ODC Cases

Case 1 United Products, Inc. Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis United Products, Inc., is a small office products and supply company, headed by the son of the founder, George Brown, President. Brown is a laissez-faire president/owner who is about to leave on a three-week European vacation. He doesn’t want much growth because he is unprepared to put forth extra effort. Growth is limited by his motivation to work harder. Students will tend to be critical of Brown, his management style, and organizational strategy and structure. Brown has a good track record as president: His company has grown at an enviable 20 percent a year, and the functional organizational structure works well. Brown knows how to delegate and decentralize control. He allows employees to demonstrate their abilities and rewards them for performance, and he creates an enjoyable organizational culture. His time on vacation or playing golf is a tribute to his management skills and ability to design a structure that allows for delegation. The case considers basic management issues such as what organizations do.

Teaching Objectives 1. To familiarize students with small company operations and present the meaning of competition, strategy, and structure. 2. To critique the management style of a president who appears lazy, but is actually entrepreneurial. 3. To expose a functional organizational structure and a simple hierarchy and show role relationships in an organic structure. This case can be used after Chapter 1 or 2 as the first case of the semester. It is easy to analyze and understand, and is a good preview for many organizational theory topics in the text. Encourage a negative perspective of Brown and then show the opposite side of the picture. This strategy promotes debate, and also allows the students to begin to think creatively about management.

Pop Quiz Questions 1. What kind of structure does United Products use? Answer: A functional structure 2. True or false: George Brown delegates too much authority to lower-level employees. Answer: False

Issues and Discussion Questions 1. Critically evaluate George Brown’s management style. What does he do well or poorly? Discuss his personal attitudes and behaviors that appear to be somewhat negative: 1. By his own admission, he doesn’t work long hours. 2. Coming from a wealthy background, he lacks ambition and drive. 3. He is not willing to exert effort and energy to help the company grow faster than 20 percent per year.

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4. His family comes first. 5. He took a 10-month vacation from his company a few years ago. Consider his managerial policies: 1. There are no formal job descriptions. 2. He has very conservative financial policies and avoids all debt. 3. There are no specific performance standards for employees; salespeople have no specific sales quotas, but are paid a percentage of sales. 4. There is no formal planning process. 5. There are no profit goals. 6. The size of the workforce and facilities is too large for the volume of business, thus increasing costs. 7. There are very weak training programs; employees train themselves. It is clear the company is not doing well, and that Brown is a lazy, spoiled millionaire. 2. How well is UPI doing? From a financial standpoint UPI is very successful. Sales have doubled in the last four years. In 1973 sales were up 22 percent, profits rose 40 percent above 1972, and net worth increased by $123,500. From the stakeholders' viewpoint, employees earned above-average wages; sales suggest customer satisfaction. Brown goes out of his way to create a good working atmosphere, and has a personal relationship with employees and high ethical standards. It seems that the organization is satisfying stakeholders. 3. What explains UPI’s level of performance; for example, is it Brown, luck and chance, or the strategy pursued by the company over time? The question arises as to why UPI is doing so well. There will be many reasons offered for the success of the company. Write them on the board before coming to any conclusions. Some students will attribute UPI’s success to Brown’s personal actions; play this down and focus on other factors. Maybe it is chance and luck, the highly motivated sales force, or the strategy developed by Brown’s father. Consider the company’s strategy. • • • • • •

UPI’s product lines are broader than its competitors; it carries over 3,500 items in eight major product categories. This means its customers may need to deal only with UPI. Limiting contact with many suppliers gives UPI a competitive edge. None of its rivals offer such a wide range of products. UPI offers a very high level of service, is responsive to customer needs, maintains large inventory stocks to shorten delivery times, and offers good repair services. UPI continually adds new product lines and adds additional salespeople to meet customer needs. To provide the high level of quality service and maintain expensive inventory, UPI charges a price above the level of its competitors. Its prices are 10 percent higher than competitors—the premium customers pay for good-quality service.

UPI is doing a good job of managing its environment and meeting stakeholder needs. UPI is pursuing a differentiation strategy and is offering a product and service that customers perceive to be unique and worth a premium price. Because the company operates only in the Northeast, its strategy could be called focused differentiation strategy as opposed to a strategy pursued at the national or global level. Its strategy could be the chief reason for its success, but the question arises as to who devised its strategy. 4. Who was responsible for orchestrating UPI’s strategy?

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Brown, because he decided: • When to add product lines • To add new salespeople • On the differentiation, high-service/high-price strategy • On UPI’s structure to match strategy So, has Brown been a good leader? Students must reassess Brown’s role, and his apparent laziness has to be balanced against his successful strategy. Perhaps he doesn’t work 12 hours a day because he has done everything right, particularly in designing the structure to let people work independently. 5. How has the way Brown designed his structure helped UPI? How does UPI’s structure help explain his personal and managerial style? UPI’s structure can be analyzed, and it becomes obvious that Brown has designed UPI’s structure to allow his employees to perform roles effectively. Being a small company, UPI has a functional structure, like the B.A.R. and Grille. But unlike many entrepreneurs who are afraid to delegate responsibility and make all decisions themselves, Brown had recruited a general manager, Hank Stevens, and has decentralized operating responsibility to him. Brown retains responsibility for strategic decision-making and makes decisions for the future, but Stevens controls daily business, freeing up Brown to plan and think ahead. Brown created the new level of manager in the hierarchy and had all the functional managers report to Stevens. Stevens is also the sales manager and performs a dual role. UPI employs 34 people and has four levels in the hierarchy. In terms of the design challenges discussed in Chapter 2: 1. UPI is a simple company. It has a low degree of differentiation and needs only a low level of integration. 2. Brown has decentralized all day-to-day decision-making and centralized all strategic long-term decision-making. 3. Brown makes limited use of formalization and encourages the use of mutual adjustment, meeting with his managers regularly where issues get thrashed out. 6. Because it is a small company, the informal organization and organizational culture play very important roles in coordinating and motivating employees. Brown has designed a relatively organic structure in which his employees have freedom and autonomy to respond to customers’ needs and to search out new accounts. They are rewarded with a generous commission system. The structure allows UPI to perform well and meet its goals. It gives Brown the freedom to plan for the future. He may be taking European vacations, but UPI’s strategy is clearly on his mind.

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7. What problems might Brown and his managers confront in the future in operating UPI’s structure as the company grows? Brown’s company is growing, and he has sought out other companies for mergers to become the dominant regional competitor. As his company grows, he needs to separate the general manager role from the sales manager role and employ a sales and marketing specialist for training. He may need to adopt a divisional form of organization, probably a product division structure, and divide up the 3,500 products UPI sells into three or four main product categories. Thus he may need to increase UPI’s level of differentiation, which will require increased integration and formalization and standardization.

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Case 2 The Paradoxical Twins: Acme and Omega Electronics Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis Based on real events, this case is very useful for discussing the differences in the way organic and mechanistic structures work. It describes two organizations, Acme and Omega Electronics, that are bidding for the same contract for manufacturing a memory unit to be used in a photocopier. They have to meet a deadline to build 100 prototypes that satisfy the customer—a large photocopier manufacturer. Omega, which has an organic structure, wins the race and builds a more reliable memory unit than Acme, which has a mechanistic structure and is often late and relatively unreliable—many of its prototypes fail to work. Omega even corrects a design error in the original blueprint, which improves product quality. However, each company is given half the order, and Acme takes advantage of this opportunity to experiment to find ways to reduce its costs, whereas Omega does not. The result is that Acme learns to reduce its costs and offers the photocopier manufacturer a 20 percent price reduction so that it eventually wins the whole contract. Omega may have won the battle, but Acme has won the war because its mechanistic structure fosters a concern for technical efficiency and cost reduction in what is a routine manufacturing environment.

Teaching Objectives 1. To examine the advantages of an organic structure compared to a mechanistic structure. 2. To understand the need to design a structure that is simultaneously mechanistic and organic. 3. To examine the different ways for organizational effectiveness. This case can be used in conjunction with another one in this section. It is best used after Chapter 2. Pop Quiz Questions 1. Does Acme have an organic or a mechanistic structure? Answer: Mechanistic 2. Which company, Acme or Omega, eventually won the contract for the memory unit? Answer: Acme 3.

Which company produced a prototype quicker?

Answer: Omega Issues and Discussion Questions 1. Using the mechanistic and organic structure arguments developed in Chapter 2, compare and contrast the management styles of Acme and Omega. Acme uses a mechanistic structure. Its president, John Tyler, has a centralized management style and runs a very tight ship. Communication is top down. Interfunctional coordination takes place through him, as the different functional managers relay information to him, and he decides what information and orders to give other functions. Acme has a typical functional structure. You may want to make an

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overhead of Fig. 1 to show students what the structure is and how it works, pointing out the way communication takes place within the hierarchy up to Tyler. Tyler uses this structure to control his company’s high-volume mass-production technology. Acme manufactures and assembles circuit boards, a routine manufacturing activity, and apparently Tyler believes that a mechanistic structure allows him to control costs. Tyler has a technical approach and values efficiency. It is related in the case that Acme’s costs have been consistently below those of Omega and that his company has consistently beaten Omega for contracts of efficiency. Tyler believes that Omega is in business only because demand is high for circuit boards. Omega has an organic structure, because Jim Rawls, the president, believes that the company is small enough for people in different functions to coordinate and solve problems themselves. He has a decentralized management approach and fosters lateral communication between functions. Organizational charts, he believes, create barriers to communication and slow decision-making. The management team as a whole makes decisions; however, some managers feel they spend too much time in meetings “filling everybody in on what is going on.” Rawls uses an internal systems approach to measure effectiveness and values the ability to respond quickly to changing events. 2. How do the differences between the companies' management styles explain the way they coordinated the production of the memory unit prototypes for the photocopying customer? Which company did better? Because of its mechanistic structure, Acme’s different functions contributed separately to the planning needed to produce the memory unit, and activities were coordinated sequentially through Tyler. When unexpected problems arose during planning, each function’s planning was interrupted and sent each back to figure out how to assemble the memory unit. In Omega the functions all planned for the new product from the beginning. There was a longer start-up time, but problems encountered later were solved quickly because of a high level of coordination. The case relates that when functional managers finalized assembly plans, they discovered an error in blueprints, an error that required major design changes. The changes they recommended not only improved quality but also prevented a bottleneck in production (a problem Acme experienced) and a delay. When Acme learned of the changes Omega had discovered, they went back to the drawing board; however, in Omega, functions adjusted smoothly to the changes because of the high level of mutual adjustment in coordinating. Omega’s decentralized, organic approach allowed for the building of prototypes 10 days faster than Acme, correction of errors, and a highly reliable prototype—much more reliable than Acme’s, which had a 10 percent failure rate. Omega was more effective when evaluated by these criteria, although Acme’s prices were lower than Omega’s. Were they low enough to make up for lower reliability? 3. If Omega was so much more effective than Acme, why didn’t it win the final contract? How can you account for the photocopier manufacturer’s decision? An organic structure has advantages over a mechanistic structure as to innovation and adjusting quickly and smoothly to customer demands. What customer would not choose Omega and pay a higher price for speed and reliability? However, the prototype order was the prelude to a routine manufacturing contract for hundreds of thousands of memory units. Once the product was developed, the rules changed because the issue was the cost of the product. Here Acme excelled. Following product development, Omega did not reduce costs, for example, by working out efficient manufacturing procedures or seeking lower-cost inputs. Acme did, however. It continued to ride down

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the experience curve to find new and better ways of reducing costs. Its mechanistic structure provided it with the management system and incentives needed to improve and reduce its manufacturing process, so that like the tortoise, Acme won the final race over Omega, the hare. 4. What changes would you recommend to Acme and Omega if they are to survive in the future in this increasingly competitive industry? Both companies need to become simultaneously mechanistic and organic in structure to survive. As the pace of change in the industry quickens, Acme must coordinate between its functions better, and increase integration by establishing cross-functional teams, to speed product development and manufacturing. On the other hand, Omega needs to realize that too much integration slows decision-making and raises costs. Omega needs to standardize activities and to develop better monitoring and evaluation systems—using TQM—to reduce costs. Each company needs to move more toward the middle so that flexibility and innovation balance technical efficiency. 5. Do you think Acme and Omega should merge to better compete in the future? What problems might be encountered in such a merger? The question can be raised about a merger to bring out the problems surrounding mergers. Each company has something the other needs—Acme needs Omega’s skills in cross-functional coordination, Omega needs Acme’s skills in controlling operating costs. However, as alluded to in Chapter 2 and fully discussed in Chapter 5, mechanistic and organic structures have different values—different organizational cultures that might make merger very difficult. Acme has a concern for economy and frugality and uses an autocratic, centralized way of getting the job done. Omega values cooperation and innovation and uses participation. Is it possible to harmonize these values and create a new, more effective organization, or will managers leave after a merger? A discussion of the problems involved in marrying two different organizational cultures ends the analysis.

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Case 3 Continental Can Company of Canada, Ltd. Teaching Notes Copyright © Gareth R. Jones 1994 Synopsis The case allows an in-depth analysis of a mechanistic structure and allows students to apply the organizational theory concepts from Chapters 4, 5, and 6. It should be used after Chapter 6, and the TRW Systems case should follow (a two-class sequence) to illustrate the workings of an organic matrix structure. This sequence exposes the meaning and significance of the mechanistic-organic distinction and provides an example of contingency theory. CCC is in a stable environment, uses a mass-production technology, has simple tasks, and uses a mechanistic structure, while TRW is a high-tech company, employs highly skilled people, operates an intensive technology in a dynamic, changing environment, and uses an organic structure. Students should not be asked to provide a written report on this or the TRW case. These cases should be presented by the instructor to bring out interesting and valuable implications and protect their teaching value. Continental Can Company of Canada, Ltd. (CCC) is about a routine mass-production organization that is experiencing conflict between the manufacturing and sales departments. Manufacturing has all the power, and managers are rewarded for reducing costs and increasing efficiency. They have no incentive to be responsive to the needs of the sales department. Sales are declining somewhat and quality is going down. The issue is how to change the way the company operates and improve its effectiveness.

Teaching Objectives 1. 2. 3. 4. 5.

To use organizational theory concepts to analyze an organization. To show the design choices that create a mechanistic structure. To link organizational design to the contingency approach. To demonstrate a classic example of production-sales conflict. To show the power of a budget in shaping expectations and behavior.

Use this case after United Products, Inc. or Bennett’s Machine Shop. It takes about an hour to analyze the issues and see how organizational structure operates. Pop Quiz Questions 1. What structure does the St. Laurent plant use? Answer: Functional structure 2. What structure does the Continental Can Company as a whole use? Answer: Geographic structure

Issues and Discussion Questions 1. What kinds of organizational design choices has CCC made about the four design challenges discussed in Chapter 4?

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a. Vertical Differentiation There are six levels in the hierarchy, including shop floor employees, and 500 employees. This means that CCC has a relatively tall structure. Fox, the plant manager, has a span of control of 8 subordinates and Andrews, the assistant plant manager, has a span of control of 15 subordinates (there are three shifts). Is this too big? No, subordinates are all doing similar, routine work, and they are all in manufacturing-related functions, so it is easy to monitor and evaluate activities. Is CCC centralized or decentralized? CCC is highly centralized: Fox and Andrews solve problems at the top. The information gives the impression that foremen have a high level of decision-making authority, and some students will argue that this implies decentralization. The point is to look at where important or significant decisions are made in the hierarchy, and this is always higher up in CCC. People lower in the hierarchy handle only routine problems. CCC is tall and centralized. b. Horizontal Differentiation Inside the St. Laurent plant, is there a high or a low level of horizontal differentiation—division of labor and specialization? There are many different departments shown in Exhibit 1, but all are manufacturing oriented—no sales, research and development, or finance. There is a low level of horizontal differentiation; it is a simple organization or a low level of complexity. What kind of structure is it? A functional structure: The main function is manufacturing. CCC makes a wide variety of different kinds of cans; the other functions are manufacturing support functions like production control and quality control. At the company level, it uses a geographic structure because different plants are located in different parts of Canada. Why does it have many plants? Why not just one big functional structure? • • • •

There are high costs of transporting bulk commodities like cans. The needs of regional markets differ. There is a large variety of different products. To obtain economies of scale; one large plant might experience diseconomies.

So, the St. Laurent plant has a tall, simple, centralized functional structure, and CCC has a geographic structure. c. Integration Mechanisms Integrating mechanisms include: • • • •

Budget Bi-weekly production control meetings at which quality control is not present Formal once-a-month budget meeting Some unscheduled meetings

Conventional integrating mechanisms fit the low level of differentiation—when a company has a low level of differentiation, it requires only a low level of integration. d. Standardization—Mutual Adjustment

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Rules and procedures, including the budget, control the manufacturing process. There is a high level of standardization, and little use of mutual adjustment. Manufacturing managers share a common language of efficiency and economy. e. Formal-Informal Organization The informal organization parallels the formal. Social networks among managers are based on the ability to influence and affect the manufacturing process, and the budget gives all the power to manufacturing. There is little cross-functional communication. 2. Given these design choices. how would you describe CCC’s approach to coordinating and motivating employees? With its tall, highly centralized, highly standardized, and simple functional structure, the company has created a mechanistic structure to coordinate and motivate employees. The emphasis is on top-down communication, roles and authority relationships are clearly defined, and there is a high level of personal supervision and control. 3. Are CCC’s organizational structure and design choices appropriate? The company has specific problems, but in general the mechanistic structure is appropriate, given CCC’s efficiency-driven approach. From a contingency perspective it matches: • • • •

Its routine mass-production technology. This is the typical structure for a mass-production setting. Its relatively routine, stable environment. Its low-cost strategy The low level of skills and participation it expects from its workforce.

The material on technology and the environment has not been covered yet, so this discussion can only be brief. However, if the case is used late in the course, the contingency approach can be drawn out in more detail. With the structure identified and the reasons why it is appropriate outlined, the analysis can consider the company’s problems and how its structure contribute to them. 4. What problems are occurring in the St. Laurent plant? The basic problems are: • • • •

High level of conflict and lack of integration between manufacturing and sales Falling sales and a lack of response to customer needs Deteriorating product quality Lack of cooperation and trust between foreman and schedulers

5. Why are these problems occurring? a. Subunit orientation. Managers at the St. Laurent plant have a manufacturing subunit orientation. This orientation results from their interests, backgrounds, and experience; they have little interest in sales. b. The budget. The St. Laurent plant is organized as a profit center, and a strict budget is used to evaluate plant performance. All the manufacturing managers’ yearly bonuses are linked to targets set in the budget. The result is that the budget limits their behavior because they must meet the budget and reduce costs. Customer responsiveness and quality are not rewarded—only reducing costs—so managers have

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no incentive to respond to the needs of sales. Machines are not serviced enough, and this reduces quality and results in customer returns. c. Incompatible goals. Some conflict between sales and manufacturing is inevitable because of incompatible goals. Manufacturing’s goal is to reduce costs, by maximizing the length of production runs to minimize the downtime to retool to produce different kinds of products. Downtime raises costs. Attempting to maximize production runs means that manufacturing is unresponsive to customer needs, particularly to late customers, who are out of cans. So sales suffer when manufacturing refuses to meet customers’ requests. Manufacturing is pursuing efficiency goals at the expense of effectiveness goals. d. Structure. In CCC, plant managers have no incentive to respond to sales’ requests, and they control operations. Plant managers have all the power in the tall, centralized hierarchy and sales has none. The low level of differentiation at the plant level—sales is not even inside the plant—promotes manufacturing. The tall, centralized functional structure and the mechanistic, production orientation compound the problem produced by the budget and employees’ backgrounds. There is a power imbalance resulting in falling sales, falling quality, and increased returns. Only manufacturing goals are pursued in the St. Laurent plant. How can the power balance be altered? How can CCC’s structure and the budget encourage a concern for sales and customer responsiveness? 6. Draw a diagram of the key roles in the plant to show where problems are occurring. Draw a map of the key reporting relationships to illustrate where problems occur. Andrews, the assistant plant manager, reports to Fox, the plant manager, who reports to a corporate executive. The district sales manager is outside the plant and also reports to a corporate executive, not to Fox. These corporate executives report to a common superior, so that the nearest common point of authority between Fox and sales is two levels up in the corporate hierarchy. This makes it difficult for sales to exert power over Fox. Inside the plant, Andrews oversees the foremen who are responsible for the production process in three shifts. The other key functions or departments are production control, headed by Whitelaw, and quality control. Production control’s responsibility is to plan the manufacturing process to mediate between manufacturing’s cost reduction and sales’ customer responsiveness. Because manufacturing has the power, the needs of sales are not being met. Quality control is similar to production control: Quality is falling, but Fox and Andrews want to reduce costs, meet the budget, and get their bonuses. Whitelaw is in charge of those who schedule the production runs, and who have a dotted-line relationship with the foreman. This means that foremen-schedulers have an informal responsibility to coordinate activities, but no formal reporting relationships. It is easy to see that production is in control. 7. What changes should be made to the way the St. Laurent plant is operating to solve its problems? a. Changing the budget. The budget is an important mechanism for maintaining cost control; however, targets could be relaxed. Or a sales-related goal can be added. Increased product quality could be rewarded by measuring reductions in the number of returns, or increased customer responsiveness rewarded by measuring decreases in the time to satisfy customer requests. Changing the budget changes the incentives and motivation of production managers. b. Changing the structure. Students can offer suggestions about changing reporting relationships to force Fox to pay attention to sales and to change manufacturing managers’ orientations. Usually, students want to alter the hierarchy and give sales more power than production; however, this is difficult without upsetting the balance of power. Some common suggestions include:

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• •

•

Have sales report to Whitelaw, the production controller. Problem—this would further reduce sales’ power because sales is lower in the hierarchy. Put the sales manager in charge of the whole plant. Problem—it’s a manufacturing plant; production people must be in control. Bring in a new plant manager and have sales and Fox report to the new person. Problem— this lengthens the hierarchy.

There is the possibility of assigning a sales manager who reports to Fox and to the district sales manager. Making Fox responsible for sales forces him into a sales viewpoint and brings sales into weekly and monthly meetings. Both Fox and the district sales manager report to the same corporate executive, who can put pressure on Fox. This gives more power to sales and balances power. Sales, production control, and quality control can band together to put emphasis on sales and quality goals in meetings. With a new budget, production managers may change orientations, operations, and show concern for efficiency and effectiveness.

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Case 4 TRW Systems Group (A and B Condensed) Teaching Note Copyright © Gareth R. Jones, 1994. Synopsis TRW Systems Group pioneered the matrix structure to develop the Atlas and Titan missiles, the heart of the United States Intercontinental Ballistic Missile (ICBM) Program in the 1960s. It offers an in-depth account of the workings of a matrix structure with its advantages and disadvantages. It explains why TRW needed this complicated structure to manage its activities and provides an example of contingency theory. It is best used after the Continental Can Company, Case 3, to illustrate the mechanistic-organic organizational design continuum.

Teaching Objectives 1. 2. 3. 4.

To use organizational theory concepts to analyze an organization. To show the design choices that create an organic structure. To link organizational design to the contingency approach. To illustrate the workings of cross-functional teams.

Use the case after United Products Inc. or Bennett’s Machine Shop and the Continental Can Company case. It usually takes 45 minutes to an hour and can be used with the Paradoxical Twins case.

Pop Quiz Questions 1. What industry is TRW Systems in? Answer: The aerospace industry 2. What techniques does TRW Systems use to help its project groups work together better? Answer: T-groups and team building

Issues and Discussion Questions Discuss how the matrix structure works, its design choices, and why it is used from a contingency perspective. Then consider the advantages and disadvantages of the structure. 1. What kinds of organizational design choices has TRW made about the five design challenges discussed in Chapter 2? TRW used a matrix structure, but what design choices are involved in a matrix structure? Exhibit 2 in the case shows the organizational chart in 1963. a. Vertical Differentiation There are three levels in the hierarchy: President Rube Mettler, the functional and program or project manager, and the subproject manager, actually work in the teams. The number of employees is not stated, but there is a flat structure. Authority and decision-making responsibility are decentralized, and subproject managers, the ones closest to the problems, make important decisions. TRW is flat and decentralized, the opposite of the Continental Can Co.

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b. Horizontal Differentiation TRW’s matrix is based on horizontal and vertical grouping. Vertically, tasks are grouped by functional specialization, which means being a part of mechanics, electronics, physical research, and systems. (In the book, functions are called divisions). Horizontally, tasks are grouped according to the current project. Two programs shown in Exhibit 2 are the Titan and Atlas Missile Programs. Subproject managers have a functional and program boss. In terms of Chapter 2, TRW’s matrix structure has a high level of differentiation; division of labor is very high, but is based on a functional and a project logic and changes as projects change. c. Integration mechanisms • • • •

TRW’s level of integration should be high also. Is it? What are the major integrating mechanisms? Using Galbraith’s model: The two boss managers, the subproject managers, perform an integrating role and coordinate the functions with projects. As a group, the subproject managers working on a project form a team or, in TRW, since these groups are constantly changing, task forces. The matrix is a form of integrating mechanism and is designed to improve coordination.

Thus the matrix structure has a high level of differentiation and integration. What about the other design choices? d. Standardization-Mutual Adjustment Standardization and formalization play a small role in coordinating and motivating employees in TRW. Given the complex nature of tasks, rules and procedures cannot coordinate functional activities. TRW relies on mutual adjustment between scientists, and the teams provide the setting for mutual adjustment. e. Informal-Formal Organization TRW makes minimal use of formal hierarchical reporting relationships to coordinate activities. There are not many managers. The informal network of social relationships developed over time is important in determining how teams perform, and informal status relationships between scientists is important as a means of coordination. Team values and norms derive from informal interactions between scientists and are spread as members move between teams. 2. Given these design choices, how would you describe TRW’s approach to coordinating and motivating employees? TRW designed a structure that provides freedom and autonomy for employee decision-making and uses the project teams to coordinate and motivate members. With its flat, decentralized hierarchy and focus on mutual adjustment and cross-functional communication, TRW has created an organic structure. 3. Are the design choices that TRW has made appropriate for the organization? TRW’s complex matrix design and its organic structure are appropriate because from a contingency perspective they match: • Its very uncertain environment —“a large job shop subject to frequent changes” —rapid changes in technology —increased competition as it gives up protected government contracts • Its complex and rapidly changing products

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• •

Its high-tech approach and complex nonroutine research emphasis. In terms of Perrow’s model, TRW is high in task variability and low in task analyzability. In terms of Thompson’s model, it uses intensive technology and has reciprocal interdependence. It employs highly educated professionals who respond to freedom to experiment and to make decisions; that allows them control over activities. Professionals are controlled through norms, values, and socialization.

From a contingency perspective, the matrix structure matches its activities and environment. A matrix would not be suitable in a simple, stable environment for routine technology and employees with routine tasks. Here, it would promote coordination and motivation problems and raise bureaucratic costs. TRW and the Continental Can Co. use different design approaches because they face different contingencies. 4. What are the sources of power to get things done in a matrix organization? How does this affect relationships among team members and between functional and project managers? Explore the workings of the matrix in depth and consider the power relationships between functional and project managers to expose problems. Ask the students to list the sources of power of the functional and project or program managers: Program Managers Functional Managers Money and funding Expertise Scheduling and planning Functional personnel The program managers control the purse strings and project scheduling issues. The functional managers appraise and reward the subproject managers and control functional experts. In a matrix, program managers “buy” the time of functional experts who move from project to project as needed. This analysis suggests that a power balance exists between the two roles—they are mutually dependent —but ask students which role has more power, and then come to the conclusion that they have equal power. So, what are the implications of this for working relationships? There is an important statement in the case that there is a large gap between authority and responsibility that forces subproject managers and functional and project managers to cooperate to get the job done. The nearest point of authority above functional and project managers is the president, so people lower down solve problems through mutual adjustment. This has advantages and disadvantages. On the advantage side, employees with more responsibility than authority are more flexible and the organization more organic. There is no appeal to formal authority. On the disadvantage side, when authority is undefined, role conflict and role ambiguity occur. This paralyzes action and polarizes attitudes. The members of the matrix need strong bonds developed through shared norms and values— values from a cohesive organizational culture. Many employees do not like ambiguous, matrix like relationships, and many authority and status problems exist. Another advantage relates to organizational effectiveness. Ask students about the goals of project managers and the goals of functional managers. Project managers’ goals are efficiency oriented: they want projects on time, under budget. Functional and subproject managers are quality and research oriented: they want the best rocket, no matter what the cost. The power balance forces a compromise between cost and quality or efficiency and effectiveness that improves performance. Lack of agreement might lead to conflict and a breakdown of cooperation. 5. What other problems does a matrix cause for TRW? •

Other problems mentioned in the case include:

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• • • •

The time spent getting new project teams to run. TRW uses team building and T-groups to develop group cohesiveness and shared values and norms. Promoting successful people is difficult in a flat hierarchy. TRW grew into a huge multidivisional corporation, so promotion opportunities opened up. Stress for team members, People don’t like ambiguity and prefer their present teams. Shifting teams causes stress.

6. What problems might TRW have with its matrix structure as it grows? One major problem is whether a matrix structure is suitable for a large organization and whether TRW can maintain its organic approach as it grows. This is difficult to achieve, and TRW faced problems as it grew. Between 1961 and 1982, TRW grew to a multidivisional company as different projects became divisions. Different divisions started to compete and refused to share R&D knowledge. Their view was “Why should I give away this information free to another division when it cost us billions to develop?” Mettler had to recapture the cooperation of the early days and increase integration between divisions. He introduced a multidivisional matrix structure and reshaped culture by monitoring and rewarding divisional performance according to productivity, quality, and cooperation between divisions. Formal committees encouraged the cross-fertilization of ideas as the matrix was reestablished.

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Case 5 Texana Petroleum Corporation Teaching Notes Copyright © Gareth R. Jones, 1994

Synopsis This case introduces the problems of managing a multidivisional structure. It illustrates how conflict and politics develop in multidivisional structures with inappropriate integration and control systems. Texana Petroleum is a multidivisional company, attempting to increase profitability by sharing resources and skills among divisions. The divisions are in conflict, and politics and the pursuit of divisional selfinterest, preventing synergies from emerging. Texana pursues a vertical integration strategy in the oil industry and related diversification in the plasticbased consumer products industries. The division, responsible for coordinating company resources—the Polychemicals Division—enjoys its power as the “resource controller” and frustrates attempts to develop new products to increase their market share and profitability. The case examines how a corporate center solves problems and how organizational conflict and politics emerge. Teaching Objectives 1. To familiarize students with the problems of managing a multidivisional structure. 2. To show how organizational politics and conflict result from organizational structure and control systems. 3. To provide a setting for changing structure to match strategy. 4. To show how a matrix structure at the multidivisional level can solve problems of politics and conflict. This case can be used after Chapter 6 to show the problems of a multidivisional structure. It is best used at the end of the course, after the lecture on politics and conflict, to provide an example of how politics and conflict occur in a multidivisional structure. The case also brings out the meaning of the strategy and structure relationship and underscores the message that strategy and structure should fit, so it could be used after the chapter on strategy. Pop Quiz Questions 1. What kind of structure does Texana use? Answer: Multidivisional 2. What was Texana’s original strategy and what did it change to? Answer: It was vertical integration; it changed to related diversification. Issues and Discussion Questions 1. How has Texana’s strategy changed over time? What is the rationale behind the changes? Texana originally pursued a strategy of vertical integration. The oil company was involved in exploring, processing and refining, and selling petroleum products through a chain of company-operated service stations. It was fully vertically integrated and internalized the value added by petroleum operations. The company experienced stiff competition in its core petroleum business when other oil companies

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competed for customers. Profit margins fell as price competition increased, and the company decided to change its strategy. It sold the service stations and abandoned oil production for the consumer petroleum market. The company changed its strategy to related diversification and expanded into processing petroleum for chemical and plastics products. Texana entered the consumer products businesses of plastic, packaging, and building products, which used raw materials provided by Texana’s Polymer and Chemical Division, responsible for developing chemicals for these divisions. The rationale was to obtain synergies because resources flowed from the petroleum business to the polychemicals division and to the end-using divisions. Another rationale was to enter industries where competition was less severe and profit margins higher than in the petroleum business. Finally, by diversifying outside one industry, Texana exploited its competences in chemical processing and was no longer tied to one industry. In changing strategy, Texana built upon existing skills in chemical processing and developed the polychemicals division. Texana developed the molded products division. It acquired packaging and building products by buying existing firms to enter these industries. So, Texana was poised to expand market share by providing new and improved chemical and plastic products developed through skills in polychemical processing. 2. What structure did Texana employ to pursue its new strategy? What problems did this structure cause the organization? Texana used a multidivisional structure to manage strategy. Each division had a functional structure with support functions, including research and development. Each division was a separate profit center, and aggressive new managers were recruited to maximize the growth potential of each division. Control was decentralized to the managers of the various divisions. Divisional managers were evaluated by return on investment against the budget, and corporate management did not interfere in each division’s businesslevel strategy. The philosophy was that decentralized control would allow maximum growth. Decentralized control permitted the divisions to grow, but there were serious problems: a. The corporate center’s failure to help create synergies between divisions created a vacuum of power at the top of the organization and allowed divisions to behave according to self-interest. b. The corporate center’s policy of evaluating divisions separately against ROI criteria created transferpricing problems between divisions. Because the central polychemicals division controlled the supply of chemicals to the end-using divisions, it maximized ROI and hurt end-users, unable to obtain resources to expand their business. c. As a result, gains from synergy were not achieved. Polychemicals had no incentive to help the endusing divisions’ business-level strategies because it was not rewarded for cooperation. Polychemicals would be harmed by developing products with uncertain returns. Because the corporate center was uninvolved, no integrating mechanisms were in place to foster cooperation. Texana’s structure did not match its strategy—integration and control systems were not in place to reap the gains from related diversification. Lack of control created the context in which politics and conflict could flourish. 3. Chart the sources of power of the various divisions in Texana. Which is (are) the most powerful division(s).

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Looking at the sources of power of the divisions makes clear a power play between the polychemicals division and the end using divisions. Polychemicals is more powerful than the end-users because it has the following sources of power: a. It is central to other divisions because it supplies resources to the end-using divisions and knows about their demands and needs. b. It is nonsubstitutable because the chemicals can only be supplied by the polychemicals division. It is substitutable for chemicals acquired in the open market. c. It is powerful because it has the expertise to produce the chemicals. The end-using divisions lack the knowledge or resources to produce chemicals. d. It can cope with the uncertainty facing the end-using divisions. It can reduce uncertainty because it can supply or withhold resources—the chemicals. In contrast, the only power of the end-using divisions is control over contingencies — namely, the ability to generate revenues and increase market share. This depends on the ability to develop new products from the chemicals supplied by the polychemicals division. The power of the corporate center is a consequence of its ability to control financial resources. The corporate center has decentralized control to the divisions, and there is a power imbalance, with polychemicals holding the most power. 4. What is the effect of the distribution of power in the organization on interdivisional relations and corporate performance? The power imbalance has led to a high level of politicking and conflict between divisions. The result is the loss of synergies and lower organizational performance. Top management is looking for solutions. 5. What are the main sources of conflict between divisions in Texana? a. Differences in divisional orientations. Polychemicals has a research and development orientation and operates in a centralized way. It uses language very different from that of the end-using divisions, which have a marketing orientation and are concerned with increasing market share. b. Status inconsistencies. Because of its centrality and nonsubstitutability, the polychemicals division views itself as the elite division. It responds to end-users’ needs when it wishes. It has the power, and the corporate center does not intervene. The scientists regard themselves above the marketers. c. Task interdependencies. Because of the resource flows through polychemicals, end-users are dependent on this division, so polychemicals’ unwillingness to respond to the end-users’ needs leads to conflict. d. Incompatible evaluation systems. Divisions are rewarded on return on investment, so polychemicals is unwilling to risk supplying new chemicals with limited demand, as this raises costs. The evaluation system is causing problems and provoking transfer-pricing problems. e. Scarcity of resources. The ability of the divisions to grow depends on capital from the corporate center. As all the divisions wish to expand, including polychemicals, there is a fight for limited resources.

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The way Texana is managing its multidivisional structure is promoting problems between divisions and corporate performance is suffering. How should Prentice, the new CEO alter the design of Texana’s structure to create synergies and improved performance? 6. How should George Prentice change the way Texana manages its multidivisional structure to improve corporate performance? Discuss possible solutions to the problem, and suggest a plan for changing the organization’s structure. Prentice must change the multidivisional structure to reduce the power of polychemicals and increase integration between divisions. Students can recommend solutions. Hold a discussion of the utility of these different solutions. a. Texana can employ more liaison roles between divisions and establish task forces and teams to enhance cooperation. b. It can introduce integrating roles and create new positions to feed information between divisions and enhance product development as well as resource transfer between divisions. c. The firm could introduce a multidivisional matrix structure at the corporate level. On the horizontal axis would be the various divisions; on the vertical axis would be the corporate staff offices of research and development (to be created), finance, marketing, and soon. The matrix would involve the top officers of the divisions and corporate center. This structure would increase the power of corporate headquarters, and balance power among divisions since polychemicals becomes just another division. d. It can centralize R&D at corporate headquarters so that the polychemicals lose some power. This would ensure that end-using divisions’ requests for materials are in the interests of the corporation. e. It can change the way polychemicals is evaluated. Rather than evaluate polychemicals on ROI, it could be evaluated on a cost basis, on how efficiently it produces chemicals, or on how much cost savings are achieved each year against a budgeted target. This would remove the division’s incentive to compete with the end-users and allow for its R&D aspirations. f. To enhance cooperation, it can centralize divisional headquarters in one building in Chicago so that managers can easily meet and interact with each other and with corporate managers. g. New managers can change the corporate culture to foster more cooperative values and develop the culture necessary for pursuing related diversification. The debate over the best combination of solutions can be interesting and provocative. Students can devise a plan for change. • • • •

First they decide what to change in the corporation. Next they can chart the obstacles to change, such as existing divisional orientations or balance of power and lack of by corporate managers. The culture is an obstacle to change. Then they can decide about top-down or bottom-up change. Should the firm move to a multidivisional matrix structure and start with integrating roles and task forces and build a matrix? Or implement a matrix immediately and centralize headquarters in Chicago? Finally, they would decide how to evaluate the change effort and how to choose measures to assess the effects of the changes.

The case generates discussion on the relationship between strategy and structure.

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Case 6 W.L. Gore & Associates Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis This case examines the origin of cultural values and norms; it mirrors the position taken in Chapter 7 that cultural values result from people, structure, property rights, and ethics. Each of these four factors is considered. The entrepreneurial culture shows the relationship between organizational structure and culture. This case depicts an organic approach and a highly decentralized organization. W.L. Gore & Associates, Inc., best known for its Gore-Tex fabric, manufactures a wide range of products derived from polytetrafluoroethylene, an artificial fiber frequently referred to as PTFE. PTFE is best known by Du Pont’s brand name, Teflon. W.L. Gore began in 1958 to use PTFE for insulating electric cables. By 1990 it manufactured a wide range of related products, arranged into four divisions: electronics, medical products, fabrics, and industrial products. The case chronicles the growth of the company and the nature of the structure and culture created by its founder, Wilbert (Bill) Gore. Teaching Objectives 1. To illustrate the role of leadership and entrepreneurial vision in creating a culture for an organization. 2. To illustrate the nature of terminal and instrumental values and to show how these are transmitted to an organization’s members. 3. To illustrate how culture results from people, property rights, organizational structure, and ethics. 4. To show how an organization’s culture can be a source of competitive advantage and to demonstrate how organizational structure and culture can facilitate innovation. This case is best used directly after Chapter 5 to illustrate the origins and nature of organizational culture. Used in conjunction with one or both of the other cases on organizational culture, it provides examples of the importance of culture in organizational design and shows that culture can be created to achieve a competitive advantage. It also illustrates how an organic structure works and the design challenges that an organization confronts when it chooses to use this structure.

Pop Quiz Questions 1. What was the name given to the structure created by W.L. Gore? Answer: Lattice structure 2. Do Gore employees enjoy strong or weak property rights? Answer: Strong

Issues and Discussion Questions 1. What influenced the Gore system of “unmanagement”? The major influence on the Gore system of unmanagement was the strong leadership of W.L. Gore himself. Bill Gore exemplifies the visionary, charismatic leader who founds an organization that functions according to the founder’s values. From the very beginning, he envisioned an organization where people were not inhibited by such traditional principles of management as hierarchical levels of authority, reporting channels, and subordinate relationships. He and more recently his son, Bob Gore,

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have carried forward this vision. Both Bob and Bill Gore show that strong leadership does not have to be authoritarian. A leader who can communicate an organizational direction does not have to use authoritarian approaches and generates greater loyalty. This case illustrates the importance of leadership in shaping a company’s development and culture. 2. What are the values of the Gore culture? The terminal values of the Gore company are high quality, innovation, and excellence. The instrumental values that guide the achievement of terminal values are fairness, freedom, commitment, and discretion. Gore’s employees have freedom to experiment, to take risks, to respond creatively to new product development or improvement, and to use the company’s resources responsibly for innovation and excellence. The case discusses the norms and rules that indicate appropriate behavior at Gore, such as behavior governing travel expenses. The emphasis is on the maximum amount of self-control and the minimum amount control and direction from written rules and procedures. 3. How are these values transmitted to Gore associates? The very word associate–employee is not used by Gore—it is a part of the language that has emerged in the Gore company to transmit terminal and instrumental values. There are no job titles and minimal emphasis on superior-subordinate distinctions and differences between functions. The organizational language mirrors the company’s guiding values—fairness, freedom, commitment, and discretion. Employees learn their own roles in the organization. Other ways of transmitting the company’s values are the design of offices and factories, their location in attractive areas, the central communal eating areas, and the minimum of status differences. Gore epitomizes the meaning of individualized socialization practices. New employees are left alone to discover how the organization works and what their role should be. The role of existing Gore associates is to be supportive, to invest new employees, and to provide guidance to help newcomers discover their role and behavior. Individualized socialization tactics encourage an innovative role orientation that supports terminal values. 4. What are the origins of Gore’s cultural values? Following the discussion of Gore’s culture and how it is transmitted, focus on the four factors that cause cultural values: people, property rights, structure, and ethics. People. The vision and values of the founder play a major role in explaining the origin of this company’s culture. Based on his experiences in many other organizations, such as Du Pont, Gore saw how the four instrumental values of fairness, freedom, commitment, and discretion resulted in entrepreneurship and excellence. He made them central to his organization and transmitted them to his associates. Presumably, the people attracted to Gore accept these values. There is turnover by those who find ambiguity in company operations, so using the attraction-selection-attrition framework, these values become stronger as people become more homogeneous. Property Rights and Personnel Policies. The strength of the property rights given to employees can be seen in personnel policies, a direct product of the founder’s leadership and vision. These policies are based in company culture and explain company success. Gore avoids the we/they atmosphere and has achieved its culture by practicing equality from the parking lot to the office. There are no status differentials at Gore: no reserved parking spots except for customers and the handicapped, no separate dining facilities, no plush offices for a management elite, no organizational charts, no lengthy policy

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manuals, no separate compensation systems, and no job titles (everyone is an associate). What does exist is a flexible organization based on fairness and contribution. Gore’s employees get formal feedback twice a year on their performance from a compensation committee that includes their peers. They regularly receive informal feedback from their sponsors. Associates are encouraged to make commitments, join teams, create new products or production processes, make suggestions, and in general improve themselves on the job. To recognize and reward associates’ achievements, Gore has established a property rights system that compensates everyone through six-month salary reviews, a profit-sharing scheme, and an Associates Stock Ownership Program, giving associates 20 percent of the company. Strong property rights encourage a feeling of ownership, and employees are encouraged to contribute in whatever way they feel best suits them. Clearly, Gore’s property rights system leads to values that encourage commitment. Structure. Gore reinforces these values by using its very flat, decentralized lattice structure, really a product team structure in which teams are formed and disbanded as products are developed and marketed. Gore’s flat hierarchy and minimum supervision reinforce property rights. Both are based on the philosophy that employees control their behavior and work effort. The flexible nature of the system allows employees to find suitable roles within the organization The lattice structure demonstrates how an organic structure works and the importance of mutual adjustment as people are responsible for communicating and coordinating to solve problems. The lattice structure illustrates the design challenges outlined in Chapter 4 and shows how design choices create an organic structure. 1. 2. 3. 4.

Differentiation—Gore keeps this to a minimum to reduce the problems of integration Decentralization of authority Mutual adjustment The importance of the informal organization

Ethics. Gore has a clear and unambiguous set of ethical values that guide behavior. As a major supplier of medical products, Gore demonstrates its values to stakeholders by recalling products and absorbing the costs. The interaction of the personal and professional characteristics, property rights, and structure demonstrates the power of culture in shaping behavior and in motivating and coordinating employees. 5. What is the source of Gore’s competitive advantage? Gore’s competitive advantage stems from three company features. First, the Gore family clearly articulated a company vision and has pursued it without variation since 1958. Second, the company has a core competence in applying PTFE to numerous applications. PTFE-based materials manufactured by Gore have found applications in areas as diverse as insulation cables for the space shuttle, cables in computers, outdoor clothing, and medical products. Gore has reaped the benefits of being a first mover. Its first-mover advantage is protected by patents and by keeping processes secret. Its first-mover advantage allows for a premium price charged for many products and has helped develop a strong brand name. The third source of Gore’s competitive advantage is its culture. Gore’s decentralized culture, characterized by direct lines of communication, no fixed or assigned authority, a flat hierarchy, and use of self-managing teams, (1) facilitates employee commitment, (2) promotes innovation—demonstrated

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by Gore’s history of new products, and (3) allows a quick response to market demands and crisis situations. 6. Can Gore maintain its culture as it continues to grow? Gore’s culture is best suited to a small organization. To have an organization in which everyone has access to others, in which people find their niche, in which teams play a large role, and in which formal authority structures are absent, the number of people must be small. Bill Gore recognized this when he decided that no facility should exceed 150–200 associates. By following this policy, Gore has grown big while remaining small. The company exceeds 5,300 employees, divided among 44 plants worldwide, so the size of any one facility is held to manageable proportions. Of course, there is a cost to this policy: It limits economies of scale and leads to duplication. Because many of Gore’s products serve niche markets, the lack of scale economies might not be serious. So far, the benefits of limiting facility size outweigh the costs. 7. Can the Gore management culture work in other companies? Other companies send managers to Gore to learn how to produce a creative, loyal, and motivated workforce. Yet, other companies cannot imitate Gore’s culture without radical destructuring and a change of established cultures. Gore has built its culture from its inception. Others could follow the Gore model, but it is doubtful whether an established organization could adopt Gore’s radical structure. In an established organization with a well-developed structure and hierarchy of authority relationships, Gore’s personnel practices would at best be unsettling to those in power. Subordinates could see these practices as a revolt. 8. Are there any clouds on Gore’s horizon? There are three clouds on Gore’s horizon. First, Gore is dependent on a single basic material, PTFE, for manufacturing a high percentage of its products. If the raw material required to make PTFE became expensive or the product or production process were found to be environmentally unsafe or a low-cost or technically superior substitute became available, Gore could face difficulties. To reduce risk, Gore might diversify its material base. Second, Gore’s products are vulnerable to imitation by competitors. To grow and remain profitable, Gore must innovate, or the company could fall upon hard times. Gore’s culture seems ideally suited for innovation. Third, Gore’s culture has been sustained through a prolonged period of corporate growth. The company has not tried to sustain itself through a period of slow growth and/or market reversals. Other companies, such as IBM, have had real difficulties trying to sustain their culture in such circumstances. It is not clear how well Gore’s culture would stand up to adversity.

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Case 7 Three Roads to Innovation Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis This short case introduces students to the way in which 3M, a company whose lifeblood is innovation, seeks to promote and maintain a culture of innovation among its employees. It describes the various programs and techniques that 3M has developed to support entrepreneurship, including cross-functional teams and recognition and reward of employees. Teaching Objectives 1. To show how a company maintains a culture of innovation. 2. To show how interactions among people, property rights. structure, and ethics produce organizational culture. This case is best used after the W.L. Gore case in the same class period. It provides a succinct account of 3M’s product development process and how this entrepreneurial company maintains its ability to innovate new products. 3M’s goal is that 25 percent of its growth each year should come from new products. Pop Quiz Questions 1. What percentage of time does 3M encourage its researchers to use on projects of their own choosing? Answer: 15 percent 2. What is the structural innovation that 3M uses to encourage product innovation? Answer: A product team structure or cross-functional teams

Issues and Discussion Questions 1. What are the terminal and instrumental values of 3M’s culture? 3M’s main terminal value seems to be innovation—pushing its employees to excel at inventing new and improved products and processes that benefit customers. To achieve this ideal end state, it promotes the instrumental values of entrepreneurship, risk-taking, and autonomy to encourage experimentation. 3M develops norms and practices to encourage these values, including the expectation that 15 percent of employee time is for projects they choose with resources provided for these projects. 2. What are the main ways in which 3M tries to create a culture that supports innovation? 3M creates a culture for innovation in the following ways: a. Providing employees with freedom and resources for risk-taking. 3M encourages employees to use 15 percent of their time on projects they choose. b. Management sponsorship, whereby senior managers encourage and support innovation, and recognize and reward failure.

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c. Creation of cross-functional teams from product development, process development, marketing, manufacturing, packaging, and other functions, empowered to design and develop products to meet customer needs. Teams bring about the rapid development of shared norms and values that increase communication and reduce problems of subunit orientations to speed the development process. d. Rewarding and honoring cross-functional teams who introduced successful new products through the 3M Golden Step Program, which provides tangible rewards, and the Carleton Society, a hall of fame for 3M scientists. e. Rewarding innovators with promotions, in research or management, using its dual-ladder system of promotion and the practice of promoting from within the organization. f. Using product champions to head each team and providing entrepreneurial leadership needed for product development. A product champion supports group members, encourages shared group norms, and provides the resources needed to meet team goals. 3. How do the interactions among people, property rights, and structure and ethics combine to influence 3M’s cultural values? Values contribute to culture as product champions and management sponsors provide leadership and support to teams for experimentation. Cross-functional teams and the product team structure provide an organic structure, so people from different functions can cooperate and develop the shared norms and values that enhance innovation. Teams provide autonomy and allow risk-taking and individual decisionmaking. Property rights can be seen, as 3M tangibly rewards employees through promotion into management in 3M’s dual promotion system, bonuses for successful new product development, and intangible rewards like its scientists’ hall of fame. Ethics can be seen through 3M’s concern for customers and in extensively testing and developing products to meet customer needs.

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Case 8: The Scaffold Plank Incident Teaching Notes Copyright © Stewart C. Malone and Brad Brown, 1994. Used with permission. Synopsis A young “trader,” Bob Hopkins, quotes a price on a fairly large order of 3 x 12 rough-sawn planks to one of his wholesale lumber company’s best retail customers, Quality Lumber. Later, in an offhand conversation with a fellow trader, Bob becomes concerned that the rough-sawn lumber might be intended to be used as scaffold plank. Scaffold plank while 3 x 12 and rough-sawn, is inspected and certified to stringent standards to ensure its strength. It is also much more expensive than the lumber Bob gave the quote on. Bob’s first dilemma is whether or not he should call back his customer, Stan, and make sure he understands that his quote was not for scaffold plank. Bob is advised against calling because it is none of his business what his customer is ordering: Bob’s company has the lumber for sale and somebody wants to buy it. Bob calls Stan back anyway, and finds that the lumber order is intended to be used as scaffold plank, but the end customer wants to save some money. Besides, there is no scaffold plank in stock in the city. Now Bob’s dilemma is whether or not he should sell the lumber, knowing it is going to be used for a purpose for which it is not certified. Bob’s boss, John White, has made this a test of Bob’s loyalty to the company by writing up a sales order for the lumber and putting Bob’s name on it. Bob has to decide whether he should listen to John White, a well-respected businessman, or follow his own conscience.

Teaching Objectives The Scaffold Plank Incident is appropriate for a stimulating lively discussion about ethical behavior and corporate social responsibility. It is a short case, but the discussion is sometimes quite intense and can easily fill a regular 50- to 75-minute class period. It is best used after Chapter 2. This case illustrates well the different styles of thinking associated with the Utilitarian, Moral Rights, and Justice models of ethics. Draw upon Table 2.2 in the book in order to bring this point out. Students will have different perspectives on the case depending upon which model they use to view and frame the issues.

Pop Quiz Questions 1. What is scaffold plank used for? Answer: It is a higher-grade lumber generally used by construction workers or window washers that stand on the planks high above the ground. 2. What position did John White, the owner of the company, have regarding whether or not to sell the lumber? Answer: He was in favor of selling it.

Issues and Discussion Questions

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We generally follow the “seven step moral reasoning model” that was used as the discussion framework for ethical vignettes at the Arthur Andersen & Co. series of Conferences on Teaching Business Ethics1. This Teaching Note will follow that format because it provides an organized vehicle for bringing out all of the relevant aspects of the case. 1. What are the relevant facts in the case? •

Bob Hopkins has a straightforward order for lumber that his company regularly sells without question.

•

The order represents a substantial, but not incredible, sum of money, $13,536. (Board feet are calculated as the product of the thickness in inches, the width in feet, and the length in feet. Thus, this order is calculated as: Price = [3”x 1’x 16’x 600 pc.] x $470/1000 Bd Ft = $13,536.

•

Bob’s customer, Quality Lumber, is going to sell the lumber to a contractor who will use the lumber as scaffold plank.

•

If White Lumber does not sell the 3 x 12 planking, the end customer may end up using 2 x 12 planking—an even worse scaffolding solution—because there is no scaffold plank readily available.

The economy is slow and White Lumber Company needs this sale as well as future sales that might be foregone if Quality Lumber is lost as a customer.

2. What are the ethical issues? • • •

First, should Bob even try to confirm his suspicion that this perfectly legal order o f lumber will be used for a purpose it is not legally certified for? Should the lumber be sold once its intended use is determined? What should Bob do if he decides not to participate in this lumber sale?

3. Who are the primary players? • • • • •

•

Bob Hopkins John White—owner of White Lumber Company Stan Parrish—the buyer at Quality Lumber Co. Employees of White Lumber Company—many of whom are far less employable than Bob Hopkins if White Lumber has to have a lay-off. The foreman at the end-purchaser’s firm The workers who will be standing on the scaffolding

4. What are the possible alternatives? • •

Bob could sign the order, as is, and sell the lumber. Bob could agree to sell the lumber, but ensure that the invoice is clearly marked “not certified for use as scaffold plank.” (This option would not please Mr. White, Quality Lumber, or the contractor foreman. And it would not really do anything for the end-

This model is based on an extension of Gerald F. Cavanagh, Dennis J. Moberg, and Manual Velasquez, “The ethics of organizational politics,” Academy of Management Review 6 (1981) 363-78. 1

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• •

users, the workers on the planks, because they are not likely to see the invoice. However, this will be a popular suggestion from the students in your class.) Bob could refuse to sign the order. If he does this, he may be fired—or he may not be fired, at least not immediately. Bob could be a “whistle-blower,” attempting to expose the whole situation to protect the lives of unknown workers.

5. What are the ethics of the alternatives? Three philosophical approaches can be introduced to students as a way of analyzing the ethics of the alternatives. Utilitarian Approach: The utilitarian approach to ethical decision-making holds that moral decisions should produce the greatest good for the greatest number in society as a whole. While appealing conceptually, especially to quantitatively oriented students who understand cost/benefit analysis, the actual calculations can be complex when the costs and benefits to all of society must be considered. For that reason, simplifying assumptions are generally made to limit the calculations to only those directly impacted. (These simplifying assumptions often give rise to criticisms that this model is simplistic, often self-serving, and unable to appropriately consider impacts that are not easily reduced to dollars and cents.) In this Scaffold Plank Incident, the benefits are fairly easily measured once the societal dimension is reduced to the primary stakeholders. But the costs can be complicated. One might want to calculate the cost to the contractor of having to wait for certified scaffold plank to be delivered (an alternative almost never suggested in class). The probability of this lumber causing an accident and the severity of that accident should be assessed. These probabilities can then be multiplied times the “cost” of the accident to develop the probabilistic “cost” of using uncertified lumber as scaffold planks. How do you place a dollar value on a life (or limbs)? Students have trouble wrestling with this issue even though we do it all the time in society. For instance, the installation of seat belts and air bags in automobiles can be projected to save a certain number of lives, but we generally delay implementation for several years because of costs. The classic case concerning the “exploding” gas tanks in Ford Pintos can be brought up at this part of the discussion as an example of a utilitarian decision that was viewed as unacceptable in retrospect. Moral-Rights Approach: The moral-rights approach asserts that people have fundamental rights as human beings that cannot be taken away by another’s decisions. Those rights include:

• • •

The right of free consent. In this case the workers have the right to know they are risking their lives on substandard planking material. The right of freedom of conscience. Individuals may refrain from carrying out any order that violates their moral or religious norms. In the Scaffold Plank Incident, Bob Hopkins has the moral right to not be forced to sign the purchase order. The right to life and safety. In this case the characters seem to think that OSHA regulations are overcautious; but are they? How can they justify this belief? Justice Approach: The justice approach holds that moral decisions must be made on the basis of equity, fairness, and impartiality. And a decision must not make the least advantaged portions of society worse off. In this case, the justice model would lead us to conclude that the incomes of the lumber yard owners, brokers, and buyers is being traded off against the safety of the poor worker on the plank.

6. What are the practical constraints?

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a. It is very difficult for Bob Hopkins to find out who the end-user is in order to protect the workers’ interests. If he cannot do that, then just remaining “uninvolved” does not really solve any problems, because someone else in his company will sell the lumber to Stan and the dangerous scaffolding will be put up anyway. b. John White has turned this incident into a loyalty test. Bob Hopkins’s job may be jeopardized if he does not cooperate.

7. What actions should be taken? Here the discussion must be managed sensitively to ensure that attacks on other people’s positions do not become personal attacks on their character. We want the students to be developing an ethical reasoning framework for decision-making, rather than just stating their “feelings” without some grounding model. If the discussion lags or the class seems overwhelmingly committed to one course of action, the instructor may need to play the role of “devil’s advocate.” If the class seems to want to sign the purchase order because “it’s legal; what’s the problem?” ask a question such as “What if your brother worked on scaffolding? This might be his company. Would that make a difference?” Or, “How would you feel if you read in the paper that someone was killed in an accident because of uncertified scaffold plank?” (A former student mailed us just such an article from the Johnstown, Pennsylvania, Tribune Democrat dated October 1991.) The article recounts how in 1991, a Pittsburgh jury awarded $1.15 million dollars to Schree Toth, the widow of construction worker, Joseph Toth, who fell to his death when a rotten plank snapped on a construction project managed by Mellon-Stuart. It was discovered that Mellon-Stuart had used common planking instead of higher quality scaffold planking in the project. On the other hand, if the whole class seems too willing to refuse to sign the purchase order without facing the seriousness of the consequences, keep pressing them to see how far they could follow up on ensuring worker safety. Are we responsible for righting all the wrongs in the world, or only those we are directly in contact with? You could also introduce the concept of risk. Is there a point where the risk of danger is so small that we don’t have an ethical dilemma? After all, accidents will happen, won’t they? This tends to be a lively discussion. Our students always want to know what should be done. We avoid a direct answer and state that when they are in a situation where they have to make a difficult ethical decision, we want them to identify the issue and alternatives, have an ethical framework in their minds to give them guidance, and to agonize over their decision. If they do that, we can accept the decision. (We hope.)

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Case 9 Beer and Wine Industries: Bartles & Jaymes Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis This case is about a new industry—the wine cooler industry—and the manner in which Bartles & Jaymes, a subsidiary of Gallo Wines, became the market leader. It links the industry environment to organizational strategy and shows how competition develops in a new industry. It points out that a distinctive competence (e.g., marketing and distribution) leads to competitive advantage. It demonstrates the importance of using distinctive competences to manage the organizational environment and allows for an evaluation of Bartles & Jaymes’s strategy. The case considers how Gallo Company manages its environment and strategy as the leading wine company in the United States. Teaching Objectives 1. 2. 3. 4.

To analyze the organizational environment. To show how new industries through new products and how environmental competition changes. To illustrate the importance of developing a distinctive competence to compete in an industry. To demonstrate how strategy develops from a distinctive competence and how firms use their strengths to manage the industry environment. 5. To show how vertical integration helps defend competitive advantage and manage the environment. This case offers insights into many organization-environment issues and is best used after Chapters 8. It shows how a strategy evolved into a new industry. Gallo Brothers introduced a new product—a wine cooler—through a new subsidiary, Bartles & Jaymes, which became the market leader. The parent company’s strategy helped the new subsidiary’s strategy, increasing its competitive advantage. The case clarifies competition issues in the industry environment. Pop Quiz Questions 1. What corporate-level strategy contributes most to Gab’s competitive advantage? Answer: Vertical Integration 2. Did Bartles & Jaymes pursue a low-cost or a differentiation strategy? Answer: Differentiation strategy Issues and Discussion Questions Begin with an analysis of Gallo and look at the development and nature of its strategy at all levels in the firm. Examine threats and opportunities in the alcoholic beverage industry and the development of the wine cooler industry. Then examine how Gallo used its distinctive competences to exploit environmental opportunities by founding Bartles & Jaymes to enter the wine cooler industry.

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1. Chart the development of Gallo’s functional-, business-, and corporate-level strategies. What are the strengths and weaknesses of these strategies, and how do they fit together to provide the firm with its competitive advantage? At the functional level, Gallo’s distinctive competences have been in manufacturing and marketing. From the beginning, the two Gallo brothers took different roles in the company. Julio became responsible for increasing the output of wine from the family’s vineyards, and Ernest became responsible for finding innovative marketing techniques. The brothers seemed to be in competition: one tried to produce more than the other could sell, the other tried to sell more than his brother could produce. The two competences were complementary and resulted in Gallo’s being the largest vintner in the United States today. See Exhibit I. At the business level, strategy followed the development of these distinctive competences. At first, when the company concentrated on increasing output, it focused on selling bulk wine, bottled under other names. As marketing skills developed, the Gallo brothers bottled their own wine and concentrated on the inexpensive jug wine end of the market. They brought out such brands as Thunderbird (a cheap wine, high in alcohol content), and as a result, their image was connected with the jug wine business. Beginning in 1975, they changed their image and became broad differentiators in the wine industry. Besides cheap jug wines, they market a full range of varietal wines, such as Cabernet Sauvignon and Chardonnay, in both the premium, high-priced end of the market and the good-quality, medium-priced end of the market. They have expanded their domain and serve niches in the wine market by pursuing a product proliferation strategy. They have moved from a focused to a differentiated strategy by serving all market segments. Their marketing skills have contributed to this change in strategy, and to a degree, their jug wine image is fading. Gallo’s strategy now is to act as a broad differentiator, with many product lines aimed at all market segments. Though it is a closely held company, Gallo is probably the most profitable wine company in the market today. Its functional strategy matches its business strategy. The fit between functional- and business-level strategies occurs as well at the corporate level. From the beginning, Gallo has pursued a strategy of vertical integration that has contributed in many ways to its business-level strategy. Gallo operates in almost every value-added stage in the wine industry. First, it owns one of the biggest intrastate trucking companies in California to handle transportation needs. It ships its grapes to its winemaking facilities, makes its own bottles, and ships the raw materials needed for glass production (such as lime and sand) in its trucking fleet. It also makes its aluminum bottle tops in its own manufacturing unit. On the output side, Gallo controls marketing and distribution. It owns more of its distributors than competitors, and even the distributors it does not own conform to Gallo marketing practices to sell and distribute Gallo wines. Gallo has coopted distributors who rely on it for wine supplies and has power over them. Gallo enjoys extensive control over product marketing and can promote its own products rather than competitors’. Gallo decides how its wines are marketed in supermarkets. Gallo’s control over the environment through vertical integration illustrates resource dependence theory. Its strategy of vertical integration allows it to control and protect its resources because (1) it avoids the problems of using the market, such as the expense of middlemen, (2) it controls the value added at each stage of production, thus increasing productivity, and (3) controls distribution complements marketing skills, enabling Gallo to become the full-line differentiator. Student can see the reason for Gallo’s success. It has used strategy to control the environment—each level of strategy reinforces the next and feeds back to the other levels. All levels are complementary and

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allow the firm to reap gains from the fit among functional-, business-, and corporate-level strategies. At this point, discussion can turn to the wine industry and the opportunities and threats the firm is facing from the specific and general environmental forces. 2. What forces in the specific and general environments of the beer and wine industry result in threats and opportunities for Gallo? a. Specific Environment Forces in the specific environment include competitors, customers, suppliers, and so on. Some points to note are: • • •

• •

The threat of entry is low. Large firms with large share of the market dominate both industries. Small firms can enter the market, but dominant firms are not threatened, and they can counter threats by introducing competing brands. In addition, one of the principal barriers to entry for new firms is the huge marketing expenditures needed to enter these industries. And firms such as Gallo and Miller Brewing Co. are protected in this respect by their distinctive competence in marketing. Industry competition is high. Firms are competing for market share. Competition is not principally by price, but by image and differentiation. Each large wine firm has its jug wine, its middle-of-the-road brand, and its top-quality varietals in different price brackets, but within each price bracket there is little price competition. Large, powerful customers can be a problem in that large distributors control the distribution and marketing of beers and wines. Gallo owns many of its distributors, so it faces no threats. Large, powerful suppliers pose not problem for Gallo because it is vertically integrated backwards. It controls the supply of grapes, bottles, and so on.

b. General Environment Several forces in the general environment cause problems for beer and wine firms. Tough drunk-driving laws and the emergence of organizations such as MADD (Mothers Against Drunk Driving) have affected consumer attitudes toward alcohol and the level of consumption. • •

An increasingly health-conscious consumer, realizing that beer and wine are high in calories, demand lower-calorie beers and “healthier” alcohol products. The raising of the legal age for drinking and the increasing age of the population are reducing alcohol consumption. (People under 34 are typically the biggest consumers of alcoholic beverages.)

To these threats in the general environment, beer and wine firms responded with light or alcohol-free beers and wines. It was precisely this context that provided an opportunity for Gallo and other wine producers—the wine cooler industry. 3. In what ways did the Bartles & Jaymes venture enable Gallo to use its distinctive competences to introduce a new product and expand its domain? The emergence of the wine cooler industry was tailor made for Gallo. With the consumption of wine expected to level off or even decline, here was an opportunity to add to its product line and capitalize on its distinctive competences in manufacturing, marketing, and distribution. It was a perfect opportunity to exploit a new industry, and as yet there were no barriers to entry. The product itself was simple to produce (50 percent wine mixed with 50 percent fruit juice to produce a 6 percent level of alcohol, half as strong as wine but 30–40 percent stronger than beer). Wine coolers capitalized on the increasing popularity of soda, as the resulting mixture was sweet and carbonated.

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Gallo quickly exploited this opportunity by creating the product and using its marketing strengths to position the product to appeal to the wine cooler consumer. The product was marketed to the more sophisticated consumer as being healthier, because it had less alcohol, but fun and refreshing to drink. Gallo’s control over sales and distribution gave it an enormous advantage in terms of ability to reach the consumer. An innovative marketing campaign featuring two “good old boys,” rather than a California beach scene, contributed to the differentiated image. Bartles & Jaymes was given a multimillion dollar advertising budget to establish the product and achieve market leader status. By 1986 its combination of marketing and distribution skills had enabled it to replace the former industry leader, California Cooler. 4. What business-level strategy would you recommend that Bartles & Jaymes pursue in the future? How should Gallo continue to exploit its competitive advantage in this new industry environment? Although Gallo has now achieved market leader status, there are many competitors in the market. Barriers to entry include huge marketing budgets needed to establish new products—Bartles & Jaymes’s 1986 budget was $30 million. The case documents how competitors have positioned their products and attempted to segment the market to protect and enlarge their domains. Can Gallo maintain its status by marketing alone, or will it need to introduce new products to compete? The number of flavored wine coolers is increasing, as is the number of coolers whose base is not wine, but beer (Stroh’s) or bourbon (Jack Daniels). Should Bartles & Jaymes expand its product range or concentrate on its present formula? After all, no one would want Miller Lite to change, so should wine coolers change? Similarly, what is the future of the industry? Are wine coolers a fad, or will they continue to grow in demand as consumers switch from beer and wine to the new product? Answers will vary, but the case can be brought to a close by reviewing the way Gallo seized environmental opportunities and used its strategy of staying with the wine industry, its core business. Maybe Gallo’s should expand globally. The company is expanding California wines to enter the European and the Far East markets. Can wine coolers be far behind?

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Case 10 Bennett’s Machine Shop, Inc. Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis The case chronicles the progress of a small firm in the automotive machining and repair business that has grown and developed as a result of the entrepreneurial abilities of its founder, Pat Bennett. The case demonstrates how a company’s founder can hurt the company by becoming too closely involved in the day-to-day management to make decisions strategically. There are problems due to a lack of consistency in strategy and the inattention to managing structure. These problems are not obvious in a large corporation because organizational design remedies them over time. Teaching Objectives 1. To illustrate the process of small business management, entrepreneurship, and the pitfalls surrounding it. 2. To demonstrate how business-level strategy flows directly from a company’s distinctive competences. 3. To show how both strategy and structure are important in managing a small company effectively. 4. To provide students with the opportunity to do a SWOT (strengths, weaknesses, opportunities, threats) analysis to achieve a fit between strategy and structure. This is an excellent case to use after the lecture on strategy. Very straightforward and easy to analyze, this case allows students to understand how strategy relates to structure. It also is a good illustration of how structure must change as the organization grows. In this case, we have an entrepreneurial business owner whose organization has grown to the point that more structure and more management is needed. Pop Quiz Questions 1. What is Bennett’s core competence? Answer: Rebuilding and installing engines 2. What strategy does Bennett’s pursue? Answer: Differentiation or focused differentiation Issues and Discussion Questions The overriding strategic issue raised by this case is the need for the entrepreneur (1) to be in control of the company’s strategy and structure and (2) not to let routine operational problems dictate the development of the company’s mission and goals. Ask students to present a synopsis of Bennett’s mission, goals, and current business-level strategy and then to do a full-scale SWOT analysis of the company’s present situation. 1. What are Bennett’s current mission and business-level strategies? How have these developed over time from the company’s beginnings? Bennett’s Machine Shop specialized in rebuilding auto engines—taking old and worn-out engines and machining them by grinding and lathing to create renewed engines. The company went into auto repair

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work, installing the rebuilt engines along with other mechanical systems, such as air conditioning. These two activities were its main line of business for several years until an opportunity arose to machine and resharpen aircraft tools for the Boeing Corporation. This opportunity allowed the company to build on its distinctive competence in machining and provide a profitable opportunity for expansion. So Bennett’s bought new machine tools to meet Boeing’s needs, and the company was now involved in a third business. In terms of its mission, Bennett’s is in the business of finding ways of repairing or renewing mechanical equipment and operating systems of all kinds. This mission is a direct consequence of the interests of the company’s founder, Pat Bennett. Armed with a degree in engineering, Bennett is interested in all aspects of the machining business and is constantly searching for new ways to exploit his core competences. Bennett’s business-level strategy is built on the following: •

• •

It provides full-service rebuilding and installing of engines in customers’ cars. No other business in the local area offers such a complete service, although many simply sell rebuilt engines. Over time, Bennett’s has extended customer service by finding new ways of exploiting its distinctive competence in machining. Over time the customer groups served by Bennett’s have grown to reflect the different activities that Bennett’s now provides. Customers form a market segment, requiring rebuilt engines or general machining tasks. Its distinctive competence is the entrepreneurial ability and engineering competence of its founder, Pat Bennett. In this company, opportunities to offer new products for new customers are the direct result of the company’s distinctive competence.

2. Do a SWOT analysis of Bennett’s, and use it to outline the problems the company is presently experiencing. A SWOT analysis examines environmental opportunities or threats how distinctive competences lead to specific strengths or weaknesses that can help or harm the ability to manage the environment. a. Strengths • The ability of the founder to find new ways to exploit the firm’s distinctive competence in machining. The danger is that over time the firm has lost its core business activity, rebuilding and installing engines because of involvement in the Boeing tool-servicing contract. • The company’s ability to provide complete engine service. No other firm in the area can duplicate Bennett’s scale of activities, giving the firm a unique advantage. • The company’s ability to price its product below competitors’ (except for Hi-Lo Auto Parts, which does not install engines) and still make above-average profits. b. Weaknesses

•

Poor new venture management. The danger is that for each new venture, Bennett underestimated the time, resources, and management burden. Now he is contemplating even more ventures in machining, with the same set of resources.

•

Bennett’s inability to delegate and establish a good operating structure. The company has no established structure and control system. There is only one supervisor (Jack Beard, the shop coordinator), and Bennett questions his ability to supervise employees efficiently. The lack of control is illustrated by Bennett’s decision to position his office on the shop floor to supervise employees directly. This is too little too late, but supervising employees keep him from doing strategic planning. Bennett’s inattention to formulating and implementing strategy. Bennett has no clear concept of goals and how to achieve a fit between strategy and structure. The weaknesses are symptomatic of this larger problem: a lack of strategic thinking. Whenever the company

•

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generates excess cash, Bennett either spends the money or embarks on a new venture. He does not strengthen his existing supervision of employees or introduce control systems, such as accounting and personnel systems to monitor performance and provide feedback. This is left to part-time people who give him no feedback on performance or payroll costs. c. Opportunities •

•

The company should pursue the Boeing work, even at lower profit rates, and expand the machine side of operations. There are several business areas for expansion. General skills are an asset and can generate revenues and support the overhead costs that cause the current cash flow problem. Concentrate on expanding sales in the core business of engine rebuilding and installation. The company has a unique competence and an established market niche for its central business activity. New ventures should be left alone until this business is a consistently strong performer. The company should concentrate on establishing a good reputation with customers through advertising and on improving the quality of its work and customer service.

d. Threats • A rival company might establish an engine rebuilding machine shop. At present, there is no sign of competition. However, any service station could seize the opportunity to install engines obtained from suppliers such as Hi-Lo if Bennett’s lost credibility with consumers. • Boeing might become a powerful customer and act opportunistically toward Bennett. If Bennett continues devoting resources to Boeing, it may become increasingly dependent and locked in as a captive supplier. Bennett must ensure that his core business is not neglected by expanding work for Boeing. Bennett’s is an intrinsically strong company with a distinctive competence that can be exploited with a cohesive business-level strategy and structure. 3. On the basis of this SWOT analysis, suggest a plan for turning the company around. Be sure to link strategy and structure issues in your recommendation. •

•

•

•

On the strategy side, improve the company’s position in its core business of engine rebuilding by embarking on a marketing strategy to maintain demand. Demand falls because of a lack of innovative marketing. A sustained effort to smooth over periods of slack demand with increased advertising would stabilize the core business. Because the equipment and machinery to satisfy Boeing’s demands is paid off, Bennett’s should continue to bid for Boeing’s custom work to defray overhead and contribute to profits. However, this venture should not be expanded until the core business is on a sure footing. Bennett needs to overhaul and redesign organizational structure. He needs a supervisory hierarchy, with supervisors or team leaders in each area of activity. The shop coordinator position should be eliminated and replaced with a supervisory position. An incentive structure should be introduced to improve productivity, customer service, and cleanliness. This could be tied to company profits, and workers could receive monthly and yearly bonuses in addition to their weekly paychecks. Finally, Bennett needs to increase standardization and formalization and introduce rules and procedures for control. Purchasing and inventory control is almost nonexistent; a new person should control this activity. The profit made on parts would pay this person’s salary after the system is implemented. This person could have responsibility for marketing and for finding out how customers heard about Bennett’s. As financial circumstances permit, a production controller could handle the books and accounting systems. Payroll and expenses data should

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be given to Bennett weekly to maintain control of operations. He should use of budgets to control operations. •

Given the above changes, Bennett should be able to focus on the strategic needs of the business because the changes in strategy and structure should free him from routine decisionmaking.

Focusing on strategy and the core business plus adopting an effective structure should provide a solid foundation for growth. With operational procedures, Bennett’s can innovate and increase company revenues. The company can exploit its distinctive competence and maximize the founder’s entrepreneurial talents.

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Case 11 Southwest Airlines Teaching Notes Copyright © Gareth R. Jones, 1996 Synopsis This case illustrates the challenges facing a new organization in a hostile environment. It charts the way Herb Kelleher, Southwest’s well-known CEO, orchestrated company growth and strategy since its founding in 1968 and first flight in 1971 to its status today as one of the most profitable U.S. airlines. Teaching Objectives This case can be used after the chapters on the environment and strategy or the chapter on birth, growth, decline and death to show that challenges change over time. The instructor can ask about experiences flying Southwest, and knowledge of the carrier to generate lively discussion. Remember, however, that the focus of this case is on the early years of Southwest’s development and illustrates how to manage in a complex environment. 1. To illustrate the issues and problems surrounding the founding or birth of a new organization. 2. To discuss how the environment is a force affecting organizations. 3. To show how strategy develops over time. Discussion Questions 1. At the beginning, what forces in the environment most affected Southwest Airlines and what opportunity was Southwest founded to take advantage of? Southwest Airlines owes its start to the fact that in 1970 the Civil Aeronautics Board or CAB regulated competition in the interstate U.S. airline market and would not allow new airlines into the U.S. market. Major airlines showed little interest in intrastate travel, seeing it as an appendage to interstate operations. Intrastate flights were expensive, inconvenient, and had poor service. Kelleher and his colleagues saw the opportunity for efficient in-state operations between Dallas, Houston, and San Antonio. They established Southwest to meet the need for cheap flights in Texas. Recognizing the potential threat from the upstart airline, the major air carriers in Texas, American Airlines and Braniff, launched a legal battle to stop Southwest. They delayed the airline for two years, but in 1971 the first Southwest Airlines flight took off. Though they lost their legal battle, the major carriers launched a price war against Southwest, attempting to drive the cash-starved carrier out of business, but Southwest fought back and survived. The case shows the uncertainty surrounding organizational birth. Southwest entered the industry late with a K-specialist strategy. Since then, in expanding into many market niches it pursues a K-generalist strategy (See below). 2. Chart the development of Southwest’s strategy over time. From the beginning, intense competition and a lack of resources drove Kelleher’s strategy for the airline. To survive, the airline had to keep costs low, or it could not charge the low fares on which survival hinged. It had to increase the efficiency of the planes and develop the “10 minute turnaround” that allowed the operation of three planes with the same efficiency as the competitors’ operation of four. To keep costs low, Southwest operated out of the less-popular hub in a city, Dallas’s Love Field, Houston’s Hobby airport, and eventually Chicago’s Midway airport. These early moves became major strengths for Southwest.

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With its focused low cost business-level strategy established, Kelleher took advantage of another change in the macro-environment, the Federal Airline Deregulation Act of 1978, to expand. Taking advantage of Southwest’s low-cost strengths, and the increased competition due to deregulation, Kelleher expanded east into Louisiana, and west using Phoenix as a hub. During the 1980s, Southwest expanded into major Western markets, meeting intense resistance from the high-cost airlines. Southwest’s low-cost structure protected it and generated revenues and profits for expansion. The next opportunity came in 1991, when Midway Airlines, operating from Chicago’s Midway airport, closed due to vigorous industry competition. Kelleher and his colleagues seized the opportunity of securing the gates controlled by Midway and establishing a hub in the Midwest. In 1995, Southwest began service in Florida and made inroads on the eastern seaboard. Kelleher’s strategy has been to turn Southwest into a national carrier and move from a focused low-cost strategy to an industry wide low-cost strategy. Because Southwest has the lowest costs of any U.S. airline, it can pursue this strategy. It sets the prices in many of its markets and has built its cost advantage by using Boeing 737 aircraft and cross-training employees to help speed the turnaround of planes. 3. How would you describe the airline industry after deregulation? Since deregulation the airline industry has been very uncertain. In terms of the three sources of uncertainty (complexity, dynamism and richness): • • •

The environment is very complex. The airlines compete head to head and the actions of one company directly affect the actions of others. The environment has changed rapidly as new airlines are born and some airlines go bankrupt. Change is tied to change in the macro-environment, particularly the economy, which affects demand. The environment has been poor, characterized by price wars as airlines match prices to retain customers. Only those airlines with reduced costs have been profitable, and many have gone bankrupt or been subject to takeovers in the last decade.

In this uncertain environment, Southwest pursued a market development strategy, since its goal has been to find new market segments for its basic product—a low-priced airline ticket. The low-cost structure has allowed for this, and Southwest does not compete in a market without a cost advantage. To pursue its market development strategy, the airline has developed its operating route structure and taken over small airlines to become a national carrier. 4. What do you think the future holds for Southwest? The future looks bright. Demand is increasing as the economy booms. Boeing continues to supply Southwest with new versions of the efficient 737. Southwest enjoys a national reputation and has secured scarce gates in most large cities. It could become a major player and a threat to other, less-efficient, airlines. Kelleher, in delegating considerable operating authority to his employees, has avoided the crises that characterize the growth of many organizations.

Case 12 Pharmacia & Upjohn Teaching Notes Copyright © Gareth R. Jones, 1999 Synopsis

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This case is about the merger of two pharmaceutical companies. It details the rich history of Upjohn, a family owned company that had been in business since 1885. While they have successfully adapted to the environment through most decades, the pharmaceutical industry in the 1990s had become very complex. Despite heavy investment in R&D, Upjohn was not as successful as they had hoped at keeping new drugs in the market, which is critical in this industry. Pharmacia was an organization that had a very strong product development process, but needed a U.S. partner to become a strong player in that market. This case is best used towards the end of the course. It illustrates many issues related to organizational structure, managing in a global environment, strategy and structure, and adapting to change.

Teaching Objectives 1. To illustrate how organizations manage in dynamic, changing environments. 2. To show the power of complex environmental forces, and their effects on how organizations compete. 3. To illustrate how strategy develops from distinctive competences. 4. To show how mergers can create synergies between two organizations by combining core competences.

Pop Quiz Questions 1. What was Pharmacia’s core competence? A. Product development. 2. Why did Upjohn appeal to Pharmacia as a good merger candidate. A. They had the systems in place to give Pharmacia access to the U.S. market.

Issues and Discussion Questions Begin by focusing on Upjohn and its rich history. This is to illustrate how companies grow and adapt to the environment. Despite all their attempts, they were not able to compete effectively in the 1990s due to the lack of new drugs in the pipeline, which is critical in this industry. It is important that students understand that the source of this is a complex environment, not bad management. This is a good lead in to the value of mergers and acquisitions, which generally have a bad connotation to many students. Point out that many times, they can be beneficial by giving two organizations access to new markets, such as this case.

1. List the environmental challenges that Upjohn has faced in its history, and how it adapted. • The first competence was the invention of a new pill that released medication better in the body. The patent on this lasted for 15 years, when better types of pills were introduced. Upjohn then had to imitate the technologies of competing organizations. • They focused on introducing creative products such as providing pleasantly flavored drugs, and a sweet laxative that was a big seller for over 4 decades. The early 1900s also saw Upjohn add quite a few new product lines, and develop new research areas.

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• They aggressively marketed through doctors, which kept them successful through the 1930s. • Growth in the 1930s and 1940s was through vitamins. They were considered a leader in nutritional supplements. • By the 1950s, they were considered to be a leader in R&D, with 421 employees in that department alone. •

It pursued vertical integration by establishing its own chemical manufacturing division.

• Now a public company, they expanded in the 1960s and 70s through sales offices and production facilities worldwide. • By the 1980s, it had become a global research-based manufacturer and marketer of pharmaceuticals, chemicals, agriculture products, and health services.

2. What changes occurred in the pharmaceutical environment in the 1970s and 1980s? • It is important to chart the changes to show how difficult it is even for large and successful organizations to adapt. • More countries were tightening regulations on the drug approval process, lengthening tremendously the time it takes to introduce a new drug to market. This eroded profitability in that the patent time is reduced. • The introduction of the generic drug after patents expire puts tremendous pressure on the developing companies. It costs about $150 million to develop a new drug, and it must pay for this development through drug sales. •

This caused prices to go up, and many countries passed legislation to reduce drug prices.

• Health maintenance organizations (HMOs) emerged, which are like national chains that by drugs in bulk. This forced companies into bargaining and negotiating, which lowered profits.

•

As with most industries, global competition also became intense in this industry.

3. What has occurred because of these changes in this industry? After detailing and discussing these changes, note that the solution was to merge with other organizations. This was primarily an attempt to vertically integrate, such as the merger between Merck and Medco, the mail order company.

4. Why did Upjohn seek a partner for a merger? Despite its best efforts at diversification and R&D, it was not able to keep new drugs in the pipeline, which is still critical in this industry. It recognized that it could not continue to be a global player on their own, and it did not want to be taken over. The merger between Pharmacia and Upjohn was a win-win for both organizations. Pharmacia had a very strong product development process, and Upjohn had the systems to allow Pharmacia to be a strong player in the U.S. market.

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This would allow both companies to offer a much wider product line to HMOs and the national drug supply companies. This put them in a much better bargaining position.

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Case 13 Philips, N.V. Teaching Notes Copyright © Charles W.L. Hill, 1994 Synopsis This case considers the large Dutch multinational electronics company, Philips NV, transformation of global strategy and structure during the 1980s and early 1990s to meet environmental competition. The case opens with the history of Philips from its founding in 1891 until the early 1980s when it evolved into a classic multidomestic company. Rapid changes took place in the operating environment during the 1960s and 1970s, making the multidomestic strategy inappropriate. Philips made organizational and strategic changes during the 1980s and early 1990s to transform the company from a multidomestic to a transnational corporation.

Teaching Objectives 1. To show how changes in the competitive environment require to change company strategy and structure. 2. To demonstrate the importance of achieving a close fit among strategy, structure, and environment. 3. To discuss the relative merits of multidomestic, global, and transnational strategies and structures to compete in the global marketplace. 4. To build appreciation for the difficulties of transforming the strategy and structure of an organization as large and complex as Philips. The Philips case is best used after Chapter 3 on the international environment. It can be an in-class discussion about global competition, global strategies, and organizational change. Although the case is short, the discussion takes a full class period. The best teaching plan is to identify environmental changes facing Philips in the 1970s. Ask why Philips had low profits during the 1970s. The answer is that its strategy and structure were no longer appropriate to its environment, and the result was poor performance. This opens the discussion of Philips’ strategic and organizational changes needed to survive in the 1980s and 1990s. The conclusion is that Philips must pursue transformational change in strategy and structure to become a transnational corporation. This leads to the next issue—the impediments to organizational and strategic change at Philips—and this discussion reveals the sources of organizational inertia.

Issues and Discussion Questions 1. How did the environment that Philips faced change during the 1960s and 1970s? What were the implications of those changes? A number of key changes took place in the operating environment during the 1960s and 1970s. Specifically: a. Falling trade barriers as a result of GATT and the EC paved the way for greater international competition and facilitated the emergence of companies pursuing a global strategy. b. Japanese companies emerged as world-class competitors in Philips’ major markets. Matsushita and Sony used a global strategy to drive down production costs and price competitively. Matsushita originally produced its products in Japan and exported globally. By serving the world market from a

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single, low-cost location, Matsushita reaped economies of scale and location, which helped undercut Philips’s prices. c. The fixed costs of developing new products rose. Amortizing these fixed costs required companies to reap substantial scale economies, which in turn implied that a global strategy was optimal. d. The pace of innovation accelerated, and product life cycles became shorter. The rapid obsolescence of products made it important to serve the world market from a single, low-cost location to capture all possible scale economies, thereby amortizing development costs. The increased pace of innovation in electronics requires that companies be fast and successful innovators. e. As global markets emerged in the electronics industry, issues of dominant design became important. This became clear in the battle between the Betamax and VHS formats for videocassette recorders. Setting global technological standards became a key source of competitive advantage. These changes made the world electronics industry more global. In the language of Chapter 8, the pressures for global integration increased while the pressures for local responsiveness declined. At the same time, competition based on innovation increased. To succeed in consumer electronics in the 1980s and 1990s, companies had to realize location and scale economies, amortize the fixed costs associated with product development, establish their technology as a dominant industry design, and excel at new product development. 2. Why did Philips have low profits during the 1970s? Why did this situation persist during the 1980s? The basic theme here is the lack of fit among strategy, structure, and environment. Philips was a multidomestic company in a global environment. The changes implemented during the 1980s were only cosmetic. The basic character of Philips was still rooted in strongly independent national organizations and a top-heavy bureaucracy in Eindhoven. Philips was not optimally organized for product innovation— as a company competing in the electronics industry needs to be. As a result, profits were low. Specifically: a. Philips had a global matrix structure based on national organizations and product divisions. The national organizations were responsible for day-to-day operations (manufacturing and marketing) and strategy implementation, whereas product strategy was determined jointly by worldwide product divisions and national organizations. The product divisions were responsible for new product development—although some R&D was undertaken within major national organizations. b. In practice, within this global matrix structure, national organizations were dominant. This is shown by the U.S. national organization’s decision to reject Philips’s own V2000 VCR format in favor of Matsushita’s VHS format, despite protest by the product division. Managers from national organizations populated Philips’ 10-person board. Although the board was to arbitrate disputes between worldwide product divisions and national organizations, it was biased toward the national organizations. c. The dominance of the national organizations over the product divisions resulted in duplication of manufacturing facilities and a lack of coordinated global strategy for new products. This duplication led to a lack of location and scale economies plus high operating costs. The lack of global coordination limited Philips’ ability to establish worldwide technological standards, putting it at a competitive disadvantage vis-à-vis Matsushita and Sony. Marketing was carried out in the national organizations, while R&D was carried out in the product divisions, leaving a coordination gap between the two functions. This gap harmed product development (i.e., products were poorly commercialized).

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d. For historical reasons, the technical and commercial sides of the business were split. Competition between technical and commercial managers paralleled the lack of integration between production and R&D hand and marketing. The consequences were poorly commercialized products and a slowness in bringing products to market. Since product innovation is important in this industry, this aspect of Philips’ structure and administrative heritage could explain the low profit rate. e. A further organizational drain on efficiency was the top-heavy headquarters bureaucracy. Most of the head office staff had experience with and were loyal to the national organizations. They were out of touch with customers and protected their own interests rather than value creation. They prevented a shift in the matrix from national organizations to product divisions. The root cause of Philips’ poor performance is a dysfunctional structure, poorly aligned with its environment. 3. What must Philips do to survive? Philips must adopt a transnational strategy and manage its global matrix and structure better. Strategically, Philips must do the following. a. Reduce costs by eliminating duplication and enhancing location and scale economies. It should serve the world market from a few choice manufacturing plants based in optimal locations (from a factor cost perspective). The company probably still needs local responsiveness. There may be a need for some customization of marketing strategy and, perhaps, product attributes. b. The company must become more innovative, introduce products more quickly, engineer simultaneous worldwide product introductions to establish technical standards, and better commercialize its technology. c. The company should seek strategic alliances with other major consumer electronics companies to achieve three goals: (1) share the costs and risks associated with developing new products, (2) improve core competences, and (3) help achieve new technical standards. With regard to structure, Philips needs to do the following: a. The product divisions should have the most power in the global matrix. Under Van de Klugt and Timmer, the company has moved rapidly in this direction. When the product divisions dominate the organization, Philips can rationalize production and eliminate duplication. Making product divisions major units can build ties between marketing and R&D. This should improve the new product development process. When product divisions dominate, the company will engineer worldwide simultaneous new product introductions, necessary for technical standards. b. Demands for local responsiveness—particularly in consumer electronics—indicate that the company must retain its national organizations. The national organizations need some control over marketing and national strategies. Philips needs a matrix, but one in which the product divisions dominate. c. The company must reduce it headquarters bureaucracy. d. Somehow the company must eliminate the damaging intracompany conflict between product divisions and national organizations and between the commercial and technical sides of the business. It must build a culture of shared values. This requires management education (reeducation) on a massive scale within Philips. (Philips is currently pursuing just such a management education program.)

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4. Identify the sources of inertia within Philips. How can inertia be overcome? To change its strategy and its structure, Philips must overcome internal inertia. Inertia forces within Philips have slowed the change process and contributed to poor performance. The inertia forces are: a. The Eindhoven bureaucracy. Large, entrenched, and with close ties to the national organizations, the headquarters bureaucracy has stifling change at Philips. Resistance by the Eindhoven bureaucracy to change makes sense—managers have the most to lose from a company realignment that increases the power of the product divisions. b. Administrative heritage. The administrative heritage of Philips includes a value system that pits the technical and commercial sides of the business against each other. It rates experience in the national organizations over experience in the product divisions. This value system and cognitive biases act as a barrier to change. c. Organizational Design. Until the mid-1980s, at least, Philips’ administrative heritage was reinforced by a design that gave the heads of national organizations more power and influence than divisional heads. The heads of national organizations would resist a decrease in their power and an increase in that of product division managers. d. Lack of new blood. Although Philips has a global reach, the company is really run by the so-called Dutch Mafia. The top managers are all Dutch, and most have a long history of service at Philips. As a consequence of this inbreeding, Philips’ managers lack the ability to see things from a different perspective. Their existing cognitive schemes prevent change. Overcoming these inertia forces requires a number of steps: a. Bold leadership and vision. All studies of organizational change emphasize the importance of leadership for transformational change. Philips needs to change its culture, starting at the top. The appointment of Timmer as CEO in 1990 signaled change. Timmer was the first Philips CEO to have come from the product divisions—an important symbolic change. Note though that even Timmer was reluctant to introduce significant restructuring until the investment community insisted. b. Cultural change. Philips must change its culture, which is based on its own heritage. Managers need a massive reeducation program to socialize them into a new value system that stresses cooperation between the technical and commercial side and emphasizes the dominance of the product divisions. New blood from outside Philips must be added plus promotion of non-Dutch nationals to senior management positions. c. Structural change. Philips must change its structure, and this has been the greatest area of progress. In 1987 Van de Klugt initiated a restructuring that increased the power of the product divisions by placing product division heads in the main management group and removing the heads of national organizations. d. Downsize the Eindhoven bureaucracy. This is a must, yet Philips has been slow in this area. This bureaucracy is a major source of resistance to change. Its power must be cut by downsizing and reassigning staff personnel to product divisions.

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Case 14 “Ramrod” Stockwell Teaching Notes Copyright © Gareth R. Jones, 1994

Synopsis This case considers conflict and politics in organizational settings. Ramsey “‘Ramrod” Stockwell, vice president for Production at Benson Metals, is becoming very uncooperative and difficult. Ramrod is having frequent run-ins with sales, who are exasperated with his uncooperativeness and refusal to supply them with reliable information concerning delivery dates, and production scheduling. Most students feel the problems stem from Ramrod, his obstinacy and “rough diamond” personality. They favor firing to reducing conflict and getting Benson Metals back on track. The problem is due to the internal power structure, unchanged in a changed environment with more importance placed on production than on sales. More company revenues come from the production and specialty steels, only produced because of skills in manufacturing. Historically, sales has been the most important function in Benson, and it is not willing to relinquish power and prerogatives and adjust to changing realities. Backed into a corner, Ramrod is fighting to protect the integrity of his department by being uncooperative and hoarding power to make others dependent on him. The case illustrates the difference between personal and institutional power. It highlights the need to analyze the context of behavior, not just the behavior itself.

Teaching Objectives 1. To show students how the power structure in an organization changes as contingencies—from the environment and technology—change. 2. To expose students to the sources of conflict in organizational settings. 3. To provide a vehicle for an action plan to resolve organizational conflict and devise a strategy for change. Based on real people and events, the case is best used after Chapter 14, on conflict and politics, so students have can analyze the power structure. It takes from 45 minutes to an hour to analyze, and with the Rondell Data case, it provides good exposure to managing organizational politics and conflict.

Pop Quiz Questions 1. What is Ramrod Stockwell’s title? Answer: Vice president for production 2. Which function is Ramrod having the most problems with? Answer: Sales

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Issues and Discussion Questions 1. What kinds of products and technologies does Benson Metals use? How have these been changing recently? Benson Metals, a medium-sized maker of specialty steel products, has traditionally used a craftslike technology to produce a variety of metals. In terms of Perrow’s model of technology, task variety and task analyzability are low, as there is still guesswork, skill, and even some “black magic” in manufacturing products. Benson also produces metals in very small quantities—pounds not tons—so that in terms of Woodward’s model it is small batch, and the skills and knowledge of production people are more important than machines in getting the job done—task complexity is low. Recently, the company has moved into making sophisticated and technically difficult steels for the aerospace industry. Not only are they difficult to produce, these steels require more research skills, metallurgical analysis, and delicate handling in all stages of production. They are produced to very stringent specifications. In terms of Perrow’s model, task variety has increased and task analyzability has fallen—production is more nonroutine and research oriented and depends more on the skills, experience, knowledge, and judgment of production personnel. Companies cannot imitate these skills, so they form a competitive advantage. The environment surrounding the company has changed to more uncertainty because a new range of products is manufactured. Both technology and environment have changed, affecting the contingencies facing the company, and increasing potential risks and returns. 2. What problems is Benson Metals encountering as it changes products and technologies? An increased level of conflict between sales and production poses a problem. Production is responding to the new pressures facing the organization, yet it is continually fighting with sales. Sales wants a rapid response to unexpected customer requests or tries to discover production’s plans or when the finished product will be ready. Morale is falling as the effects of these conflicts spread. Managers in different functions are taking sides, usually siding with sales against Ramrod and production. Communication and decision-making have slowed as a result of uncooperative attitudes. Integration between functions is falling. This is dangerous for nonroutine technology that requires a high level of differentiation and integration to be effective. 3. What is causing these problems in Benson Metals? The sources of the conflict can be isolated. Keep the discussion focused on the people, principally Ramrod, and examine what he is doing wrong; this approach makes the later analysis of power more dramatic. The attitudes and behavior of Ramrod Stockwell cause the problem. Although he is competent, he causes conflict within his own function and other functions. In his own function he fails to delegate authority and keeps the reins of power in his own hands. He has a centralized management style and does not share information, which makes it impossible for subordinates to provide salespeople with the information they need. He does not follow the chain of command; he goes to people only when he needs them. Violating lines of authority reduces the authority of his managers and also leaves them uninformed. His attitudes affect relationships with other functions, especially sales, because he also does not allow subordinates to share any but routine information. Because of the centralization of authority in production, subordinates do not possess information. Only Rob Bronson, the vice president of sales, can get information from Ramrod, and he is too busy to do so (and too proud since he would have to admit

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dependency on Ramrod). Stockwell says something can be done but fails to provide an accurate time frame, making planning difficult for sales and other departments—making them dependent on Ramrod. Ramrod is a “rough diamond” and has little social contact with other top managers at Benson Metals, which further isolates him. Managers have suggested sensitivity training to help him better communicate and delegate. The conclusion is that Ramrod is the problem—his attitudes and values. What is the solution? Fire Ramrod? After the pros and cons have been considered (the firm would lose his valuable skills and expertise), the instructor can turn the discussion to the issue of the company power structure; students rarely raise this issue. 4. In the past, which function has had the most power in Benson Metals? How has the power relationship between production and sales been changing recently? Traditionally, sales has enjoyed most of the power: • • • • •

President Tom Hollis worked with Fred Benson and was the sales director. Most of the “assistant to” managers groomed for promotion come from sales. Sales gets the credit for good work while production is blamed in the bad years. Sales can slip orders into the production process, although, as in the Continental Can case, this causes significant problems that will increase as the sophistication of the metals increases. Production managers play second fiddle to salespeople: They have inferior facilities and limited access to resources and to top managers.

The traditional power of sales reflects the fact that in the past, the main contingency facing Benson was to sell its products in a competitive market against four or five other companies who compete for the same customers. In this environment, developing customer relationships and servicing customers is very important. Recently the environment has changed and production has become more important—only production can produce the kinds of steels customers want. In the new competitive environment: • • •

Production controls the main contingencies. Production has become central and nonsubstitutable. Production reduces the uncertainty facing sales, not vice versa.

Even though the power of production is increasing, Benson’s internal power structure does not reflect this change. Rob Bronson, the sales manager realizes the change but deliberately avoids a change in the status of sales, and the result is conflict. The message is that maybe Ramrod is not the problem; it is Benson’s unchanged internal power structure in a changed environment. Ramrod’s attitudes and behaviors seem logical once it is understood that he wants to increase his function’s power and status in the organization: • • •

He doesn’t delegate authority and share information to increase his power over sales. Information is a power resource, and by hoarding information he can increase the uncertainty of other departments and their dependence on him. He agrees to all requests but gives no feedback. This increases his power and makes him nonsubstitutable.

Ramrod, consciously or unconsciously, is withholding information to increase the dependence of others on him and to change the balance of power in his favor. A strong CEO would understand this and might

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publicly recognize the importance of production and correct the imbalance. The chairman and his son are weak and the president is from sales, so nothing is being done. The level of conflict is escalating as sales fights back. 5. Suggest some ways to try to solve the problems the company is experiencing. What would be a good strategy for change? There are several ways of increasing the power of production vis-à-vis sales. •

• • • • •

Like Continental Can, Benson should create a production control department to buffer sales and production and reduce or eliminate sales’ ability to slip new customer orders into the production process. All requests should flow through production control, which transmits them to production. This reduces sales’ traditional power over production and helps promote a power balance. The support of top management is vital for a change in attitudes, and top management needs to recognize the increased status of production publicly. To increase the status of production, top management can improve manufacturing facilities and give Ramrod a bigger office and staff, a more central location, and greater access to top management. Create a task force to examine how environmental changes affect working relationships and to increase perceptions of the importance and status of production. Send Stockwell to a management training course to improve his skills at delegation. If these changes don’t work, then fire him.

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Case 15 Rondell Data Corporation Teaching Notes Copyright © Gareth R. Jones, 1994

Synopsis The Rondell Data Corporation is an innovative electronic products company that manufacturers two major lines of electronic products, broadcast equipment and data transmission equipment. The company has grown from 100 employees in 1947 to over 800 employees in 1978. As it has grown and increased the number of new products developed and manufactured, it is having problems coordinating activities. The company structure is not sufficient to manage the breadth and depth of activities. As functions have grown and differentiated, each has developed subunit orientations. As different functions pursue their own goals and fight for their own interests, the level of conflict in the organization increases, and the engineering department, finds itself in the crossfire. Engineering handles all conflicting demands and interests of the other functions and integrates activities, but without power. Power results from informal working relationships built up over time. The president, Bill Hunt, attributes the lack of cooperation to problems with the head of engineering, not to the failure of organizational structure. The issue is that the company needs a new structure to coordinate its activities and reduce conflict.

Teaching Objectives 1. To examine how conflict can emerge between functions because of poor organizational design. 2. To analyze the different sources of conflict in an organization. 3. To analyze how different kinds of structure can be used to reduce conflict and speed product development. This case is best used after the lecture on conflict, so students can pick out the sources of organizational conflict. It shows how the interests of functions differ and defines differentiation. Discussion can fill an entire class period if attention is given to redesigning the structure. Students sympathize with Frank Forbus, Rondell’s last director of engineering (Rondell has had three directors in four years), who is fired before Christmas because the CEO blames him and not Rondell’s structure for not resolving the conflict.

Pop Quiz Questions 1. What are Rondell’s main product lines? Answer: Broadcast and data transmission equipment 2. What happened to Frank Forbus at the end? Answer: He was fired.

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Issues and Discussion Questions 1. What are the goals and subunit orientations of the different functions in Rondell? The five principal functions in Rondell that must work together to produce new products are production, sales, research, engineering services (part of engineering), and the control department (containing accounting, purchasing, and materials control). Each function contributes something unique and has a distinct subunit orientation. a. Production minimizes manufacturing costs. The goal is to obtain products from the engineering design department for easy and inexpensive manufacturing. The manager in charge of production, Dave Schwab, is concerned about protecting his turf, and resists attempts by other departments to interfere with manufacturing. Production’s orientation is short-term technical efficiency. b. Sales’ goal is to supply customers with new and innovative products to retain their business. It also wants new products on time without shipping delays. Sales has a history of optimism about delivering new products quickly, and that optimism pressures other functions. Sales is to supply information to R&D for use in product development. Its orientation is toward meeting the changing needs of Rondell’s customers—it is focused on the environment. c. R&D’s goal is to find innovative ways of improving existing products and creating new products. Some R&D functions try to improve the manufacturing process to reduce costs or increase reliability, but R&D is purely new product oriented. R&D causes problems by introducing new innovations into the design process at an advanced stage. Its orientation is toward long-run product development. d. Engineering service’s job is to coordinate and integrate activities. Engineering services takes the inputs from sales and R&D—new customer requests or improved component designs—and builds the final product design with production specifications. It sends these plans to production, which designs the assembly process to produce inexpensively and efficiently. Its orientation is to improve the effectiveness of internal systems. e. The control department controls purchasing and materials control. It is a service department to the manufacturing and engineering services and has an internal systems orientation. 2. What are the sources of conflict in Rondell and why is the conflict among functions a major problem? Although engineering services is responsible for product development, other functions, like R&D and sales, influence the new product development process. This causes conflict. Sales can set ambitious targets for introducing new products over engineering’s objections. Both sales and R&D can intervene late in the design process and make changes, creating problems for engineering services. The production manager constantly returns the product design plans sent to manufacturing because engineers have not worked out the bugs. More redesign becomes necessary, and manufacturing is slowed down, causing sales problems as product introductions are delayed. Manufacturing itself contributes, routinely sending flawed plans back to engineering, though many errors could be corrected during the preproduction setup. Each function pursues its goals at the expense of the others. Growing complexity of the company’s business and the wide range of products it produces resulted in engineering services as the linchpin of the product development because it coordinates other functions. Yet, this function is considered crucial by top management, which always sides with R&D or sales against engineering. R&D is considered the most important function because the company has been

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driven by technical developments that result in new products. Just as in the Ramrod Stockwell case, there is a power imbalance, and different functions compete for power and control of resources. It is helpful to use the material on conflict in Chapter 14 and discuss the five main sources of conflict: a. Interdependence. As Rondell has grown, each function pursues its own interests at the expense of the others. Each subunit’s desire for autonomy conflicts with the organization’s desire for coordination, and Rondell’s structure provides no coordination and integration necessary to pull activities together. b. Heterogeneous goals and priorities. Each function’s different goal and subunit orientation causes it to view problems differently. Subunits have become competitive as the attempts of one to achieve goals thwart the attempts of another. c. Bureaucratic factors. Rondell’s structure has evolved historically and status inconsistencies have developed among different groups and managers—between the heads of R&D and engineering. Although the head of R&D, “Doc” Reeves, formally reports to Frank Forbus, the director of engineering, informally Reeves has more status and power. The manufacturing manager is concerned about his lack of a degree, which he believes lowers his status, so he deliberately causes problems for other managers to increase his power and status. d. Incompatible performance criteria. Each function is evaluated according to its goals, so when slow engineering design raises manufacturing costs or results in lost customers or penalty clauses in customer contracts, functions come into conflict. e. Competition for scarce resources. Some functions, such as R&D, can command whatever resources they want. Engineering services is running very lean, its engineers stretched thin, and no resources for an effective preproduction unit. Given that profits have fallen, competition for resources might increase, which will worsen the problems. It is clear that the company needs to take action. Because structure is the source of the problem, the company must understand how structure works and see how it has contributed to problems. 3. What kinds of organizational design choices and structure does Rondell use to control its activities? How do these contribute to the problems it is experiencing? Rondell uses a functional structure to coordinate its activities. It is a relatively small company, with only 800 employees, and it appears to have about five levels in the hierarchy, counting first-line supervisor and shop floor employees. The arrangement of functions has grown rather haphazardly over time. The rationale for having both R&D and engineering services report to the director of engineering is historical precedent, as the head of R&D also has a dotted-line relationship to the president. Similarly, the rationale for having purchasing and materials control in the control department while quality control is in engineering services developed as a temporary wartime need. There is no separate production control department to coordinate manufacturing, engineering services, and sales. Manufacturing seems to do its own scheduling, and preproduction engineering is weak and underdeveloped. Rondell’s pattern of differentiation contributes to its problems because task and role relationships among functions are not well defined. There are few formal integrating mechanisms, which promotes conflict. Going through Galbraith’s list of integrating mechanisms shows few formal links between functions such as task forces and teams. Most cross-functional contact is high up in the organization between the heads of the functions, not between lower level personnel. The single high-level executive committee was the brainchild of the controller and a relatively recent development. It was not working well because the president used it to pass on routine information, not for integrating among the functions.

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Both differentiation and integration in Rondell promote conflict among functions because the structure is not complex enough to coordinate the growing need for cross-functional communication. Decision-making is centralized, and Hunt is involved in all important decisions between himself and key functional managers. This centralized style prevents lower-level managers from solving their own problems through mutual adjustment. Thus, Rondell is not making the best use of its managers’ functional skills and abilities. Not much use is made of formalization or standardization except inside manufacturing, where Schwab has developed a very mechanistic structure. In building this barrier between manufacturing and the other functions, Schwab, the production manager, has caused major coordination and communication problems that foster conflict. Rondell uses the informal more than the formal organization to coordinate activities, and this causes conflict. The power of the key managers results from their historical contribution to the company. Even though the organizational chart shows that “Doc” Reeves reports to Frank Forbus, Reeves has more power and has the ear of the president. Forbus should have considerable formal power, but because of the informal decision-making, he is powerless to resist sales, R&D, or manufacturing when they cause problems at any stage of the design process—hence the conflict problem. Many of Rondell’s problems come from the design choices by top managers and especially by Hunt, who has paid little attention to design. 4. How might you change Rondell’s structure to reduce conflict and speed product development? There are many ways of changing structure and redefining task and role relationships, and the pros and cons of each of these can be discussed. Rondell could increase integration among functions. It could create product development committees from different functions who discuss product development and solve problems. Higher up the organization, the executive committee could function more effectively with an agenda and by holding the functions accountable for meeting goals. If integration increases, this might coordinate what is still a relatively small organization. This solution would require Hunt to change his management style. He must decentralize authority to functional level managers and avoid siding with one function over another. Given the history of the company, this is unlikely. A more radical solution might be necessary, involving a change in the level of differentiation to change the power of different functions and realign them. Engineering services has become the most central function. How can its power be increased? How can a new power balance be achieved? The company could use cross-functional teams and create a product team, responsible for a new product from development to manufacturing. This would be a radical change. R&D would be split off from engineering design and kept centralized, reporting directly to the president. Members of the R&D department might be assigned responsibility for liaison with each team and for transferring knowledge to each team. An engineering services manager who is responsible for coordinating teams and other functions would head each cross-functional team. Each team would be responsible for new product development activities, including preproduction planning, and would assume many responsibilities of the manufacturing department, which would become a resource. Schwab would supervise the assembly of the final product and not cause problems. Team leaders would report to the executive vice president.

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In this arrangement, the power of engineering services is increased because its managers lead the product teams, and the power of the other functions is reduced as their members report to the team leaders. The arrangement is flexible because as each product proceeds to the routine manufacturing stage, members can be reassigned to new teams. Such a structure would break down the functional boundaries that cause Rondell’s present problems, reduce conflict, and speed product development. A third option would be to keep the functional structure and to formalize the product development process by creating written guidelines that govern how a new product passes from stage to stage with minimal intervention from other functions. Here, the goal would be to increase the level of standardization to control cross-functional activities.

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