEN, MBA, PG. (CSU)

This chapter examines organizational change, including technological change. Technological change requires that organizations learn how to manage the innovation process. Organizational change is defined as the process by which organizations reach desired goals. Planned organizational change creates value for stakeholders.

to regain customers; a growing organization designs new products. Change is prevalent. In the past 10 years, over 50 percent of all Fortune 500 companies have undergone significant restructuring. Targets of Change Organizational change includes changes in four areas: 1.

Human resources are an organization’s most important asset.

Q. What changes are made in human resources? A. Changes include: investment in training, socializing employees, changing norms to motivate a diverse workforce, monitoring promotion and reward systems, and changing top management. 2. Functional resources can be transferred to maximize value creation as the environment changes. Thus, key functions grow in importance. Organizations can change structure, culture, and technology to improve the value created by functions. Q. Give examples of structural and technology changes.

3. Technological capabilities provide new products, change existing ones, and create a core competence. Improving the reliability and quality of goods and services is an important capability. Organizations may need to restructure to achieve the benefits of new technology. 4. Organizational capabilities are imbedded in operations. Organizations use human and functional resources to seize technological opportunities through structure and culture. These four resources are interdependent, so changing one leads to a change in others. Recruiting a team of scientists leads to restructuring a product team. 10.2

Forces for and Resistance to Organizational Change

Organizations face both the forces of change and resistances to change. (Fig. 10.1) Forces of change require change or loss of competitive edge. Competitive forces spur change, because an organization must equal or surpass rivals to sustain a competitive advantage in efficiency, quality, innovation, or customer responsiveness. Managing change is crucial when competing for customers.

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A. A product team culture increases development time. Technology that uses selfmanaged work teams increases productivity and quality.

Economic, political, and global forces, such as the North American Free Trade Agreement (NAFTA) or other economic unions, are significant forces of change. The European Union (EU) has increased to 20 countries. Production in an EU country eliminates tariffs, so Japan produces cars in England to avoid foreign tariffs. The three distinct economic spheres—North America, Europe, and Asia—expect to have more trade within their arena than across spheres. Low-cost competitors, low-cost inputs, and new technological developments are realities of global competition. Organizations may need structural change to enter foreign markets and adapt to different cultures. Demographic and social forces include an increasingly diverse workforce, changing, hiring and promotion. Many workers want to balance work and leisure. Companies need flexibility in scheduling to meet employee childcare needs. Ethical forces place greater demands on firms for honest, corporate behavior, so some firms have hired ethics officers to report offenses or give ethical advice. Organizations protect whistleblowers and foreign employees.

Q. What environmental forces caused these companies to change their practices? A. In this case, it was primarily the general public. Transition into the resistances to change section to discuss what may prevent these organizations from changing immediately. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Resistances to Change can occur at the organizational level, group level, or individual level. Organizational-Level Power and conflict: If change benefits one function at the expense of another, conflict impedes the change process. Powerful divisions, such as IBM’s mainframe division, can sabotage change.

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Organizational Insight 10.1: Nike, Reebok, Adidas, and the Sweatshops These companies came under scrutiny because the countries that they outsourced production to paid very low wages and had extremely poor working conditions. Public outcry is a good example of a force that forces an organization to change.

Differences in functional orientation mean that divisions or functions view problems from various perspectives and seek changes to benefit their own group. If sales fall, R&D wants funding for product development while sales wants to hire more people. Subunit orientations cause coordination problems and slow decision-making. A high level of task interdependence makes change difficult. The greater the interdependence, the more complicated change is. It is more complicated at top levels by affecting the entire organization. Mechanistic Structures are resistant to change by design. People in a mechanistic structure are expected to act a certain way, and are not given the freedom to change. Q. Are mechanistic or organic structures more opposed to change? A. Mechanistic structures are more resistant to change because people behave a certain way and do not adjust their behavior to changing conditions. Not maintaining the ability to act in an organic way results in inertia. Sometimes revolutionary change is needed to adapt the structure.

Group-level resistances to change Group norms: When change results in different task and role relationships, informal norms may become invalid, making a new set of norms necessary. People may resist this. Group cohesiveness, attraction to the group, is helpful, but if it is too high, the group may resist change. The group may work to maintain its position even at the expense of other groups. Groupthink occurs when members ignore negative information to achieve harmony. Individual-level resistances to change Uncertainty and insecurity: Resistance to the uncertainty and insecurity of change results in inertia. Selective perception and retention suggests that people perceive information consistent with their views. If change doesn’t benefit them, they do not endorse it. Habit: People prefer familiar tasks and tend to return to original behaviors, making change.

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Organizational culture, values and norms, cause predictable behavior. The culture itself may cause resistance to change. Some develop conservative cultures that make employees reluctant to take risks. In addition, if property rights are strong, people will protect their position. Only revolutionary change may be strong enough to change culture.

Lewin’s Force Field Theory of Change shows the opposition between the forces for and against change. When the forces are in balance, a company remains in inertia without change. For change to occur, the forces for change must increase while resistance to change decreases. (Fig. 10.2) Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Managerial Implications Managers must continuously monitor the environment to identify the forces for change. Then, they must analyze how the change will affect the organization, and determine which type of change to pursue. 10.3

Evolutionary and Revolutionary Change in Organizations

Evolutionary Change I: Socio-Technical Systems Theory Sociotechnical systems theory contends that managers need a fit between technical systems and social systems or technology and culture. If change occurs, managers must ensure that technology, structure, and culture are matched. Researchers suggest that a team-oriented system promotes values that enhance efficiency and product quality. Total quality management uses sociotechnical systems theory. After World War II, coal mining in Britain changed from small batch to mass production. With small batch, workers needed cooperation and adopted an informal structure. The new technology did not meet productivity forecasts because the new structure abolished the support system and informal relationships that fostered group cohesiveness. Consultants recommended decentralizing authority to the work group. This led to the concept of socio-technical systems theory which argues that managers need to fit or jointly optimize the workings of the technical and social systems. Evolutionary Change II: Total Quality Management Total Quality Management First developed by a number of American consultants, including Demming and Juran, total quality management (TQM) was developed to make flexible work teams more

PHAM HOANG HIEN, MBA, PG. (CSU)

Change is classified as evolutionary change, gradual and incremental, or revolutionary change, sudden and drastic. Evolutionary change adds small adjustments to strategy and structure to handle environmental changes. Revolutionary change results in new operating methods, goals and structure. Three ways to implement revolutionary change are reengineering, restructuring, and innovation.

efficient. The goal of TQM is continuous improvement to decrease costs, enhance quality, and eliminate waste. (Table 10.2) The implementation of TQM begins with the commitment to quality. Employees aim to improve customer service delivery. Manufacturing aims for fewer defects. Culture must value TQM, and quality circles develop TQM norms in functional areas. TQM empowers employees, letting them design efficient procedures and control quality. Control is attained by mutual adjustment and decentralization. Costs are reduced as workers aim to improve quality, replacing numerical targets with a focus on customer service. Quality circles are groups of workers who meet regularly to discuss how to improve performance. Organizational Insight 10.2: Citibank uses TQM to Increase Customer Loyalty Citibank implemented an organization-wide TQM program designed to address the main customer complaint that was associated with transactions taking too long. By examining the processes, the TQM program reduced the number of handoffs needed to process a loan request by 75%. In addition, the customer response time was reduced from several hours to 30 minutes.

A. There are many different reasons, but some sources relate to managers having to give up power and decision-making ability, it changes their routine (habit), and is a much larger change than many organizations first anticipate. It needs to become a way of life in an organization as opposed to a quick-fix program. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Evolutionary Change III: Flexible Workers and Flexible Work Teams In implementing socio-technical systems theory and TQM, many organizations are finding it easier to achieve their goals by using flexible workers and teams. Flexible workers can be transferred between departments and functions as demand changes. Q. What are the advantages of flexible workers? A. Quick response to environmental changes; reduced boredom and increased incentives for quality;

PHAM HOANG HIEN, MBA, PG. (CSU)

Q. Why would managers resist this type of positive organizational change?

better understanding by learning one another’s tasks; and combining tasks to increase efficiency and reduce costs. Flexible work teams are groups of employees responsible for completing a stage of production. Groups of assembly line workers are assigned responsibility for one stage of manufacturing, such as producing a car transmission. A flexible work team is selfmanaged; members jointly assign tasks and transfer from one task to another. To produce cars, different teams assemble different components and deliver those components to the final-product work team. Customer demand determines team activities as each team alters activities to the pull coming from the output side of production. (Fig. 10.3) Organizational Insight 10.3: Flexible Work Teams at Globe Globe Metallurgical Inc., a specialty steel producer, wanted to implement flexible work systems, but the union refused to cooperate.

A. Globe wanted flexible work systems, so the union went on strike. During the strike, 10 managers and 35 employees controlled two of the five furnaces. Productivity increased through cooperation; seven workers, one from each function, operated one furnace. A team leader coordinated the work and schedules. After the strike, Globe needed 120 workers compared to the previous 350 to run five furnaces. Now, employees also participate in profit-sharing. Flexible work teams reduce costs because a quality control function is not necessary; employees control quality during the conversion process. Flexible work teams try to improve efficiency. New ideas begin in quality control circles, meetings to improve productivity. Experienced employees train new members, and everyone is responsible for hiring new workers. A team culture emerges, and managers merely facilitate activities and help develop improved procedures. Organizational Insight 10.4: GM and Toyota Give Plant a New Lease on Life GM closed its Freemont plant in 1981 due to poor productivity and then formed a joint venture with Toyota, New United Motors Manufacturing Inc. (NUMMI), using Japanese management techniques. Q.

Describe the teams at NUMMI.

A. NUMMI divided workers into 350 flexible work teams, consisting of five to seven members and a team leader. Each worker performs the tasks of others, and jobs are rotated. Workers try to improve on tasks and monitor quality. Teams design jobs, and managers offer support and supervise activities. NUMMI has no layoffs and provides training, plus control over the production line. By 1986 Fremont doubled its previous

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Q. What happened when work teams were introduced at Globe?

productivity and surpassed any other GM plant. Drug abuse and absenteeism fell sharply. Flexible workers and teams result in reciprocal task interdependence. Research has shown that effective teams increase efficiency and organizational performance with no change in technology. These methods also apply to service organizations. McDonald’s uses a just-in-time inventory system. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Revolutionary Change I: Reengineering Reengineering, a term popularized by Hammer and Champy, involves rethinking business processes, activities that cross functional boundaries. Processes, not functions, are the focus of attention. Reengineering involves reorganizing a process, such as materials management, to create value. Vertical and horizontal communication and coordination are difficult because purchasing, production control, and distribution have their own hierarchies.

Slow production and increased costs lead companies to redesign materials management. (Fig. 10.4) Three areas of responsibility can be integrated into one function with one hierarchy of managers, and this arrangement improves communication and coordination. (Fig. 10.4b) Steps for successful reengineering: organize around outcomes not tasks; have those who use the output of the process perform the process; and decentralize decisionmaking to the point where the decision is made. Reengineering can improve integration between functions and solve control problems. If a company becomes involved in large, complex activities, it needs a more complex structure. Organizational Insight 10.5: How to Stay on Top in the Greeting Card Business Hallmark discovered that once a new design for a card was printed, it took about 3 years to get the product to the market. Work teams examined the business process, and now the product reaches the market in a matter of months. Q. Are these the result of TQM or reengineering?

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Managers focus on business processes, which is any activity that cuts across functional boundaries.

A. The two concepts compliment each other. Hallmark needed to reengineer in order to provide customers with a higher quality product. TQM is a continuous process, so Hallmark should continue to find ways to produce products better, cheaper, and faster. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ E-Engineering is a term used to refer to companies attempts to use all kinds of information systems to improve performance. Revolutionary Change II: Restructuring Restructuring is a method used to change task and authority relationships to improve organizational effectiveness.

The negative effects of downsizing include overworked managers and lost opportunities. Companies that fail to control growth must downsize to remain competitive. Revolutionary Change III: Innovation Innovation is the successful use of skills and resources to create new technologies or new goods and services. 10.4

Managing Change: Action Research

Lewin’s Force Field Theory of Change shows the opposition between the forces for and against change. When the forces are in balance, a company remains in inertia without change. For change to occur, the forces for change must increase while resistance to change decreases. (Fig. 10.5) Action research is a strategy for generating and acquiring knowledge that managers can use to define an organization’s desired future state. It consists of the following steps (Fig. 10.6): Diagnoses of the Organization Managers must first recognize the existence of a problem that needs to be solved. This is done by identifying a gap between desired performance and actual performance.

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The drive to decrease bureaucratic costs results from competitive pressures. Mergers and acquisitions in many industries such as banking have led to downsizing because fewer managers are needed. Other companies have reduced staff to match competitors.

Determining the Desired Future State After identifying the present state, the next step is to identify where the organization needs to be in the future. Implementing Action Implementation is a 4-step process. First, managers identify possible impediments to change at all levels. The second step is to decide who will be responsible for actually making the changes. External change agents may be used, which are outside consultants who specialize in managing change. Internal change agents are managers from within that are knowledgeable about the situation. The third step is deciding which specific strategy to use to unfreeze, change, and refreeze the organization per Lewin’s model.

Evaluating the Action is the final step in the process. Managers assess the degree to which the changes have accomplished the desired objectives. Institutionalizing Action Research Like TQM, action research must be a habit or a norm for every organizational member in order to be effective. To assist this, members at all levels of the organization must be rewarded for being part of successful change efforts. Managerial Implications Managers must develop criteria to evaluate whether a change is necessary, and carefully design a plan that minimize resistance. 10.5

Organizational Development

Organizational Development is a series of techniques and methods that managers can use in their action research program. The goal is to improve organizational effectiveness and to help people reach their potential. OD Techniques to Deal with Resistance to Change The following are tactics that managers can use to deal with resistance to change.

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Top-down change is implemented by managers at a high level in the organization, knowing that the change will reverberate at all organizational levels. Bottom-up change is implemented by employees at low levels and will gradually rise through the organization.

Education and Communication- One impediment to change is that participants are uncertain about what is going to happen. Providing them information reduces resistance. Participation and Empowerment- These are key elements of most TQM programs. People that are involved in the change and decision-making process are more likely to embrace rather than resist. Organizational Insight 10.7: Competitive Advantage Achieving Change Through Empowering Workgroups This case shows how Clorox empowered workers, creating middle managers that have new responsibilities now that the empowered workgroup is making more decisions. Q. Are these new “non-manager managers” needed now that the work group is making most decisions?

Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Facilitation- People need both training and time off to deal with the stressful effects of major organizational change. Bargaining and Negotiation- Change causes conflict, and bargaining and negotiation are the major instrument used to resolve conflict. Manipulation- Sometimes senior managers need to intervene, as politics shows that powerful managers have considerable ability to resist change. Coercion- When all else fails, some individuals need to be threatened with dire consequences in order to get them to change. OD Techniques to Promote Change Counseling, Sensitivity Training, and Process Consultation- Recognizing that each individual is different also requires them to be treated or managed different. Sometimes counseling will help individuals understand that their own perceptions of a situation may be incorrect.

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A. Empowerment has changed the nature of their jobs, but they have gained new responsibilities. In this case, the manager was able to focus more on the needs of the customers and suppliers.

Sensitivity training is an intense type of training designed for those who have problems working with other groups. They examine their perceptions of the other group, can be a very intense experience in that innermost thoughts and feelings are brought to light. In process consultation a trained consultant works with a manager on the job to help improve his or her interactions with other organizational members. Team Building and Intergroup Training- These techniques are designed to manage change with or between groups. Team building is similar to process consultation except that it involves the entire group worker together. Intergroup training goes a step further and looks at how different functions or divisions work together. Organizational mirroring is a technique designed to get both interdependent groups to see the perspective of the other side. Appreciating others’ perspectives allows the groups to work together more effectively. Total Organizational Interventions- At the organizational level, organizational confrontation meetings can be used. All managers get together and discuss whether the organization is effectively achieving its goals

DISCUSSION QUESTIONS AND ANSWERS 1.

How do evolutionary change and revolutionary change differ?

Evolutionary change makes incremental changes consistently and uses a bottom-up strategy. Employees suggest improvements. Evolutionary change facilitates learning and response to environmental changes. Revolutionary change takes radical steps with a top-down change strategy. Revolutionary change overcomes inertia. 2. What is a business process, and why is reengineering a popular instrument of change today? A business process is any function that cuts across functional boundaries. Reengineering is popular today because all organizations need to continuously find ways to do things better in order to compete. The starting point is to fundamentally rethink how tasks are completed. 3. Why is restructuring sometimes necessary for reengineering to take place?

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Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________

Because by completely rethinking a business process, a more efficient structure often emerges. Many organizations, for example, are using flexible work teams in place of a mechanistic hierarchy. The point is that organizations need to continuously look for more efficient processes, and this often involves restructuring the task relationships. 4. What are the main steps in action research? The steps are detailed in Figure 10.6 5. What is organizational development, and what is its goal? It is a series of techniques that managers can use in their action research programs to increase adaptability. The goal is to improve organizational effectiveness and to help people in organizations reach their potential and achieve their goals. ORGANIZATIONAL THEORY IN ACTION

1. Discuss the obstacles to change at the divisional, functional, and individual level. 2. Discuss ways to overcome obstacles to change to move the organization to its desired future state. Making the Connection Students will find an example of an organization undergoing a major change. They explain why the organization is making the change and what its change strategy is. The Ethical Dimension Students assess the ethics of reengineering, and the sources of resistance when it will mean the layoff of over 30% of the employees. Analyzing the Organization Students examine the extent to which their organization has been involved in major change efforts. They examine whether the changes are revolutionary, evolutionary, and what types of changes have been occurring. CASE FOR ANALYSIS Sears Changes Again and Again This case details some major structural and market changes that Sears underwent in the early 1990s. This case shows how dynamic the retail market is.

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Each small group of students represents one of the big three automakers and plans a change to remain competitive. The plan includes changing from a multidivisional structure to a cross-functional product team structure and implementing a total quality management program. The students should:

1. What were the major changes that Sears made over time? The major changes involved altering dramatically the strategy and structure. Martinez sold off unprofitable ventures, including the famous Sears Tower. He also dramatically changed the target market, attempting to sell women’s clothes and market to the “middle-American mom.” When the CEO changed in 2000, the new CEO made more dramatic changes, including emphasizing “hard side” appliances and tools as opposed to clothing. 2. Search for recent articles on Sears that describe the impact of these changes. How effective have its recent change efforts been? Answers will vary. This allows students to see how dynamic the retail environment is. You could also have them examine how the competitors respond to the changes that Sears makes.

1. Assign the models in the chapter to individuals or groups to explain to the entire class with examples. 2. To illustrate the importance of cross-functional teams, divide the class into two groups. Group one consists of 10 members who represent various functions. Group two is organized into the following functions: manufacturing, R&D, engineering, and marketing. You are a customer who wants a certain product, like sunglasses. Group one can produce what you want quickly and at a lower cost. They ask you what you want and you describe it. They all cooperate to design and commercialize the product. Group two takes longer. R&D comes up with the idea. Engineering designs sunglasses. Manufacturing complains about the high costs. Engineering redesigns the product and sends it back to manufacturing. Manufacturing produces the product and gives it to marketing. Marketing says this product is not what customers want. 3. As a follow up, ask students how they would manage the above changes. Discuss all techniques through coercion. The point is that students need to match the technique with the situation. For example, coercion can sometimes have really negative effects, but simply providing more information may not be effective. 4. Ask students how they would respond to changes in the structure of the class. Ask a student in the back row to come and sit up front, and watch the reaction. This a good illustration of habit, and how even small changes can make us uncomfortable.

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TEACHING SUGGESTIONS