7974290 Organizational Theory Design and Change Chapter 01

CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS1 PART 1: LECTURE OUTLINES CHAPTER 1 ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS TEACHING OBJECTIVES 1. To define an organization and explain how it creates value in three stages: input, conversion, and output. (1.1) 2. To discuss why organizations exist and how they achieve goals collectively. (1.1) 3. To describe organizational theory, how organizations function, and relate to organizational structure, culture, and design. (1.2) 4. To show how organizational design helps a company gain a competitive advantage, deal with contingencies, manage diversity, increase efficiency, increase innovation, and effectively manage change. (1.2) 5. To illustrate the consequences of poor organizational design and loss of control over structure and culture. (1.2) 6. To discuss the three approaches of evaluating organizational effectiveness: external resource, internal systems, and technical approach. (1.3) 7. To distinguish between official goals and operating goals. (1.3) CHAPTER SUMMARY This chapter discusses organizations, organizational theory, and the importance of organizational design. An organization is a tool for individuals or groups to accomplish goals. An organization creates value at three stages: input, conversion, and output. Organizations exist because people working together to produce goods and services create more value than those working alone. Organizations may exist to increase specialization and the division of labor, to use large-scale technology, to manage the external environment, to economize on transaction costs, and to exert power and control over employees. The components of organizational theory are structure, culture, and design and change. Organizational design helps a company gain a competitive advantage, deal with contingencies, manage diversity, increase efficiency, and increase innovation. Poor organizational design results in company decline, including layoffs and difficulty in attracting resources. Organizational effectiveness should be measured according to a manager’s methods of control, innovation, and efficiency. The external resource, internal systems, or technical approach measure effectiveness and official and operative goals. Difficulties arise in measuring effectiveness even if stakeholders have shared goals. An organization must select the best way to achieve goals. Organizations are affected by the environment, technology, and processes. The technological environment entails innovations in production processes and new products. CHAPTER OUTLINE 1.1 What Is an Organization? An organization is intangible; it cannot be touched or felt. Thinking of an organization evokes its product or service. The name Anheuser-Busch evokes the word beer, not why the company provides beer or how it controls employees. An organization groups people and resources to provide goods and services to PHAM HOANG HIEN CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS satisfy a need. Entrepreneurs begin with the idea of satisfying a need then collect resources to meet that need. 2 Focus on New Information Technology: Amazon.com, Part 1 Amazon.com shows how Jeff Bezos saw a need and created an organization to meet it. Q. What prodded Jeff Bezos to start Amazon.com? A. Recognizing the opportunity to build an online bookstore, Bezos started Amazon.com to meet the needs of computer owners. An online bookstore could offer a larger and more diverse selection, an online catalogue, an easy search capability, and book reviews. Bezos organized resources to meet the need for a new bookstore. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ How Does an Organization Create Value? The value creation process includes input, conversion, and output. (Fig. 1.1) Q: What are some inputs a company needs to provide a product or service? A. Inputs include human resources, raw materials, capital, money, and information. The value created depends on how a company selects and acquires inputs. Inputs are transformed into outputs at the conversion stage. The value created depends on the quality of an organization’s skills and its ability to learn from the environment. The conversion process results in an output, a finished good, or a service. Sales revenue buys more inputs, so the value creation cycle continues. The value creation cycle is used for nonprofit and manufacturing organizations and service companies. Q. What are the inputs, conversion processes, and outputs at McDonald’s? (Fig. 1.2) A. The inputs include meat, fries, employees, and capital, such as cooking equipment. The conversion process entails cooking the food. The outputs are sandwiches and fries. Why Do Organizations Exist? People working together to produce goods and services create more value than people working alone. (Fig. 1.3) Organizations exist: To Increase Specialization and the Division of Labor In an organization, individuals concentrate on areas of expertise and become more specialized. An engineer concentrates on one part of the engine and this specialization creates value. To Use Large-Scale Technology Technology enables organizations to achieve economies of scale, cost savings through large-volume production, and economies of scope and cost savings when underutilized resources are shared. To Manage the External Environment An organization has the resources to monitor and manage the external environment, economic, political, and social factors plus suppliers and the market. PHAM HOANG HIEN CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS To Economize on Transaction Costs An organization can reduce transaction costs and expenses associated with negotiating, monitoring, and governing exchanges between people and can control exchanges. To Exert Power and Control Organizations exert pressure on employees to conform to task requirements through employment, promotions, and rewards. Employees who fail to meet organizational needs can be fired. These factors create stability, allow skills to develop, and increase value creation. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 3 1.2 What Is Organizational Theory? Organizational theory is the study of how organizations work and how they impact and are impacted by the environment. Organizational theory relates to organizational structure, culture, and design. (Fig. 1.4) Organizational structure is the formal setup of task and authority relationships. Structure controls the coordination of activities and employee motivation to attain goals. Structure must be continually evaluated. Organizational culture, a set of shared values and norms, shapes and controls behavior in an organization. Q: What determines culture? A. People, ethics, rights, and structure of the organization develop culture, which can vary widely among organizations that provide similar goods in the same environment. Coca-Cola promotes cooperation and has loyal employees, whereas Pepsi has a competitive culture and high turnover among managers. Organizational design is the process by which managers select and manage aspects of structure and culture so that an organization can achieve its goals. Organizational change is the process by which organizations move from their present state to some desired future state to increase their effectiveness. Organizational Insight 1.1: Opposite Organizing Approaches at Apple and Dell Computer People who start new organizations may lack the skills necessary to effectively design the organization. The Apple Computer example illustrates this well. Q. How do these two examples illustrate the importance of proper organizational design? PHAM HOANG HIEN Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ The Importance of Organizational Design and Change Organizational design helps a company deal with contingencies. understood how important a well designed organization was. Structure can make employees aware of the environment. achieve competitive advantage. specific decisions. Organizational design implements an organization’s strategy and serves as a core competency because it is difficult to imitate. The Consequences of Poor Organizational Design Organizational design affects company performance. PHAM HOANG HIEN . yet employee roles are often neglected until a crisis hits. An organization can design its structure to increase environmental control. Speed. and created a structure centered on participative management. and increase its efficiency and ability to innovate goods and services. One reason for decline is a loss of control over organizational structure and culture. making them hard to imitate. and abilities. acquiring resources becomes difficult. Although Jobs stated he had little desire to manage the day-to-day operations of Apple Computer. Dealing with Contingencies A contingency is an event that might occur and must be considered in planning. on the other hand. Talented employees leave. 4 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Managing Diversity The workforce has become more diverse with people of many national origins working for the same company. Organizational design must be continually evaluated. Managers are forced to change elements of structure and culture that derail strategy. and actions that use core competencies to create a competitive advantage. Organizational design makes a firm more innovative. Gaining Competitive Advantage Good organizational design offers a competitive advantage. and the value creation process slows down. Competitive advantage emerges from core competencies. Promoting Efficiency. An entrepreneurial culture fosters innovation.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS A. which caused problems. An organization must design its structure to maximize its diverse talents and to develop a culture that fosters cooperation. Michael Dell. Companies must compete with low-cost producers globally and market new products and processes. Structure and culture are tools to respond to the complex global environment and changing technology. The workforce is aging. value creating skills. and was not as hands-on as Jobs. he desired more power as the organization grew and began intervening in the day-to-day operations. manage diversity. Managers formulate strategies. and Innovation Organizational design can increase efficiency. Although technology can be duplicated. involving employees in decision making. structure and culture develop over time. and high productivity. and adapting the organization to meet those needs. Time Warner was very hierarchical in nature. An important factor is management’s ability to perceive and respond to environmental change. Organizational Insight 1. attracting resources. Q.3: Ups and Downs at Mattel This case illustrates the importance of both understanding customer needs. as evidenced by the implosion of the dot. profitability. Q. innovation.2: Redesigning AOL Time Warner This shows the difficulty in trying to merge two organizations that have very different structures. What indicators evaluate control over the environment? . Innovation entails developing skills to discover new products and processes and designing adaptable structures and cultures. Q. He created teams of both AOL and Time Warner managers. but made AOL managers responsible for taking the lead. environmental factors often play a role in the success of an organization. Stakeholders value aggressiveness and an entrepreneurial spirit. and the quality of a company’s products. What mistake did Mattel make in trying to satisfy customer needs? PHAM HOANG HIEN Q. 1. and using political processes. Indicators include stock price. Efficiency involves developing modern plants for rapid. return on investment.3 How Do Managers Measure Organizational Effectiveness? Researchers see primary management tasks as control. and culture. managers evaluate a firm’s ability to manage and control the external environment.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 2 here to emphasize the connection between organizational theory and structure. and efficiency. What did Pitman do to try and reorganize the two companies? A. while AOL was used to the fast-changing environment of the IT industry. change. A. How were the two organizations different from a structure standpoint? A. _________________________________________________________________________________ _________________________________________________________________________________ 5 Organizational Insight 1. low-cost production. The External Resource Approach: Control Using the external resource approach. In addition.coms. it shows that regardless of the structure. Control means dominating the external environment. design. as they were more accustomed to brining new products to market quickly. fast distribution. A company may be effective in one area and ineffective in another. Operative goals must be consistent with official goals. The Internal Systems Approach: Innovation Using the internal systems approach. to measure innovation. Q.4 The Plan of This Book PHAM HOANG HIEN . Measuring Effectiveness: Organizational Goals Organizational effectiveness is evaluated by both official and operative goals. Operative goals are specific long-term and short-term goals that direct tasks. and coordinating activities. What productivity measures could a service company use? A. the increased efficiency of these two companies as they affect consumers. Employee motivation is an important factor in productivity and efficiency. 6 Organizational Insight 1. managers evaluate organizational effectiveness. A good class discussion can revolve around the positive benefits of advanced technology. The Technical Approach: Efficiency The technical approach is used to evaluate efficiency. Official goals are the formal mission of an organization. production. Service companies could measure sales per employee or the ratio of goods sold to goods returned. Innovation is measured by the time needed for decision making. they use benchmarking to compare the company to competitors. Productivity gains include increased production or cost reduction. Structure and culture should foster flexibility and rapid response to market changes. managers examine market share and costs. How is innovation measured? A. they review decision-making time. Flexibility fosters innovation. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 3 here to emphasize the approaches to evaluating effectiveness. Q. ____________________________________________________________________________________ ____________________________________________________________________________________ 1. Productivity is measured at all stages of production. Consider for example.4: Improving Efficiency at FedEx and UPS This case is a good illustration of the importance of continuously evaluating and updating technology. Managers use operative goals to measure effectiveness.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS A. Effectiveness is measured by productivity and efficiency (ratio of outputs to inputs). The skills needed to rapidly develop new products was not present in the company that they purchased. They also underestimated the need to update their core products. To measure control. To measure efficiency. At the input stage. Organizational theory is the study of how organizations function. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ The Organizational Environment. value depends on how an organization selects and obtains the inputs. 3. and innovation management. Organizational design entails decisions about structure and culture.5 shows how the various chapters fit together and provide a model of the components involved in organizational design and change. Organizational Change. What is organizational effectiveness? Discuss three approaches to evaluating effectiveness and the problems of each approach. certain inputs create more value than others. and organizational structure and culture? . Structure is the formal set of task and authority relationships.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS Figure 1. profits will generate inputs and improve the conversion process. value is a function of employees’ skills. At the conversion stage. Organizational Design. and transforming them into a product or service. and the purpose of design is to develop a structure that will respond effectively to these challenges. How do organizations create value? What is the role of entrepreneurship in this process? Value is created at the input. gathering inputs. reengineering. The main source of uncertainty is the environment. 7 Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. Chapter 3 presents models that reveal why the environment is a major source of uncertainty. The third part of the book deals with the many different issues involved in changing and redesigning organizations. PHAM HOANG HIEN 2. and are impacted by employees and society. An organization must design its structure to handle relationships with stakeholders in the external environment. such as restructuring. including learning from and responding to the environment. Included in this are different change processes. The same basic problems occur in all work settings. conversion. Organizational theory deals with the whole organization. and output stages. Culture is a set of shared values that influence behavior. The value creation cycle will continue if customers are satisfied. organizational design and change. Entrepreneurship is important to value creation by recognizing a need. What is the relationship among organizational theory. Chapters 4 through 8 examine the principles on which organizations operate and the choices available for designing and redesigning their structures and cultures to match the environment. impact. Output creates value if it satisfies a need. The technical approach reviews an organization’s ability to use skills and resources efficiently. The external resource approach evaluates a company’s ability to obtain scarce resources and valued skills. This approach considers neither the environment nor structure and culture. Answers may vary slightly.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS 8 Organizational effectiveness is the ability to use resources to create value. innovation. Some measures include the length of time to get a product to market. This approach does not consider costs or the external environment. and drinks • Lower the cost of labor • Improve the quality of the food and the skills of employees • Increase profits. return on investment. and efficiency. innovation. decision-making speed. However. fries. A fast-food restaurant’s goals will differ from a business school’s goals because a school is a nonprofit organization. it includes control. stock price. and market share. (a) Some goals used to measure effectiveness at a fast-food restaurant are as follows: • Lower the cost of meat. and efficiency. These indexes are compared to competitors’ indexes. this approach fails to consider organizational culture and structure. and market share • Satisfy government requirements on sanitation and fair labor laws • Reduce employee conflict • Speed up the time it takes a customer to get served • Find more efficient ways to produce the food • Increase employee motivation by offering bonuses • Increase the quality of the food by ensuring that it is not too greasy and that it is hot when customers receive it • Minimize the number of wrong orders (b) A business school’s goals may be the following: • Attract top-quality faculty and students • Maximize revenue from tuition and fees • Offer scholarships • Attract revenue from organizations and alumni • Gain the support of the local community • Reduce conflict • Ensure that students are prepared for jobs • Respond to changes in the environment by constantly updating the curriculum • Encourage coordination among faculty from different departments ORGANIZATIONAL THEORY IN ACTION PHAM HOANG HIEN . Indicators include stock prices. and coordination time. The internal approach reviews the organization’s ability to innovate and respond to the environment quickly. 4. It is important to evaluate an organization in all three areas—control. Draw up a list of effectiveness goals that you would use to measure the performance of (a) a fastfood restaurant and (b) a school of business. this exercise encourages students to look through newspapers and magazines to find an example of a company that is dealing with some of the issues in the chapter. good or bad. 2. what are its major problems. and how does it measure effectiveness? Other issues such as technology or competition may be included. not just for-profit corporations. (3) They determine the best measures to evaluate the organization’s effectiveness. The founder. what does it do. (2) They identify environmental factors with the greatest impact. was the largest retailer of copying stores. Each module requires the student to collect and analyze company information for a report to be submitted at the end of the semester.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS Practicing Organizational Theory: Open Systems Dynamics Small groups of students design an organization from an open systems perspective: (1) They determine the input. The report answers the following questions: what is the organization. How do these behaviors relate to the attempts of doctors and nurses to increase organizational effectiveness in the ways discussed in the chapter? Or. and the role of ethics in this environment. The purpose is to help students understand the many ways in which organizations can help or harm people in the environment. Kinko’s had an informal management process and difficulty managing growth. CASE FOR ANALYSIS Kinko’s New Operating Structure Kinko’s Inc. The first example asked students to examine doctors and hospitals. or the local community play a role in the ethical behavior of doctors and hospitals. to attempts to pursue their own self-interest? This question serves as a good example of why organizations exist. 9 The Ethical Dimension This exercise will be found at the end of each chapter. ANALYZING THE ORGANIZATION Each student selects a company to study throughout the semester. Students may draw upon their own experiences with doctors. Orfalea. or contact a local company. but it had to change its operating structure in response to competitive pressures from Quick Copy and OfficeMax. Another interesting discussion might revolve around defining and discussing what “pursuing their own selfinterest” really means from both an ethical and a practical standpoint. how does it create value. 1 List examples of these ethical and unethical behaviors. and output processes. This is a complicated question because there are so many different systems in the health-care environment. who are its stakeholders. conversion. Medicare. The assignment for this chapter is to find a company that has helped or harmed a stakeholder group. or the discussion could shift to how insurance companies. Students can choose an organization like IBM or GM and find articles in magazines. Making the Connection Also at the end of every chapter. on the Internet. used franchising to launch PHAM HOANG HIEN . Make sure the students understand that all organizations attempt to increase their effectiveness. 1. but this structure should help Kinko’s to respond more quickly to competition and develop consistent procedures and services to meet customer needs. This is a good method for getting the students to understand the overall value of the material throughout the semester. and no sharing of ideas on customer service. and efficiency. To make sure students appreciate why organizations exist. Common examples include long lines at the grocery store. Consultants recommended centralized control and a set of internal authority relationships. Stress that performance is evaluated based on control.com web site (http://www. 3. etc. Kinko’s developed a more formal organizational structure. poor service at a restaurant. One student is an R&D manager who uses the internal systems approach. which are then shared with the class.amazon. Ask students to look the at the Amazon. 2 Use discussion questions during the class by dividing students into small groups or pairs and allowing 5–7 minutes to prepare answers. What were the problems facing Kinko’s managers? 10 Kinko’s structure was too decentralized. PHAM HOANG HIEN . Have them compare this to competitors that have surfaced. 4. One student is a manufacturing manager who evaluates performance using the technical approach.barnesandnoble. Ask students to explain the models in the chapter and give examples. making it difficult for top managers to implement changes rapidly. such as Barnes & Noble (http://www. innovation. TEACHING SUGGESTIONS 1.com). but this approach did not assist Kinko’s in controlling costs or improving customer service. It may take time for the store owners to relinquish control. have them give examples in class of when organizations have not served them well. What steps did managers take to solve these problems? Kinko’s centralized operating systems such as purchasing and finance to reduce costs. Models can be assigned in advance. Try to help them re-frame their examples in the context of the course material. The structure was informal with decisions left up to Kinko’s franchisees.com) and discuss how Amazon satisfies a need. The third is a corporate manager who uses the external resource approach. 2. such as specialization or the conversion process.CHAPTER 1: ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS growth. Use role play to measure organizational effectiveness using the three approaches. 5. Satisfying stakeholders creates problems due to competing goals. local communities.1) 2. (2. (2. including the sources of ethics. Organizational stakeholders include inside and outside stakeholders. MANAGERS. To examine how to create an ethical organization (2. and how it explains the relationship between top management and the board of directors (2. and employees. AND ETHICS TEACHING OBJECTIVES 1. Stakeholders are motivated to participate in an organization if they receive inducements or rewards that exceed their contributions. MANAGERS. 6. and the workforce.1) . A. Shareholders are company owners who buy stock to earn dividends and stock appreciation. 4. and the role of authority in making decisions (2. CHAPTER OUTLINE 2. They can withdraw support if inducements fall below contributions. CHAPTER SUMMARY This chapter examines the role that managers and stakeholders play in the organization. allocating rewards. suppliers. Ethics and ethical behavior is discussed. managers. moral hazard.4). To understand the role that ethics plays in top management (2. An organization must select the best way to achieve goals.CHAPTER 2: STAKEHOLDERS. trade unions. claim. an organization must minimally satisfy them all. the government.3).1 Organizational Stakeholders Inside stakeholders are closest to an organization and have a direct claim on organizational resources. and the general public. PHAM HOANG HIEN Organizations create value for stakeholders—those with an interest. Inside stakeholders include shareholders. To discuss an organization’s stakeholder groups. To examine difficulties in meeting stakeholders’ goals: competing goals. managers. and long-term effectiveness. local communities. Difficulties arise in measuring organizational effectiveness even if stakeholders have shared goals.3). and unions. AND ETHICS 1 CHAPTER 2 STAKEHOLDERS. or stake in the organization. To understand agency theory. allocating rewards.2) 3. Agency theory explains the relationship between top management and the board of directors.4). Although stakeholders have competing interests. Q: Name some inside stakeholder groups. 5. employees. To review and examine how top management is structured. (Table 2. and (2) outside stakeholders—customers. Every company has two main groups of stakeholders: (1) inside stakeholders—shareholders. including shareholders. and choosing a time frame to measure effectiveness. and how to create an ethical organization. 1: The Increasing Power of Institutional Investors Large institutional investors have increased the power of shareholders in dealing with management. It sends birthday cards to frequent fliers. Outside stakeholders include customers.000. PHAM HOANG HIEN . and the general public. Managers often leave an organization if contributions exceed inducements. answers letters. Southwest treats employees well.2: Southwest Airlines Satisfies Its Customers Q. the largest American public sector pension fund. The workforce includes nonmanagerial employees who contribute through the performance of assigned duties. Unless they get value. If employees (one stakeholder group) are treated well. and the company loses a stakeholder. AND ETHICS Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2 Organizational Insight 2. Customers are the largest outside stakeholder group. Organizational Insight 2. Southwest focuses on customer satisfaction. they feel motivated to treat customers (another stakeholder group) well. Calpers watches managers and boards to guard against the pursuit of personal interests at shareholders’ expense. How does Southwest satisfy stakeholders? A. Top managers are indirectly appointed by shareholders through a board of directors. Managers contribute skills to receive compensation and satisfaction. The California Public Employees Retirement System (Calpers). and gets feedback from customers on service. trade unions. Employees decrease performance or leave if contributions exceed inducements. Managers coordinate resources to meet organizational goals and strive to invest shareholder money profitably. Motivation is related to the rewards and punishments that influence performance. Who are outside stakeholders? A. they own 13 percent of the stock. How do large investors monitor managers? A.CHAPTER 2: STAKEHOLDERS. They block provisions that prevent shareholder benefits and decision making and control managers’ escalating salaries and bonuses. Q. MANAGERS.000 members. suppliers. local communities. customers withdraw monetary support. The money paid for a product is a customer’s contribution to the organization. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Outside stakeholders neither own nor work for the company but have an interest in it. Q. the government. manages $65 billion for over 1. U. allocating resources. The public was upset in 1992 when the president of United Way misused funds. AND ETHICS Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Suppliers provide raw materials and parts and directly affect company efficiency. _________________________________________________________________________________ _________________________________________________________________________________ • 3 2. by creating strong ties with suppliers to improve quality. whose cars have high-quality parts.2 Organizational Effectiveness: Satisfying Stakeholder’s Goals and Interests Competing Goals Shareholders own the company. and other issues. including real estate and employment. depend on local businesses. yet it is difficult to determine the distribution of excess rewards. The government wants companies to compete fairly and comply with laws pertaining to employee pay. Yet ownership and control are separated because managers control the company and can pursue personal interest. growth. automakers are imitating the Japanese. Trade unions directly impact a company’s productivity and effectiveness. . An organization must minimally satisfy the interests of all stakeholders who often have conflicting goals. the organization faces the problems of competing goals. They may focus on short-term profits instead of long-term growth or avoid risk taking because they control their own salaries. Allocating Rewards Reward allocation is important because it motivates stakeholders. thus managers should maximize shareholder wealth. The general public: The wealth of a nation is tied to the success of its businesses. and balancing short.S. discrimination.CHAPTER 2: STAKEHOLDERS. short-term profit. To win stakeholder approval. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to discussion question 1 here to highlight the potential controversy between shareholders and managers. The public wants corporations to behave in a socially responsible way. The government contributes to organizations by standardizing rules. or PHAM HOANG HIEN Organizations are coalitions of stakeholders who bargain to balance inducements with contributions. Which criteria should measure effectiveness. Suppliers indirectly attract customers because high-quality inputs lead to high-quality products. Local communities: The economics of a community. MANAGERS.and long-term goals. safety. but union demands can conflict with shareholder demands. AND ETHICS long-term wealth maximization? Should employees receive short-term bonuses or lifetime employment? Should shareholders receive dividends or have profits reinvested? 4 Organizational Insight 2. The CEO is responsible for setting an organization’s goals and designing its structure. As owners. The CEO chooses key executives to fill top-level positions in the hierarchy. 4. PHAM HOANG HIEN . However. doctors might have the incentive to give patients minimum standards of care to cut costs or overcharge patients to increase hospital profits. fire. 2. Still. 5. MANAGERS. Figure 2.1 shows the reporting relationships of a large company. and discipline top management. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Managing Stakeholder Interests Satisfying stakeholders such as customers. Authority is the power to hold people accountable for what they do.3: Should Doctors Own Stock In Hospitals? There is a trend for medical doctors to become stockholders in the hospitals in which they work. The board has the legal authority to hire. The Chief Executive Officer The CEO is at the top of the hierarchy and can influence organizational effectiveness and the decision making process in the following five ways: 1.CHAPTER 2: STAKEHOLDERS. The CEO determines top management’s rewards and incentives. and they are represented by a board of directors. employees. 2. Q. The CEO’s actions and reputation influence inside and outside stakeholders opinions of the organization and impact the organizations ability to attract resources from its environment. There are potentially competing goals for doctors as shareholders and caregivers. who act as trustees.3 Top Managers and Organizational Authority Shareholders are the legal owners of the corporation. Is this a conflict of interest between doctors and patients? A. The CEO controls the allocation of scarce resources among an organization’s functions and divisions. 3. and the government reaches the ultimate goal of satisfying managers and shareholders. doctors see themselves as professionals and feel there is no reason to assume they lack integrity. the responsibility of using organizational resources to create value is delegated to managers. CHAPTER 2: STAKEHOLDERS, MANAGERS, AND ETHICS The Top-Management Team The president is the person who has a position directly below the CEO and generally is called the chief operating officer (COO). In most companies the president takes responsibility for managing the organization’s internal operations, and the CEO takes responsibility for managing the organization’s relationship with external stakeholders and for formulating a long-range business plan. Executive vice presidents are directly below the president. They oversee a company’s most important line and staff functions. Q. What is the difference between a line role and a staff role? A manager who has a line role is directly responsible for the production of goods and services, such as a production manager. A manager who has a staff role has no direct responsibility for production and is in an advisory role. R&D and sales managers have staff roles. The president and executive vice president constitute a company’s top-management team and are part of corporate management. The topmanagement team is a critical part of an organization, because they make many important decisions, such as what strategy the organization should pursue. 5 Other Managers Other corporate managers include senior vice presidents and vice presidents. Vice presidents report to senior vice presidents, who report to executive vice presidents. Companies may also have general managers or divisional managers. These managers are present only in companies that are organized into separate business divisions. For example, a person could be in charge of the Frito-Lay Division of Pepsi-Cola. These managers are divisional management and not corporate management and they determine policies for the divisions that they run instead of objectives for the organization as a whole. Divisional managers generally report to a member of the topmanagement team. Managers at the next level are called functional managers; these managers are in charge of a certain function, like marketing or finance. Functional managers are responsible for developing capabilities in their area that lead to core competences. An Agency Theory Perspective Agency theory is useful for understanding the relationships between various levels of management. A relationship exists when one party (the principle) delegates decision making authority or control to another (the agent). The agency problem is that of accountability, both because one party may have more information than the other, but also the parties may have different goals. Moral hazard occurs when the agent has more information than the principle and the agent has an incentive to pursue his or her own self-interests. To solve the agency problem, governance mechanisms must be put in place, which are some forms of control which align the interests of the principles and agents. Q. How does the agency problem make managing difficult? PHAM HOANG HIEN CHAPTER 2: STAKEHOLDERS, MANAGERS, AND ETHICS 6 The theory is typically used to describe relationships that could exist when managers don’t have a clear picture of or understanding of the job at hand. Consider a job such as a delivery driver. They are basically on the road with little supervision, so they have more information than their managers do regarding the day-to-day requirements of the job. If that is combined with incentive to pursue selfinterests, the situation is such that bad things are possible. For example, a delivery driver may decide to spend company time running personal errands, because it is in his best interests, and management will not find out. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2.4 Top Managers and Organizational Ethics Ethics are the moral principles or beliefs about what is right or wrong. These principles help guide managers when the best course of action is not clear, or when different stakeholders have different needs. Because management decisions are often difficult, it is useful to understand the frameworks that individuals use in making ethical decisions. Table 2.2 discusses three models that are relevant for management, the utilitarian model, the moral rights model, and the justice model. Organizational Insight 2.4: The Use of Animals in Cosmetic Testing Gillette believes that the only safe way to test its products is to use animals, and it defends its position by responding to every letter of protest, and even telephoning children at home to explain. Q. Is using animals ethical? A. Answers will vary dramatically. Instead of letting the students “argue” about the merits of each position, try to frame their answers into the utilitarian, moral rights, and justice perspectives so that they get a feel for why people can come to different conclusions. Sources of Organizational Ethics Ethics come from three sources, society, group or professional, and individual. Societal Ethics PHAM HOANG HIEN These include such things as the legal system, customs in a society or culture, and in the norms and values that people use to interact with each other. Organizational Insight 2.5: Is it Right to Use Child Labor? Many low-cost foreign suppliers employ young children to produce their products. Q. Is it ethical for U.S. companies to purchase products from these companies? A. Again, answers will vary, and the two positions are detailed in the case, but try and frame the discussion around the thought processes that managers might use in making this decision. Professional Ethics CHAPTER 2: STAKEHOLDERS, MANAGERS, AND ETHICS These are the moral values and rules that a specific group relies on, such as doctors or lawyers. A good example is athletics. In football or basketball, it is acceptable and not considered cheating to try and sneak something by an official. Players don’t call penalties on themselves. However, in golf, the ethical standards are such that players are expected to call infractions on themselves. 7 Individual Ethics These are the personal and moral standards that individuals use to structure their interactions with people. Why do ethical rules develop? Because individuals when left to their own devices tend to pursue their own goals at the expense of the common good. The “Tragedy of the Commons” example illustrates this well. Ethical rules and laws emerge to control this type of behavior. Why Does Unethical Behavior Occur? Unethical behavior occurs due to lapses in personal ethics, self-interest, and outside pressure. Lapses in Personal Ethics Individuals may believe that any help to the organization is acceptable, even if it harms others. Self-Interest Individuals face ethical issues when they weigh personal interests against the impact of their actions on others. Research suggests that individuals with high stakes are more likely to behave unethically. Companies with financial problems are more likely to commit unethical and illegal acts (price fixing). Outside Pressure The probability of unethical behavior increases when outsiders pressure individuals to perform. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2.5 Creating an Ethical Organization Ethical people create an ethical organization. An employee decision is ethical if it falls within acceptable standards in the organization’s environment, is communicated to all affected parties and is approved by those with whom the decision maker has significant personal relationships. An unethical decision hurts stakeholders in a manner that is unacceptable in the organization’s environment. Top managers influence a company’s ethical culture. As a figurehead, a manager models the company position on ethics and promotes ethical behavior through employee incentives. A manager informs customers and stakeholders about values and allocates resources to social causes. PHAM HOANG HIEN These are whistle-blowers. AND ETHICS Designing an Ethical Structure and Control System Structure and culture can be designed to encourage ethical behavior. Authority relationships and rules can be designed to foster ethical behavior. 2. What is the agency problem? What steps can be taken to solve it? PHAM HOANG HIEN . Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. when their job may involve staffing. What would each stakeholder group want to do with the profits. budgeting. shareholders would want a dividend. MANAGERS. What is the role of the top management team? Make sure that students understand that top management has specific duties. we expect top management to know everything that goes on in their organization. etc. Create an ethics committee to make formal ethical judgments. Too often. If employees feel helpless to prevent an unethical act or are afraid to discuss ethical concerns. they may confide in an outside person or agency. You might also compare what a top management team does in a small company versus a large company. Allow subordinates to discuss ethical concerns with upper-level managers. they don’t want increased profits through unethical behavior. customers would like to see reduced prices. but unethical top managers make an ethical culture difficult to establish. The mission statement can direct employees towards ethical decisions. This is a good way to illustrate how different groups will view the same issue. For example. 2. A good way to illustrate this is to have the students imagine that an organization has much more profit at the end of the year than originally forecasted. Unethical behavior makes a company a riskier investment. 3. or designing the strategic mission. Outside stakeholders such as the government can create rules to promote ethical behavior. hurts a company’s reputation. Outside regulation can help establish societal ethics. and top management impacts ethics. Supporting the Interests of Stakeholder Groups Although shareholders want high profits. 8 Creating an Ethical Culture Ethics are part of an organization’s culture. 3. Give some examples of how the interests of different stakeholder groups may conflict. and lowers its stock price.CHAPTER 2: STAKEHOLDERS. Ethical top managers foster an ethical culture. Create an ethics officer to investigate claims and inform employees about ethics. employees would want a bonus. An organization can take the following actions to make whistle-blowing acceptable: 1. there are financial reasons to behave ethically as opposed to it just “being the right thing to do. AND ETHICS 9 The main focus of this is to understand the problems that can occur when individuals that need to work together have different goals. but in management. What caused these behaviors. MANAGERS.” 5. The Ethical Dimension This one asks the student to think about the last time they either were treated unethically or saw someone else being treated unethically.” It is easy to think that everything wrong in society is an ethical dilemma. The point is.CHAPTER 2: STAKEHOLDERS. Make sure they understand the difference between ethics and “bad behavior. Ask a manager to describe an instance of ethical behavior that she or he observed and an instance of unethical behavior. and what were the outcomes? Make sure the focus is on the long-term outcomes. . Also. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory Small groups of students are designing a code of ethics for a large supermarket chain. This is a good exercise for illustrating agency theory and moral hazard. Look at Arthur Andersen. The solution is to make sure systems are in place that keep everyone focused on the same goals. 4. 6. so that students can see the real value of ethical behavior. Making the Connection Students are looking for managers that have pursued their own self-interest at the expense of other stakeholders. Use the 3 questions on page 38 as a guide for the students to assess the code. it means something different. Why is it important for managers and organizations to behave ethically? Because society is better off. Search business magazines such as Fortune or Business Week for an example of ethical or unethical behavior. First they need to discuss what ethical dilemmas employees will face. and how this applies to organizations. you might discuss which stakeholders are affected most by the code of conduct. because most management decisions have an ethical component. and the organization is better off in the long-term. and then design a code of conduct that is most appropriate. ANALYZING THE ORGANIZATION PHAM HOANG HIEN . Look at the longterm benefits of Johnson & Johnson’s decision as compared to Dow Corning. This is easy to do. and use the material in the chapter to analyze it. and have the opportunity and motivation to pursue their own self interests. TEACHING SUGGESTIONS 1. a third volunteer. another volunteer. used franchising to launch growth. The founder.” What this shows is that organizations must put forth effort to manage ethically. 3.com/our_company/our_credo/index. Outline a series of steps Dow Corning’s directors and managers should have taken to have prevented this problem. and try to look at what their ethical stances are. and discuss what their interest or “claim” in the organization is. identify its top management structure. CASE FOR ANALYSIS 10 Kinko’s New Operating Structure Kinko’s Inc. such as their local gas station. 2. was the largest retailer of copying stores. I can sell you brooms at a lower price and give you a 5% commission on the deal. you might discuss how at Dow Corning. One student will be a warehouse worker who overhears the supervisor. the management behavior seemed “out of character. MANAGERS. Orfalea. Kinko’s had an informal management process and difficulty managing growth. this would have never happened. Had they had a system like J&J. It is clear from looking at J&J’s credo that they really focus on stakeholders and making ethical decisions. The point is that they should have had some sort of ethical system in place to help guide them in making decisions. Point out that huge companies like Arthur Andersen really can’t afford to have a PHAM HOANG HIEN . Have them make a list of all of the stakeholders. AND ETHICS This module focuses on having students identify the stakeholders of their chosen organization. 2. make sure the students really understand the value of behaving ethically. The setting will be a government warehouse. Why did the managers at the two organizations have different ethical stances towards their customers? (Hint go to J&J’s website and look at its Code of Ethics). Use the utilitarian. Consultants recommended centralized control and a set of internal authority relationships. The supervisor does not know that the worker overheard the conversation.” The supervisor states that he or she is tired of paperwork and that will be fine. A role play can be used to encourage a discussion on ethics. If you will bypass procurement procedures. but this approach did not assist Kinko’s in controlling costs or improving customer service. In contrasting the stance. and this is illustrated quite well by their credo. and says to the supervisor: “This warehouse has thousands of items. church. which contains cleaning supplies. It might be worthwhile to either print this out or bring up the website during class.htm.jnj. The distributor comes to the warehouse. Discuss what the worker should do. The credo can be viewed at http://www. make a deal with a distributor. and justice models to compare solutions from different perspectives. it does not just come naturally to so called “good managers. moral rights. or electric company.” Johnson and Johnson does this.CHAPTER 2: STAKEHOLDERS. This helps them to relate the theory to actual practice. but it had to change its operating structure in response to competitive pressures from Quick Copy and OfficeMax. have the students identify all of the stakeholders of a well known organization. 1. In small groups. In light of the recent corporate scandals. and consumers have too many choices. Point out that a few bad decisions at Arthur Andersen effectively shut the company down.CHAPTER 2: STAKEHOLDERS. Visit the Johnson & Johnson website and look at their credo. 11 PHAM HOANG HIEN . AND ETHICS bad image. yet profoundly effective this philosophy is. The organizational insights in this chapter are very useful for classroom discussion.4. remembering to keep the focus on how managers must make decisions. split the class into two groups based upon their initial opinion of using animals in cosmetic testing. The global economy is too competitive. Discuss with the class how simple. using Insight 2. You can then have a mini-debate in class on the issues. MANAGERS. 4. 5. For example. General environmental forces include: economic.1) To distinguish between the specific and general environment. Strategies for managing competitive interdependencies include: collusion and cartels. co-optation. Specific environmental forces include outside stakeholder groups that directly impact the ability to obtain resources: customers. and mergers and takeovers. and joint ventures. technological. demographic and cultural. Mechanisms to minimize transaction costs and avoid bureaucratic costs include: keiretsu. Sources of transaction costs include: environmental uncertainty. and environmental forces. strategic alliances to include long-term contracts. third-party linkage mechanisms.1) To discuss the sources of uncertainty in the environment: complexity. A simple. The global marketplace makes the environment highly uncertain. 5. Strategies for managing symbiotic resource interdependencies include: developing a good reputation. unions. 7. How can the environment be managed? Resource dependence theory states that an organization should minimize its dependence on scarce resources. organizations have symbiotic and competitive interdependencies. (3. political. (3. dynamic.4) To examine strategies for managing competitive interdependencies. and risk involved with specific asset investments. dynamism. franchise. strategic alliances.6) CHAPTER SUMMARY An organization’s domain includes its goods and services and its customers. To define the organizational environment and organizational domain.1) To review resource dependence theory. distributors. 8. minority ownership. dynamism. need to prevent opportunism. an organization should use informal linkages when transaction costs are low. (3. but a complex.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 1 CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. competitors. 6. and outsourcing. (3. PHAM HOANG HIEN . 3. Transaction cost theory considers the costs of interorganizational linkage mechanisms. (3. and richness. An organization should choose the linkage that provides the greatest transaction cost savings at the lowest bureaucratic costs. (3. An organization must cope with forces in the specific and general environments. poor environment is highly uncertain. stable. networks. Because formal linkage mechanisms increase bureaucratic costs. and richness determine the extent of environmental uncertainty. 2. and mergers and takeovers. Complexity. In the specific environment. international. the government. and suppliers. bounded rationality.2) To examine strategies for managing symbiotic resource interdependencies. (3.5) To review transaction cost theory. rich environment has some uncertainty. One way to enlarge the domain is to expand internationally. (Fig. unions. a firm gains resources and the domain grows. Name the forces in the general environment. Organizational Insight 3.1 What Is the Organizational Environment? The resources surrounding an organization. protection. An organization operates in both specific and general environments. An organization deals with each group to attain resources for survival. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 1 here to give an example of the specific and general environments. and social forces. age. Technological forces. and input prices. Changes in the kinds of customers or in consumer tastes affect an organization. Political and environmental forces impact government policy toward business and stakeholders. PHAM HOANG HIEN . In this case. and affect production costs. including new production methods. comprise the organizational environment. including birthrates.S. Resource procurement is impacted by competition. changes in technology. Managers Stumble in Hungary This case illustrates the complexities associated with expanding globally. cultural.1 GE’s U.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 2 CHAPTER OUTLINE 3. such as raw materials and skilled workers. 3. impact operations. The general environment contains forces that affect all organizations and shape the specific environment. and lifestyle of a nation’s people influence demand. competitors. The organizational domain refers to the goods and services offered and the customers and other stakeholders served. Demographic. A. The specific environment contains outside stakeholder groups who have a direct effect on obtaining resources. there were dramatically different expectations between workers and managers.1) Outside stakeholder groups include customers. suppliers. Strategies to attract customers change to meet new customer needs. distributors. Poor environmental management shrinks a firm’s domain. Q. and the government. and an organization conducts transactions to obtain these resources for production. By managing these environments effectively. This case also illustrates how important it is to manage both the specific and general environmental forces in order to take advantage of the global marketplace. an organization designs transactions to enlarge its domain. and enlargement of its domain. How do global markets affect environmental stability? A. the more complex. uncertain. (Fig. When is an environment stable? A. Producing different products for different customers increases complexity. dynamic. A poor environment is not only located in a poor country or region. The more interconnected the forces in specific and general environment. and richness of the environment. 3. and interconnectedness of specific and general forces. but faces intense competition and battles for resources. Managing 100 suppliers is easier than 1. Describe the traditional environment for booksellers. and poor environment. When is an environment unstable and dynamic? A. Q. Uncertainty stems from complexity. PHAM HOANG HIEN .CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 3 Sources of Uncertainty in the Organizational Environment Because all organizations face uncertainty. and rich environment and high in a complex.000. unstable. and difficult to manage is the environment. Q.com. and rich. Uncertainty is low in a simple. number. managers cannot predict resource supply. dynamism. Q.com changed the whole nature of the bookselling environment. What makes an environment poor? A. the more uncertainty a firm faces. Environmental dynamism is determined by how much and how fast specific and general environmental forces change. an organization plans environmental management. Environmental richness depends on the quantity of resources available for an organization’s domain. In most industries. Q.2) Environmental complexity is a function of the strength. the global marketplace makes the environment more complex. Dynamism means that environmental forces change quickly and unpredictably. The greater the number and differences among them. Rich means abundant resources and low uncertainty. stable. Q When is an environment rich? A. Q. Part 2 Amazon. Notes____________________________________________________________________________ Focus on New Information Technology: Amazon. Stability means that environmental forces affect resource supply in a predictable way. After determining its environmental forces. and customers became more closely linked. Resource dependence theory proposes that an organization’s goal is to minimize its reliance on other organizations for the supply of scarce resources. Before Amazon.com changed the global environment? A. making the environment more uncertain and competitive. Amazon created a higher level of industry competition and made the industry environment poorer. They should chart these forces in the specific and general environments and plan how to deal with contingencies. stores. who supplied small bookstores or large chains like Barnes & Noble. Q. large bookstores compete online. dynamism. and richness of the environment.2 Resource Dependence Theory Resource supply is contingent on the complexity. What causes dependence on another organization for a specific resource? A. A poor environment faces scarce resources. uncertainty was low. Information technology made the environment more unstable and resources harder to secure. Direct negotiation with publishers led to increased environmental complexity because publishers. PHAM HOANG HIEN . How has Amazon. and rich environment. wholesalers. Managerial Implications: Analyzing the Environment Managers should analyze the organizational environment and identify sources of uncertainty. • Refer to discussion question 2 here for examples of environmental uncertainty. By offering quick access to all books in print at a discount. 3. Dependence is contingent on two factors: how essential the input is to survival and the degree to which others control the resource. simple. Small bookstores have closed. In this stable. book publishers sold indirectly to wholesalers. Q. and online bookstores do battle in price wars. and large and small companies were profitable.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 4 A. Two facets of resource dependence must be managed: An organization must exert influence to get resources and respond to the needs and demands of others in its environment. An organization is more dependent if the resource is critical to survival and tightly controlled. a valuable input in producing effective applications software. Q. ______________________________________________________________________________ ______________________________________________________________________________ 3. so companies depend on Microsoft. What companies have symbiotic interdependencies? A. Q. Microsoft is not dependent on others for resources. and merger and takeover. The control of this resource has increased Microsoft’s market share. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ • Refer to discussion question 3 to review resource dependence theory. Auto manufacturers distribute cars through dealers. The specific environment contains symbiotic and competitive interdependencies. and the company was found to have an unfair advantage in a court of law. This makes Microsoft extremely powerful. How does Microsoft manage resource dependence? A. It controls the development of computer operating systems. (Fig.4 Strategies for Managing Symbiotic Resource Interdependencies Cooperation is greater if strategy is formal. co-optation. Symbiotic interdependencies occur when the outputs of one organization serve as the inputs for another. The best interorganizational strategy reduces uncertainty and provides the least loss of control.3) PHAM HOANG HIEN Notes_______________________________________________________________________________ .3 Interorganizational Strategies for Managing Resource Dependencies. strategic alliance. Competitive interdependencies exist among organizations that compete for scarce resources. an organization and its suppliers. _________________________________________________________________________________ _________________________________________________________________________________ 3. 3. Four strategies for managing symbiotic resource interdependencies include: developing a good reputation. An organization manages interdependencies through interorganizational strategies. with a loss of freedom for independent action.2: Mighty Microsoft Microsoft dominates the operating system market. Linkage mechanisms connect companies and require coordinated actions.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 5 Organizational Insight 3. A contract requires compliance even if a firm can negotiate a better offer. Intel supplies chips for computer manufacturers such as Compaq. each of which owns shares in the other organizations and works to further group interests. Strategic alliances. 3. The Japanese keiretsu is a group of organizations. 3. networks. At the Fuyo keiretsu. A network is a group that coordinates activities via contract. sharing of resources by several companies.4) Long-term contracts reduce costs by sharing resources or spreading the risk associated with activities such as marketing and R&D. In many countries bribery is used. companies rely on formal alliances. Minority Ownership occurs when organizations buy a stake in each other. Co-optation is used to counter problematic forces in the specific environment. (Fig. Some use an interlocking directorate. How can outsiders be brought inside the organization? A. and reduce the difficulty of managing parent company interdependencies. Q. (Fig. Japan has two types of keiretsu: Capital keiretsu to manage input and output linkages and financial keiretsu for linkages among different companies. Contracts. and prompt payment of bills. Members have other companies with minority ownership in suppliers. are popular for managing interdependencies. a linkage whereby a director from one company sits on the board of another. A financial keiretsu is an interlocking directorate with members serving on the bank’s board. Participants can pool distinctive competences. a formal legal agreement defines rights and responsibilities. but it illegal in the United States. minority ownership. Developing a good reputation is the most frequently used linkage mechanism for managing symbiotic interdependencies. PHAM HOANG HIEN . An organization brings adversaries inside the organization. Hitachi. Name the advantages of joint ventures. (Fig. high-quality goods and services. A company can perform design work and have partners produce the product. The more formal agreements provide stronger linkages and tighter control over joint activities. Partners use those skills to increase efficiency and reduce the core organization’s costs and size.5) Joint ventures are formal strategic alliances among two or more companies to establish and share ownership in a new business. and joint venture. because the only connection is the agreement. both written or verbal. Each organization sends managers to the new company. design a new structure. and Canon. A dishonest company will be unsuccessful in the long term. 3. Toyota is a capital keiretsu with a minority stake in suppliers.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 6 Developing a Good Reputation An organization can build a good reputation in the eyes of customers and suppliers through fairness and honesty. usually with a bank at the center. A network is more formal than a contract because more ties connect members who share competencies such as R&D skills with partners. As environmental uncertainty increases. keep parent companies small. Toyota works with suppliers to improve quality.6) Q. Fuji Bank is the center with members such as Nissan. Alliances include: long-term contracts. A. forming a more formal alliance. are the most informal kind of alliance. Q.7) Collusion and Cartels Collusion. The OPEC cartel controls the price of oil. Some strategies are illegal in the United States. reduces competitive uncertainty.. and signaling. competitors save money. The association can lobby the government for favorable industry policies. competitors still plot to coordinate activities. 3. A. Advantages: Interaction decreases the concern about deceptive organizational practices. Third-Party Linkage Mechanisms PHAM HOANG HIEN An indirect way to coordinate activities is through a third-party linkage mechanism. An increased information flow allows an easier response. developing technology and obtaining a patent). and problems arise in managing a new business. third-party linkage mechanisms. a secret pact among competitors to share data for an illegal purpose. deter new entrants. Collusion includes: setting industry standards on pricing and product specifications. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 3. or harm competitors (e. but organizations can use strategies to manage competitive resource interdependencies: collusion and cartels. How do companies collude in the United States? A. making artificially high prices industry standards (a leader sets the price and competitors conform).CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 7 Mergers and takeovers are the most formal strategies for managing interdependencies. However. This strategy is used if a company must control a critical resource or manage a significant interdependency. (Fig. A merger or takeover results in resource exchanges within organizations and prevents control by a powerful supplier or customer. A cartel.5 Strategies for Managing Competitive Resource Interdependencies Competition increases uncertainty. By cooperating in a joint venture. Q. . Strategic alliances manage both symbiotic and competitive interdependencies. increases the stability and richness of an organization’s environment and reduces uncertainty. A more formal strategy is an explicit attempt to coordinate a competitor’s activities. mergers and takeovers are costly. a group that coordinates activities. Although collusion and cartels are illegal in the United States. and mergers and takeovers. strategic alliances. a cue to competitors about price hikes and strategies through announcements. These linkage mechanisms let companies co-opt themselves and benefit from coordination. Third-party linkages assist in managing resource interdependencies and reducing uncertainties. a regulatory body such as a trade association that shares information and governs competitive practices.g. Give an example of a cartel. mechanized structures make it hard to compete in a dynamic environment. IBM and Xerox are similar examples. PHAM HOANG HIEN . What companies faced this problem? A. and governing exchanges between people. Transaction cost theory proposes that organizations should aim to minimize transaction costs for inside dealings and outside transactions. Q. Some companies use mergers to become the sole player in the marketplace.6 Transaction Cost Theory Interorganizational strategies provide control over forces in the specific and general environments. Transaction cost theory addresses why and when organizations choose and change strategies. Managers should aim for an informal linkage mechanism yet identify the purpose and problems of a strategic alliance to choose between a formal or informal linkage mechanism. and because monopolies have faced no competition. Transaction cost theory is useful for identifying the costs and benefits of each linkage mechanism.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 8 Mergers and takeovers strengthen a competitive position by increasing a firm’s domain and ability to broaden its product range. monitoring. Why are cartels. Transaction costs are associated with negotiating. their tall. time spent monitoring and negotiating exchanges could have created value. a monopoly. Transaction costs reduce productivity. GM controlled its environment for a long time and then suffered greatly when the environment changed. Competitors enter the industry due to changes in technology or government policies. and large companies use them for environmental change. 3. collusion. which is illegal in the United States and most other developed countries. and other anticompetitive practices bad for companies? A. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Managerial Implications: Resource Dependence Theory Managers should study each resource transaction and decide how to manage it. Q. and potential exchange partners decrease. a customer may buy products at a lower price. Ekco has a new computer system that provides a just-intime inventory service to retailers that simplifies ordering and inventory tracking. one exchange relationship. Bounded rationality makes it costly to manage transactions in uncertain environments. A rise in transaction costs leads to more formal linkage mechanisms to gain control. and select the linkage that achieves cost savings at the lowest level of bureaucratic costs. Transaction cost theory attributes the move from less to more formal linkage to reducing transaction costs. known as bounded rationality. organizations increase transaction costs by using resources to enforce agreements for protection. is risky. to process data and understand their environment.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 9 Sources of Transaction Costs Environmental uncertainty and bounded rationality: People have a limited ability. uncertainty is low. How does Ekco Group manage interorganizational relationships? A. organizations use formal linkage mechanisms like minority ownership. including bakeware products. PHAM HOANG HIEN . Risk and specific assets: Investing in specific assets. The Ekco Group reduces customer transaction costs by offering a wide range of products. Opportunism and small numbers: The potential for opportunism is high when relying on one supplier or a few trading partners. Joint venture partners favor activities that create value for both parties. such as reputation and unwritten contracts. and pest control devices. such as contracts. so they use formal linkages. so customers save by dealing with one supplier. Companies do not trust each other. When choosing a strategy. Organizational Insight 3. Transaction costs increase when more specific goods and services are exchanged. whereas time spent in a meeting could have created value. because one firm owns the other. Integration and communication are costly. household plastic products. Transaction costs are low when nonspecific goods and services are exchanged. Merger partners seek mutual success. uncertainty increases. estimate the savings from using different linkage mechanisms. Q. Transaction Costs and Linkage Mechanisms Interorganizational linkage mechanisms depend on transaction costs. and many exchange partners exist. So. kitchen tools. Bureaucratic Costs Formal linkage mechanisms reduce transaction costs but may not be used because internal or bureaucratic transaction costs are still incurred. Using Transaction Cost Theory to Choose an Interorganizational Strategy Transaction cost theory considers the costs of linkage mechanisms and forecasts when and why a strategy should be selected. To reduce transaction costs. estimate the bureaucratic costs.3: Ekco and its Suppliers The Ekco Group offers a wide product range. managers must: Identify the sources of and level of transaction costs. Companies use informal linkage mechanisms. After the company invests. It also illustrates how organizations operating in the global environment really need to specialize and be very efficient at what they do. who makes exchanges with the customer. Pick an organization. For a complex product. Franchisers give rights to franchisees because the bureaucratic costs of managing their businesses are too high. really shows how complex the global environment is. The decision to make or outsource products depends on whether value exceeds bureaucratic costs. The transaction cost approach considers why and how organizations choose different linkage mechanisms. An organization considers transaction costs when deciding on product distribution. The franchiser gives a franchisee the rights to use resources in exchange for a flat fee or a percentage of the profits. such as a local travel agency or supermarket. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. PHAM HOANG HIEN • Refer to discussion question 5 here to review transaction cost theory. Otherwise.4: Li & Fung’s Global Supply Chain Management This insight. Three mechanisms minimize transaction costs while avoiding bureaucratic costs: Keiretsu offers the benefits of ownership without the costs. informal mechanisms with lower bureaucratic costs should be selected. Outsourcing. The franchiser provides the inputs to the franchisee. is another strategy for managing interdependencies. How does a franchise reduce transaction costs without incurring bureaucratic costs? A. then draw a map of the forces in its general and specific environments that affect the way it operates. The optimal mechanism minimizes transaction and bureaucratic costs. Organizational Insight 3. Franchising allows for marketing a company’s products in a particular area. buying a specialized service. Q.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 10 Transaction cost theory suggests that formal linkage mechanisms are appropriate when transaction costs are high. Auto manufacturers control franchised auto repair dealers. The relationship is symbiotic. but without ownership and the management costs. Toyota has a minority interest in its suppliers for control and reduced uncertainty. but products such as groceries require less control and can be sold through retailers. Describe its organizational domain. _________________________________________________________________________________ _________________________________________________________________________________ . in addition to illustrating transaction cost theory. a company will have formal control over franchisees or distribution outlets. For a local supermarket. PHAM HOANG HIEN Resource dependence theory states that interorganizational linkages minimize dependence on other organizations for scarce resources and influence them to make resources available. reducing risks and costs. demographic and cultural. The environment is dynamic and uncertain if forces change significantly or quickly. In the growth stage. technological. General environmental forces are economic. competitors. competitors.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 11 Answers will vary. Strategic alliances require resource sharing. Uncertainty is kept low by managing complex relationships with outside stakeholders. but operates in a dynamic environment. suppliers. between rich and poor. Customer preference influences store offerings. what motivates organizations to form interorganizational linkages? Under what conditions would a company prefer a more formal linkage mechanism to a less-formal one? Transaction cost theory states that interorganizational linkages minimize transaction and bureaucratic costs. 3. unions. An organization chooses a more formal linkage mechanism as transaction costs increase. a few suppliers. Health care regulation could affect operations. suppliers. the domain includes neighborhood customers. 2. . and richness. (Technology may change. different outside stakeholders. An organization is complex and uncertain if there are many. The government ensures that FDA. A small biotechnology firm has low complexity because of few stakeholder groups. The carmaker is complex and operates in stable environment. According to resource dependence theory. and a few customers. This company has a rich environment in large cities with supplies of scientists and a medium level of uncertainty. and safety requirements are met. It is poor and uncertain in a poor country or where resource competition is high. The environment is dynamic as forces change. Answers will vary. International forces are strong. interrelated outside stakeholders. Specific environmental forces include customers.) General uncertainties affect specific outside stakeholders such as suppliers and customers. but resources are secured by managing outside stakeholders. with changes foreseen. High unemployment dictates low-margin items. What are the major sources of uncertainty in the environment? Discuss how these sources of uncertainty affect a small biotechnology company and a large carmaker. competition is not intense and competitors are small. Sources of environmental uncertainty include complexity. Strategic alliances allow for symbiotic and competitive interdependencies and ensure a supply of high-quality. The environment is stable because forces affect resources predictably. but recession reduces demand. and the government. Technology facilitates convenience and fast checkout. the government. and distributors. It can obtain resources without high complexity. no union. what motivates organizations to form interorganizational linkages? What is the advantage of strategic alliances as a way of exchanging resources? 4. The industry is mature. ethnic food). strong. Demographic and cultural forces determine the food offered (baby food. Unions ensure fair wages and good working conditions. A large carmaker has high complexity because of the relationship between many. Formal linkage mechanisms should be used when the transaction cost savings outweigh bureaucratic costs. low-cost inputs. and environmental. Environmental issues ensure recycling plastic bags. Suppliers must provide high-quality items. dynamism. Partners can pool distinctive competences to produce a competitive product. including a union. employment. According to transaction cost theory. The environment is poorer due to competition. companies use to enforce any ethical codes that they develop? This also is a complex question because each culture has different norms and values. such as resource dependency.5). They generally work long hours for only a few dollars per day. but make the basis for discussion the environmental principles discussed in this chapter. A more complex situation may call for something much more complex. 1. ANALYZING THE ORGANIZATION Students define their organization’s domain. A good example to use is Johnson and Johnson and their ethics credo (from Chapter 2). Each group wants to widen its geographical regions. and explain why the company selected the mechanism. When and under what conditions is it right for companies to buy their inputs from suppliers that do employ women and children? This is a complex question. Students consider the types of strategic alliances and recommend a way to carve a niche in the soda market. has the right decision been made? 2. What kinds of interorganizational strategies could U. using resource dependence theory or transaction cost theory. they must match the strategy needed with the level of complexity in the environment.S. Have students debate and discuss this again. start a discussion about competition and remaining competitive in a global economy. and determine if the structure is designed to reflect environmental uncertainty. The Ethical Dimension This case deals with organizations that purchase products from organizations that employ women and children is sweatshops. They list the interorganizational linkage PHAM HOANG HIEN . if an organization refuses to do business with these sweatshops. When students say this. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Protecting Your Domain Small groups of students are entrepreneurs who have marketed a new kind of root beer. such as a long-term contract or a joint venture. In other words. Making the Connection Students find an example of a company using a specific interorganizational strategy. On the surface it seems easy to simply not do business with these types of organizations. such as a joint venture. analyze the factors of uncertainty. This was also dealt with in Chapter 2 (Insight 2. Students decide how to protect and expand the company’s domain.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 12 5. and then can’t remain competitive. What interorganizational strategies might work most successfully as a company expands globally? Why? The key to this question is to make sure that students understand that to manage the environment. a starting point for expanding globally is to build a good reputation. For example. This company needs long-term contracts or networks. CASE FOR ANALYSIS How Ford Manages Its Environment This case illustrates the various ways in which Ford has managed its environment over the years. or. Group IV: A company that wants rapid growth but lacks capital or resources to run its organizations. List the various ways in which Ford has attempted to manage its environment over time. They didn’t just change from contracts to keiretsu’s because it was a new management technique. This company forms joint ventures and alliances to share risks and costs of developing new technology. 2. and a large auto manufacturer. Group II: A medium-sized pharmaceutical manufacturer with many distributors. When the environment became even more complex in the 1980s. Group III: A large telecommunications company. This group manages relationship through trust. This company considers franchising. In five groups. Early on. 2. To manage these environments. wages. the competition. Co-optation can manage symbiotic forces as seen in a role play with four students. owners know suppliers well. TEACHING SUGGESTIONS 1. What can the management team do? It can bring the union president inside the organization through a joint union-management discussion committee. they began producing their own parts. in this case. but rather they did this in response to the environment. it eventually split into three divisions. a telecommunications company. Ford developed some keiretsu-type arrangements in order to manage this. and benefits and tries to influence employee opinions. This is a good application of resource dependency theory in that they managed their environment by reducing their dependency on suppliers. Ford used contracts. This is a good illustration of the many different ways that the environment can be managed. Why did Ford change the methods it used to manage the environment? The key here is to make sure students understand that the management strategy needs to fit the environmental situation. Joint ventures and mergers may be too costly. AT&T participated in strategic alliances and engaged in acquisitions. As the environment got more complex. .CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 13 mechanisms and use resource dependence theory and transaction cost theory to explain why the mechanisms were chosen. Each group defines its organizational domain and lists the forces in its specific and general environments. Each group selects an interorganizational strategy and explains its choice of strategy. students represent organizations that vary in size and complexity. One is the local union president who complains about rules. 1. • • • • PHAM HOANG HIEN 3. The class is divided into three groups who work for a grocery store. Group I: A small grocery store with products from two or three suppliers. Three students form a management team of a manufacturing plant. and the fact that we all drive autos. 7. 4. 6.CHAPTER 3 MANAGING IN A CHANGING GLOBAL ENVIRONMENT 14 • Group V: A hotel with competition. Students can compare the business environment of the 1970s with that of today. PHAM HOANG HIEN . Groups must weigh the cost of the strategy against the benefits. and outsourcing. Ford has developed long-term relationships with suppliers and has other companies. in its network. Have students look at Ford’s web site and assess changes in its organizational environment. This hotel joins a trade association to manage its competitive interdependencies. franchising. The auto industry is a good example because of both the dramatic changes that occurred. Point out that Japanese stakeholders take a long-term view and deal with people they know and trust. Students review the strategies that allow organizations to minimize transaction costs without incurring bureaucratic costs: keiretsu. 5. such as a rental car company. production. (4. The following seven integrating mechanisms. (4.1) 2. (4. To illustrate the design challenge of balancing centralization and decentralization. Integrating department The integrating mechanism must facilitate communication and coordination for effectiveness. and managerial.5) 11. Horizontal differentiation groups people into subunits. Determining who will make decisions 4. Deciding how to coordinate activities 3. and managerial. adaptive. To show how the contingency approach tailors organizational structure to environmental uncertainties. (4.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN CHAPTER 4 BASIC CHALLENGES OF ORGANIZATIONAL DESIGN TEACHING OBJECTIVES 1. adaptive. Liaison role 4. with two or more functions grouped into a division. Integrating role 7. are reviewed: 1. and horizontally based on functional groups and divisions.3) 6. but unnecessary mechanisms are costly. (4. As an organization becomes differentiated. The second design challenge is balancing differentiation and integration.4) 10. those with similar skills are grouped into functions. Determining the level of differentiation 2. (4. PHAM HOANG HIEN .4) 8. The first design challenge is to determine the level of vertical and horizontal differentiation. Deciding how tightly the organization will control employee activities Differentiation is the process of dividing labor. production. (4. To discuss the balance between differentiation and integration and examine the seven integrating mechanisms.2) 5. Each role has a horizontal and a vertical dimension. (4. To outline the difference between a mechanistic and organic structure. (4. more complex integrating mechanisms coordinate activities. To show that standardization or mutual adjustment results from organizational goals.1) 4.3) 7. (4. maintenance. To review the five functions that accomplish organizational goals: support. maintenance. To illustrate the design challenge of balancing standardization and mutual adjustment. To explain the differences between liaison and integrating roles and between task forces and teams.1) 3. they differentiate into five functional roles: support. (4. To examine interlocking roles that are differentiated vertically based on a hierarchy. Hierarchy of authority 2. Vertical differentiation designs a hierarchy of authority and establishes reporting relationships to connect subunits. Task force 5.5) 1 CHAPTER SUMMARY This chapter addresses four challenges of organizational design: 1.4) 9. Team 6. To show the importance of the informal organization. As organizations grow. In an organization individuals are assigned specific responsibilities. listed from simplest to most complex. To explain how differentiation occurs and why it is a design challenge. Direct contact 3. 1 Differentiation The first design challenge determines how to control and coordinate value creation. 4. Two people started the restaurant and performed all the tasks. The contingency approach tailors organizational structure to the sources of uncertainty. Organizational Roles Every position in an organization requires certain behaviors. Standardization results in predictable behavior.1) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 4. The owners opened two more restaurants. Q: How did Bob and Amanda manage the increasingly complex activities? A. but as business increased Amanda took control of the dining room and Bob managed the kitchen. they hired 22 people. marketing. norms. CHAPTER OUTLINE 4. Growth makes the organization complex with high division of labor and high differentiation. They hired people to perform specific tasks such as bartending and a manager to oversee maintenance. As division of labor increases. (Fig.R. and training. and informal behavioral expectations. Bob and Amanda opened two other restaurants and centralized support functions such as purchasing. Socialization is the process of learning and internalizing norms. an organization is decentralized and relies on mutual adjustment. determine relationships. called organizational roles. For innovation. through growth. The relationships between managers and waiters ensure effective customer service. written rules. An organic structure is appropriate in an uncertain. Distributing decision-making authority influences employee behavior. Clearly defined roles and authority relationships give organizations the control to facilitate goal achievement. Initially they performed all tasks. managers specialize in some roles and hire employees to specialize in others to develop core competences. the manager has authority. Mutual adjustment relies on judgment rather than formalized rules for problem solving.A. and Grille Restaurant Growth increases division of labor and differentiation. each with advantages and disadvantages. In a simple organization. A mechanistic structure is appropriate in a predictable. An organization must manage differentiation. Task-related behaviors. the process of creating and controlling the division of labor. Standardization is facilitated through formalization. Because a restaurant manager holds waiters responsible for behavior. most organizations are a combination of the two.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 2 The third design challenge is the balance between centralization and decentralization. In reality. division of labor is low with few coordination problems. changing environment requiring flexibility. If an organization desires predictability. PHAM HOANG HIEN . The fourth design challenge is balancing standardization and mutual adjustment.1: The B. stable environment. Centralization results in predictability whereas decentralization fosters innovation. which increased differentiation. it is highly centralized and relies on standardization. 4.A.A. (Fig. waiters report to managers. and lower-level managers direct workers. and the number of functions and divisions indicates an organization’s complexity—the extent of differentiation. each with its own set of five basic functions to offer a competitive advantage. Maintenance functions include personnel.R. Two or more functions are grouped into a division. and Grille develop? A: The services manager handled advertising and bought supplies. and created task and functional relationships. The B. The accountant. Vertical differentiation provides control over activities. Busboys and waiters are grouped into functions. Roles are horizontally differentiated according to tasks. Production functions improve organizational efficiency. Dividing labor between the kitchen and dining room facilitated production.1) As organizations grow. engineering.A. and long-range planning.R. sales and marketing. The three restaurant divisions had centralized support functions. a managerial role. Support functions handle a company’s relationship with its environment and its stakeholders. cashiers. Vertical differentiation creates reporting relationships to connect organizational roles and subunits.R. a support role. Maintenance functions keep an organization in operation. Adaptive functions include research and development. 4. Managers at all levels have roles: top managers formulate strategy. 3. and public relations and legal affairs. 4.2) Organizational roles are vertically differentiated according to the hierarchy of authority. Large companies have self-contained divisions. each restaurant division consists of the dining room and kitchen. creating a division of labor and grouping into subunits. Support functions include purchasing. When did the restaurant differentiate into divisions? A. an adaptive role. Adaptive functions allow for organizational responses to changes in the environment. Q. Bob and Amanda ensured good customer service. Larger organizations have many divisions. middle managers use resources to meet goals. (Fig. and cleaning staff performed maintenance roles. 2. chefs form the kitchen function. 5. market research. They include production operations. and Grille differentiated into divisions as additional restaurants were added. PHAM HOANG HIEN . Lower levels report to higher levels. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Differentiation at the B. production control. Vertical and Horizontal Differentiation Each role at the restaurant has a vertical and horizontal dimension. Managerial functions expedite departmental control and coordination. and quality control. and janitorial services. and Grille Q: What roles did the B.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 3 Subunits: Functions and Divisions Those with similar skills or shared resources are grouped into functions. they differentiate into five functional roles: 1. 5. 2. Other design challenges include: balancing differentiation and integration. 3. 6. PHAM HOANG HIEN Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ . Direct Contact requires managers from different functions to meet to coordinate activities. Teams require different functional managers to coordinate activities. and divisions. Integration or coordinating tasks. subunit orientations. 4. Managerial Implications: Differentiation Managers should draw an organizational chart to identify the distribution of authority and division of labor. from simplest to complex.2 Balancing Differentiation and Integration The second design challenge is to balance differentiation and integration. However. Liaison Role requires a manager to coordinates with other subunit managers. Integrating roles coordinate two or more functions or divisions. emerge as an organization becomes complex. include: 1. Managers should analyze each person’s role and relationships between roles. Integrating Departments coordinate functions or divisions. Hierarchy of Authority specifies reporting relationships. 7. Managers should analyze relationships between departments to make sure the division of labor creates value. improves coordination and communication. balancing centralization and decentralization. _________________________________________________________________________________ _________________________________________________________________________________ Organizational Insight 4. employees feel more loyalty to their teams than to their regular jobs. and coordinating the formal and informal organizations. Horizontal differentiation creates subunits to facilitate specialization.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 4 Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Design Challenges The first design challenge is selecting the levels of horizontal and vertical differentiation to reach organizational goals. (Table 4. balancing standardization and mutual adjustment. 4. Integration and Integrating Mechanisms Subunit orientations make communication and coordination difficult. Task forces create a temporary cross-functional committee. however. perceiving one’s role as a subunit member.1) The seven integrating mechanisms. functions. • Refer to discussion question 3 here to show how integrating mechanisms facilitate communication and coordination.2: Integration at Amgen Amgen has been successful with its new drugs Epogen (an anemia drug) and Neupogen (an immune system stimulant). Growth has led Amgen to adopt two integration mechanisms: product development teams and task forces. In balancing integration and differentiation.3 Balancing Centralization and Decentralization The third design challenge determines how much decision-making authority to centralize and decentralize.R. a full-time position to improve communication between divisions. An organization can create an integrating role.A. managers must develop core competences and select integrating mechanisms that foster subunit cooperation.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 5 Q. An organization with many integrating roles can establish an integrating department. Initially. PHAM HOANG HIEN . authority is centralized. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 4. What was the level of differentiation and integration at the B. More integration is needed as the organization grows. How can Amgen improve communication and coordination? A. Q. so the owners ran the restaurant with little integration. which is only part-time. As companies become large and complex. and Grille? A. Differentiation versus Integration Managers must fit integration to the level of differentiation. One criticism of the hierarchy of authority is that employees are risk-averse and give tough problems to supervisors. This differs from a liaison role. Centralization versus Decentralization of Authority When top managers make decisions. authority is decentralized. this slows decision making and leads to missed opportunities. When lower-level managers make decisions. but excessive differentiation or integration increases costs (more managers) and time spent coordinating activities. communication barriers increase. differentiation was low. Amgen needs to integrate its teams into a hierarchy of authority to provide control so that teams coordinate with functions. The optimal balance occurs when middle managers make some decisions. Yet. decentralization makes planning and coordination difficult. Waste Management Inc. Chemical Waste Management. High-tech companies encourage innovation and risk-taking. The chance to demonstrate skills and competencies motivates managers. What types of companies decentralize authority? A. Should United Way centralize or decentralize? A. The distribution of authority controls how workers behave.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN Q. What are some advantages and disadvantages of decentralization? A. and the company may lose control of decision-making. Q. Decentralization offers flexibility and responsiveness. The decentralized management style was blamed because there was little involvement from top managers.3: Centralize or Decentralize? Decentralization can be a disadvantage. so the structure is highly centralized. but managers become involved in day-to-day decisions and lose sight of strategic or long-term decision-making. a disposer of hazardous waste. Pollution-monitoring equipment was turned off to save disposal costs. The failure to control decision making and the pressure to increase profits led employees to deliberately mishandle waste. and top managers make strategic decisions. What problems did Waste Management incur due to its balance of decentralization and centralization? A. Q. United Way had not found the right balance between centralization and decentralization. United Way suffered from the perception that donations were used for overhead not for the needy. risk-takers. was interested only in the profits. the army discourages risk-taking and maximizes control. Managers must select a balance between centralization and decentralization. PHAM HOANG HIEN . Waste Management Inc. so they decentralize authority. Q. Centralization keeps a company focused on goals. Q. 6 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4. What are the advantages and disadvantages of centralization? A. and managers were accused of mislabeling containers to avoid disposal costs. gave its subsidiary. complete authority to make operating decisions. Consultants felt that the best way to save money and increase efficiency was to reduce the number of local organizations and centralize business functions. Evaluating the balance of authority is ongoing. making managers accountable. internalized standards of behavior. like R&D. managers hesitate to suggest changes. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ PHAM HOANG HIEN . If formalization and standardization are extensive. Standardization makes actions predictable. If the norm is to make no changes. and Federal Express use formalization. What companies use formalization extensively? A. like accounting. Some functions. Some norms promote effectiveness. but others. When production workers select a work rate and “ratebusters” violate the norm by working too fast. there is no room for mutual adjustment. Highly formalized companies are generally highly centralized. and others reduce it. Are those companies highly centralized or decentralized? A.4 Balancing Standardization and Mutual Adjustment 7 The fourth design difficulty balances standardization and mutual adjustment. Q. Complex. Standardization is the process of following rules and standard operating procedures (SOPs). Socialization means learning norms and unwritten rules. UPS. Standardization versus Mutual Adjustment It is challenging to balance control through standardization with employee problem solving for mutual adjustment. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Socialization: Understood Norms Rules are formal statements that specify methods for goal attainment. and norms are informal. Mutual adjustment allows for judgment rather than rules to solve problems. Companies with a high level of mutual adjustment are highly decentralized. Integrating mechanisms such as task forces and teams increase mutual adjustment. The military. they face reprisals. and mutual adjustment provides flexibility for responding creatively. Even if rules changes. An appropriate balance between standardization and mutual adjustment promotes creative and responsible behavior. Q. require risk taking. Formalization: Written Rules The use of written rules and procedures to standardize operations is known as formalization. require standardization. Employees are held accountable for following rules. uncertain tasks rely on mutual adjustment.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 4. behavior is unchanged because rules become internalized norms. Employees perform many tasks and work with people from various functions. mutual adjustment.com.7b) Q. with empowered employees to meet customers’ needs. Organic structures encourage flexibility and decentralize decision-making. How does Amazon. What is the major integrating mechanism? A.7a) Q. unchanging environments. (Fig. 8 ___________________________________________________________________________ ___________________________________________________________________________ Focus on New Information Technology: Amazon. The primary integrating mechanism is the hierarchy. Roles are loosely defined. The desire for good customer service led to a decentralized structure. How did Jeff Bezos structure Amazon. 4. information systems were standardized. Promotion is slow and one’s career path outlined.com coordinate and motivate employees? A.5 Mechanistic and Organic Organizational Structures Design choices produce mechanistic and organic structures. 4. Customer service was the most important element. Employees receive company stock as a motivator. Standardization and formal rules facilitate control and coordination. Emphasis on the hierarchy makes the informal organization aware of status. Q. PHAM HOANG HIEN . For efficient book distribution and shipping. Status is based on leadership ability not a formal position in the hierarchy. (Fig. Part 3 Design choices were driven by the need to ensure that Amazon’s software effectively linked customers to the web site.com? A. This rigid structure is appropriate in stable.6) Mechanistic structures influence people to behave in a predictable manner. Socialization is the vehicle for coordinating and motivating employees. but mutual adjustment improved customer responsiveness. Q. Managers should list their principal tasks and responsibilities and be aware of the informal norms and values that influence group members. decentralization and standardization vs. They learn organizational roles from members of their functions and the norm of providing excellent customer service.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN • Refer to discussion question 4 here to emphasize the role of goals and the environment in balancing centralization vs. Managerial Implications: The Design Challenges Managers should create a map of the principal integrating mechanisms and determine which levels in the hierarchy have responsibility for specific decisions. What integrating mechanisms are used? A. Decision-making is highly centralized and roles clearly defined. Organic structures respond quickly to change. (Fig. This structure requires complex integrating mechanisms such as task forces and teams. 4. 4. This structure has allowed Sony to introduce innovative products. Integration. (Fig. the military needs a mechanistic structure. and standardization are more effective. 3. Sony’s organic structure encourages innovation.2) Research findings: 1. Top management interferes only if groups duplicate efforts. (Table 4. An organic structure is not always appropriate. roles loosely defined. In complex. PHAM HOANG HIEN . and container manufacturing. Authority is decentralized. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Lawrence and Lorsch on Differentiation. Q. informal and decentralized organizations using mutual adjustment are more effective. R&D. certain environments. Engineers can join any project if they can make a contribution. and (3) differences in integrating mechanisms. Sony has 23 groups with hundreds of development teams that encourage communication and innovation. centralization. and mutual adjustment preferred to standardization.4: Sony’s Magic Touch Sony uses its organic structure to motivate and coordinate employees. formalization. (2) differences in subunit or functional orientations. They selected companies and measured: (1) differentiation in production. The Contingency Approach to Organizational Design Contingencies shape organizational design. useful for understanding the effect of structure on behavior. and the Environment The number and size of an organization’s functions reflect the need to manage exchanges with environmental forces.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 9 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4. Each department creates its own response to environment issues. and sales departments. In unstable. food processing. attitudes vary significantly. In stable. unstable environments. but in reality. 4. organizations mix both structures. What characterizes Sony’s structure? A. Effective companies match levels of integration with levels of differentiation. uncertain environments. 4. Mechanistic and organic structures are ideals. Engineers who take successful risks are promoted and gain control of resources.9) Lawrence and Lorsch analyzed three industries with three levels of uncertainty—plastics. 2. Highly differentiated companies have complex integrating mechanisms. The contingency approach customizes structure to the sources of uncertainty. Franchisees can tailor menus and decor to local customers. and operations are standardized. but an uncertain environment has led to an organic structure. 10 Burns and Stalker on Organic versus Mechanistic Structures and the Environment Burns and Stalker found that companies with organic structures were more effective in unstable and changing environments. McDonald’s environment is more uncertain.6: Wal-Mart’s Race to the Top Wal-Mart has achieved a balance between a mechanistic and organic structure. and centralized authority is more effective. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 4. Burns and Stalker proposed that structure be designed to match the dynamism of the environment. This facilitates mutual adjustment. regional vice presidents are in charge of district managers. How is Wal-Mart mechanistic? How is it organic? A. A flat. Q. Decision-making is centralized at the store manager level. In a clearly defined hierarchy. and customer responsiveness. The vertical operating structure has a defined hierarchy. information sharing. Wal-Mart’s structure is organic because store managers make decisions. Why is an organic structure more effective in a dynamic environment? A. A stable environment makes complex decision-making unnecessary. McDonalds’ mechanistic structure based on formalization ensured standardization.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN To be effective.5: McDonald’s Changing Environment McDonald’s environment is becoming more uncertain. but store managers and employees make some decisions. Q. transactions are managed easily. so it views its domain differently. who are in charge of store managers. Wal-Mart employees. an organization must adapt its structure to match its environment. make suggestions that are implemented. Burns and Stalker strengthen this conclusion. called associates. offering new products to new customers. Q. McDonald’s challenge is to make its structure organic to promote flexibility yet maintain centralization to ensure standards of quality and cleanliness. decentralized structure increases communication. General forces include environmental issues such as safe packaging. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 4. Wal- PHAM HOANG HIEN . Specific forces of uncertainty include changed consumer tastes and increased competition. How has McDonald’s responded to its changing environment and what is the role of structure? A. Companies with mechanistic structures were more effective in a stable environment. CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN Mart has informal norms and values that foster responsive behavior. the structure is decentralized with control through mutual adjustment. When does an organization need to use complex integrating mechanisms? Why? As organizations become differentiated. Complex and highly differentiated organizations. In large organizations. Outline the major roles and functions. Under what conditions is an organization likely to prefer (a) a mechanistic structure. marketing. Why does differentiation occur in an organization? Distinguish between vertical and horizontal differentiation. Wal-Mart uses task forces and teams. such as those with several divisions. the structure is centralized with control through standardization. uncertain environment. division managers never meet. vice presidents. Horizontally there are five functions and specializations within each function. and forms subunits. The hierarchy from top to bottom is president. Vertically the hierarchy has several layers. and information systems. To encourage risk-taking. unchanging environment. The balance depends on organizational goals and the environment. establishes division of labor. so integrating roles promote communication and coordination. To coordinate. Draw an organizational chart of your business school or college. Horizontal differentiation groups roles according to task responsibilities. management. Vertical differentiation is a hierarchy of authority with reporting relationships established to connect organizational roles and subunits. (b) an organic structure. or (c) elements of both? PHAM HOANG HIEN What factors determine the balance between centralization and decentralization and between standardization and mutual adjustment? . 2. Centralization and standardization promote predictability. they establish a division of labor. Under department heads are faculty members. decentralization and mutual adjustment promote innovation. To discourage risk-taking. 3. then student assistants and workers. Notes_________________________________________________________________________ 11 ______________________________________________________________________________ ______________________________________________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. 5. accounting. Differentiation occurs because as organizations grow and become more complex. Centralization and standardization fit a stable. leading to poor communication and coordination. 4. subunit orientations emerge. whereas decentralization and mutual adjustment fit a changing. use complex integrating mechanisms to facilitate communication and coordination. How differentiated is it? Do you think the distribution of authority and division of labor are appropriate? Answers will vary. Complex organizations must control and coordinate activities to achieve goals. dean of the business school. department heads from each of the functional departments—finance. The military has a mechanistic structure. An organization prefers a mechanistic structure to encourage predictable behavior in a stable environment. PHAM HOANG HIEN CASE FOR ANALYSIS Where Should Decisions Be Made? .CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN 12 a. students have founded the Zylon Corp. students examine the ethical implications of various structures. The Ethical Dimension Using the design challenges. and employees might get frustrated and behave unethically. A mechanistic structure is preferred when formalized rules must be followed. and design challenges in their company. Making the Connection Students will find examples either in business publications or online of a company facing one of the design challenges discussed in the chapter and explain how the company has handled the challenge. ANALYZING THE ORGANIZATION Students will describe differentiation. If technology changes and a company has skilled workers. it needs an organic structure. For example. The key point based upon Contingency Theory is that structures must fit the environment. Safety concerns would most likely be a high ethical concern. the situation is more likely to produce wrong decisions. When they don’t. or if a project requires cross-functional coordination. but still decentralize some decisions. c. They will determine whether their company is decentralized or centralized and whether it uses standardization or mutual adjustment. which. An organization can have rules and centralized decision making. Students review the organizational structure and propose design choices to solve these problems. a rapidly growing Internet software company. Likewise. a creative software company that has a mechanistic structure would also be ineffective. b.. but remains flexible. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Growing Pains In small groups. uncertain environment. but now employees do not feel rewarded for performance. If technology doesn’t change and the tasks are simple. and managers do not listen to their ideas. Most organizations adopt both a mechanistic and organic structure and simply lean more toward one. faced with uncertainties on the battlefield. could be viewed as unethical. a nuclear power plant that should be very mechanistic may operate very poorly. An informal structure has worked. A balance between mechanistic and organic structures results in a competitive advantage. An organization prefers an organic structure to foster innovation in a changing. in turn. and make bad decisions if they are structured in an organic format. They will describe the role of the informal organization and identify integrating mechanisms. a mechanistic structure is preferable. core competences. Why did Procter & Gamble move to centralize control? 13 Top managers believed that highly decentralized global decision-making prevented cooperation in similar divisions in different counties (soap and detergent divisions) and in different divisions in the same country or world regions. 2. authority was centralized. 4. and in 1996 P&G earned record operating profits on record global sales. and R&D are on the same level. 6. it will need more innovation and move towards decentralization. 2. 5. Vice presidents were responsible for cooperation among divisions. In a vertical authority relationship. This change was made in 1995. decision-making at Procter & Gamble was decentralized. or informal standards of behavior. and norms. When would managers realize that they had gone too far and “centralized” control too much? When P&G does not respond to customers as quickly as competitors. 3. formal written statements.CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN Until 1995. The key point is that high levels of formalization are efficient. employees report to a supervisor. Managers can demonstrate their personal skills and will be more motivated. but tend to break down when customers have unusual requests or requirements. PHAM HOANG HIEN . who reports to a manager. The balance between centralization and decentralization can be changed to make better use of resources. Ask students which of the six design challenges their organization faces regularly. TEACHING SUGGESTIONS 1. The chart shows that task responsibilities are horizontal. top management divided global operations into North America. Examples might include a retail store’s return policy. Have students discuss when formalization has “failed” them. Have students distinguish between rules. Have students debate the advantages and disadvantages of centralization and decentralization. sales. each area was assigned a global executive vice president. who reports to a vice president. or a video-rental store’s late-fee policy. functions such as manufacturing. This new structure reduced costs and allowed for rapid innovation. because employees require less training and don’t have to make as many decisions. Decentralization promotes flexibility and responsiveness by allowing lower-level managers to make on-the-spot decisions. managers in each country made their own decisions. 1. Thus. and Asia. A good follow up discussion concerns restructuring. Use the four design challenge questions as a guide for this chapter. the Middle East. This structure impeded managers of similar divisions from cooperating. Have students bring real organizational charts from their organizations. Europe. This is a good way for students to understand how the efficiencies of formalization must be balanced with customer needs. An organizational chart can illustrate the difference between vertical and horizontal differentiation. and why it does not always occur when faced with these design challenges. These questions really put a practical spin on the basic principles of design. This chapter examines the vertical dimension of structure—the hierarchy of authority created to control an organization’s members. as each function has its own hierarchy. standard operating procedures (SOPs). Factors shape the hierarchy: horizontal differentiation. Parkinson’s Law demonstrates how hierarchies get too tall. How and why does vertical differentiation occur? The hierarchy emerges when an organization faces coordination and motivation problems due to increased horizontal differentiation. and high bureaucratic costs. The minimum chain of command principle is explained. and standardization. (5. To review the factors that affect the shape of the hierarchy: horizontal differentiation. centralization. because employees follow rules. To discuss the trends toward empowerment. Increasing the span of control can substitute for increasing hierarchical levels. To demonstrate how an increased span of control can prevent a hierarchy from becoming too tall. (5. To examine Max Weber’s six principles for a bureaucratic structure.4) 9. The informal organization can increase control. Authority should be based on rational legality. Span of control is based on the complexity and interrelatedness of tasks. Decentralizing authority improves communication and coordination due to less direct supervision. because tall hierarchies have problems with communication. Standardization reduces direct supervision.1) 4. (5. provides stability. (5. To address the problems associated with tall hierarchies: communication.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL CHAPTER 5 DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL TEACHING OBJECTIVES 1. and contingent workers. These design decisions can ensure that a hierarchy remains flat so the organization can control activities.3) 7. cross-functional teams. Horizontal differentiation keeps the hierarchy flat.1) 3. Managers must prevent the PHAM HOANG HIEN . and norms. motivation. and rules. and bureaucratic costs. (5. A hierarchy is tall if it has many levels relative to organizational size and flat if it has few levels relative to size. Most large companies do not exceed 9 or 10 levels and do not increase the number of managers.5) 1 CHAPTER SUMMARY To protect shareholders goals. competence.1) 2. managers must constantly analyze organizational structure. To consider the advantages and disadvantages of a bureaucracy. (5. To consider the importance of the informal organization. standardization. centralization. (5. self-managed teams. (5. Simple and less interrelated tasks call for a wider span of control. affecting the size of the hierarchy. Horizontal differentiation controls employees when an organization cannot increase its hierarchical levels. To examine how the hierarchy emerges and how most companies limit hierarchical levels.3) 8. clearly defined roles. To consider Parkinson’s Law and the minimum chain of command principle. and increases core competences. (5. motivation.2) 6. and the informal organization. reduces transaction costs.1) 5. A bureaucratic structure controls interactions among organizational members. The chapter outlines Max Weber’s six principles of bureaucratic structures and reviews the advantages of bureaucratic structure. The shape of the hierarchy. PHAM HOANG HIEN A. Q. Distortion leads to poor decisions. So. Tall hierarchies face problems. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Problems with Tall Hierarchies Q. (Fig. the number of levels.000 employees stays at 9 or 10 levels. and one with up to 100. Managers choose between a flat hierarchy with few levels relative to company size and a tall hierarchy with many levels relative to size. Why is the number of hierarchical levels and managers limited? Communication Problems. establish the extent of vertical differentiation. accidentally or deliberately. 2 CHAPTER OUTLINE 5. Self-serving managers give selective information to decision-makers.2) Organizations actively restrict the number of managers and the number of levels as they grow.3b). and the span of control (the number of subordinates a manager oversees). (Fig. which lead to coordination and motivation problems.3a). Managers must determine the shape of the hierarchy. plus the balance between centralization and decentralization. communication takes longer. because decision-makers have incorrect information. most organizations have a pyramid structure (Fig. The Emergence of the Hierarchy As an organization grows.1 Authority: How and Why Vertical Differentiation Occurs Determining the level of vertical differentiation is a basic design challenge. organizational costs rise. At this point the hierarchy emerges to coordinate and motivate members by increasing the number of managers and organizational levels. 5. As the chain of command extends. as it goes up and down the hierarchy. Subordinates tell superiors what they want to hear. which slows decision-making. 5. A long chain of command leads to misinterpretation of the message. the decision-making process slows. If the hierarchy is neglected. Coupled with this trend is the use of empowerment and self-managed teams. Another cost-saving measure is the use of contingent workers. Information is distorted. .CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL hierarchy from becoming too tall and centralized. and the company becomes unresponsive to stakeholders. one with 3. 5. 5.1) Size and Height Limitations Research on size and height of the hierarchy shows that a firm of 1000 has 4 levels.000 has 7 levels. Restructuring and downsizing are a trend to reduce costs. differentiation and the division of labor increase. not a bloated structure (Fig. How can information be distorted? A. it increased the number of dockyard officials by 40 percent and top managers by 79 percent. with less authority and responsibility. so they make work for each other.000 extra managers saves $300 million. The minimum chain of command principle states that a company should choose the minimum number of hierarchical levels needed for goal achievement. the less managerial authority and responsibility there are. are less motivated. Why did this occur? A. Layoffs become necessary if management pays no attention to its hierarchy. Organizational Insight 5. growth ceases. “Work expands so as to fill the time available. In other words. Parkinson’s theory is that managers want to increase the number of subordinates. When organizations get too tall. To avoid layoffs. while the British Navy decreased the number of ships by 68 percent.2: Using the Hierarchy to Promote Creativity and EMI EMI is a record company that gradually lost its creativity because it was managed by a top heavy team of executives who did not recognize the entrepreneurial ability of their subordinates. so a cut of 1. Tall hierarchies decrease motivation because managers. making it easy for managers to shirk responsibility. the CEO attributed slowing sales and earnings to an increase in the number of top levels of management. a company must continually evaluate its hierarchy. which is what happened to Du Pont.” Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 3 The Ideal Number of Hierarchical Levels: The Minimum Chain of Command Managers should base hiring decisions on whether the value added exceeds the cost. The taller the organization. When the company matures. Accountability in a tall structure decreases.000 a year.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL Organizational Insight 5. A company grows and hires managers without considering long-term costs. managers have more responsibility and are more motivated. they cannot respond as well or as quickly to the marketplace. a company pays a middle manager an average $300. and cost reduction becomes necessary. PHAM HOANG HIEN . The Parkinson’s Law Problem Parkinson observed that from 1914 to 1928. This was fixed by flattening the structure so that the organization could respond better to customer needs. not rivals. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Motivation Problems. Bureaucratic Costs.1: The Shake-up at Du Pont Du Pont is one of America’s largest chemical companies. He believed that too many managers were slowing down the recognition and reaction to problems. In a flat structure. How did Du Pont’s structure contribute to its problems? A. Recently. Q. Tall hierarchies have high bureaucratic costs. Q. These issues illustrate aspects of Parkinson’s law. but a manager with three subordinates manages six (Figs. 4 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 5.7) Q. For complex. For routine. and the informal organization. but a production supervisor has a wide span of control. Manufacturing must exercise tight control over subordinates and control costs. Q. a narrow the span of control. as tasks are complex and interrelated at the top. What determines an effective span of control? A. 5. the span of control can be narrow.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL This is very similar to what happened in the Du Pont insight. not direct supervision. Interrelated tasks require a narrow span of control because horizontal relationships must be managed. dissimilar tasks. (Fig. a manager loses control over subordinates. Most organizations have a pyramid shaped hierarchy. Q. similar tasks. R&D often uses project teams.8) Horizontal differentiation allows an organization to remain flat because hierarchies are developed in subunits. an organization maintains control by increasing horizontal differentiation and establishing specialized functions or divisions. A manager with two subordinates manages three relationships. and make a good discussion topic. What problems are caused by horizontal differentiation? PHAM HOANG HIEN . A manager’s span of control is limited to the number of subordinates that can be adequately supervised. Each subunit also has a hierarchy. Span of Control To avoid becoming too tall. standardization. thus organizations use other design challenges to control activities: horizontal differentiation. Horizontal relationships are less important if tasks are not interrelated. Horizontal Differentiation When vertical differentiation cannot be increased. A research supervisor has a narrow span of control. If the span of control becomes too wide.6a–b). the number of subordinates a manager directly oversees. 5. an organization can increase the span of control. (Fig. Sales has fewer levels because it relies on standardization. Why does manufacturing have many levels? A. Interrelatedness. 5.2 Control: Factors Affecting the Shape of the Hierarchy An effective span of control must be limited. which makes a good point that this issue is common as organizations grow. the span of control can be wider. An increase in subordinates exponentially increases the subordinate relationships to be managed. Complexity. centralization. and informal norms and values to control behavior. Different companies have different spans of control. R&D has fewer levels because complex tasks are difficult to supervise. Decentralization keeps the organizational structure flat. Tasks are controlled through rules. managers must maintain adequate supervision over people and resources. Regional managers were responsible for ensuring the smooth flow of freight through their regions. He developed the bureaucracy. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Managerial Implications: Authority and Control PHAM HOANG HIEN Managers must assure that the hierarchy matches organizational needs and is not too tall or centralized. Managerial teams should review the hierarchy’s design. Organizational Insight 5. a structure in which people follow rules and are accountable . and organization must continuously evaluate the environment and respond to changes. causing an organization to lose sight of its goals. Horizontal differentiation causes coordination and motivation problems that are controlled through centralization. This was done be decentralizing authority and giving regional managers the authority to make operational decisions in the field. If the hierarchy provides too little control. a German sociologist. Centralization The communication and coordination problems of a tall company make a manager’s job one of monitoring and supervising. rules eliminate direct supervision. so a wide span of control is used. but changes in the competitive environment also meant that this efficiency needed to be balanced with being responsive to customers. standardization. and norms. Notes_______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 5. One solution is to reduce the number of managers by decentralizing decision-making to lower levels.3: Union Pacific Decentralizes The centralized structure of Union Pacific was designed to reduce costs. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Standardization Another way to flatten the hierarchy is through standardization. developed an organizational structure to improve operations.3 The Principles of Bureaucracy Max Weber (1864–1920). This case illustrates how both centralization and decentralization have their advantages and disadvantages.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL 5 A. and the informal organization. standard operating procedures (SOPs). and managers can delegate responsibility because subordinates know the rules . In addition to illustrating the value of rules and standard operating procedures. Weber’s six principles of bureaucracy distribute responsibilities and authority to maximize company’s effectiveness. and norms should be used to control the behavior and the relationship between roles in an organization. This principle requires managers to see all potential job candidates objectively. People know the chain of command. 6 Organizational Insight 5. kinship. Power should be separate from personality. Principle One: A bureaucracy is founded on the concept of rational-legal authority. Advantages: 1. Reduced costs of monitoring subordinates 4. Increased integration 5. Principle Four: The organization of roles in a bureaucracy is such that each lower office in the hierarchy is under the control and supervision of a higher office. The position separated from the person 7. or heredity. it was too late to save the restaurant. not social status. Increased accountability and reduced transaction costs 3. Decreased costs of performance evaluation and of rule enforcement 6. Role conflict. conflicting demands on a subordinate. this case also serves as an excellent example of the power of the reputation effect. a person’s authority is due to position in the organization. Although they did implement procedures. A clear pattern of vertical and horizontal differentiation is necessary for effectiveness. and role ambiguity (fear of responsibility because of unclear tasks) should be eliminated. they lost control of the food quality due to the lack of training and standard preparation procedures. as word had already spread that they had poor quality and poor service. whereas norms are unwritten. Principle Three: A role’s task responsibility and decision-making authority and its relationship to other roles in the organization should be clearly specified. Principle Six: Administrative acts. Stability needed for employees to take long-term perspectives PHAM HOANG HIEN . Q. In an attempt to open many restaurants quickly. Principle Five: Rules. rules become official guidelines that can be used even when people leave. Although the fixed the quality problem. When written down. Principle Two: Organizational roles are determined by technical competence. Guidelines and skills able to be passed on to successors 8. and rules should be formulated and put in writing.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL for their actions. Rules for designing the hierarchy 2. decisions. Written documents ensure that people can be held accountable.4: Never Underestimate the Power of Rules General Mills opened a chain of Chinese restaurants that had early success. standard operating procedures. The Advantages of Bureaucracy A bureaucratic structure exists when an organization implements Weber’s six principles. Rules are formal written standards of behavior. it was too late in this case to save the organization. What are the advantages of a bureaucratic structure? A. Reporting relationships should be periodically reviewed to ensure clarity.5: Wildcat Strikes in the Gypsum Plant Gypsum. Managers and their subordinates together determine the subordinates’ goals.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL 7 Despite these advantages. What is the role of the informal organization? PHAM HOANG HIEN . 2. bureaucracies have negative connotations. decision-making and coordination occur outside formally designed channels. 3. and rewarding decisions fairly. Workers could take wallboard for personal use and have excessive absenteeism until a new plant manager reactivated rules that had never been enforced. Why should managers understand the informal organization? A. Slowed decision-making and increased costs due to a tall and centralized hierarchy 2. the network of personal relationships that develop over time. Rules and norms emerge out of the informal organization. a mineral for making wallboard.4 The Influence of the Informal Organization At all organizational levels. Managers and employees should adopt a “questioning attitude” toward the organization. managers and employees should follow bureaucratic principles. Specific goals and objectives are established at each level of the organization. The informal organization affects the way the “formal” hierarchy works. It consists of three steps: 1. is mined and processed by the General Gypsum Company. They do not own their positions and must benefit stakeholders. Managers and their subordinates periodically review the subordinates’ progress towards meeting the goals. Failure to meet stakeholders’ needs due to too many rules Management by Objectives This system provides a framework to both evaluate and to monitor progress towards the achievement of organizational goals. Organizational Insight 5. The workers initiated strikes and only went back to work when authority was defined and rules established for settling disputes. Managers should make hiring. promoting. Q. Q. Q. Disadvantages: 1. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 5. Managerial Implications: Using Bureaucracy to Benefit the Organization For organizational effectiveness. What causes this negative thinking? A. and Self-Managed Teams Information technology is making it much easier for organizations to cost-effectively design a structure based upon empowerment and teams. organizations today are making use of self-managed teams and cross-functional teams as opposed to the traditional bureaucracy. another trend is to employ contingent workers. What are the advantages and disadvantages to using contingent workers? A. The challenge is to achieve the proper mix of mechanistic and organic structure. The trend towards decentralization is largely due to technology that allows this to be done cost effectively. Managers must consider how the informal organization affects both individual and group behavior when making organizational changes. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN . Q. Such employees may have coordination and motivation problems. Contingent workers do not help a company develop core competences. Will decentralization abolish the hierarchy? A. This allows organizations to both reduce costs and stay flexible. Contingent workers cost less because they receive no benefits and are only hired as needed. Empowerment. As organizations become flatter. an estimated 20 percent of the U. workforce is comprised of contingent workers. Others contend that even a team-based company composed of empowered workers needs a hierarchy and a minimum set of rules and SOPs to control activities. ________________________________________________________________ ______________________________________________________________________________ 8 5. Q. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 2 here to emphasize how the informal organization affects the shape of the organization. Therefore. Still.S.5 IT. Some suggest that more lateral relations will emerge. without losing many of the benefits of centralization.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL A. as there is no promotion or job security. The informal organization can enhance organizational performance because many accomplishments occur through the informal network in ways not revealed by the formal hierarchy. Altering the formal structure disrupts the informal norms that make the organization work. Norms and values standardize behavior. The informal links can augment the formal authority relationships. Direct supervision ensures that employees are performing tasks appropriately and that costs are minimized. and salespeople. and kitchen help. An R&D lab has a flat hierarchy and a narrow span of control. What factors determine the appropriate authority and control structure in (a) a research and development laboratory. and waiters. or (c) a small manufacturing company? a. A small manufacturer needs to exert tight controls and monitor employees to control costs. A large department store has a flat hierarchy. In what ways can the informal organization and the norms and values of its culture affect the shape of an organization? An organization can use the informal organization. so the company can add fewer levels to the hierarchy and hire fewer managers as the company grows. and procedures instead of a tall hierarchy. The store relies on standardization. so a wide span of control is appropriate. Choose a small organization in your city. The number of levels is appropriate because four levels is the minimum number for effectiveness. manager. This structure is appropriate because complex tasks make it difficult to monitor employees. The informal organization and norms provide control. and lower-level managers have a wide span of control: a manager. One possibility is a locally owned restaurant with a four-level hierarchy that includes owner. Therefore it has a taller hierarchy and a smaller span of control. PHAM HOANG HIEN . and draw a chart showing its structure. cooks. The lab uses norms and values to control behavior. three assistant managers. and busboys are simple. 2. cooks. c.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL DISCUSSION QUESTIONS AND ANSWERS 1. The tasks of waiters. The manager oversees three assistant managers. department heads. such as a restaurant or school. Do you think the number of levels in its hierarchy and the span of control at each level are appropriate? Why or why not? 9 Answers will vary. and values to increase control. b. The span of control is appropriate. who oversee 12 people. This structure is appropriate because tasks are simple and similar. (b) a large department store. 3. norms. rules. Teams could facilitate mutual adjustment. assistant managers. so lower-level managers have a wide span of control. because regardless of the methods used. . An organization needs the minimum number of levels for achieving goals. ORGANIZATIONAL THEORY IN ACTION Organizational Theory Exercise: How to Design a Hierarchy Students form small groups of managers assigned to restructure a division by abolishing 25 percent of managerial positions. and norms can control behavior. To prevent an unnecessary increase in managers. The Ethical Dimension Students examine which workers should be terminated during a restructuring of middle managers. Roles should be based on competence. not status or kinship. How can the principles of bureaucracy help managers design the organizational hierarchy? 10 The principles of bureaucracy ensure that an organization’s structure is effective. f. even during growth. If members rely solely on rules. they become unresponsive to stakeholder needs. Each lower office in the hierarchy should report and be responsible to a higher office. Put rules in writing. how to obtain adequate supervision with fewer managers. a higher-level officer should approve hiring decisions. Ensuring future effectiveness. as many families or individuals have experienced this situation firsthand. which stifles innovation. This is a good exercise to relate the issue of satisfying stakeholders needs to the ethical processes encountered during a typical restructuring. determined by the position not the person. and how to make downsizing less painful for employees. When does bureaucracy become a problem in an organization? What can managers do to prevent bureaucratic problems from arising? Bureaucracy becomes a problem when managers fail to control growth. slows decision making. Assigning roles. Tasks and decision-making authority should be clearly defined. standard operating procedures. somebody needs to be terminated when IT replaces the need for workers. problems can be prevented. This is a difficult exercise. b. Making the Connection Instruct students to find an example of a company that has recently changed its hierarchy of authority or its top-management team and ask them to explain why changes were made. Controlling behavior. Managers can avoid problems by controlling the hierarchy. and increases operating costs. d. Authority should be based on rational-legal authority.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL 4. PHAM HOANG HIEN Ask students for their personal experiences. Controlling authority. It instructs managers on the following: a. e. 5. resulting in a tall and centralized hierarchy. If managers follow Weber’s six bureaucratic principles. Defining tasks. c. Students discuss how to cut positions. The basis of authority. Rules. thus the span of control is narrow. By the tenth person. this is possible because of technology. Use a role-play to illustrate the problems with tall hierarchies. Would they enjoy working under this system? Why or why not? Use the principles of management by objectives in the classroom. 1. They must evaluate the hierarchy (tall or flat) and the span of control (narrow or wide). 6. The work is simple. 5. standardization. the instructor is the manager. so it is easier to supervise more people. Hierarchies tend to be pyramid shaped because work at top levels is more complex. 3. centralization. or downsizing. Ask students to discuss the advantages and disadvantages of working for an organization that implements Weber’s bureaucracy.fn. PHAM HOANG HIEN . created cross-functional teams instead of centralized decision making. and the students are subordinates. Three students are research scientists looking for a cure for cancer. Ten students work for a computer company. and she assigned each team to its own sales staff in order to speed the introduction of the products to market. Invite a CEO from a local company to describe the organizational structure of the company. the idea is distorted. CASES FOR ANALYSIS A New Approach at Hewlett-Packard This case demonstrates how organizational structure becomes a critical focus when a company begins to decline or lose its market share to competitors. HP was not able to keep up with competitors who were able to introduce new products much quicker than it could. 2. and horizontal differentiation. have one student supervise 20 production workers.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL 11 ANALYZING THE ORGANIZATION Students will draw an organization chart of their company’s top management and describe the topmanagement team. They will discuss their company’s use of bureaucracy. What kind of changes did Fiorino make to its structure to help HP increase the speed of innovation? She flattened the hierarchy by cutting two layers of management. and the company loses out due to the tall hierarchy and unwillingness to promote innovation. 4.cnn. The idea goes through the chain of command. Another competitor introduces a fax modem. She is already taking advantage of technologies by creating teams and flattening the structure. As an out-of-class assignment. and much of this was attributed to the structure. TEACHING SUGGESTIONS 1. Conversely. acquisitions. Student one has an idea for a fax modem and tells a supervisor who checks with a superior. 2. In general. These tasks are complex. students will look at business publications and on the Internet http://www. How should Fiorino make use of new kinds of information technologies to help its hierarchy of authority work better? The key point is that this is a continuous process. and find current examples about structural changes: mergers. Use a role-play to demonstrate how span of control depends on the complexity of the tasks. The person is unlikely to suggest other ideas. That is. Role play how this might work based upon their objectives in the classroom. This is in reference to many organizations having a structure that inhibits change. Ask students what this them is.CHAPTER 5: DESIGNING ORGANIZATIONAL STRUCTURE: AUTHORITY AND CONTROL 7. 12 PHAM HOANG HIEN . and discuss. Notice how most of the Organizational Insights and cases in this chapter had a similar theme. so managers should continually evaluate the cost/benefit ratio of company structure. Functional structures face control problems as an organization grows and becomes more complex: lack of communication. To discuss the emerging trends toward network organizations. PHAM HOANG HIEN . To show the differences among the three types of product structures: product division. (6. and integration. multidivisional. Structures may need to be changed over time.4. (6.2) 4.1) 2. To explain the concept of a multidivisional matrix structure.3) 6. the amount of coordination needed. and the boundaryless organization.2) 5. and lack of customer responsiveness.6) 8. motivation. outsourcing. Three product structures (product division. and integration. horizontal differentiation. Reengineering an organization can increase performance.1) 3. and the boundaryless organization.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 61 CHAPTER 6 DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION TEACHING OBJECTIVES 1. the product. The advantages and disadvantages of the matrix are reviewed as well as the difference between the matrix and the product team structures. Organizational structure fosters coordination. The appropriate structure depends on the complexity of activities. The functional structure stands as the foundation of horizontal differentiation by creating a division of labor that leads to core competences. each with advantages and disadvantages. (6. To demonstrate that grouping tasks by function is the foundation of horizontal differentiation. The source of control problems./6. A key issue in organizational design is how to group tasks and coordinate activities to create a competitive advantage. (6. To explain the geographic and market structures. geography. the number of products marketed. The geographic structure and the market structure are examined with their advantages and disadvantages. the geographical location.7) CHAPTER SUMMARY Company tasks are organized to provide customers with goods and services. (6. The multidivisional matrix structure offers a high level of coordination among divisions. (6. Trends in structure include network organizations.6) 9. The matrix structure is appropriate when a high level of coordination and a rapid development time are necessary. a company adopts a more complex structure by increasing vertical differentiation. To stress that structure must be evaluated periodically and may need to be changed. To show how to group and coordinate tasks and how an effective organizational design leads to core competences and a competitive advantage. and product team) are discussed. inability to measure performance. (6. (6. To resolve these issues. or the customer. determines the type of structure. and product team. outsourcing. (6. and the customer served. To illustrate that moving from a functional to a more complex structure increases vertical differentiation. and control. highlighting both advantages and disadvantages. horizontal differentiation. multidivisional.5) 7. To outline the advantages and disadvantages of a matrix structure. peers develop norms and values that increase their effectiveness and loyalty.com’s Internet software to link employees to customers. and Grille grouped waiters and busboys into the dining area function and chefs and kitchen staff into the kitchen function. Describe Amazon’s functional structure.1 Functional Structure Functional structure is the bedrock of horizontal differentiation. Bezos developed core competences that made Amazon. Then he established the information systems department to implement these systems and interact with customers. a company can attain a core competence and competitive advantage. Working closely. a functional structure emerges. Learning from peers increases skills and abilities.R. 2. and Grille example above for a good working example of how and why an organization would group by function.com. Bezos created R&D to develop and improve in-house software. First. Q. Q. How does the functional structure help a company reach its goals? A. Finally. Control Problems in a Functional Structure A functional structure controls people and resources and develops core competences. By focusing on the best way to divide the total task into functions and recruiting experienced managers. Peer supervision is key if work is complex because supervision from above is difficult.R. a financial department and strategic planning department were added. As others assume specialized roles. 3.com competitive.A. As a company grows and becomes more complex. A. ___________________________________________________________________________ ___________________________________________________________________________ Focus on New Information Technology: Amazon. Part 4 Jeff Bezos achieved success due to the functional structure that effectively allowed Amazon.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 62 CHAPTER OUTLINE 6. People with common skills share information for problem solving or accomplishing a task. • Refer to The B. which begins when one person assumes a functional task. The B.A. each function tries to maintain the company’s PHAM HOANG HIEN . with people placed in groups based on common skills or common use of resources. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Advantages of a Functional Structure 1. People can supervise each other and meet work schedules. A company organizes jobs into functional areas to offer consumers high-quality products at reasonable prices. As functional abilities increase. and increasing control with rules. Reengineering the design of the functional structure can increase effectiveness. using integrating mechanisms such as task forces and teams to improve coordination between subunits and motivation. Location Problems. Evaluating the cost and contribution of each function to a product is difficult. (Fig. similar products at a few production sites and markets to one type of customer.2 From Functional Structure to Divisional Structure A functional structure best serves a company that produces a few. Customer Problems. division of labor within a function and between functions is a vital design task. Increasing integration.2). Some companies consolidate departments to resolve coordination problems. This move entails three design choices: Increasing vertical differentiation. With regional offices. Strategic Problems. (Fig. a company may solve control problems through integrating mechanisms.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 63 position. Q. Solving daily coordination problems prevents top managers from focusing on longterm strategic issues. Increased demand may strain manufacturing to produce products fast enough or in sufficient quantity. Increasing horizontal differentiation. Marketing and sales have functional hierarchies. product teams or divisions to overlay a functional grouping. 6. Communication Problems. New types of customers require customized products to meet their needs. Measurement Problems. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Reengineering Functional Structure to Solve Control Problems Before adopting a more complex and costly structure. When production expands to more products at more locations and to several types of customers. centralizing decision-making. 6. 6. Functions communicate poorly because of subunit orientation. increasing the levels in the hierarchy. What problems do functional structures face? A. Control problems arise. a company requires a complex structure. A diagram of task relationships shows if the organization is obtaining the advantages of a functional structure or experiencing disadvantages. resulting in a loss of strategic direction. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ PHAM HOANG HIEN Managerial Implications: Functional Structure .3) For an entrepreneur. a company must balance decision-making between centralized functions and regional managers. _________________________________________________________________________________ _________________________________________________________________________________ PHAM HOANG HIEN .3 Divisional Structure I: Three Kinds of Product Structure As the number of products and/or services increase. or product team structure. a multidivisional structure can control many businesses. Divisions are self-contained. a geographic structure fits best. multidivision. Q. Multidivisional Structure A multidivisional structure is appropriate if products are different and are sold in many markets. These decisions determine a company’s product division. If many. The multidivisional structure has a corporate headquarter.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Moving to a Divisional Structure A divisional structure groups people from different functions to provide customers with goods or services. tasks are grouped by product and function. furniture makers. (Fig. A product structure groups products into separate divisions.4) Each support function is grouped into a product-oriented team.6) • Refer to discussion question 2 here to distinguish between a product division and multidivisional structure. Vertical differentiation is increased and support functions centralized at the top. Because products differ. a market structure fits best. Staff members facilitate integration to share information quickly among divisions. organized functionally and responsible for overseeing division managers. Unlike a product division structure. (Fig. 6. If different customer types cause problems. What types of companies generally meet this criteria? A. An automaker doesn’t know how to market a computer. The type of divisional structure depends on the source of control problems.5) Sharing of skills and resources increases a function’s ability to create value across product divisions. If multiple locations cause problems. 64 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 6. Heinz has product divisions with manufacturing facilities and a manager who coordinates with support functions like marketing. and paper companies fit a product division structure. Support functions can be centralized at the top or grouped for each product division. Product Division Structure A product division structure with centralized support functions is appropriate when products are similar and target the same market. Food processors. J. H. centralized support functions at the top is infeasible. each with their own support functions and control. (Fig. This structure makes subunits easier to manage as a company grows. 6. complex products cause problems. A company must determine the difference and complexity of products and coordination methods between support functions and product divisions. 6. a product structure fits best. What companies should use the multidivisional structure? A. and reduces costs. the price of a product or service sold by one division to another 4. Determining what authority to centralize or decentralize from the corporate to the divisional level 2. PHAM HOANG HIEN . GM’s structure had several benefits: 1. Functional specialists serve on self-contained. due to a division of labor between corporate and divisional managers. the product team structure customizes products. Distorted information. How was GM’s structure different from a product division structure? Evaluate GM’s structure. speeds development time. Improvement in employee morale due to divisional decision-making 3. The poor communication leading to slow development in the multidivisional structure is avoided. and functional. have a multidivisional structure because it permits growth and retention of control. 65 Organizational Insight 6. Increased control. 4. The ability to measure each division’s performance and to allocate resources better 2. design. Sharing of divisional information to compare profitability and product development time Still costs soared due to duplication of functions. because corporate managers monitor divisional managers and make comparisons. resulting in communication problems Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Product Team Structure A hybrid of the product division and the multidivision structures. GM’s structure had self-contained divisions and a corporate headquarters staff. Determining transfer pricing. Coordination problems from uncooperative divisions competing for resources 3. cost control. like General Motors. Sufficient time for corporate managers to focus on strategic issues 4. and corporate managers evaluated performance and created strategic plans. A. An internal labor market. but centralized control for economies of scale.1: Creating GM’s Multidivisional Structure Alfred Sloan took over GM’s 25 product divisions in 1923 when Ford was highly centralized and achieved economies of scale by producing one model. Profitable growth. Increased organizational effectiveness. because good divisional managers are promoted to corporate management. Disadvantages of a Multidivisional Structure 1.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Q. Most Fortune 500 companies. Higher bureaucratic costs 5. because capital can be allocated to divisions with the greatest potential return on investments. Sloan developed a multidivisional structure with diversity in R&D. Divisional managers made decisions. Advantages of a Multidivisional Structure 1. but kept R&D and purchasing centralized. and marketing skills. and strategic planning. and layers of hierarchy slowed decision-making. 2. but centralized control resulted in look-alike cars. divisional. Q. There are three management levels: corporate. 3. In 1984 competition forced GM to consolidate divisions. So GM returned design control to the divisions. Wal-Mart had to choose a structure complex enough to operate its growing empire and still maintain its mechanistic/organic balance. 6.9) 66 Organizational Insight 6.9) This structure increases both horizontal and vertical differentiation. (Organizational Insight 4. including international operations. A regional hierarchy is added. Store operations are divided into regions. giving managers input into their region’s product mix to maximize sales. development time was seven to eight years compared to Toyota’s three. Customer demand was high. What structural problems did Wal-Mart face? A. The functional approach was ineffective. with a development time of three years. good quality. A. Q. Why did Chrysler change to a product team approach? What benefits did this structure provide? A. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN . Organizational Insight 6. This ineffective method was successfully replaced by Chrysler’s product platform teams.4 Divisional Structure II: Geographic Structure As a company expands into different regions. 6. and employees become loyal to product not function. responsible for acquiring inputs. Wal-Mart will further divide up its international division to meet customer needs. As it expands globally. and low costs. Describe Wal-Mart’s structure. Q. The product team structure was successfully tested for a new sports car. (Fig. Decentralization and integration facilitate rapid decision-making.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION product division teams. it needs to organize its core competences to meet the needs of different regional customers. quality was poor. (Fig.2: Iacocca Pioneers Chrysler’s Team Structure To develop a car. The geographic divisional structure permits some functions to be centralized and others to be decentralized. A team manager oversees design and manufacturing activities. Wal-Mart selected a geographic structure.3 Wal-Mart Goes National Then Global Wal-Mart found the right balance between a mechanistic and organic style of operating and has prospered.6) Q. and costs were high. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 6. Chrysler traditionally created a product division. A matrix is an organic structure. consumer.11) Organizational Insight 6. 6. 3. To customize products for different regions. Each division develop products for its customers but uses centralized support functions. The matrix structure is flat with decentralized authority. to coordinate among different customer types. Advantages of a Matrix Structure 1. 6. Communication among divisions improved. What were the advantages of a market structure? A. Structural changes should increase effectiveness. Control is exerted horizontally via teams. and computers) saved the bank $2 million. Q. a multidivisional structure. Disadvantages of a Matrix Structure 1. (Fig. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 6. What are the drawbacks of a matrix structure? A. for dissimilar products. divisions did not coordinate. Q. matrix team members have two bosses and team membership is not fixed. insurance.6 Matrix Structure The matrix structure includes both functional and product responsibility. Managerial Implications: Changing Organizational Structure Functional structures may require change to improve control.5 Divisional Structure III: Market Structure The customer is the focus in a market structure: commercial. use a market structure. For production of many similar products. and government customers. Functional barriers and subunit orientation are reduced. Managers competed for customers. market research. because managers were not competing for customers or resources. Although both a product team and matrix structure use teams. The product manager leads the team whose members are responsible to both functional and product managers. but work under a product manager. Centralizing support functions (advertising. Mellon Bank reorganized.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 67 6. use a geographic structure. This structure permits a quick response to market changes. use a product development team structure. and credit cards. PHAM HOANG HIEN . 2. Cross-functional communication allows members to learn and develop skills. Functional employees remain under a functional head. To reduce development time through more integration. corporate. 4. and sales fell. It is used for a high level of group coordination to respond to changing conditions. organizing divisions by CDs. Employee skills are utilized.4: Tailoring Structure to Customers Mellon Bank used a product structure. Employees are concerned about both cost and quality. Lack of bureaucratic structure leads to role ambiguity and role conflict. (Fig.12) Role and authority relationships are ambiguous. a divisional structure is appropriate. Nike keeps R&D in-house but outsources other functions to companies around the world. Division heads and corporate executives exchange information and coordinate activities. transferring activities to outside organizations such as suppliers. (Fig. 6. faxes. Organic organizational behavior 4. 3. Functional experts join an organization to meet a contract and then go to another project. Companies are using outsourcing. Unmet expectations lead managers to increase control resulting in a taller.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 2.7 Network Structure and the Boundaryless Organization Companies are moving towards network structures. Corporate specialists analyze divisional performance and design action plans. Difficulty in replacing partners and keeping proprietary information from competitors 3. Outsourcing offers increased flexibility and reduced costs. Teams may fight over resources. but unlike members of a matrix structure. they are not part of the organization. manufacturers. Coordination problems emerge. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN . Partners replaced for unmet performance expectations 5. Production costs reduced through partners with lower costs 2. Network structures are becoming complex. High bureaucratic costs avoided with a flat structure 3. Informal hierarchies emerge in response to uncertainty. Difficulty in obtaining ongoing learning to build core competences The Boundaryless Organization The boundaryless organization connects people by computers. 5. a group of organizations which coordinate activities via contracts not a hierarchy. bureaucratic structure. 4. Advantages of Network Structures 1. followed by lack of cost reduction and improved quality 2. 68 The Multidivisional Matrix Structure A matrix design can enhance a multidivisional structure when placed at the company’s top to increase integration between corporate and division managers. and computer aided design systems. Access to low cost foreign sources of inputs and expertise Disadvantages of Network Structures 1. and distributors. video teleconferencing.13) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 3 here to compare the product structure and the matrix structure. Designing organizational structure is an increasingly complex management activity. Members often refuse transfers to stay with peers. _________________________________________________________________________________ _________________________________________________________________________________ 6. Corporate headquarters is a level with a division of labor between corporate and divisional managers. customer concerns. Access to low-cost foreign sources of inputs and expertise PHAM HOANG HIEN A functional structure is simpler and is used for one business. This reporting structure reduces role conflict and role ambiguity. What are the advantages and disadvantages associated with network structures? Advantages: 1. Top managers spend time on operational and coordination issues. Partners replaced for unmet performance expectations 5. Functions develop hierarchies. and neglect of strategic matters. • A multidivisional structure has a corporate headquarters staff. High bureaucratic costs avoided with a flat structure 3. Determining the contribution and cost that each function brings to a product is difficult. Production costs reduced through partners with lower costs 2. 3. Control increases because corporate managers oversee and measure divisional performance. a product division structure is appropriate for one business. A functional design makes product customization difficult. various divisions can have different structures. Why might an organization prefer to use a product team structure rather than a matrix structure? A product team structure allows employees to report to only one boss. more horizontal and vertical differentiation. it encounters control problems: lack of communication. product structure divisions share centralized support functions. become remote. 2. 4. in a matrix. Organic organizational behavior 4. As organizations grow and differentiate. and make coordination difficult. . A company adopts a multidivisional structure because the number and complexity of different products cause control issues.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 69 DISCUSSION QUESTIONS AND ANSWERS 1. a product team structure avoids conflicts over resources. making responsibilities clear. Balancing control between corporate and regional offices is difficult. inability to measure performance. which leads to more bureaucracy and a taller hierarchy. An internal labor market allows for the promotion of divisional managers to corporate positions. Employees may create their own structure. Because of a clearly defined hierarchy. people rotate and feel unstable. What are the principal differences between a functional structure and a multidivisional structure? Why does a company change from a functional to a multidivisional structure? 5. Established procedures are used because team membership is fixed. neglecting long-term strategic concerns. • A multidivisional structure permits a company to run many businesses. A multidivisional structure has more integration. not two. location issues. what problems can arise with a functional structure? As a company grows. How do the product division structure and the multidivisional structure differ? There are structural differences: • The divisions in a multidivisional structure are independent with their own support functions. • In a multidivisional structure. the team manager. There are two basic positions. These problems eroded Caterpillar’s market share. slow development time. R&D teams were assigned to specific products. The Ethical Dimension Students examine the ethical issues surrounding outsourcing. but shared information. CASE FOR ANALYSIS A New Caterpillar Emerges Caterpillar was a low-cost manufacturer in the construction equipment industry. Caterpillar had slow decision-making. Coordination problems emerge. making managers responsible for all activities and coordination with centralized support functions. and updated factories. and is unethical. 2. The first is that outsourcing to other countries costs the U. as products were related. Caterpillar’s functional approach was outdated. Each division had cross-functional PHAM HOANG HIEN . How did Fites change Caterpillar’s structure to improve its effectiveness? Fites created 4 centralized support divisions and 14 product divisions. followed by lack of cost reduction and improved quality 2. the CEO saw that their success resulted from cross-functional teams. This structure was more effective. high costs. 1. and lower productivity. Each was a profit center with responsibility for profits and losses. What were the problems with Caterpillar’s old organizational structure? Decision-making process was highly centralized. and return-on-investment goals. Caterpillar restructured into 14 product and 4 support divisions. decentralized control. Make sure they understand that each structural option has its pros and cons.S. By observing Japanese manufacturers. department heads such as manufacturing made decisions and sent them down the hierarchy. and structural changes were needed to remain globally competitive. Making the Connection Ask students to find an example of a company that has changed its horizontal differentiation. and functional managers coordinated poorly. Decisions were removed from those making the product. The other position is that the consumer benefits in the long run by organizations running more efficiently. Difficulty in replacing partners and keeping proprietary information from competitors 70 ORGANIZATIONAL THEORY IN ACTION Organizational Theory Exercise: Which New Organizational Structure? Small groups examine how to move from a functional structure to one suited for an organization trying to expand into different regions of the country. The result was higher costs. but competition from the Japanese threatened its position. ANALYZING THE ORGANIZATION Students will analyze the structure and problems of their companies. and a long production time. and they need to apply all of the principles discussed in previous chapters to determine the most effective structure. jobs.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Disadvantages: 1. and marketing functions of a company that manufactures ice cream. Students will suggest a more appropriate structure. Look up General Motors on the Internet and report to the class about GM’s structure. students are assigned a structure and will list its advantages and disadvantages and give examples. Marketing decisions were decentralized to the regional level for rapid response time. it is a good example to show how important structure really is in an organization. Production says it can produce only three flavors. engineering. and manufacturing to work together reduced product development time by 50 percent. 71 TEACHING SUGGESTIONS 1. A good discussion topic is how the matrix structure violates Weber’s bureaucratic principles. This exercise should shows control problems associated with a functional structure. product design. In small groups. 6. Requiring marketing. divide students into finance. such as a restaurant that is organized by product instead of function. To illustrate the value of a proper structure. Management is too busy resolving coordination problems to determine strategy. Structures: functional. separate the functions geographically by using several classrooms. 3. To make this even more realistic. Students get a better flavor of how difficult it is to coordinate activities when they are not all in the same room. Show them how this would make the restaurant very inefficient because it would need wait staff and cooks from multiple departments in order to serve the customer. Manufacturing upgraded its facilities. and network. Although this would be very costly and a poor dining experience for the customer. If the company also offered yogurt. Ask students what they think of this. Show how role ambiguity and role conflict arise. 5. 4. matrix. The product manager wants speed and low costs. 2. One student will be a financial specialist who works on a certain product team and reports to the finance manager and to the product manager. 7. To illustrate control problems with a functional structure. These changes made Caterpillar compete more effectively. Marketing wants to offer many flavors. and the functional manager wants quality. Ask for three students to volunteer. and what their experiences are with working with multiple bosses. and increased productivity 30 percent. and finance is concerned with costs. production. it could attract more customers. have students design a really inefficient structure. PHAM HOANG HIEN . used product teams. market).CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION product teams responsible for marketing. A role-play demonstrates the problems with a matrix structure. divisional (product geographic. and manufacturing to increase productivity. language. For an individualized orientation. (7. professional. An organic structure encourages an innovative culture. Property rights outline the rights and responsibilities of stakeholder groups. (7. (7. large salaries. ceremonies. The sources of culture include the characteristics of the people (particularly the founder). and control over organizational resources. Structure impacts culture. which includes ethics. determines how organizational members interpret the environment. and four rites: passage. in the long run. To discuss the methods used to transmit organizational culture to members. and investiture. organizational ethics. integration. formal. and degradation. informal. Organizational ethics is a product of societal. disjunctive. Managers must examine the interaction of all four sources. stock options. Rights given to employees include long-term employment. To distinguish between terminal values and instrumental values. Rights given to managers include: a golden parachute. Cultural values are transmitted through stories. and helps achieve a competitive advantage. PHAM HOANG HIEN . Organizational culture is the set of values that controls behavior. company tactics include: individual. pension and benefits. and organizational structure. Shareholders enjoy the greatest property rights. It has been shown that managers who behave in a socially responsible fashion will. To discuss the various stances organizations can take on corporate social responsibility. Social responsibility refers to a manager’s duty to make decisions regarding the welfare and well-being of the stakeholders and society. and employee stock ownership. and structure.1) 3. For newcomers to develop an institutionalized orientation. fixed.4) 6.1) 2. An organization has two types of values: terminal and instrumental. sequential. and divestiture. To explain that organizational culture is a set of values that controls behavior and impacts the way members make decisions and interpret the organization’s environment. and individual ethics.3) 5.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 1 CHAPTER 7 CREATING AND MANAGING ORGANIZATIONAL CULTURE TEACHING OBJECTIVES 1. To explain the interaction of the four sources of culture. (7. Van Mannen and Schein’s model of socialization tactics distinguishes between institutionalized and individualized role orientations. (7. property rights. serial.2) 4. random. To examine the sources of organizational culture: characteristics of the people. (7. property rights. enhancement. a mechanistic structure produces a predictable culture. variable. Members learn values indirectly or through a formal socialization process. organizational ethics. company tactics include: collective. Organizational culture controls behavior and plays a role in organizational effectiveness.5) CHAPTER SUMMARY This chapter examines organizational culture. The strength of an organization’s commitment to social responsibility is on a continuum. most benefit all stakeholders including shareholders. (Fig. The most influential values are unwritten and reflected in shared beliefs and norms. The two are very much intertwined. Look at how the Mexican culture’s work schedule differs from the U. How can a country’s culture influence the culture of the organization? A. An organization usually has two types of values: terminal and instrumental. This would very much affect the success of the joint venture. as this case shows. What is organizational culture? A. What is the difference between a terminal and an instrumental value? A. rules. organization and a Mexican organization formed a joint venture that failed due to cultural differences. A company can control and motivate its people through organizational culture. BankAmerica was much more conservative in its decisionmaking style. How did BankAmerica go about changing the culture of the new organization? A. Over time. and standard operating procedures (SOPs).1: How Global Culture Affects Organizational Culture This insight discusses how a U.S. Organizational Insight 7. they discovered dramatic differences in the way that each organization conducted business.1) Q. instrumental values accomplish terminal values. Q. and norms are internalized. causing problems that were not able to be solved. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 7. but instrumental values are conveyed through rules. Employee risk-taking (an instrumental value) helps achieve innovation (a terminal value).S. norms. culture’s. PHAM HOANG HIEN . it stripped authority from Security Pacific’s managers and took control of the new organization.2: Mergers and Culture After BankAmerica and Security Pacific merged.1 What Is Organizational Culture? People are a company’s most valuable resource. Q. Because it was the dominant organization.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 2 CHAPTER OUTLINE 7. whereas an instrumental value is a desired behavior. 7. and believed that its culture was the one that the organization should adopt. The terminal and instrumental values of each culture was very different. Terminal values are written in the mission statement and official goals. Q. Organizational culture is the set of shared values that control interactions among company members and with external stakeholders. A terminal value is a desired outcome or end state. SOPs. all within a couple of weeks after the merger. acceptable standards of behavior. Watching existing members and determining appropriate behavior lets newcomers learn indirectly. suggests that structuring socialization teaches newcomers key values. 3. Newcomers respond the same way as existing members do. Formal vs. Random. Q. Socialization.2 How Is an Organization’s Culture Transmitted to Its Members? The method of conveying values influences the culture to motivate employees and increase organizational effectiveness. disjunctive processes develop individual behavior. random tactics are based on newcomer interests and needs. Serial vs. and language.1) Q. but they also learn unacceptable practices. Individual. Individual tactics allow newcomers to learn new responses. Collective vs. Individualized role orientation. 5. 4. Q.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 3 Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 7. Fixed tactics provide a specific timetable for each stage. Informal. Institutionalized role orientation. 6. Divestiture gives members negative social support (neglect) until they conform to norms. assures that members learn appropriate values. Socialization and Socialization Tactics Newcomers become insiders when they internalize organizational values. ceremonies. A. Collective tactics consist of common experiences to generate standard responses. variable tactics set no timetable. Newcomers respond creatively and experiment with changing norms and values. How does a newcomer learn values? A. Variable. Disjunctive. How can culture can be communicated to new organizational members? A. 2. Sequential vs. Differences between the two include: 1. PHAM HOANG HIEN . Divestiture vs. Formal tactics separate newcomers during learning. (Table 7. Investiture. Role orientation is the characteristic way newcomers respond to a situation. the process of learning and internalizing norms. Name two types of role orientations. Investiture gives positive support immediately. informal tactics encourage learning on the job. A socialization model by Van Mannen and Schein. These tactics influence role orientation. Newcomers learn values from formal socialization and informal stories. military-style socialization leads to an institutional orientation. Sequential tactics establish a sequence for activities. Fixed vs. Serial tactics use existing members as role models and mentors. and teamwork. ceremonies. Rites of enhancement are public recognition of employees (news releases and awards dinners). and how are those values conveyed? A.2) There are four organizational rites: 1. innovation. What are the dangers of institutionalized socialization? A. and departure from the organization. An organization chooses institutionalized or individualized tactics based on goals. institutionalized tactics fit. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Stories. Arthur Andersen. and organizational language communicate cultural values. Q. The show serves as a rite of integration because the employees’ shared experiences encourage teamwork. and a formal manner of addressing each other. These rites foster a cooperative and innovative culture. Language includes not only speech. 3. the company rewards almost half of its 1. Q. It produces sameness among members. and organizational language convey cultural values. and Organizational Language Stories. making it hard to adapt to changes. and how are those values conveyed? A. PHAM HOANG HIEN . ceremonies. allowing a change or reaffirmation of values. 2. At its annual trade show. Rites of degradation denote involuntary departure. Microsoft and 3M are more informal. Triad uses rites of integration and rites of enhancement. and EDS have strict dress codes. their offices.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 4 Q. The military. and use technical language. (Table 7. Q. individualized tactics fit. nice offices. What does Triad do to enhance culture? A. and its sales have exceeded forecasts every quarter. Ceremonies. What company evokes conservative values. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Stories. for innovation. their company cars. a computer company.3: Triad Systems Builds a Culture Based on Success Triad Systems. uses rites to enhance its culture. Technical language facilitates mutual adjustment (sports team). For predictability and standardization. Stories and language reveal the type of behaviors the company values and those that are frowned upon.500 employees for focus. but also what people wear. and nice company cars and speak formally. Triad has won a national quality award. Rites of integration build bonds between members (an office party or cookout). 4. have a casual dress code. promotion in. What company evokes innovation. Organizational Insight 7. Rites of passage signify entry to. 7. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Managerial Implications: Analyzing Organizational Culture Managers need to study the culture to identify terminal and instrumental values. Q. People are drawn to companies with values similar to their own. The values and norms of consensus and obedience to the hierarchy and respect for authority made employees sound alike. property rights given to employees. and luxury communicate images about an organization’s values.3 Where Does Organizational Culture Come From? Organizations have different cultures due to the interaction of four factors: people.4: siteROCK’s Military Management Culture A high-tech. organizational culture becomes more unique. norms. Organizational Insight 7. All processes and procedures are in writing. and ethics. dot-com organization goes against the norm and implements a culture similar to that of a military organization. A building design can be a symbol. This has resulted in an organization that provides high levels of customer service. think alike. How did siteROCK develop an institutionalized role orientation? A. and retain people with different values.2) Characteristics of People within the Organization Companies attract. What were the problems with P&G’s culture? A. ethics. P&G had become a bureaucratic nightmare! PHAM HOANG HIEN .5: Proctor & Gamble’s Culture is Hard to Change Proctor & Gamble (P&G). has a distinct and insular culture with a strong and homogeneous set of values. the well-known soap and detergent company. Q.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 5 Organizational Insight 7. and look alike. Managers should develop ceremonies to teach values and enhance commitment. and a patio connected to a garden to show the value Disney places on imagination and creativity. Team Disney Building has offices. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Symbols also reveal an organization’s values. The founder impacts the culture by setting the initial values and hiring the first employees. Are goals. 7. hire. location. personalities. Isolating the corporate office conveys the image of a hierarchical and status-conscious organization. (Fig. a restaurant. As people and values become more similar. office size. and rules effectively transmitted? Managers should examine socialization methods and look for ways to improve the process. and structure. They also implemented “two-man” norms that allowed co-workers to work with a partner in solving problems. and decision-making opportunities. the CEO fired 15. How did the new CEO change the culture? A. What ethical values were violated? A.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE Q. Yet an organization can cultivate ethical values to control employees through guidelines for appropriate behavior. stock ownership plans. 6 Organizational Insight 7. Organizational Insight 7. Beech-Nut. and decision-making authority. A. Managers receive golden parachutes. a maker of baby foods. Strong property rights at Southwest Airlines’ result in employee loyalty. Personal ethics influence organizational ethics. the rights given to stakeholders to receive and use organizational resources. stock options. (Table 7. Property rights shape employee behavior and determine organizational effectiveness. To reduce costs.6: Apple Juice or Sugar Water? In the 1980s. severance payments. health insurance.3) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Q. Beech-Nut violated societal ethics codified in law. pension and benefits. To instill a new entrepreneurial spirit with risk-taking. Shareholders have the greatest property rights. selected a low-cost supplier to save $250. and pensions. control over resources. Why did GM’s divisional managers refuse to sign contracts with EDS to benefit GM as a whole? PHAM HOANG HIEN . Top management failed to instill ethical values. Ethical values are an inseparable part of organizational culture. but managers sold it as pure apple juice. and malic acid. because they own the resources and share in profits. large salaries. lifetime or long-term employment. and speed” the new terminal and instrumental values.000 a year. sugar. The Food and Drug Administration (FDA) investigated and fined the company over $2 million. Organizational Ethics The cultural values of the founder and the top managers are beyond an organization’s control. Q. Property Rights Cultural values arise from property rights. Q. An R&D specialist revealed that the concentrate contained corn syrup.000 employees and made “stretch. Employees receive notification of layoffs. Employees’ rights may be limited to wages. innovation. Beech-Nut broke the law and threatened consumer health. and a clash emerged over property rights. Name the property rights given to managers and employees. Personal ethics stem from societal ethics and an individual’s upbringing. Rewards are now based on the ability to increase P&G’s value.7: A Clash of Two Cultures General Motors (GM) bought Electronic Data Systems (EDS) in 1987. Q. Can Property Rights Be Too Strong? Property rights affect performance positively but can also be too strong. An organic structure leads to innovation and flexibility. Structure can promote cooperative norms and values that improve integration and coordination. A mechanistic structure results in predictability and stability. salaries. IBM had a conservative culture because employees had the rights of lifetime employment. also GM employees. pension. Employees tried to increase quality to meet customer needs. whereas EDS’s employees received stock options based on contract profits. the formal system of rules and task and authority relationships. GM’s managers had different behavioral expectations. Cultural changes in 1987 increased sales by 70 percent and the workforce by 79 percent. What did Bimba do to change its culture? A. Organizational Structure Organizational structure. a producer of aluminum cylinders. Employees feel ownership for their position. The owner created an employee stock ownership (ESOP) plan in 1987. had a rigid culture in which employees followed orders. Teams in a product team or matrix structure have shared cultural values. Bimba Manufacturing Company. Cross-functional teams including managers shared concerns and met with customers. A. resulting in conflict and power struggles. What terminal values will a mechanistic structure achieve? . Different structures lead to different cultures. benefit from markups on contracts with them. Organizations must assign property rights based on performance and continually evaluate the property rights system. Managers functioned as advisors not bosses. The choice between centralization and decentralization promotes different cultural values. Teams hired and socialized their own members. Bimba changed its property rights system. is a source of culture. and instituted a more cooperative culture. What terminal values will an organic structure achieve? A. sold 90 percent of the company to employees. GM’s managers refused to have EDS’s managers.8: Bimba Changes Its Property Rights System The property rights system changes an organization’s culture. Because top managers decide how property rights are distributed to others. and termination agreements. benefits. Organizational Insight 7. thus product development time is short. they influence culture. They received straight salaries without performance based rewards.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 7 A. Top Management and Property Rights Top managers determine their own property rights: terms of their employment. PHAM HOANG HIEN Q. Q. the property rights system. • Refer to discussion question 3 here to emphasize the fit between organizational culture and design. its people. and organizational structure. and accountability. and structure on culture. The following approaches are on a continuum from low to high. A manager should produce a plan including all four factors to redesign culture to improve effectiveness. and focus on balancing the interests of the many different stakeholders. To avoid negative cultural change. What values does decentralization promote? What values does centralization promote? A. organizational ethics. Decentralization promotes creativity and innovation. property rights. but make no attempt beyond this to behave socially responsibly.___________________________________________________________________________ _________________________________________________________________________________ Managerial Implications: Designing Organizational Culture A manager should identify the source of cultural values and norms and analyze the effects of people. PHAM HOANG HIEN . The Accommodative Approach Accommodative managers recognize the need to behave responsibly. and do all they can to prevent knowledge of their behavior from reaching stakeholders. A larger and more complex organization with a successful culture can decrease effectiveness. An organization might need to change its structure. ethics. and only major modifications change values. The Obstructionist Approach Managers choose to behave unethically and illegally.5 Corporate Social Responsibility An organization can take several approaches to social responsibility. stability. Developing ethical values should be a top priority. making cultural change difficult. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 7. The Defensive Approach Defensive managers stay within the law. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 7. or its property rights system. managers must design a structure to handle control problems. These factors interact.4 Can Organizational Culture Be Managed? Managers must examine the interaction of the sources of culture: the characteristics of organizational members.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 8 Q. centralization promote obedience. The third source is property rights.. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here to consider the pros and cons of social responsibility. stable culture. Ethics can control behavior. Q. Employees are evaluated on their participation in the social mission. given to members to receive and use organizational resources. ethical behavior.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE The Proactive Approach Proactive managers go out of their way to learn about the needs of the different stakeholder groups.5 percent of pretax profits as grants to support social activities. Organizational structure influences culture. for example. and an organic structure promotes an innovative culture. (2) organizational ethics. offer free ice cream at charitable events. The distribution of property rights motivates employees. The founders are socially conscious and contribute 7. The founder establishes culture by setting values and hiring the first members. A. Ben & Jerry’s sponsors local concerts and film festivals. What is the origin of organizational culture? Why do different organizations have different cultures? The people within an organization are the primary source of culture. and over time culture becomes more distinct. and has renovated a New York subway station. 9 Organizational Insight 7. and individual ethics. not just shareholders. a product of societal. companies attract those with similar values. Consider. Employees remain focused on the company’s social mission. a producer of super premium ice cream. Describe Ben & Jerry’s view of social responsibility. Each company’s pattern of interaction among these four variables sets its culture apart. ______________________________________________________________________________ ______________________________________________________________________________ Why be Socially Responsible? The answer to this seems clear in that all stakeholders benefit from responsible. The second source of culture is ethics. has a culture instilled by founders Ben and Jerry that adopts a broad stance on social responsibility. (3) property rights. . and (4) organizational structure. The other perspective on this is that businesses that focus on things other than increasing profits is a deterrent from the overall mission of the organization. DISCUSSION QUESTIONS AND ANSWERS 1. A mechanistic structure promotes a conservative. professional. and are willing to utilize organizational resources to benefit all stakeholder groups. that managers need to spend resources determining which social issues they will respond to. PHAM HOANG HIEN Organizational culture arises from four sources: (1) the characteristics of its people. which could deter from customer service or build products of high quality.8: Ben & Jerry’s Ethical Culture Ben & Jerry’s Homemade Inc. Random and variable tactics use no set sequence and no timetable. random. Organizations are free to do as they wish if they obey the law. disjunctive. and language. For clear-cut situations. and divestiture. serial. Sequential procedures offer a sequence of activities. ORGANIZATIONAL THEORY IN ACTION PHAM HOANG HIEN The answer to this question will vary. sequential. Disjunctive procedures require newcomers to develop behavior. Values are conveyed through stories. Serial methods provide role models and mentors. informal. Culture motivates employees because norms and values encourage behavior for goal achievement. 4. fixed. a company should act to produce the greatest benefit for the majority. with training tailored to individual needs. Some will argue that an organization should examine every situation from a moral perspective. ceremonies. To develop an individualized role orientation. Supporters of the broad stance argue that ethical and moral behavior pays off long-term and that employees should use judgment instead of relying solely on laws and standards. Individual tactics involve viewing each learning experience as unique. “An organization should always adopt a broad stance on social responsibility. the way members learn and internalize values. Collective tactics provide common learning experiences to encourage standardized responses.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE 2. Formal tactics separate newcomers from existing members. a company uses several tactics: collective. Divestiture offers negative support. a. Structure and culture must fit because different structures promote different behaviors. or taunting until newcomers conform. Structure can help achieve terminal values. formal. Investiture tactics provide immediate positive support. They will not support unethical behavior. there is the golden rule. and investiture. a company employs socialization tactics: individual. In what ways can organizational culture increase organizational effectiveness? Why is it important to obtain the right fit between organizational structure and culture? 10 Culture increases effectiveness through motivation. is appropriate for a company that desires predictability. In ambiguous situations. tall and centralized. Informal tactics include on-the-job training in a team. An organization should act to produce the greatest good for its stakeholders. but a company instills values through socialization. Fixed tactics provide a timetable. variable.” Explain why you agree or disagree with this statement. Others may disagree and state that sometimes moral actions reduce profits. 3. but state that a company is responsible only for complying with laws and conforming to society’s ethical customs and practices. To develop an institutionalized role orientation. . A mechanistic structure. An organic structure fits innovation and flexibility. Culture uses incentives to reward behavior resulting in core competences and a competitive advantage. Culture improves structure. neglect. How do newcomers learn the culture of an organization? How can an organization encourage newcomers to develop (a) an institutionalized role orientation and (b) an individualized role orientation? Newcomers learn culture indirectly by observing existing members and determining appropriate behavior. b. whether or not laws exist. one volunteer is a drill sergeant. Managers file daily reports on the neatness of employees’ desks. List the reasons why Southwest’s and Value Line’s cultures differ so sharply. impact effectiveness. and the stock ownership system rewards employees for company performance. Two volunteers are new military recruits. 2. The discussion should focus on how culture and structure contribute to this problem. On the other hand.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE Practicing Organizational Theory: Developing a Service Culture In small groups. Management does not cooperate with employees. and managers cooperate with employees. 11 The Ethical Dimension Students examine how in certain companies the culture becomes so strong that individuals begin to act unethically and pursue their own short run interests. so a new CEO would have to be patient and accept that change would come over a long period of time. A flat. and others refuse to help the recruits. a terminal value. the drill sergeant trains newcomers to march and do specific drills (sequential procedures). and the steps organizations can take to help prevent the problem. A role-play illustrates how socialization tactics encourage an institutionalized orientation. Culture becomes entrenched and is very difficult to change. and identify the organization’s ethical stance. They are to determine how to develop a culture that will focus on high-quality service. The drill sergeant is a role PHAM HOANG HIEN . determined in part by the CEO. CEO Jean Buttner values frugality so much that employees sign in every day and raises are limited. Newcomers are separated (a formal procedure). To achieve excellent customer service. Making the Connection Ask students to find an example of a company that has been trying to change its culture and to explain why the old culture is no longer effective. Boot camp (a fixed procedure). CASE FOR ANALYSIS A Tale of Two Cultures Values. 1. it is not as simple as changing CEOs. discuss the characteristic ways in which members interact. students are the owners of a new five star hotel in Florida. ANALYZING THE ORGANIZATION Students analyze the culture of their organization. Southwest’s culture is marked by good customer service and management cooperation with employees. The two recruits are in the same platoon (a collective tactic). informal structure encourages innovation. Value Line under CEO Jean Buttner monitors employees closely and gives meager raises because being frugal is the main instrumental value. Southwest Airlines maintains a flat structure. TEACHING SUGGESTIONS 1. lasts six weeks. Value Line’s culture fosters employee turnover and customer dissatisfaction. Could Value Line’s next CEO copy Southwest’s culture? Although Value Line could certainly benefit from copying Southwest’s culture. 6.CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE model (a serial procedure). As an outside assignment. Compare and contrast the two perspectives. Students will debate the pros and cons of social responsibility. The drill sergeant is hard on the recruits and others call them names (divestiture tactics). Students will look at Ben & Jerry’s web site to find out about their current projects to improve society. Organizations like Enron and Arthur Andersen tend to make us think that most organizations behave irresponsibly if given the opportunity. who opposes social responsibility. PHAM HOANG HIEN . 2. These tactics result in conformity and obedience to military’s norms. Students will report to the class. Using Table 7.4. 5. 12 4. Students can search the web for examples of organizations that behave in a socially responsible fashion. have students come up with their own examples of social responsibility based upon organizations in their own community. students will read a work by Milton Friedman. 3. Levi’s established a network structure. For example. Levi’s is seeking to both reduce costs and provide customer responsiveness. the market that it competes in. and foreign partners produce and distribute products. 1. Production facilities are located around the world to take advantage of low cost foreign labor. What structure does Levi Strauss use to implement its strategy? To implement its transnational strategy. Moreover.S. Levi’s transfers knowledge to its subsidiaries. Analyzing the Organization Students will examine the domain that the organization serves. Levi Strauss has located production facilities around the globe and customizes its products to local tastes. To implement its strategy. and the strategies used to create value for its stakeholders. What global strategy is Levi Strauss pursuing? Is it effective? Levi Strauss is pursuing a transnational strategy. marketing knowledge learned on Decker’s in the U. A partner will be replaced if it doesn’t meet Levi’s standards. For example.S. foreign subsidiaries are responsible for marketing. It is also transferring knowledge abroad. Levi’s wants to tailor its jeans to local customers. Levi Strauss uses a network structure. was transferred to Europe. and foreign partners produce and distribute products. Foreign subsidiaries are responsible for marketing. Other countries desire various colors. 2. However. Design is performed in the U.S.CASE FOR ANALYSIS Levi Strauss’s Goes Global This case demonstrates how a company can pursue a transnational strategy. PHAM HOANG HIEN . Asia may offer more smaller size jeans. Design is performed in the U. and nonroutine research. abilities. To show that technology is used at all stages in the value creation process: input. output. (9. and computer-integrated manufacturing (CIM). (9. To consider how technology can improve organizational effectiveness using three approaches: external resource. (9. AND CHANGE] CHAPTER 9 ORGANIZATIONAL DESIGN. knowledge. To define technology as the combination of skills. whereas mass production has a mechanistic structure. (9. Small-batch and continuous-process technology have organic structures. To analyze how technical complexity affects organizational structure. (9. and continuous-process.4) 8. (9. conversion. machines. (9.2) 3. The internal systems approach uses technology to increase innovation and reduce design and production time.6) 12. just-in-time (JIT) inventory. and output.2) 4. The technical approach uses technology to improve efficiency and quality while reducing costs. Technology exists at three levels: individual. To examine Charles Perrow’s theory that differences between routine and nonroutine tasks result from task variability and task analyzability. DESIGN. COMPETENCES. fixed workers. Three types of technology. To consider the costs of intensive technology and cost reduction through specialism. (9. To examine James D. and task interdependence are reviewed. an organization moves from a mechanistic to an organic structure. and technical. 1|Page [PHAM HOANG HIEN . the extent to which the production process can be controlled.4) 9.7) CHAPTER SUMMARY Technology is the combination of skills. in order of complexity include: small-batch and unit. The Aston Studies found that size determines structure more than technology. To examine Joan Woodward’s theory that technical complexity differentiates technologies. It creates value and increases effectiveness at all three stages: input. and other tools used to transform inputs into outputs. functional.3) 5. and organizational. technical complexity. The external resource approach uses technology to help manage and control outside stakeholders. Technical complexity. internal systems. The concept that strategy determines structure is called the technological imperative.5) 11. (9. and other equipment used to convert inputs into outputs. differentiates technologies. machines.PHAM HOANG HIEN [ORGANIZATIONAL THEORY.3) 6. and inventory stockpiles. To review the structural characteristics of routine and nonroutine tasks. AND TECHNOLOGY TEACHING OBJECTIVES 1. Charles Perrow distinguished between routine and nonroutine tasks according to task variability and task analyzability. mass production and large-batch. To examine innovations in materials technology: computer-aided design (CAD). According to Joan Woodward. routine and complex tasks. (9.1) 2. engineering production. To review the technological imperative and the Aston Studies. craftswork. (9. As tasks become more complex. computer-aided materials management (CAMM). To review the major elements of traditional mass production: dedicated machines.3) 7. These two dimensions classify four types of technology: routine manufacturing. (9. conversion. computers. Three models examine the effect of technology on organizational design.5) 10. Thompson’s theory that task interdependence affects technology and structure. group techniques to perform work and create value. Q. so a change in technology impacts culture. Advanced manufacturing technology (AMT) consists of innovations in materials technology and in knowledge. Mass production has moved toward advanced manufacturing technology. AND CHANGE] In the third model. tasks were broken down into simple components. Organizational Insight 9. A. the way inputs are converted into outputs (i. which reduced car prices by two-thirds and created a mass market. workers hated their jobs and were constantly monitored. CHAPTER OUTLINE 9. abilities. Traditionally.1 What Is Technology? Technology is the combination of skills. and output activities.e. materials. Why was the new manufacturing process so efficient? 2|Page . James D. personal skills and individual knowledge. mediating technology and pooled interdependence.. justin-time (JIT) inventory systems. conversion. New technologies allow for flexibility and cost control. CAD and CAMM coordinate the input and conversion stages. mass production and craftswork). CPA uses robots in the conversion stage. Innovations in materials technology involve machinery and computers.1: Progressive Manufacture at Ford [PHAM HOANG HIEN Henry Ford manufactured cars using craftswork. and parts were interchangeable. machinery. but in 1913 he opened a “progressive manufacture” or mass-production plant.. Sociotechnical theory is explained. but AMT coordinates input. Mass-production technology involves using conveyor belts and a standardized assembly process to produce goods. The strategy of specialism reduces the costs associated with intensive technology. These technologies increase technical complexity and task interdependence and make tasks more nonroutine. long-linked technology and sequential interdependence. techniques. and other equipment that people use to transform inputs into outputs. Computer-aided design (CAD). Changes have affected both structure and culture.e. Q. Describe the system of progressive manufacture. tasks built on preceding tasks). functional or departmental. Work was delivered via conveyor belts and performed sequentially (i. Yet. Craftswork involves skilled workers interacting to make a customized product. Technology relates to culture. Thompson considers task interdependence. and organizational. and intensive technology and reciprocal interdependence. computer-aided materials management (CAMM). Technology exists at three levels: individual. Traditional mass production uses dedicated machines and fixed workers to facilitate economies of scale and a low-cost advantage. DESIGN. vertical integration controlled inputs.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. achieving flexibility at little or no cost increase. and computer-integrated manufacturing (CIM). organizations stockpiled inventory to protect the conversion process. It also applies to services. Technical approach for increasing efficiency and quality. product development. the organizational structure must maximize the effectiveness of technology. reduced the need for skilled workers. External resource approach for managing and controlling outside stakeholders. DESIGN. to manage relationships with outside stakeholders. AND CHANGE] A. Internal systems approach for innovation. Describe the three stages of the value creation process.1) The input stage uses technology. conversion. The finance department obtains money at a favorable interest rate. The process was so controllable and predictable that direct supervision was eliminated and the span of control widened. A. Q. Three theories consider the relationship between technology and design. and reducing costs. and procedures to transform inputs into outputs. Q. A. techniques.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. _________________________________________________________________________________ _________________________________________________________________________________ 9. and output.g. 9. The conversion stage combines machines. Managers should understand technical complexity. and reduced development time.2 Technology and Organizational Effectiveness Q. (Fig. To improve efficiency. such as skills and procedures. employees learn time management techniques. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 1 here to review three approaches for measuring effectiveness using technology.3 Technical Complexity: The Theory of Joan Woodward 3|Page [PHAM HOANG HIEN .. the organization’s specific environment. and task interdependence. Because each function develops technologies to create value. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 9. procedures for quality testing. Describe technology at the conversion stage. the differences between complex and routine tasks. Technology is used at all three stages in the value creation process—input. and managing after-sales service). What approaches measure and increase effectiveness using technology? A. and created specialization and division of labor. The output stage uses technology for distribution to external stakeholders (e. Technology influences structure. Mass-production technology simplified tasks. selling and marketing. What advantages does small-batch offer? A. Hospital surgical teams and customized furniture makers Q. because personal skills are more important than machines. Low technical complexity occurs when the conversion process relies mainly on individual skills. but people perform assembly operations when labor costs are low. and predictability. The technology has low technical complexity. This technology offers the flexibility for a wide range of products tailored to individuals. Large-batch and mass-production technology use machines to increase technical complexity and efficiency. Q. and continuous-process technology. Technical complexity refers to the extent of programming. DESIGN. Ford used mass production to decrease production costs and create a mass market. 9. such as machine breakdowns. programmed in advance and fully automated. It is costly but ideal for new or complex products. Mass production is generally connected with automated equipment.2) 4|Page [PHAM HOANG HIEN . the more difficult the control. Ford. making work predictable. large-batch and mass-production technology. technology is programmed. Low technical complexity makes quality and consistent production difficult. resulting in standardized work and controlled production. controlling. Give examples of small-batch technology. Woodward associated 10 levels of technical complexity with three types of technology: small-batch and unit technology. the more difficult the program. and Coca-Cola Q.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. (Fig. Lower production costs lead to lower prices. A. Gillette. Employees only handle exceptions in the work process. Small-batch and unit technology produce customized products or small quantities. Q. • Refer to discussion question 2 here to review small-batch and mass-production technology. What are the advantages? A. High technical complexity occurs when conversion processes. make work standardized and predictable. A. Large volumes of standardized products are produced with tasks programmed into machines. Researcher Joan Woodward argues that technical complexity is the dimension that distinguishes technologies. not machines. Give examples of companies with mass-production technology. AND CHANGE] When standardized procedures transform inputs into outputs. _________________________________________________________________________________ _________________________________________________________________________________ Continuous-process technology is the height of technical complexity because production is almost totally automated and mechanized. and decision-making centralized. Researcher Charles Perrow argues that unpredictable events happen when technical complexity is extremely high (e. The structure is taller and wider. as teams deal with unanticipated events. (Fig. Increased technical complexity makes organizations taller with a wider span of control. Decisions are managed as they occur. The first-line supervisor’s span of control increases to 48. making it impossible to solve all problems. so mutual adjustment is needed. DESIGN. such as Anheuser-Busch Q. Q. the hierarchy increased to four levels.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. Continuous production. A. Automating production is not always practical. Continuous-process technology uses programmable tasks and a predictable work process. more predictability in production. such as Exxon. but breakdowns are possible. such as DuPont. What companies use continuous-process technology? A. What are the advantages? A. 5|Page [PHAM HOANG HIEN . Research for new drugs cannot be programmed in advance. and small in continuous-process technology.g.3) Small-batch technology needs a flat. greater technical efficiency. Supervisors have a narrow span of control and use mutual adjustment. nuclear plants use continuous-process technology). and lower costs Woodward found that an increased use of machines decreased costs. because rules and procedures coordinate activities. Woodward developed a model showing the structure of each type of technology. and brewing companies. with decentralized decision-making and a narrow span of control for supervisors (23 employees). An organic structure fits small-batch technology. three-leveled hierarchy. chemical companies. A mechanistic structure fits mass production. Oil producers. but others argue that continuousprocess technology can be operated safely if a balance of centralized and decentralized control is attained. Many customers will pay a premium price for customized products. First-line supervisors have narrow span of control in small-batch technology. wide in mass production technology.. AND CHANGE] Q. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Technical Complexity and Organizational Structure Because technology affects structure. 9. He implies that nuclear power stations should be closed. little variation. Describe the hierarchy and span of control for mass production. so close monitoring to prevent disasters makes the hierarchy eight levels. Mass production technology can program tasks for a standardized manufacturing process. The need for quick responses makes an organic structure fits continuous-process technology. 3. so an organization must fit its structure to its technology. An employee encounters exceptions but handles them with standard procedures. and an exception does not require much search activity to correct it. whereas standardization and repetition make task variability low.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. Craftswork is a form of small-batch technology. The structure of large organizations may result from other factors that cause growth and differentiation. Exceptions at any stage in the value-creation process and new situations make task variability high. 6|Page [PHAM HOANG HIEN . but new situations take time to resolve by adapting existing procedures to new situations. A. Mass production is routine manufacturing with inputs standardized and standard procedures followed to handle exceptions. Serving fast food is easier to analyze than research and development tasks. Q.4) Perrow identified four types of technology: 1. The Aston Studies on technology and structure concluded that size determines structure more than technology. Because people develop problem-solving procedures. but far less in large organizations.4 Routing Tasks and Complex Tasks: The Theory of Charles Perrow Charles Perrow asserts that the difference between routine and nonroutine technologies is task variability and task analyzability. and that the sample biased her results. Exceptions rarely occur. Perrow considered technology according to task variability and analyzability. 2. such as GM and IBM. (Fig. Task analyzability is the need for search activity to solve problems. Strategy can cause growth. Craftswork has low task variability and analyzability. whereas nonprogrammed tasks make analysis difficult. Tasks low in variability and high in analyzability offer a low-cost advantage. They conceded that technology affects structure in small organizations. AND CHANGE] The technological imperative suggests that technology determines structure. Engineering production has high task variability and analyzability. Give an example of routine manufacturing. 9. DESIGN. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 9. Routine manufacturing has low task variability and high task analyzability. Others observed that Woodward studied small firms. engineering is a form of small-batch technology. 82 percent having less than 500 employees. An organization may decide to produce a wider range of products and enter new markets. Procedures make routine tasks easier to analyze. existing procedures make many types of products. What causes organizational growth? A. New situations are few. Task variability is the number of new or unexpected situations faced while performing a task. Q. making it the most complex and least routine in the classification. What is the best structure for routine technology? A. and output can be performed independently. Because individuals do not work with others. An organic structure fits. such as finding a cure for diseases and the activities of top management team. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here for examples of task complexity. Thompson looked at the relationship among tasks. Each part of the organization contributes independently to performance. DESIGN. and the impact on technology and structure. With routine technology. Q. long-linked. Nonroutine Technology and Organizational Structure Complex tasks need a structure that facilitates quick responsiveness. 7|Page [PHAM HOANG HIEN . Thompson identified three types of technology: mediating.5 Task Interdependence: The Theory of James D. Because decisions are made at the top. Routine Technology and Organizational Structure Perrow’s types of technology affect structure. Perrow and others have proposed that an organization should move from a mechanistic to an organic structure as tasks become more complex and less routine.1) Q. each associated with a different type of task interdependence.5) Mediating Technology and Pooled Interdependence Mediating technology is a work process in which input. _________________________________________________________________________________ _________________________________________________________________________________ 9. People and departments who work independently have low task interdependence. using mutual adjustment through teams and task forces. such as planning and forecasting. and intensive. Nonroutine research includes high-tech R&D. organizations with routine technology simplify jobs by using machines for complex tasks and minimizing the judgment needed by employees. A tall structure with centralized decision-making fits. conversion. Nonroutine research has high task variability and low task analyzability. (Table 9. employees perform clearly defined tasks. What is the best structure for nonroutine technology? A. and the work process is standardized. Q. (Fig. It is based on pooled task interdependence. AND CHANGE] 4. Thompson James D. 9. Why is nonroutine research so complex? A. and each exception requires search activity. task interdependence is low. Those who rely on each another have high task interdependence. The number of unexpected situations is large.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. A mechanistic structure fits. task interdependence. A flat structure with decision-making decentralized is best. What are the disadvantages? A. Q. conversion. Costs are low because of control through standardization. activities are performed in a series. which requires coordination. Computers facilitate mediating technology to coordinate production. and increases task analyzability. reduces task variability. How are sequentially interdependent activities coordinated? A. Interdepartmental coordination results in more product innovation and efficiency. and evaluating performance are easier by measuring outputs objectively. so firms are adopting a product team structure. DESIGN. Q. yet long-linked technology has the advantages of specialization and division of labor to increase productivity. Companies using mediating technology may use outsourcing. Manufacturing depends on material management to secure quality inputs in a timely fashion. Planning and scheduling manage connections between input. Errors at the beginning of production are enlarged later. A. Sequential interdependence simplifies tasks. The sales department uses mediating technology because one salesperson does not affect another. What are the advantages of mediating technology? A. Program conversion processes standardize procedures. making tasks routine. Vertical integration acquires a supplier or distributor.2: USAA: Improving the Delivery of Intangible Services The United States Automobile Association (USAA) changed from mediating to long-linked technology. Q. Organizational Insight 9. so each department affects the next. which means that one person’s actions affect another’s. How did USAA improve customer service? How did the new methods affect structure? 8|Page [PHAM HOANG HIEN . Global competition increases interdependence. but collectively. Mediating technology exists when little integration between departments is required. Employees do not become skilled and have no opportunity for skill enhancement because they adhere to designated procedures. Repetition of routine tasks increases efficiency. controlling.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. Mass-production technology is founded on sequential task interdependence. the stores determine organizational performance. and output. Monitoring. In a franchise. Q. AND CHANGE] Q. Slack resources and extra resources handle unexpected situations. Long-Linked Technology and Sequential Interdependence Long-linked technology is based on sequential interdependence. Give an example of mediating technology at the department and organizational levels. Organizing tasks sequentially and controlling the work pace result in cost savings. Sequential interdependence uses outputs to serve as inputs for another department. the performance of one store has no effect on another. but each person’s performance affects the department’s total sales. Coordination costs are higher. so organizations reduce task interdependence to coordinate activities. Q. then divided into five groups and evaluated on the number of complaints. HP increased departmental interdependence. The CEO moved to reciprocal interdependence. making tasks impossible to program. Q. This organic structure reduced new product development time. This strategy uses resources efficiently and decreases coordination problems. producing only a narrow range of outputs. promote mutual adjustment. AND CHANGE] A. the work of all people and departments is inseparable. Policy-writing and service departments were joined. Why would a company avoid intensive technology? A. Because the task sequence cannot be preset. How did HP improve development time and change structure? A. A hospital can specialize in cancer treatment. making intensive technology more costly. Organizational Insight 9. Mutual adjustment is the means of coordination. which is easier to control and predict. Intensive technology is expensive. Hospitals forecast the resources needed for patient demands.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. Decision-making was centralized. much coordination is required. Intensive Technology and Reciprocal Interdependence Intensive technology is based on reciprocal task interdependence. DESIGN. Hospitals and R&D departments use intensive technology. With mediating technology. Organizations can reduce costs through specialism. HP reorganized several functions into cross-functional teams. eliminated two layers in the hierarchy. Slow decision-making increased development time. Product team and matrix structures provide coordination and decentralized control to operate intensive technology. More complex and nonroutine tasks decrease technical complexity. The sequential process required new projects to go to each department and for committee approval. Technology resulted in a flatter hierarchy with decentralized decision-making. Poor customer responsiveness encouraged the move to more interdependent departments. _________________________________________________________________________________ _________________________________________________________________________________ 9|Page [PHAM HOANG HIEN . They return to long-linked technology. there was no interdepartmental communication to solve problems. What structures fit intensive technology? A. decentralized control. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here for examples of task interdependence. These structures are flat. Q. and abandoned the committee structure. and permit a firm to capitalize on new developments.3: A New Approach at Hewlett-Packard In 1989 Hewlett-Packard (HP) lagged behind competitors in introducing products to market. conversion. Dedicated machines perform one operation at a time and produce a narrow range of low-cost products. the level of technical complexity. An organization might advertise to sustain customer demand. task variety. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 9. 10 | P a g e [PHAM HOANG HIEN Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ . Inventories of raw materials and semi finished components are stockpiled to avoid shortages that slow production.7 Advanced Manufacturing Technology (AMT): Innovations in Materials Technology Innovations in materials technology. computers. Vertical integration protects access to inputs and to customers. What is the disadvantage of mass production? A. 9. 9. task analyzability. fixed workers. is inflexible and often termed fixed automation. An assembly line and fixed workers. and other equipment are based on a new perspective of input. Retooling a dedicated machine can take days. Then managers should evaluate the fit between technology and structure. (Fig. lean production. and large inventories make it difficult to change production when a customer needs change. and sequential task interdependence. and task interdependence of an organization or department. and avoiding slowdowns.6 From Mass Production to Advanced Manufacturing Technology A company can maximize gains from economies of scale and division of labor by using dedicated machines. characterized by high technical complexity. Mass production. New technologies have facilitated customer responsiveness at a low cost: flexible manufacturing. increase control over production. DESIGN. performing standardized procedures. machinery. Dedicated machines. Q. and computer-aided production. AND CHANGE] Managerial Implications: Analyzing Technology Managers should analyze the input-conversion process. Finished goods are kept in inventory to respond quickly to customer demands. standardized processes. and output. How can environmental uncertainty be reduced? A. AMT increases integration and coordination between these activities. and it takes long production runs to maximize efficiency and minimize costs.6a) Q.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. An organization decreases costs by protecting conversion processes from environmental uncertainty. routine tasks. Inventory is no longer stockpiled. increased flexibility and lower-cost. linking raw materials to the customer. but increases task interdependence. not pushed from the input stage. customized product design. Now. With CAMM. using computers to make decisions. Technical complexity increases because combined activities create a continuous process. requires inputs and components to be transferred as needed. and control inventory. Q. a low cost. and quick response to environmental changes. Components are stored in bins. Describe just-in-time inventory. This continuous process increases technical complexity.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. Coordination requires an organic structure. and only the conversion stage has sequential activities. Links to suppliers facilitate the quick transfer of information. Reduced design costs. have higher design costs. competitive advantage and reduced costs through quality. More complex products. materials are pushed into the conversion process according to a predetermined plan. developed from the Japanese kanban (card) system. Computer-integrated manufacturing (CPA) is an innovation in the conversion stage. and a differentiation advantage. JIT systems diminish these barriers and cause the entire process to become one chain of sequential activities. improved manufacturing efficiency. Just-in-time Inventory Systems Q. Name the advantages of JIT. In mass production. Computer-Aided Design Design costs represent a large portion of mass production’s total costs and explain the production of large quantities of few products. computer-aided materials management (CAMM). Thus inputs are pulled from the output stage. A just-in-time system works for raw materials and components. easier selling and servicing with improvements made during design. develop manufacturing production schedules. Computer-aided materials management manages the flow of resources in the conversion process. A. Q. making JIT function effectively. CAMM links an organization to suppliers. CAMM allows for a low-cost or a differentiation strategy. CAMM combines activities and increases task interdependence. like cars. Designing new parts requires building prototypes and scale models. Computer-aided materials management (CAMM) can manage the flow of raw materials and parts. A. computer-aided design (CAD) simplifies this process and designs detailed prototypes according to a computer program and redesigns quickly. Output workers inform input workers about supplies. AND CHANGE] Innovations coordinate input and conversion activities: computer-aided design (CAD). 11 | P a g e [PHAM HOANG HIEN . risk of failure reduced by solving problems during design. Mass production has boundaries between stages. so conversion workers take inventory without coordination from input workers. and just-in-time (JIT) inventory systems. A just-in-time inventory system. the flow of input materials is regulated by customer demand for finished goods. and empty bins are returned to the supplier for refilling. Controlling the flow of materials avoids the costs of carrying excess inventory and is flexible enough for quick response. Like CAD. Name the advantages of CAD. DESIGN. Mass production has independent stages. transfer machines are expensive to retool. and robots perform the conversion operations. Computer-integrated manufacturing (CPA) keeps costs down by using software to control changes of operation. Computer-controlled machines produce a wide range of components and are controlled by a master computer. a company that makes cellular telephones and pagers. Q. conversion. uses AMT to focus on customers. which are scanned by a computer with design software. a company that operates in the competitive information technology market. Robots are used and quickly programmed for different operations. Each machine performs many operations. eliminating retooling. Organizational Insight 9. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 12 | P a g e [PHAM HOANG HIEN . Yet. These four innovations in materials technology—CPA. A salesperson sends an order to the factory electronically. which reduces flexibility. Motorola. and a futuristic factory quickly customizes products. JIT systems. assemble the product. DESIGN. making mass production like continuous-process production. using bar codes. CAMM. They reduce the need for expensive inventory and increase product reliability by increasing automation and technical complexity. Reprogramming robots costs less than retooling transfer machines. and CAD coordinate the input and conversion stages. ownership increases costs. Technical complexity and quality increase as costs decrease. CIM increases technical complexity and efficiency by speeding up the production process. JIT inventory systems.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. and CAD—offer flexibility and diminish barriers by combining input. making mass production more like continuousprocess production. Motorola has a differentiation advantage because customers pay more for customization. Flexible Manufacturing Technology and Computer-Integrated Manufacturing Dedicated machines placed in a series are called transfer machines and perform one operation on a component and quickly transfer it to the next machine. Computers give the machines components. and what are the benefits? A. Increased efficiency and flexibility to customize products. AND CHANGE] A. It has a futuristic factory in which a series of robots can respond to individual orders within hours. Salespeople are placed at the top of the organization. and unload the final product. Flexible manufacturing allows for many kinds of components to be made at no extra cost. which increases flexibility. Finished products are tested and sent to customers. obtaining the benefits of small-batch technology JIT requires coordination and management of relationships with suppliers. Buying a minority stake in suppliers is an option. so long-term contracts with suppliers is another alternative. transfer it to a different machine. uses AMT to increase customer responsiveness. Yet. CAMM. and the machines in a series perform more than one task.4: Motorola’s Factory of the Future Motorola. and output activities. How does Motorola use AMT. and a change in one machine requires a change in others. Small-batch technology facilitates customer responsiveness. 2. AND CHANGE] DISCUSSION QUESTIONS AND ANSWERS 1. (b) a fast-food restaurant. Roto-Rooter. 3. improve customer service. mass production. Technical complexity increases the levels in the hierarchy: small-batch technology needs three levels.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. uses craftswork. Machines control the work in mass production. 5. but monitor the machinery and manage exceptions. lowerpriced cars. mass production. such as customization. Low task variability and analyzability implies that tasks that are easy to analyze. The technical approach uses technology to improve efficiency and quality while reducing costs. Span of control is narrow for small-batch technology with decision-making decentralized and wide for mass production with decision-making centralized. Task analyzability is the degree to which search activity is required to solve a problem. GM uses routine manufacturing. Merck uses nonroutine research to discover new drugs. New technological developments. routine. DESIGN. a plumbing company that adapts techniques to each house. six levels. Why is technical complexity greatest with continuous-process technology? How does technical complexity affect organizational structure? Continuous-process technology has an automated conversion process. so tasks are programmed and costs are reduced. such as machine breakdowns. Task variability is the number of new or unexpected situations or exceptions that an employee encounters while performing a task. and less complex. Mass production produces large volumes of standardized products and relies on machines. to make cars. The internal systems approach uses technology to innovate and to reduce product development time. 4. Mass production produced better-quality. . An architecture firm uses engineering production technology. and (c) a biotechnology company? What different kinds of structure are you likely to find in these organizations? Why? 13 | P a g e [PHAM HOANG HIEN Task complexity depends on task variability and task analyzability. How does small-batch technology differ from mass production technology? Small-batch technology makes customized products or small quantities relying on employee skills and knowledge not machines. Mass production enabled Ford to make cars for the mass market. and continuous-process. Span of control is narrow for continuous-process technology with decision-making centralized. How can technology increase organizational effectiveness? The external resource approach measures effectiveness using technology to manage and control outside stakeholders. What makes some tasks more complex than others? Give an example of an organization that uses each of the four types of technology identified by Perrow. four levels. and many are willing to pay a higher price for customized products. What level of task interdependence is associated with the activities of (a) a large accounting firm. Mass production has more technical complexity than small-batch technology. Employees are not involved in production. Small-batch or continuous-process technology need organic structures whereas mass production needs a mechanistic structure. New situations rarely arise and tasks are routine.PHAM HOANG HIEN [ORGANIZATIONAL THEORY. 6. and another employee turns on the movie. The Ethical Dimension Students examine the ethical issues regarding an organization’s ability to monitor and control employees. The structure is flat and organic. which has sequential interdependence. The output side coordinates with the input side. The structure is tall and centralized. as functional members cooperate to develop products. which has pooled interdependence. Computer-aided design (CAD) physically produces a part.Discuss how AMT and innovations in materials technology and in knowledge technology have increased task interdependence and the technical complexity of the work process. AND CHANGE] (a) Task interdependence is low in an accounting firm. nonroutine tasks. which has reciprocal interdependence. The usher then takes the ticket and directs customers. These changes require a flat. task variability. . Crossfunctional teams replace fixed workers. Computer-aided materials management (CAMM) uses computers to track inventories eliminating much manual work. This organization needs a flat. A product team structure is appropriate. 7. DESIGN. technical complexity is low because people are more important than machines. One relevant theory that you can use to frame the issue is Agency Theory from Chapter 2. organic structure with mutual adjustment and low formalization for control. and task analyzability and recommends the type of task interdependence appropriate for their strategy. The cashier takes the money and issues a ticket. a person operates the movie reel. but organizational success depends on collective efforts. tasks are routine and programmed in advance. Task variability is low and task analyzability is high. who perform sequential activities. You might 14 | P a g e [PHAM HOANG HIEN ORGANIZATIONAL THEORY IN ACTION . Students then discuss the type of technology to be used in the store. Innovations in knowledge technology increase task interdependence. and task interdependence. How have these innovations changed the structure of organizations operating a mass-production technology? Innovations in materials technology increased technical complexity as machines replace humans to perform tasks. Mass production sequences activities only for the conversion process. organic structure to facilitate mutual adjustment. The activities of each person affect others. (b) Task interdependence is medium in a fast-food restaurant. decentralized. Practicing Organizational Theory: Choosing a Technology In small groups. In a movie theater. because activities are controlled through standardization. (c) Task interdependence is high in a biotechnology company. People perform tasks independently. students are investors in a large computer store. Long-linked technology is used and task interdependence is sequential. Find an organization in your city and analyze how its technology works using the concepts discussed in this chapter: technical complexity. eliminating a worker from retooling a machine. The actions of one employee affect the actions of others. Each group analyzes the level of technical complexity. Task interdependence increases as these techniques make value creation a continuous process. people buy a ticket and standard procedures are available for exceptions. PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] discuss with the students the ethical issues associated with not allowing the workers to socialize on the factory floor. Making the Connection Ask students to find an example of a company using one of the technologies described in this chapter and to identify the technology. Students will explain why it is being used and how it affects the organization’s structure. CASE FOR ANALYSIS The Shape of Things to Come Japanese companies used mass production but realized that there was excessive handling time. Thus, they adopted production forms called “cell layouts.” Layouts provide for customer responsiveness. 1. How do the new “cell” designs change the level of technical complexity, task variability and task analyzability, and task interdependence? Cell designs are small-batch rather than mass-production technology. They have lower technical complexity because processes are not programmed in advance and workers have more skills. Task variability is higher, and task interdependence increases from sequential to reciprocal because workers perform more tasks. Task analyzability is lower because tasks are nonroutine, and less search time is needed to handle exceptions. 2. Based on this analysis, what type of technology discussed in the chapter does the new system remind you of? This system is similar to small-batch technology with lower costs. 3. What are the advantages associated with the use of the new technology? Reduced handling time, handling costs, and inventory costs are achieved due to faster production and employee motivation. The cell layout enables organizations to be responsive to customer needs by making production of small quantities feasible. ANALYZING THE ORGANIZATION Students determine the role of technology in their organization and the level of technical complexity. They analyze task variability, task analyzability, and task interdependence. They determine how technology affects their organization’s structure. TEACHING SUGGESTIONS 1. To illustrate how technology can affect organizational structure, divide the class into five groups. Each group is assigned a company and must determine the type of technology used, using Woodward’s classifications of technical complexity and/or Perrow’s classifications based on task variability and task analyzability. Each group determines the structure. 15 | P a g e [PHAM HOANG HIEN PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Group 1: A customized furniture maker that uses craftswork and small-batch technology and has low technical complexity, low task variability, and low task analyzability. It uses an organic structure. • Group 2: A standard refrigerator manufacturer that uses mass production and has high technical complexity, low task variability, and high task analyzability. It uses a mechanistic structure. • Group 3: A beer manufacturer that uses continuous-process technology and has a tall, centralized, mechanistic structure. • Group 4: An architectural firm that specializes in customized houses, uses engineering production, a type of small-batch technology, and has low technical complexity, high task variability, and high task analyzability. Its structure is organic. • Group 5: A biotechnology company that uses nonroutine research and has high task variability, low task analyzability, and an organic structure. A role-play illustrates that intensive technology causes decreased technical complexity and increased task complexity. Work processes cannot be programmed in advance. The organization is a hospital. You are the administrator and six students volunteer. Divide the class into departments: radiology, cardiology, labor and delivery, and clinical labs. On day one, two students come in to have babies, so send them to labor and delivery; and one student has fainting spells, so send that student to clinical labs. Note that radiology and cardiology do nothing. On day two, two students have broken bones, so send them to radiology; and one student has heart problems and is sent to cardiology. Note that labor and delivery and clinical labs do nothing. Intensive technology costs money. The class determines how to reduce hospital costs. Forecasting can tell what resources will meet patient demands. The hospital can pursue the strategy of specialism and provide a narrow range of services, such as the treatment of cancer. Use Figure 9.4 to show Perrow’s classification of four technologies: routine manufacturing, craftswork, engineering production, and nonroutine research. Divide the class into two groups to explain and give examples of craftswork and mass production. Craftswork has low task variability and task analyzability; plumbing has low task variability, but exceptions take time to resolve. Existing technology needs to be adapted to solve the unique situation. Engineering production has high task variability and high task analyzability; an architect who builds customized houses faces new situations, but exceptions require little search because of standard procedures. Discuss mediating technology and pooled interdependence, long-linked technology and sequential interdependence, and intensive technology and reciprocal interdependence. Use Figure 9.5 to illustrate the differences between the three levels of task interdependence. Students will give examples of each. A consulting firm has pooled interdependence. Mass production has sequential interdependence, and a biotechnology company has reciprocal interdependence. Students will look at Ford’s web site and determine what changes in technology are on the horizon. Students will report their findings to the class. It is helpful to clarify the difference between push and pull strategies. With traditional mass production, the plan is preset; inputs move down the assembly line, and large volumes are produced to achieve economies of scale. With CAMM, production is determined by customer demand. Inputs are pulled into the system; salespeople submit orders that are electronically transferred to manufacturing. JIT inventory is the responsibility of the materials management function to control inputs. In JIT, inputs arrive as they are needed, keeping inventories at a minimum. A JIT system needs CAMM to operate successfully. Figure 10.2 demonstrates how a JIT system works. CIM is used by the manufacturing function and involves using robots. Use role-play to distinguish between JIT inventory systems and traditional mass production systems. Four students volunteer to do a simple task, such as collating and stapling training instructions for new workers. A stockpile of paper exists. Worker one piles up the raw materials, sheets of instructions. Worker two grabs from the pile and collates the pages. Worker three staples the pages. • 2. 3. 4. 5. 6. 7. 16 | P a g e [PHAM HOANG HIEN PHAM HOANG HIEN [ORGANIZATIONAL THEORY, DESIGN, AND CHANGE] Worker four places the product in a bin. With JIT, no inventories are needed. Copies are produced on demand. Workers one and four are no longer needed. Worker two receives an order, receives the pages directly from the supplier, and collates them. Worker three continues to staple and hands the product to marketing, instead of a stockpiler. 17 | P a g e [PHAM HOANG HIEN These competitive threats propelled Roddick to franchise in the U. stores. so the Body Shop missed out on the rapid growth achieved through franchising. PHAM HOANG HIEN . the owner decided to maintain control over the stores.S. and what problems did it encounter? In the United States. 1. What strategy did the Body Shop use to grow in Europe? The Body Shop developed natural cosmetics and grew rapidly throughout Europe using franchising and alliances. founded in 1976 by Anita Roddick. What strategy did the Body Shop use in the United States. Large U. grew to over 700 stores by 1993 but did not franchise in the United States as it did in Europe. 2. The owner wanted to maintain control over U.S. cosmetic companies like Estee Lauder imitated the Body Shop and had more name recognition.S.CASE FOR ANALYSIS The Body Shop Gets Middle Aged The Body Shop. To discuss the role that information technology has on innovation and creativity. They recognize and implement either quantum or incremental product improvements.2) 5. or procedures to better serve the needs of customers. Innovation brings about technological change.1 Innovation and Technological Change Innovation is the development of new products or production systems. and property rights. The stage-gate development funnel is discussed as a model used to promote innovation.2) 6. To discuss the role of intrapreneurs in organizations.1) 4. Intrapreneurs are entrepreneurs that are innovative employees of the organization. and experience used to design and produce goods and services. Although product team and matrix structures promote innovation. (13. A focus on structure. which results in incremental innovations. Technology is the skills. In managing innovation in high-tech organizations. production or operating systems.3) CHAPTER SUMMARY This chapter examines innovation and creativity. The chapter concludes with a discussion of how information technologies creates synergies and efficiencies in the organization. (13. The chapter then discusses ways to manage the innovation process. organizations need more complex integrating mechanisms: Team managers and product champions. services.CHAPTER 13: MANAGING INNOVATION AND CHANGE 1 CHAPTER 13 MANAGING INNOVATION AND CHANGE TEACHING OBJECTIVES 1. There is a link between innovation and technological change. cross-functional cooperation is key. Changes in technology are prevalent and significantly affect an organization.1) 2. The product life cycle is discussed with emphasis on how the rate of technological change in an industry and the role of fad and fashion play on the level of innovation and creativity that is needed in an industry. To define innovation as the process of developing new products. including project management and the stage gate funnel. To explain various techniques used to manage the innovation process. thus enhancing creativity and innovation. Quantum technological change. people. CHAPTER OUTLINE 13. is distinguished from incremental technological change. To discuss the product life cycle. This is the process of developing new products. and joint ventures. (13. “skunk works.” new venture divisions. which results in quantum innovations.1) 3. tools. To review the ways to foster an innovative culture: organizational structure. (13. and property rights fosters an innovative culture. Incremental innovations build on quantum innovations. and how it affects the rate of innovation. (13. people. (13. Attention is given to the tools and processes associated with project management. PHAM HOANG HIEN . The life cycle is represented by four stages: Embryonic. After the dominant design appears. Q. (Fig. Personal computers (PCs) and genetic engineering are examples. companies improve base technology through incremental change. Such innovations force companies to change. This is often because of obsolescence (VCRs) . or fashions. This caused problems because the store managers did not have the ability to predict trends. but others like IBM have experienced market decline. The rate of technological change determines how important it is for managers to innovate.1) Companies like Microsoft and Intel have gained from technological change. and it has yet to gain widespread acceptance. such as Intel’s first microprocessor.Consumers are buying replacement products (cars. products that use these refinements. Products that use a quantum technological advance. such as Intel’s newer microprocessors are called incremental innovations. a technological discontinuity creates fierce competition to become the leader.Customers are unsure what the product has to offer. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 1 here to review quantum and incremental change.1: Innovation at the Gap In an effort to increase innovation. Quantum technological change is a basic transformation that reforms the way products are made. Growth. PCs) as opposed to first time buyers. 13. Anderson and Tushman call quantum innovations “technological discontinuities. are called quantum innovations. The length of the life-cycle depends upon the rate of technological change and the role of fads and fashions to the particular industry or market.Occurs when demand falls.CHAPTER 13: MANAGING INNOVATION AND CHANGE 2 Two types of technological change are quantum and incremental change. Technological change is both an opportunity and a threat. fads. He fixed the problem by centralizing control at the top. The Gap clothing chain decentralized many product development duties to the store level. Why does decentralization of innovation work in some industries but not others? PHAM HOANG HIEN Decline. telephones. Incremental technological change is an improvement of base technology.Many consumers are entering the market and purchasing the product for the first time (for example: PDAs) Maturity.” In the model of innovation. Organizational Insight 13. _________________________________________________________________________________ _________________________________________________________________________________ The Product Life Cycle The life cycle represents the changes in demand for a product that occur over time. Creating new products makes others obsolete. and start their own companies. 13. fads and fashion change so quickly that a lower-level manager can’t keep up with the trends.3) Stage-Gate Development Funnel If resources are spread too thin by funding too many projects. combining or synthesizing two or more previously unrelated ideas. stage-gate development funnel. Creativity can simply be defined as going beyond the current boundaries. In some industries such as clothing. and Creativity Intrapreneurs are entrepreneurs inside an organization who are responsible for the success or failure of a project. Companies like 3M. a new product development plan with all the pertinent information including resource requirements. the wide mouth of the funnel.4) Stage 1. New ideas are given to an evaluating team to determine the idea’s feasibility and its match to company strategy. or modifying a product or process in order to make it better. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Innovation. and in compliance with certain specifications. The involves a variety of management skills and tools. Project Management A project is a subunit whose goal centers on developing a product or service on time. A cross-functional team prepares the plan. which is to determine which tasks are critical to the completion of the task. especially for large projects. using customer needs assessment surveys. team leadership. (Fig. The Critical Path Method shows what these models are trying to achieve. and managers can keep up. Once these criteria are met. “skunk works. Project management is the process of managing the project. Some tools that project managers use include PERT/CAM networks or GANTT charts. 13.CHAPTER 13: MANAGING INNOVATION AND CHANGE 3 A. (Fig. scientists. allow research scientists time to develop their projects. Managers need a plan for approving projects. Intrapreneurship. fosters innovation by requesting new product ideas. 13.” and new ventures. such as a stage-gate funnel. Many times. Rewards may be offered for ideas. PHAM HOANG HIEN . This is a good illustration of why decentralized authority does not always work. Examples include generating new ideas. and what the sequence of the tasks should be.2 Managing the Innovation Process High-tech companies use several tools to increase innovation: Project management. the proposal goes to stage 2. they get frustrated with the internal workings of the organization. A knowledge creating organization is one where such innovation is going on at all levels and in all areas of the organization. no project receives the required resources to make it successful. Other industries operate in a much more stable environment. within budget. or researchers employed by a specific company. These would include managers. R&D must cooperate with product engineering. How did the product champion bring the Mustang to market? A. Once on the top planning committee. and giving the team informal leadership. an R&D engineer. Coordinating with marketing assures that the products are customer driven. Team Leadership A leader needs a cross-functional perspective and a certain level of authority and power.CHAPTER 13: MANAGING INNOVATION AND CHANGE 4 A senior management committee at gate 2 determines if the plan is beneficial based on resource requirements. members must cooperate on the project. and Lee Iacocca. This lack of authority impedes cross-functional coordination. a product champion may emerge informally. The idea would have died had Lee Iacocca not become Ford’s PHAM HOANG HIEN . materials management. Heavyweight leaders are more effective for new product development or project management. A team structure may be incapable of solving coordination issues. a vice president and general manager. What structures best manage high-tech innovation? A. The product team structure and matrix structure are appropriate for high-tech organizations. Product development teams need representatives from marketing. engineering. revised.2: Championing the Mustang Engineer Don Frey championed the Ford Mustang. Don Frey. Top management refused to support the Mustang because of money lost on the Edsel. Subunit orientations make coordination difficult. What functions must coordinate with R&D? A. Q. Organizational Insight 13. Although some leaders are assigned to projects. stage 3. Q. they are usually made up of three to six people.” new venture divisions. Using Cross Functional Teams and a Product Team Structure Successful innovation depends on the coordination between R&D and other departments. and can only handle minor modifications. realized the importance of incremental R&D and used customer complaints as a guide. Ford did not support his idea. resolving conflicts. Because authority is decentralized to teams. he championed the Mustang. Projects are rejected. supported the idea. A lightweight team leader has a lower rank than a functional department head.” solving problems. Members are responsible for one project at a time. process engineering. no control over resources. and marketing. A heavyweight team leader controls resources and may overrule functional heads. R&D and engineering groups must ensure that research results are efficiently transformed into product design. and joint ventures. Coordinating with manufacturing assures reliable products at a reasonable cost. manufacturing. because cross-functional teams develop products from the idea through the sales stage. and manufacturing. so he used other funds for a prototype. so organizations can adopt other integration mechanisms: team leaders and project champions. The time for stage 3 varies according to industry and product type. “skunk works. Q. Heavyweight leaders act as product champions by assuming “ownership. or moved to development. These structures promote understanding and reduce communication problems. Age and size lead to stability. from having authority over projects. Organizational structure: Organizational size and age impede innovation. coordination is difficult. One challenge is to balance control between corporate headquarters and the division. Project members head the division’s functions and manage the functional structure. the structure was ineffective. A new venture division is responsible for commercializing the product. Q. Organizations become inflexible as they age. and thwarted the goals of the organization. Make sure students understand that innovation is industry specific. In this case. internal entrepreneurs. “Skunk Works” and New Venture Divisions A “skunk works” is a task force established to facilitate new product design by coordinating various functions. offering a small-organization setting to encourage innovation and motivation for rapid product development. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Joint ventures allow for pooling of resources and sharing R&D risks. Lucent’s problem centered around an ineffective structure.3: Too Much Innovation at Lucent Lucent created venture divisions in an attempt to increase innovation. Iacocca risked his reputation for the project. A large organization with a large hierarchy slows decision-making. leading to a decline in the division’s entrepreneurial culture. The problems that resulted were enormous communication and coordination problems in that the managers in each division had no idea what managers in the other divisions were doing. Additional hierarchical levels keep intrapreneurs.2 from Chapter 7. Organizational Insight 13. Members from various functions are placed at a separate facility. See Figure 7. A product champion and a manager willing to take a risk achieved this innovation. It is an independent division and contains the functions to manage a project from start to finish. Is it possible to have too much innovation? A. If corporate headquarters intervenes. This is a good illustration of so many concepts in the entire text. When skills are spread across subunits. responsible for the project’s success or failure. as resources are allocated to the division. It is hard for people to remain entrepreneurial throughout their careers. A new organization is created. the division loses autonomy. Task force members are intrapreneurs. internal entrepreneurs. and the Mustang was a huge success. Not all industries need to be on the cutting edge in order to be successful. as bureaucracy increases. employees are unwilling to take risks. Creating a Culture for Innovation Culture plays an important role in shaping and promoting innovation. What structures overcome these problems? PHAM HOANG HIEN . Q. A skunk works disbands when the product is brought to the market. Corporate headquarters has concerns about profit potential.CHAPTER 13: MANAGING INNOVATION AND CHANGE 5 general manager. Product team and matrix structures provide the autonomy necessary for innovation. It can create career paths for R&D employees and let successful scientists lead projects. Top management should create a culture to support innovation and reward employee contributions to success. Scientists often take their ideas and start companies. which consist of units interacting with individuals outside of the organization to obtain knowledge about the environment. An innovative culture centers on property rights. IT also allows for more boundary spanning activities. Q. To promote innovation. IT can dramatically facilitate creativity. which are separate from formal projects.com. The informal organization is key. _________________________________________________________________________________ _________________________________________________________________________________ Managerial Implications: Innovation Research and development activities must be integrated into other functions for innovation. An organic structure emphasizes cross-functional communication. Scientists should have the option of managing areas such as manufacturing. and individuals are attracted to companies with similar values. 3M lets scientists use resources for chosen projects. 13.3 Innovation and Information Technology Innovation and Information Synergies Synergies occur when two or more individuals or subunits are able to pool their resources and collaborate across subunit boundaries. How can a company retain talented scientists? A. By improving the initial base of knowledge and having the technology to circulate knowledge rapidly through the organization.CHAPTER 13: MANAGING INNOVATION AND CHANGE 6 A. Cross-functional experience will qualify scientists to serve as project managers. An organization must establish strong property rights such as bonuses and stock options proportionate to the profits generated by their efforts. people. Individual and group performance can be tied to bonuses. Property rights: The performance of R&D scientists is difficult to evaluate. as well as those who pursue it in diverse ways. Employees need autonomy and resources to encourage new product development. . Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here to review methods to make a culture innovative. An organization needs people committed to innovation. as innovation is a complex process that often takes years to yield results. Focus on New Information Technology: Amazon. Part 6 Amazon used innovation to sell books over the Internet. PHAM HOANG HIEN The cost and time savings that occur when technology allows individuals to perform their jobs better is called information efficiency. a high-tech organization needs diversity in scientists. People: Organizations hire those with similar values. and organizational structure. They are generally attracted to organizations that have an innovative culture that allows them to develop new products and services. including generating new ideas. . The first Intel microprocessor was a quantum innovation. Selling books over the Internet is a quantum innovation because it is a first. However. mutual adjustment. 2. incremental innovations refine quantum innovations. This is because IT gives lowerlevel employees more information than they previously could have. What steps would you take to create (a) a structure and (b) a culture congenial to innovation in a high-tech organization? (a) A high-tech organization needs organic structures to promote decentralization. The informal organization can deal with obstacles associated PHAM HOANG HIEN Project management is the application of specific management techniques designed to help members in organizations complete a project. a free greeting card service. What is project management? How should managers decide which projects to pursue? 4. Incremental changes have changed Amazon from an “online book seller” to a “leading Internet product provider. and online auctions in conjunctions. Because authority is decentralized to teams. This typically means that fewer managers are needed to solve problems and make decisions. product team and matrix structures create cross-functional teams to develop products from the idea to the sales stage. and fits in with the organization’s goals and objectives. Innovations result in environmental changes and require operational changes. Characterize innovation at Amazon. In addition to books. or modifying a product or process in order to make it better. incremental innovations continue to take place at Amazon. 3. Intrapreneurs are entrepreneurs inside an organization who actually engage in the process. members must cooperate on the project. DISCUSSION QUESTIONS AND ANSWERS 1. Another quantum innovation occurs and restarts cycle. What is the relationship between creativity. intrapreneurship and innovation? They are very similar concepts. Creativity and innovation can simply be defined as going beyond the current boundaries. Amazon now offers CDs. the successors are incremental innovations. The stage-gate funnel is a good tool for determining whether or not a project or product has a market. It also creates information synergies because it facilitates increased communication and coordination between decentralized decision makers.” IT and Organizational Structure and Culture IT has allowed organizations to decentralize decision-making authority. combining or synthesizing two or more previously unrelated ideas. A. is profitable. They need to develop a process to evaluate proposals and deciding which ones to reject. Managers often try to take on too many projects at once. and cross-functional cooperation. These structures promote cross-functional understanding and reduce communication problems. Incremental change builds on quantum changes.CHAPTER 13: MANAGING INNOVATION AND CHANGE 7 Q. gifts. What is the relationship between quantum and incremental technological change? Quantum change is a dramatic shift that results in quantum innovations. ” new venture divisions. The 777 was the first airliner to be designed completely by a computer. Other integration mechanisms can promote innovation: team leaders and product champions. How easy would it be for other organizations to follow Boeing’s lead? It would not be easy for others to make changes in structure and culture to compete in the fierce battle of commercial jet aircraft. For example. Making customers an integral part of the innovation process was a dramatic change for Boeing. Boeing had traditionally been secretive about its designs. Boeing shifted to a product team structure and established cross-functional teams. Boeing invited representatives from 18 suppliers and 8 airlines to meet with the product development team. Career paths for scientists within R&D and between R&D and other functions lead to innovation. 2. how will you encourage input from employees and customers. Using the chapter material. and examine how it is doing this. People committed to innovation when maintaining diversity must be hired. Chart the major steps that Boeing took to encourage innovation and new-product development. Innovative employees should receive bonuses and stock options proportionate to their contributions to profits. Students discuss ways to revitalize the product development process. and joint ventures.CHAPTER 13: MANAGING INNOVATION AND CHANGE 8 with the formal structure. and who will be responsible for managing the program? 2. Employees from engineering and production were given responsibilities. with the 777. people. See (a) for structure. CASE FOR ANALYSIS Big Changes at Boeing Boeing faced competitive forces that made increased quality and reduced costs necessary. How will you make use of IT and organizational structure to facilitate the innovation process? The Ethical Dimension Students examine the ethical issues surrounding who should benefit when intrapreneurs make discoveries that result in millions of dollars in profit. Who should share in the profits? Making the Connection Students will find an organization that is trying to promote its level of innovation. highquality clothing. Strong property rights are imperative with bonuses tied to individual and group performance. (b) A high-tech organization should focus on structure. “skunk works. and property rights for an innovative culture. outline the way you will create a program to increase creativity and intrapreneurship at the store and corporate level. Others would have to realize that technological changes and innovation are PHAM HOANG HIEN . 1. 1. ORGANIZATIONAL THEORY IN ACTION Making the Connection Each small group of students represents top managers of a chain of stores selling high-priced. Boeing engineers developed a 3D computer aided design technology to design and test parts. and shortened development time from six to four years. Boeing responded to change by altering its structure and culture. Go to the organization’s web site and determine from a structure. or people standpoint what makes them so creative.CHAPTER 13: MANAGING INNOVATION AND CHANGE 9 related. Do this using a process that everyone is familiar with. and also have them identify what types of technology they will use. or as complex as an entirely new product. have them draw the structure of the organization. Building upon the previous. Have students identify organizations that they consider innovative or creative. Assign the models in the chapter to individuals or groups to explain to the entire class using examples. 5. Analyzing the Organization Students examine the extent to which their organization has been involved in efforts to promote innovation. 2. After the small groups settle on the most innovative idea. Compare and contrast how far IT has come in the last decade or so. culture. 3. For example. Boeing changed its technology and operating systems to raise the speed of new product innovation to develop a product that customers wanted. in the 1980s. In small groups. such as the registration process in college. have students brainstorm about an idea that they have or a business they would like to start. Today. 4. I had an assembly line system at my college in which we went from station to station to build a schedule. PHAM HOANG HIEN . Try and see if any patterns emerge. TEACHING SUGGESTONS 1. ask them how this technology allows front-line workers to be more creative. registration is all web-based. This can be as simple as a new restaurant idea. not harmful. and influencing decision-making by controlling the agenda and bringing in outside consultants. and politics in the organizational setting.CHAPTER 14: MANAGING CONFLICT. POWER. Pondy’s model of conflict consists of five sequential stages: latent conflict. An organization must manage the balance of power to ensure that power and politics are beneficial. attitudinal structuring.2) 3. control over resources. control over resources. felt conflict. power. AND POLITICS TEACHING OBJECTIVES 1. and control over decision-making premises.3) 4. (14. To address the costs and benefits of organizational politics.4) 6. The potential for conflict exists due to interdependence. POWER. (14. Although stakeholders cooperate to contribute resources. Organizational politics increase power. control over uncertainty. Power influences how conflicts are resolved. AND POLITICS 1 CHAPTER 14 MANAGING CONFLICT. To examine the seven sources of power: authority. To examine Pondy’s model of conflict and its five stages: latent. Research shows that some conflict is good to overcome inertia. Conflict should be managed before it reaches the manifest conflict stage. To consider ways to manage conflict by making changes in structure. associating with powerful managers. manifest conflict. centrality. but beyond a certain point. attitudinal structuring. To explain how power enables individuals or subunits to resolve a conflict in their favor. perceived. a third-party negotiator. To discuss how conflict can be managed by changing attitudes. increasing integration. felt. nonsubstitutability. Conflict arises when one group pursues its goals at the expense of another. centrality. building and managing coalitions. To explain that conflict is inevitable.1) 2. (14. control over information. a procedural system. To consider how organizational politics can increase power.6) 8. (14. Conflict can be managed by structural changes. manifest. control over information. (14. and unobtrusive power. establishing a procedural system for grievances. nonsubstitutability. (14. and clearly defining authority relationships. incompatible performance criteria.5) 7. perceived conflict. conflict hurts organizational effectiveness. and conflict aftermath. (14. because stakeholders compete for resources and their goals often conflict. increasing integration. subunit orientations. and competition for scarce resources. bureaucratic factors. and conflict aftermath. and using a third-party negotiator. Manifest conflict reduces communication and leads to poor conflict aftermath. control over uncertainty.6) CHAPTER SUMMARY This chapter examines conflict. There are seven sources of organizational power: authority. There are tactics for playing politics: increasing indispensability by increasing nonsubstitutability and centrality.3) 5. they compete for resources. and employee rotation. PHAM HOANG HIEN . Conflict is manifest by either open or passive aggressiveness. (14. Conflict can overcome inertia and introduce change. Managers spend time bargaining. Interdependence: As organizations grow and differentiate. such as unions getting angry and violent.2) Q. but the potential for conflict exists due to the nature of operations. functional. Different views are considered. no agreement is reached. rather than making decisions. employees want raises.3) Stage 1: Latent Conflict No conflict is present. and conflict aftermath. 14. When conflict passes a certain point. organizational conflict is inevitable. _________________________________________________________________________________ _________________________________________________________________________________ 14. it hurts an organization. POWER. conflict hurts the organization and causes decline. and . (Fig. Shareholders want dividends. 14. but not all goals are identical. (Fig. Notes________________________________________________________________________________ ____________________________________________________________________________________ ___________________________________________________________________________________ • Refer to discussion question 1 here to discuss the beneficial aspects of conflict.2 Pondy’s Model of Organizational Conflict PHAM HOANG HIEN Pondy’s model shows five sequential stages of conflict: latent conflict. An organization must manage both cooperation and competition among stakeholders to grow and survive. Pondy contends that all conflict emerges due to subunit orientations.1) Organizational conflict occurs when a stakeholder group pursues its interests at the expense of other stakeholders.1 What Is Organizational Conflict? Stakeholders compete for the resources that an organization produces. because conflict requires an organization to reassess its views. (Fig.CHAPTER 14: MANAGING CONFLICT. An organization in decline cannot afford to spend time on decision-making. Conflict is associated with negative images. AND POLITICS 2 CHAPTER OUTLINE 14. and the organization floats along. Conflict occurs at the individual. and the quality of decision-making is improved. As task interdependence increases—that is. Beyond a certain point. All stakeholders have a common goal of organizational survival. Organizations need to control conflict. 14. Given the different goals of stakeholders. subunits want autonomy. perceived conflict. falling prey to inertia. but some conflict can improve effectiveness. Desires for autonomy conflict with the organization’s aspirations for cooperation. because it needs a quick response to recover its position. manifest conflict. felt conflict. There are five potential sources of conflict among subunits: 1. Marketing wants to design advertising. moves from pooled to sequential to reciprocal—the potential for conflict increases. Groups battle for their interests. How can conflict improve effectiveness? A. There was no synergy to capitalize on transatlantic investment banking. Bureaucratic factors: Status inconsistencies can result in conflict. Incompatible performance criteria for subunits lead to conflict. Stage 2: Perceived Conflict When a subunit perceives its goals to be obstructed. Marketing blames poor sales on poor manufacturing quality. Conflict led to high management turnover. 4. conflict enters the second stage. Q. Q. Conflict arises when line employees consider themselves more important than staff employees. Organizational Insight 14.1: Conflict Causes Slow Change at Kodak Kodak experienced declining performance and hired Christopher Steffen. Why didn’t CS First Boston manage the conflict? What caused the conflict to escalate? A. putting their own interests first.2: How Rewards Produced Conflict at CS First Boston A merger between First Boston and Credit Suisse resulted in conflict. Why do they conflict? A. 3. A line function. Conflict escalated when the American unit achieved record profits but no bonuses. AND POLITICS 3 divisional levels. such as production. If functions were not interdependent. Q. as Chief Operating Officer. POWER. If an organization rewards cost control. Marketing wants to increase sales. First Boston tolerated conflict. such as large layoffs. Each group seeks the source of the conflict and finds reasons for problems. PHAM HOANG HIEN . Kodak’s team defeated Steffen. Organizational Insight 14. engineering does not comply with marketing’s request for a new product design. Manufacturing wants to lower costs. because each unit had no effect on the other. Subunits compete for their share of resources. Task interdependence was low. Increased funding allows a division to grow. He favored a revolutionary approach with radical changes. who had successfully turned around Chrysler and Honeywell. The CEO and his team favored an evolutionary approach and incremental changes. Why did Steffen resign from Kodak? A. This unfair decision prompted senior managers to leave First Boston and work for competitors. Manufacturing would not care what engineering did. Functions would simply perform their tasks. Competition for scarce resources leads to conflict. so he resigned. Conflict escalates as subunits fight over the origin of the problem.CHAPTER 14: MANAGING CONFLICT. Line functions often clash with staff functions. Incompatible goals create conflict. Differences in goals and priorities exist among different functions. is directly responsible for producing the outputs. 2. Steffen resigned from Kodak because his problem-solving approach conflicted with the top managers’. because the London division lost money. conflict would not exist. 5. Staff functions. such as accounting and human resources. Distinguish between line and staff functions. like Merrill Lynch. support the line function. Manufacturing says that marketing is not advertising effectively. What organizational conflicts have you experienced that went through all five stages. Answers will vary. Managers should prevent conflict from reaching the manifest stage to avoid a communication breakdown and a poor conflict aftermath. difficult-to-manage. If conflict resolution takes a long time or doesn’t occur. _________________________________________________________________________________ _________________________________________________________________________________ 14.3 Managing Conflict: Conflict Resolution Strategies Managing conflict is a priority. Kodak needed a changed top-management team. Stage 4: Manifest Conflict Subunits deliberately impede other subunits. coordination between managers and subunits deteriorates. resulting in a decline in effectiveness. Did anyone experience open aggression? How did the organization’s structure contribute to the problem? A. Culture is an important way to control behavior.CHAPTER 14: MANAGING CONFLICT. People aggressively promote their own interests at the expense of others. CS First Boston needed a changed rewards system. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 2 here for an example of conflict in an R&D laboratory. and small problems escalate to huge. A functional structure causes problems. POWER. conflicts. Cooperation between subunits declines as well as organizational effectiveness. Once conflict is manifest. If resolved before the manifest stage. Open aggression leaves bad impressions. Stage 5: Conflict Aftermath Every conflict has a conflict aftermath that influences conflict resolution in the future. AND POLITICS 4 Stage 3: Felt Conflict Subunits develop polarized attitudes of us-versus-them. Q. such as communication and measurability problems. but amicable solutions promote good relations. because conflict impairs organizational culture. An organization reduces conflict by structural and attitudinal changes. Conflict escalates as subunits argue. PHAM HOANG HIEN . Conflict management techniques depend on problem source. future relationships and the culture will be damaged. An organization may change organizational structures. Acting at the Level of Structure Managers can resolve conflict by changing task relationships: 1. Organizations must balance the need for conflict to overcome inertia and promote learning with the prevention and escalation of harmful conflict. conflict will result in a positive aftermath. A product team structure speeds up product development. POWER. conflict becomes harmful. Flattening the hierarchy and decentralizing authority give employees decision-making power and makes them accountable. 3. Acting at the Level of Attitudes and Individuals Different divisions and functions have different ideas about accomplishing organizational goals. A product structure assigns overhead costs more accurately. A third-party negotiator. Managers should choose a way of handling the conflict that matches the source of conflict to achieve a good conflict aftermath. _________________________________________________________________________________ _________________________________________________________________________________ Managerial Implications: Conflict Managers should analyze structure to identify potential sources of conflict and redesign it. In a tall hierarchy.CHAPTER 14: MANAGING CONFLICT. If conflict cannot be eliminated. The CEO influences attitudes by setting the values and culture. 10 people may need to sign off on a proposal. What structure is appropriate to assign overhead costs more accurately? What structure reduces product development time? A. Rotating employees. Weak CEOs fail to manage conflict. Integrating mechanisms include task forces. Authority relationships must be defined. As fighting escalates. Procedures play a large role in managing conflicts between managers and unions. teams. Increasing integration can overcome conflicts over resources and subunit orientations. so strong coalitions fight for their goals at the expense of the weaker subunits. influencing the attitudes of other managers. Strong CEOs listen to opinions and build consensus. and having the power to resolve subunit conflict. They can establish procedures to voice complaints. Q. such as a senior manager in an integrating role or an outside consultant. Top-management may be replaced to overcome inertia and change attitudes. What can managers do? A. or firing. a process to convince management and labor they have much in common. manages conflict by changing attitudes. a manager should intervene quickly to resolve the conflict. • Refer to discussion question 5 here to discuss the effects of structure on power. Conflict is reduced because employees know their superiors. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN . AND POLITICS 5 Q. promotion. Long held attitudes may necessitate a change in those mired in conflict through transfer. Managers can prevent the us-versus-them attitudes. A functional structure does not reflect the contributions of various functions to a product. Bargaining consists of attitudinal structuring. and integrating roles. 2. a tool used by the Japanese. can mediate. because everyone is afraid to take responsibility. Divisions that produce revenue have power. Groups use power to resolve conflict in their favor. Out of fear of losing authority. why would an organization decentralize? A.CHAPTER 14: MANAGING CONFLICT. Employees accept the legal right of the organization to control their behavior. and divisions seek power to influence others. A highly centralized organization makes few significant decisions. The legal charter permits the board of directors. which hurts organizational effectiveness.4) Authority is the most obvious source of power. so an element of coercion is involved. giving employees decision-making freedom and motivating them to create value. POWER. the manager limits information to subordinates. centrality. The CEO has the power to grant authority to other managers. because the supervisor is still responsible for subordinates. It is the ability to defeat the opposition in accomplishing a goal. AND POLITICS 6 14. it is the ultimate source of power. At a pharmaceutical company. who give power to subordinates. Q. Organizations need to empower both individuals and divisions.5 Sources of Organizational Power Individuals. and decentralization delegates authority to lower levels. controlling the premises of decision-making. control over uncertainty. Conflict and power are interrelated. to grant a CEO the power to use resources to create value. 14. Employees just agree with superiors. groups. Many managers try to retain control. The power of different coalitions to influence decision-making determines how conflict gets resolved and which subunits benefit. control over information. making it hard for them to make decisions. If centralization discourages coalitions. Because it is legitimate power stemming from an organization’s legal and cultural foundations. _________________________________________________________________________________ ________________________________________________________________________________ 14. Marketing gets production to run an extra batch of goods. Money is the ultimate resource. Top managers have ultimate power because they allocate resources. Authority is distributed differently in various organizations. Intentional decentralization is called empowerment. control over resources. The ability to generate resources also increases power. Centralization has top managers retain authority. PHAM HOANG HIEN .4 What Is Organizational Power? Organizational power is the tool used to resolve the conflict. R&D scientists have power. Conflict arises because groups need to cooperate but compete for resources. Control over resources gives subunits power. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 3 here to discuss the importance of maintaining a balance of power. and unobtrusive power. Decentralizing authority does not mean a loss of authority. the agent of shareholders. (Fig. as it buys other resources. There are seven sources of power: authority. nonsubstitutability. production would not have run this batch. Unobtrusive Power: Controlling the Premises of Decision-Making A dominant coalition has the power to control decision-making to resolve conflict in their favor. For differentiation. Centrality refers to those who make decisions and functions needed for resource flows. giving power. A coalition’s power stems from the ability to control the assumptions. Once manufacturing became routine. It is important to understand how politics work to recognize a skillful politician who gets visible and prestigious assignments. Nonsubstitutability means that no one else can perform an individual or subunit task. Tactics for playing politics enable individuals and subunits to attain power to accomplish goals. Those who select information are called “gatekeepers. _________________________________________________________________________________ _________________________________________________________________________________ 14. is a source of power. Such political tactics. By choosing the information others receive. causing functions to rise and fall. so marketing became important in the 1960s. AND POLITICS 7 Control over information. Politics are an inevitable part of an organization. Organizational politics is the process of acquiring power and using it to overcome opposition for a desired outcome. which stem from sources other than authority. and norms to evaluate alternatives. the major source of uncertainty. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here to review the concept of unobtrusive power.” People in specialized roles have power stemming from the control over information. This is known as unobtrusive power.CHAPTER 14: MANAGING CONFLICT. To strengthen power. Doctors have power in hospitals because they treat patients. An organization’s strategy determines which subunit is central. Contingencies change over time. cost cutting will not get much attention. an individual influences their opinions. like politicians campaigning and not keeping promises. access to and control over the information flow. POWER. With the 1970s came a recession. Patients take the word of doctors. Many have negative images about politics. Right after World War II. If marketing is the dominant coalition. goals. as firms concentrated on developing production techniques. Q. manufacturing was the most important function. because other subunits do not know the coalition has influence. so finance became important. R&D or marketing is central. Centrality is a source of power. Control over uncertainty: A subunit with control over the primary source of contingencies has power. subunits engage in politics. The manufacturing function is central for a low-cost strategy.6 Using Power: Organizational Politics Managers try to gain power to use it to their advantage. Which function is central for a low-cost strategy? How about a differentiation strategy? A. companies had to sell products. include: PHAM HOANG HIEN . Increasing indispensability. What tactics increase indispensability? A. such as access to corporate jets. making the opposition part of decision-making. AND POLITICS 8 1. Stakes include control over resources. Symbols of prestige. yet more time could be spent fighting than in making and implementing decisions. Answers will vary. Co-optation is a way to manage coalitions. Top managers must establish good relationships with shareholders and the board. power must be coupled with knowing when and how to use it. Centrality rises by accepting assignments with visibility and developing a network of contacts. 2. . Controlling the agenda allows for issues to be addressed by significant decision makers. banks. Q. Top managers become mentors. Coalitions require a trade-off: Manufacturing supports finance if finance supports manufacturing. because people do not realize their help in accomplishing another group’s goals. Politics play a role in strategy and structure choices. such as customers. such as graduating from the same school. PHAM HOANG HIEN Tactics to make decisions seem like a promotion of organizational interests include controlling the agenda and bringing in an outside expert. Associating with powerful managers. Q. Subunit can join to increase power. Individuals with specialized skills in an area of concern to an organization are indispensable. indicate power. 4. but actually the outside consultant represents the dominant coalition and recommends its solution. Politics can improve decision-making. but it does creates visibility and individuals won’t ascend the corporate ladder solely on their political ability. Opposing groups agree because they think the outsider is objective. Internal linkages increase the chance for promotions. Unobtrusive power is the most effective. Managers need long-term relationships with stakeholders.CHAPTER 14: MANAGING CONFLICT. Coalitions change. and suppliers. Influencing decision-making. 3. and control of important resources. Conflict stays in the latent or felt stage. Managers can bring in a supposedly neutral outsider. Is this political tactic ethical? A. because dissenters miss the opportunity to state their views. Building and managing coalitions. Signs of power include reputation. Politics offers the opportunity to display talent. Taking advantage of common ties. External linkages give top managers political power. talent counts. Individuals can work with managers on their way to the top in hopes of ascending the corporate ladder with them. How can you identify powerful managers? A. Q. A CEO will fall without board support. To be successful at politics. POWER. so managers need to develop coalition-building skills. because succession planning is an important responsibility. Increasing nonsubstitutability and centrality increase indispensability. ability to influence decision-making. The Costs and Benefits of Organizational Politics Coalitions lobby for their interests because the stakes are high. is a way of associating with powerful individuals and becoming indispensable. . Managers should develop a personal power base to influence decision-making and associate with powerful managers and a mentor to obtain power. conflict can improve decision-making and use resources better. Some CEOs serve as chairmen of the board. What is wrong with this assumption? A. Other top managers centralize decision-making and deny promotions to dissenters. Unsuccessful managers may retain their power despite poor performance due to control over property rights. and stock options plus private planes and chauffeured cars.CHAPTER 14: MANAGING CONFLICT. AND POLITICS 9 To achieve the benefits of politics. Benefiting from politics assumes that power is conferred on those who can provide the most benefit. value is created. angry at abuses of power. (Fig. debate declines.3: Power Struggles and Corporate Greed at WorldCom This insight details how the board members at WorldCom failed in their oversight role. checks and balances dwindle. Because different managers and stakeholders present different views. conflict escalates. A top-management team can hold all important roles on committees and choose supporters as members. influence boards to oust ineffective CEOs. Why do CEOs and directors try to keep their positions? What role do large institutional shareholders play in the balance of power? A. 14. Managers should seek to maintain a power balance between individuals or subunits to preserve organizational decision-making. POWER. Why and under what conditions can conflict be good or bad for an organization? Would you expect a higher level of conflict in a mechanistic or an organic structure? Why? Conflict can be good for an organization by overcoming inertia.5) The benefit of politics is improved decision-making because coalitions engage in a productive debate over alternatives. When powerful managers silence dissenters. an organization must create a balance of power in which all parties recommend solutions and dissenting views are considered. and effectiveness declines. The board members resigned voluntarily and cannot be replaced until the next general meeting. The balance of power among stakeholders determines whether power and politics benefit or harm an organization. They receive millions of dollars in salaries. When resources are allocated to groups that can manage contingencies. bonuses. Q. CEOs and directors want to keep their power and strong property rights. Q. Large institutional shareholders. DISCUSSION QUESTIONS AND ANSWERS 1. inertia increases. Managerial Implications: Power and Politics PHAM HOANG HIEN Managers should understand the effect of politics on decision-making. Organizational Insight 14. Power constantly moves through an organization as unsuccessful managers lose power to successful managers. They recommend outside directors less likely to reward poor performance with generous stock options. which allows for board control. They want authority to monitor top managers and create a more equitable balance of power. costing shareholders billions of dollars. and norms used to evaluate alternatives. but they are being manipulated. In a pharmaceutical company.CHAPTER 14: MANAGING CONFLICT. A balance helps allocate resources to those who can create the most value. Why is it important to maintain a balance of power between different groups of organizational stakeholders? A balance of power is necessary to manage politics and obtain its benefits. What is unobtrusive power? Why is it so important? Unobtrusive power stems from the ability to control the premises of decision-making. conflict causes performance to decline. You have been appointed to manage a large R&D laboratory. as manager of the R&D function in a cosmetic products company. POWER. 4. You find a high level of conflict between scientists in the unit. PHAM HOANG HIEN . Why might this conflict be arising? How will you try to resolve it? This conflict results from task interdependence. but lack authority and require approval from others. Discuss how you. Structure dictates which subunits receive information. A subunit is powerful if it is central to the organization. AND POLITICS 10 Without agreement on priorities and resource allocation. Integration should be increased between groups. 5. the actions of one affect the actions of others. Loss of control results in conflict. Unobtrusive power is important because others think they are promoting organizational goals. A coalition in favor of differentiation will not consider cost-cutting. checks and balances disappear. R&D scientists have reciprocal interdependence. How can the design of the organization’s structure and culture give some subunits more power? Structure and culture give some subunits more power through control over resources. Different groups of scientists have different goals and compete for scarce resources. Conflict is higher in a mechanistic structure because a tall organization loses control over its hierarchy. goals. information. This allows for alternative and dissenting views. and centrality. R&D generates resources. I would ensure that the function had special knowledge. Subunits with similar interests build coalitions to pursue common goals and use their power to influence decisionmaking. I would increase the indispensability of the R&D function by increasing nonsubstitutability and centrality. In a low-cost culture. with decentralized authority and clearly defined authority relationships. conflict escalates. I would change attitudes by allowing opinions to be aired. A balance of power helps achieve the benefits of power and politics. 3. so it has power. Bargaining over decisions keeps decisions from being made. such as a product team structure. A group with dominant power can misuse it. Effectiveness declines. An organization controls resources if it generates resources. people have decision-making responsibility. such as funding. A flatter organic structure gives lower-level employees decision-making and promotes mutual adjustment. might try to increase your power and the power of your subunit to control more resources in a battle with marketing and manufacturing. such as the ingredients to a successful product. 6. I would be visible to powerful managers and build a coalition to influence decision-making by controlling the agenda. I would implement an organic structure. An organic structure has integrating mechanisms to promote cross-functional cooperation. Unobtrusive power is important because the coalition controls the assumptions. Control over information can lead to influence over opinions. 2. I would make contacts with functions to build a network of supporters. Opposing views are suppressed. and inertia increases. manufacturing is central. How could organizations better achieve a balance of power at the top of the organization to ensure that politics benefits. Making the Connection Students will find an example of a conflict that occurred between the managers of a company or between the managers and other stakeholders. GM laid off 74. CASE FOR ANALYSIS The Shakeup in GM’s Hierarchy Tall hierarchies have problems.000 salaried workers. The board has full authority to act in the shareholders’ best interests. Decisions will be made by managers close to customers. 1. leading to conflict and high operating costs. They will identify the source of conflict and how managers are using their power to influence the decision-making process. Jack Smith flattened the hierarchy by eliminating levels and cutting managers. They were able to succeed by empowering managers better. POWER. it is often difficult for the organization to effectively respond to the customer. which is what they did in this case. What kind of power did GM’s board use to oust the company’s old management team? Why were they able to succeed? The main source of power in this case is authority. it is easy to lose sight of what the customer really wants. 2. AND POLITICS 11 ORGANIZATIONAL THEORY IN ACTION Each small group consists of top managers at a large reputable pharmaceutical company. GM hopes to speed up decision-making. With too many levels and managers. The company faces pressures from competition and the government to reduce costs and speed product development. They will discuss the conflict that will likely emerge and make recommendations on how to manage the conflict. GM will lay off 50.000 hourly and 24. Use the WorldCom case to show what can happen under these conditions. and reduce bureaucratic costs. Top management impacts organizational effectiveness. When too much power is concentrated at the top. increase responsiveness to customers. GM experienced communication and motivation problems. so top managers were replaced in 1992 with individuals who made tough design decisions. rather than harms an organization? The main issue is that when an organization gets too tall.CHAPTER 14: MANAGING CONFLICT. Under the new CEO. ANALYZING THE ORGANIZATION PHAM HOANG HIEN . which meant that decisions were made much quicker and with the customer in mind. Groups will discuss how the implementation of cross functional teams will affect the relative power of each division. The Ethical Dimension Students debate the ethical implications of CEOs appointing directors who will be evaluating their performance.009 workers. trying to produce new drugs and has an organic structure. R&D controls resources. R&D has built a coalition to control decision-making. and four in manufacturing. centrality. They can increase nonsubstitutability. Functions can increase indispensability by increasing their centrality. They get frustrated by having to seek approval from ten people. This is a good way to understand the benefits and the dynamics of conflict as it applies to organizations. 4. POWER. A flatter structure has more clearly defined authority relationships because a tall hierarchy has a long chain of command and a smaller span of control. They need to understand that although it has a negative connotation. increase integration. It can move to a product team structure. Show how long time it takes to decide what product to produce. consider a role-play. but they need each other to bring a product to market. because it generates resources. associating with powerful managers. . An organization can avoid such conflict by maintaining a balance of power. Point out that some conflict is good. 6. Marketing is the dominant function. You will be the CEO of a consumer electronics company with a functional structure. 3. To illustrate how conflict can arise. Discuss with students how to effectively play politics. mechanistic structure. The CEO has authority and control over resources. control over resources. AND POLITICS 12 Students analyze power and politics in their organization. marketing. What can this company do to manage conflict? A. Four students are in marketing. building coalitions. and set up a procedural system. Assign each group one of the sources of power: authority. and control over decision-making premises. To further illustrate the some conflict is good. The organization is a pharmaceutical company. Q. They determine if politics has been used to resolve conflicts. Q. nonsubstitutability. have students recall a time when a conflict actually made the situation better. These four functions each have different goals and compete for resources. and influencing decisionmaking by controlling the agenda. TEACHING SUGGESTIONS 1. How can a firm tell what is the appropriate amount of conflict? Conflict ceases to be good when so much time is spent negotiating decisions that few actual decisions are made and implemented. R&D scientists control information and have nonsubstitutability. Review the idea that bureaucracy increases conflict. We can often relate to this when we consider how a conflict in a personal relationship or a heated discussion with a co-worker actually improved things. In a tall. Each group makes a suggestion as to what subunit or stakeholder has power stemming from each source. What can weaker functions do to increase power? 5. and finance. 2. so manufacturing’s views were ignored. control over uncertainty. people have responsibility for decisions but no actual authority. divide the class into seven groups. Students should apply these tactics to specific functions. control over information. Ask 16 students to volunteer. but becomes bad after a certain point. R&D has centrality and control over uncertainty.CHAPTER 14: MANAGING CONFLICT. They identify sources of power and the subunits that have power from those sources. things like being well connected and saying the proper things at a meeting are all a PHAM HOANG HIEN A. four in engineering. A flatter structure allows people to make decisions and holds them accountable for their actions. To review the sources of power. four in finance. such as manufacturing. PHAM HOANG HIEN . AND POLITICS 13 part of organizational life. One can’t say. Discuss how to play ethically and morally. “I don’t play politics” and expect to get too far in most organizations.CHAPTER 14: MANAGING CONFLICT. POWER. develop functional resources and coordination abilities. and coordination abilities. corporate. To demonstrate how corporate-level strategies use core competences in new domains. product development. Contingency theory examines differences in structural design among the R&D. product team. Interorganizational strategies. divisional. corporate.3) 8.2) 6. related and unrelated diversification. which strengthen core competences. such as long-term contracts. and diversification.3) 7. Core competences stem from specialized resources possessed by functional personnel.5) CHAPTER SUMMARY PHAM HOANG HIEN. Culture also affects functional-level strategy. To analyze vertical integration. Business-level strategy combines functional level core competences to protect the organizational domain. A differentiator needs an organic structure. geographic.4) 9. Four strategies enlarge the organizational domain: market penetration. To define organizational strategy and examine the sources of core competences. (8. (8. (8. Focus strategy is reviewed.2) 5. and global. manufacturing.1) 3. MBA. (8. mechanistic structure.2) 4. Strategies that create value and achieve competitive advantage are formulated at four levels: functional. business. and global. To explain how each function creates value through lower cost or differentiated products.4) 10. market. (8. With only a few products. (8. Other structures include: product. To discuss the four levels of strategy: functional. (8. Organizational structure and culture must match business-level strategy.CHAPTER 8 ORGANIZATIONAL DESIGN AND STRATEGY IN A CHANGING GLOBAL ENVIRONMENT TEACHING OBJECTIVES 1. organizational resources. Achieving a competitive advantage at the functional level means gaining a low-cost or a differentiation advantage. whereas a differentiator needs values of innovation and quality. PG. (8. To review the importance of structure and culture to functional-level strategy. market development. a low-cost organization uses a functional. (8. To discuss the four strategies that enlarge the organizational domain. A low-cost organization needs cultural values of economy. (CSU) Strategy is an action plan for developing core competences to reach long-term goals and gain a competitive advantage.1) 2. To discuss how to implement strategy across countries. To illustrate that interorganizational strategies achieve core competences. To explain that structure should match strategy. and matrix. and the interorganizational strategies to achieve benefits without costs. . (8. Two business-level strategies are differentiation and low cost. and sales functions. (CSU) . whereas diversifiers use either the multidivisional or the multidivisional matrix structure. and link strategies at all four levels. A global matrix or “matrix in the mind” is appropriate for a transnational strategy. structure. Corporate-level strategies are considered with advantages and disadvantages: vertical integration. Managers overestimate the benefits of a strategy and underestimate costs. related diversification. which requires a high level of integration. There are four strategies for managing the international environment: multidomestic. Unrelated diversifiers use the conglomerate structure. 8. Structure and culture must match corporate-level strategies. global. and culture is difficult. and unrelated diversification. control bureaucratic costs. Matching strategy. 8. is appropriate for international or global strategies. Manufacturing. (Fig. and transnational. Resources permit reinvestment in new resources for core competences. managers must forecast the value created from a strategy. The process is a cycle. increase value without the bureaucratic costs associated with vertical integration. Vertical differentiation and the need for integration are considered. Name some core competences. Company structure should match strategy. Why do organizations have strategies? A. related diversification. tall and centralized. This structure is flat to ensure fast responsiveness and centralization and decentralization of decision-making. which require a medium to high level of integration. which is influenced by the control and coordination required. global expansion. innovation. R&D Q.Corporate strategy uses core competences attained at the business level to expand into new domains. PG. A. Interorganizational strategies. and unrelated diversifiers promote economical values. Related diversifiers foster cooperative values. because the need for integration is low. A global geographic structure. materials management. is appropriate for a multidomestic strategy. such as strategic alliances. relatively flat and decentralized.1 Strategy and the Environment Organizational strategy is a plan to use core competences to achieve competitive advantage and outperform competitors.1) Sources of Core Competences PHAM HOANG HIEN. Q. Core competences are skills and abilities in value creation activities that lead to superior efficiency. MBA. The global product group structure. marketing. Strategies use existing competences to develop new competences to outperform competitors and compete for resources. or customer responsiveness. Although the environment is uncertain. quality. international. and unrelated diversification. A competitive advantage comes from functional and organizational resources. A global network connects activities from various countries and links distributors who sell and service products. After World War II. (CSU) Establishing a global network entails organizing task and reporting relationships among managers. MBA. Structure and culture coordinate activities at functional and organizational levels. Organizational resources stem form a company’s features. Functional coordination strengthens core competences. Four Levels of Strategy . decentralizing or centralizing authority. land. Coordinating resources is a source of core competences. Both offer a competitive advantage if they are unique and hard to copy. 8. land. Japanese companies learned production methods from the United States. establishing a network. and used this competence to compete globally. companies have Japanese divisions to benefit from total quality management and lean production. Gaining access to global resources and skills gives an organization a competitive advantage. How can a company lower costs? A. (Fig. Global Expansion and Core Competences Global expansion creates value by transferring and enhancing core competences. equipment. Production can occur in a country with low labor costs. Q. Coordination abilities are difficult to imitate. PHAM HOANG HIEN. improved them. Sales volume increases. such as R&D scientists. and raw materials are factor costs. including management skills. and divisions that connect value creation activities. and gaining resources and skills. Using Global Learning to Enhance Core Competences New skills learned abroad are transferred to the United States and improved. Functional resources stem from the skills of functional employees.S. functions. enhanced competences are sent back to foreign operations.2) Transferring Core Competences Abroad Creating value by transferring core competences to a foreign market facilitates low-cost or differentiated products and a competitive advantage. and brand name. reputation. PG. and promoting shared values. Name some coordination abilities. Coordination activities include using control systems. creating economies of scale that enhance a low-cost advantage. The costs of labor. A. U. taxes. and coordinating activities leads to competitive advantage. Q. and business-level strategies protect and enlarge the existing domain. corporate.1) PHAM HOANG HIEN. R&D can create new and improved products. Sales and marketing can promote brands and target customer groups. Materials management can use just-in-time inventory and develop long-term relationships with customers and suppliers.1) A.Strategy formulation occurs at the functional. PG. Functional-level strategy is a plan to create core competences to enhance functional and organizational resources. Sales and marketing can increase demand. (CSU) 8. and global levels. (Table 8. Manufacturing can develop flexible manufacturing. (Fig. Functional managers analyze the functional environment to be aware of activities surrounding the company’s domain. 8. Corporate-level managers combine value creation skills to improve the company and divisional competitive position. Strategies to Lower Costs or Differentiate Products Q. R&D can improve manufacturing efficiency. Functional. but corporate-level strategies expand into new domains. achieved by performing activities at a cost lower than competitors’ or providing unique products. How can functions add value by lowering costs? A. Human resources can reduce turnover and absenteeism. Manufacturing can improve product quality and reliability. The top-management formulates business-level strategy by positioning the company to compete for resources. How can functions add value through differentiation? Q. Strategies create more value collectively than independently. Materials management can develop long-term relationships to ensure high-quality inputs. Human resources can hire and train skilled personnel. Creating value at one level impacts the others. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Each function aims to create a core competence for a competitive advantage. MBA. and coordination abilities. business. (Table 8.2) Merging functional core competences to achieve competitive advantage is businesslevel strategy. which lowers production costs.2 Functional-Level Strategy . PHAM HOANG HIEN. functional structure. because it uses incentive pay and standardization to control salespeople. (Fig. work is controlled by the speed of the production line and standardization achieved through rules. shared values that control behavior. A. (CSU) Q. 8. A. Mutual adjustment is unimportant because salespeople work alone. firms must select property rights. Has this structure led to a core competence? A. Why is culture important for functional-level strategy? A. Lawrence and Lorsch found that functional differentiation and integration impact performance. a tall hierarchy with centralized decision-making. R&D needs an organic structure. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Functional-Level Strategy and Culture Q. Describe the best structure for R&D. making it a competitive advantage. has a more organic structure and allows workers to participate in decision-making and make incremental improvements. Structure can be duplicated.Functional-Level Strategy and Structure Structure and culture are important to functional-level strategy because coordination abilities. is significant because it is hard to copy. decentralized hierarchy. Describe the structure of the sales function. Norms and values are based on self-control and team control. Contingency theory proposes that each function creates a structure to match its resources. Culture. but more than for R&D.3) Q. To achieve core competence. American manufacturing uses a mechanistic structure. No. result from structure. This structure is less mechanistic than for manufacturing. R&D uses a flat structure and . leading to core competence. MBA. PG. Q. flat and decentralized with mutual adjustment to facilitate innovation. Sales has a flat. Japan. Each department develops an orientation specific to its tasks and responds to its particular environment. a country with a core competence in manufacturing. and functional managers that improve coordination ability. but culture becomes ingrained in employee behavior. Empowering workers and promoting cooperative values give Japanese companies improved product quality. Wal-Mart.. giving managers control. and Nucor Q. and creating a mechanistic hierarchy. What companies pursue a different ion strategy? A. emphasis is on reducing the skill level. which in turn allows the firm to protect and enlarge its domain.small teams to stress cooperation. Q. Low-cost value creation provides customers with low-priced goods or services.S. and people with similar values can be hired. Wal-Mart pursues a low-cost strategy and directly competes with K-mart. What companies pursue a low-cost strategy? A. Employees can be given the property right of profit sharing. Culture develops core competences. This structure fosters a culture that decreases production costs. Managerial Implications: Functional-Level Strategy A functional manager should identify functional resources or coordination abilities that lead to a core competence. In the U. an organization positions itself to compete. . Neiman-Marcus and the Ritz-Carlton Hotel The strategy selected determines direct competitors. MBA.com. but achieving both low costs and differentiation requires strong core competences. Taco Bell.3 Business-Level Strategy Strategies to Lower Costs or Differentiate Products After selecting its domain. How does culture affect coordination abilities in manufacturing? A. Some organizations pursue both strategies. Managers should consider how functional structure and culture affect resources and abilities. (CSU) Business-level strategists combine functional core competences to seek environmental opportunities. Q. Managers should study competitors to see what methods are used to control functional activities. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 8. Differentiation provides unique products for customers who are willing to pay top prices. They choose and manage the domain in which the company uses its core competences for a competitive advantage. using low cost or differentiation. Part 4 PHAM HOANG HIEN. Focus on New Information Technology: Amazon. PG. _ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ____________________________ Strategies to Enlarge the Organizational Domain (Fig. even by large bookstores. marketing. The ability of a computerized online catalogue to describe and make available every book in English offered customers a selection that could not be rivaled. Q. Q. How can a firm sell more existing products to current customers? A.4) 1. MBA. A. Describe Amazon’s differentiation strategy. and competitors battle for resources. making it possible to develop both a low-cost and differentiation strategy and outperform existing bookstore competitors. It can increase advertising. PG. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _3_ _h_e_r_e_ _f_o_r_ _e_x_a_m_p_l_e_s_ _o_f_ _c_o_m_p_a_n_i_e_s_ _u_s_i_n_g_ _l_o_w_-_c_o_s_t_ _a_n_d_ _d_i_f_f_e_r_e_n_t_i_a_t_i_o_n_ _s_t_r_a_t_e_g_i_e_s_. (CSU) . and more dynamic. Q. A.Jeff Bezos used Internet information technology to sell books online. The environment becomes poorer. and customers. more complex. Dominant organizations use interorganizational strategies to merge or take over competitors. PHAM HOANG HIEN. The use of information technology to interface inexpensively with book publishers. Market penetration uses current products to increase market share in the existing domain. Competitors use this strategy to increase uncertainty for those without a low-cost or differentiation strategy. or the number of retail outlets. allowed Amazon to offer customers books at discounted prices. 8. Describe Amazon’s low-cost strategy. distributors. Q.Q. another business-level strategy. A product development strategy uses core competences to provide new products for its existing domain. Forming alliances with suppliers gains control over inputs. Rolls Royce and Pizza Hut Q. Improved products attract customers and cost less. 2. Focus strategy. Honda sells cars in foreign markets. MBA. What are the advantages of a focus strategy? A. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _2_ _h_e_r_e_ _t_o_ _g_i_v_e_ _e_x_a_m_p_l_e_s_ _o_f_ _s_t_r_a_t_e_g_i_e_s_ _t_o_ _e_n_l_a_r_g_e_ _a_ _f_i_r_m__ s_ _d_o_m_a_i_n_. Arm & Hammer promotes noncooking uses of baking soda. uses resources to concentrate on one market segment. Strategic alliances 4. A marketing development strategy involves finding new domains for existing products. A diversification strategy entails entering a new domain with new products. What companies pursue a market development strategy? A. PG. Q._ ______________________________________________________________________ ______________________________________________________________________ _______________________ PHAM HOANG HIEN. What interorganizational strategies are used? A. Diversifying offers new competitors in a new environment. Q. (CSU) . Weak competitors form alliances to develop core competences. What interorganizational strategies help enter new markets? A. What companies pursue a focus strategy? A. A company increases customer responsiveness and avoids direct competition with large low-cost or differentiated companies. 3. Business-Level Strategy and Structure Using core competences to achieve a competitive advantage depends on structural design. It has a mechanistic structure with centralized decision-making for control over functional activities and costs.______________________________________________________________________ ______________________________________________________________________ ___________ _ _Organizational Insight 8. (CSU) . Describe the structure of a low-cost organization. A. with customers in each region serviced by representatives from bottling operations. Bottling follows the lead of marketing. Q. A mechanistic structure offers adequate coordination as rapid response is unnecessary.5) A differentiation strategy requires the skills for unique products. instead of a geographic structure. low-cost producers stay behind differentiators to reduce costs. As a result. A. Describe the changes at PepsiCo. 8. Q. Manufacturing and materials management are central functions. Other functions tailor skills to the goal of low-cost production. An organic structure permits decentralization and cross-functional teams. It spun off the restaurant business to focus on the soft-drink business. MBA. (Fig. PepsiCo created a marketing research and development function responsible for coordinating all marketing activities throughout all regions. developed and marketed ahead of competitors. What new structural additions were made? A. Q. A low-cost strategy monitors functional activities to decrease product development costs. What structure does a differentiator have? A. Which type of company operates in an uncertain environment? PHAM HOANG HIEN. Q. yet the new structure is flatter and more streamlined.1: PepsiCo Chooses a New Structure To battle against Coca-Cola. New or improved products are developed when customers demand it. Decisions are centralized. The CEO decided to reengineer the company with a new pattern of horizontal differentiation. profits have increased. Q. PepsiCo decided to change its strategy and structure. PG. dynamic. quality. Three factors affect structural choice: 1. A market or geographic structure is appropriate to meet customer needs. Offering a wide product range requires more control over product development. Notes_________________________________________________________________ ______________________________________________________________________ PHAM HOANG HIEN. What values would a differentiator have? A. Business-level strategy must match structure to use resources for a competitive advantage. Marketing would attract new customers efficiently. Differentiators compete in a complex. Q. whereas lowcost companies compete in a stable environment. marketing. Q. Low-cost companies concentrate on a few products and imitate differentiators. and production. a product team or matrix structure is appropriate. a functional structure. What type of structure satisfies many customer groups? A. and excellence with product development and marketing as key functions. PG. 2. Different functions have subunit orientations.A. For rapid product development and quick customer responsiveness. so they need a structure that facilitates cross-functional cooperation. so they need the simplest structure possible. low-cost companies use the simplest structure possible. Because integration and differentiation are expensive. MBA. 3. Differentiators produce many products to satisfy many customer groups. Attracting new customer groups requires a structure able to meet customer needs. Q. and goals would reflect these values. Increasing new product development requires a structure with increased functional coordination. Emphasis is on frugality and economy. What are the values of a low-cost company? A. (CSU) . Business-Level Strategy and Culture At the business level a company needs values and specific norms and rules to use resources effectively. yet values bridge communication and coordination issues. Differentiators have a higher level of differentiation and integration. uncertain environment. a product structure. Values would foster innovation. ______________________________________________________________________ ______________________________________________________________________ ______________________ 8. Q. which only pay off in the long run. Industry analysts felt that the merger would provide important differentiation and lowcost advantages for the combined firm. Q. AHP has a culture characterized by a short-term focus on bottom-line profits.______________________________________________________________________ ___________________________________________ Organizational Insight 8. Why did AHP want to buy Monsanto? A. Managers should look for opportunities to protect and enlarge the firm’s domain. PG. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _____________________________________ _ _·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _1_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _d_esigning a structure and culture for core competence. were to merge but the cultures were too different. MBA. Specifically. Why did the merger fail? A. Managers are cost conscious and invest in products with a short-term payoff. Managerial Implications: Business-Level Strategy Members of different functions should examine interactions to reduce costs or develop differentiation.2: How Culture Derailed the Merger between AHP and Monsanto Two pharmaceutical companies. Managers should assure that structure and culture are congruent with strategy. the product range would be broader. American Home Products (AHP) and Monsanto.4 Corporate-Level Strategy PHAM HOANG HIEN. (CSU) . Monsanto has a long-term orientation driven by a desire to produce innovative products. and long-term contracts to manage supplier and distributor relationships. and unrelated diversification. A.A. The B. Corporate-Level Strategy and Structure Corporate-level strategies must be tied to the right structure. control over inputs for product uniqueness. There are interorganizational strategies such as minority ownership. strategic alliances. 8. (CSU) . Unrelated diversification involves managing from a profit perspective. Name the advantages of acquiring suppliers or distributors. Controlling distribution results in lower costs or differentiation. Variants of this structure fit related and unrelated diversification. Designing an efficient structure is crucial because poor performance can result from high bureaucratic costs. PG. businesses are bought and sold based on return on investment. control over reliability and quality. Q.R and Grille opened up a pizza restaurant.Corporate-level strategy searches for new domains to use low-cost or differentiation core competences. Name the disadvantages of vertical integration. Inefficient companies are restructured to create value. The benefits from any strategy should outweigh costs. related diversification. and opportunism avoided faced with few suppliers. A. companies pursue all three corporate-level strategies: vertical integration. Seeking ways to enter new domains.8) Vertical integration involves entering new domains that overlap the core domain as an input or output. Profits retained when earned by suppliers. What are alternatives to vertical integration? A. Q. (Figs. and a larger. Operating in more than one domain requires a multidivisional structure. MBA. companies expand and digress from the original domain. Bureaucratic costs rise. Q. Existing competences are employed in new domains.7 and 8. lower production costs. PHAM HOANG HIEN. self-contained divisions and a corporate headquarters staff. Unrelated diversification takes advantage of one specific core competence: a management team’s ability to control a group of organizations. Related diversification creates value by using an existing core competence to create a low-cost or differentiation advantage in a domain related to the core domain. so corporatelevel strategy builds on business-level strategy. vertically integrated company experiences communication and coordination problems. When pursuing opportunities. which depend on electronic and computer technology. are needed. Hitachi uses integrating mechanisms to coordinate activities. Q. PG._ _ ________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________________ _ _O_r_g_a_n_izational Insight 8. and uses a conglomerate structure. (CSU) . How does Hitachi manage related diversification? A. has 28 related divisions. After restructuring.8) Structures for Related Diversification Related diversification involves sharing resources. (Fig 8. Communication flows from top down and pertain to bureaucratic costs. A conglomerate structure makes each business a self-contained division with a small headquarters staff because activities between divisions need no coordination. MBA. Executives in integrating roles control information among divisions. Hitachi.Conglomerate Structure and Unrelated Diversification Unrelated diversification does not involve managers in routine operations. more complex integrating mechanisms. the organization needs a large corporate headquarters staff to coordinate interdivisional activities. Information flows laterally between divisions and vertically between corporate headquarters and divisions. requiring a high level of coordination and integration. management monitors each company’s performance. because of conflict over resources. Telecommunications and teleconferencing allow PHAM HOANG HIEN. acts only when necessary. Coordination is difficult. To achieve gains. such as integrating roles and teams.3: Hitachi Ltd. a major computer company. Hitachi believes that the benefits of related diversification outweigh the high bureaucratic costs. and a corporate R&D keeps divisional R&D labs informed. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _5_ _h_e_r_e_ _t_o_ _d_i_s_c_u_s_s_ _s_t_r_a_t_e_g_i_e_s_ _f_o_r_ _e_n_t_e_r_i_n_g_ _n_e_w_ _d_o_m_a_i_n_s_. Each division has R&D and decision-making authority. 5 Implementing Strategy Across Countries PHAM HOANG HIEN. A joint venture allows two companies to share resources without bureaucratic costs. Managers must match the firm’s structure and culture to strategy. Corporate-Level Strategy and Culture Culture can reduce bureaucratic costs. PG. global. Each division has a culture. Managers should evaluate costs and benefits associated with entering a new domain and the costs and benefits of various strategies. international. because divisions do not coordinate. Managerial Implications: Corporate-Level Strategy Managers must analyze the environment to protect existing domains and exploit the firm’s core competences. and divisions use common corporate language with each other. Related diversification requires coordination. How can a company achieve an innovative and cooperative culture? A. A common corporate culture would not fit a conglomerate structure. Related diversifiers may choose a multidivisional matrix structure by coordinating divisions and corporate headquarters. Q. Bureaucratic costs associated with unrelated diversification are low. MBA. Culture must reinforce strategy and structure. A company pursuing unrelated diversification values economy. but it would fit a multidivisional matrix structure. and values can help manage corporate strategy. Managers who share resources can be rewarded. so bureaucratic costs are much higher. and transnational. but the corporate culture overcomes differences. Interorganizational strategies allow for gains from related diversification and vertical integration without bureaucratic costs.scientists to share information. Members can be socialized to the innovative culture through promotions. as no exchanges among divisions occur. The company has a strong culture based on cooperation and teamwork. Long-term contracts provide the benefits of vertical integration. Each takes a different approach . Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 8. What values help manage related diversification? A. Q. Related diversifiers promote cooperation. (CSU) Four basic strategies are used to enter and compete in the international environment: multidomestic. used by U. and each has strategic control. and reduced bureaucratic costs. (CSU) . A. no access to foreign resources and skills because core competences are exported. Name the advantages of a multidomestic strategy. Disadvantages: Lack of global learning due to little interaction among divisions. A. product design. Global strategy responds to pressures for global integration. R&D. including manufacturing. Transferring profits and dividends is often the only link between a foreign division and the parent company.3) Multidomestic strategy is a reaction to high pressures for local responsiveness. PHAM HOANG HIEN. Q. higher production costs because manufacturing is located in many countries. It merely duplicates domestic operations abroad. and marketing are centralized. Each division has value creation activities. Core competences in manufacturing and distribution are transferred. (Fig. Describe the disadvantages of this strategy. Q. increased profits. A. This strategy. becoming the dominant competitor. International strategy does not respond to high pressures for local responsiveness or global integration. and higher bureaucratic costs because resource transfers are coordinated. Q. Advantages: Access to resources and skills. Coca-Cola uses this strategy. MBA. Foreign divisions do not customize products. PG. no global learning. and core competences are transferred from the home country. so customers get a standardized product. Environmental change has brought about new value creating strategies—a global and a transnational strategy. leads to low-cost and differentiation advantages. These strategies are classified on two dimensions: pressures for local responsiveness and pressures for global integration. 8. missed opportunities for long-term value creation. product development. Wholly owned foreign divisions are created. Name the disadvantages of an international strategy. Describe the advantages of this strategy. products are tailored to meet customer needs in each country of operation. a differentiation advantage through combined core competences. leaders in mass production and marketing. and a network with value creation functions established in lowcost markets plus long-term contracts with low-cost suppliers Q. and the competitive advantage of a high quality product. and marketing. Economies of scale with decreased costs and prices. Limited local responsiveness.S.to creating value. A standardized product is manufactured at a few low-cost locations and sold globally with limited customization. team control. no learning to differentiate products. . controlled resource transfers by corporate headquarters. decreasing product demand. (Fig.10) Transnational strategies typically use a global matrix structure. Divisions build on skills received and transfer improved products and processes. complex design structure and control systems due to a high level of coordination and customization Implementing Strategies There are various structures suitable to each strategy (Table 8.A. PG.1) PHAM HOANG HIEN. 8. cooperation. (Fig. lack of local responsiveness. Higher bureaucratic costs. 8.10) DISCUSSION QUESTIONS AND ANSWERS 1.10) Global strategies typically use global product group structures. coordination is needed to develop new products. high-quality products. organic structure with mutual adjustment among teams. Global coordination results in low-cost. Obtaining a core competence in R&D requires a flat. and innovation. How should an organization design its structure and culture to obtain a core competence in manufacturing and in research and development? Successful R&D requires skills to be used in innovative ways. no differentiation Transnational strategy responds to pressures for global integration and local responsiveness. (Fig. (CSU) Multidomestic strategies typically use global-geographic structures. Low-cost and differentiation advantages are achieved by transferring core competences to countries with low-cost and differentiation advantages and by creating a network for skill transfer among domestic and foreign divisions. International strategies typically use global product group structures with a product group headquarters. High bureaucratic costs because of centralization. MBA. The culture should promote self-control. Q. What are the disadvantages? A.8.9). (Fig. 8. decentralized. combining the advantages of global strategy (value creation activities located in countries with low factor costs) and multidomestic strategy (value creation activities located in foreign countries for customization). a. The culture should foster economy and frugality and reward employees for lowering costs. so a tall. Pick an organization like a restaurant or a department store and analyze how it might pursue (a) a market penetration strategy (b) a product development strategy. such as spicier chicken. a biotechnology company needs a flat. MBA. in a nice atmosphere. This restaurant decides on a market penetration strategy by increasing advertising and promotion. decentralized. such as chicken. Still. Differentiation requires strong competences in development and marketing and entails rapid innovation to introduce products in advance of competitors. local restaurant. What is the difference between a low-cost strategy and a differentiation strategy? How should a differentiated biotechnology organization and a low-cost fast-food organization design their structures and cultures to promote their respective competitive advantages? A low-cost strategy uses core competences for low-cost products targeted at customers who want low prices. This restaurant chooses a market development strategy by expanding into new regions. PG. a more organic structure allows workers to participate in decision-making. innovation. (CSU) . Answers will vary. and the sources of competitive advantages enjoyed by a small. and (c) a market development strategy. and reduces costs. 2. PHAM HOANG HIEN. The culture should foster cooperation. A differentiation strategy uses core competences for products with unique features for customers who value uniqueness and pay top price. improves quality. The company could use performancebased pay. a low-cost fast-food restaurant needs a mechanistic structure to control costs with standardization. with standardization for control. The restaurant is popular in the Southwest and might expand to the Midwest and to Mexico. This restaurant chooses a product development strategy by improving the food. centralized. A restaurant offers American food. mechanistic structure is typical. It offers buy-one-get-one-free coupons to attract customers. Compare the competitive advantages enjoyed by a large restaurant chain. and quality and reward employees for teamwork and new ideas. 4. To maintain its differentiated advantage. such as Steak and Ale or Red Lobster. It offers new items. leading to a core competence. organic structure with mutual adjustment as the primary integrating mechanism. 3. to retain its customers and improves service. To maintain its cost advantage. c. New products are developed according to consumer demand. b.A core competence in manufacturing requires cost control. related diversification fosters cooperation. MBA. The Ethical Dimension . Structure and culture must be reevaluated as a firm changes strategies. Cooks ensure high quality food. resulting in a taller structure that could stifle innovation. The transnational strategy has the highest bureaucratic costs because of coordinating resources and customizing products. All functions contribute to this differentiation. Expansion increases bureaucratic costs. a team of investors is planning to open a new supermarket. A large restaurant conforms to company standards. Coordinating activities require a complex structure with costly complex integrating mechanisms. PG. their strategies. and functional strengths and weaknesses. A small local restaurant’s competitive advantages stem from quick response to customers. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: What Kind of Supermarket? In small groups. The restaurant avoids direct competition with large differentiators or low-cost competitors by focusing on one market segment. Why would an organization choose a corporate-level strategy to expand its value-creation activities beyond its core domain? Discuss how an organization’s structure and culture might change as the organization begins to enter new domains. Each group recommends a strategy.Red Lobster’s competitive advantage is based on differentiation. In new domains. (CSU) 6. Structure and culture depend on the strategy pursued. 5. Unrelated diversification fosters economic values. costs rise more due to centralized decision-making and resource transfers in the global network. Human resources hires and trains competent personnel. Each group lists the current supermarket chains. a firm needs a complex structure such as the multidivisional structure. costs rise to coordinate activities with divisions. the restaurant remains close to customers and has the flexibility to change the menu and decor. With a global strategy. Costs are controlled through volume buying. Red Lobster has the resources to introduce new products. Marketing targets seafood lovers. Expanding makes sense if more value creation cannot occur in the core domain. With an international strategy. A multidomestic strategy has low bureaucratic costs due to lack of coordination among divisions and headquarters. PHAM HOANG HIEN. and resources are available to enter new domains. How and why do bureaucratic costs increase as a company goes from a multidomestic to an international to a global to a transnational strategy? Bureaucratic costs depend on pressures for global integration and local responsiveness. with a core competence in marketing to achieve name recognition. By pursuing a small market segment. Foreign subsidiaries are responsible for marketing. Levi Strauss has located production facilities around the globe and customizes its products to local tastes. To illustrate how each function is responsible for developing core competences. Moreover. PG. These functions work for a fast-food restaurant that specializes in hamburgers and is pursuing a low-cost strategy. Levi’s wants to tailor its jeans to local customers. Levi Strauss uses a network structure.S. sales and marketing. Production facilities are located around the world to take advantage of low cost foreign labor. the market that it competes in.S. and foreign partners produce and distribute products. For example. A partner will be replaced if it doesn’t meet Levi’s standards. divide the class into the five functions: manufacturing. Design is performed in the U. and research and development. Levi’s is seeking to both reduce costs and provide customer responsiveness. (Table 8. What structure does Levi Strauss use to implement its strategy? To implement its transnational strategy. (CSU) . PHAM HOANG HIEN. and foreign partners produce and distribute products. For example. Other countries desire various colors. Levi’s transfers knowledge to its subsidiaries. human resource management. Making the Connection Students will find an example of a company pursuing a business-level or a corporatelevel strategy and explain why the strategy was chosen. They will determine whether or not the strategy created value and describe the effects of the strategy on structure and culture. adopts the stance that it is illegal.1 ) Students should give specific examples such as selling hamburgers for 49 cents. Each develops core competences that lead to a low-cost competitive advantage. was transferred to Europe. materials management. Asia may offer more smaller size jeans. even if other cultures accept this as a norm. MBA. However. foreign subsidiaries are responsible for marketing. and why the U. 1. TEACHING SUGGESTIONS 1. Analyzing the Organization Students will examine the domain that the organization serves. and the strategies used to create value for its stakeholders. What global strategy is Levi Strauss pursuing? Is it effective? Levi Strauss is pursuing a transnational strategy.S.Students examine the issue of bribery. To implement its strategy. marketing knowledge learned on Decker’s in the U. Design is performed in the U. 2.S. Levi’s established a network structure. It is also transferring knowledge abroad. CASE FOR ANALYSIS Levi Strauss’s Goes Global This case demonstrates how a company can pursue a transnational strategy. PHAM HOANG HIEN, MBA, PG. (CSU) 2. Combining competences can protect or enlarge a company’s domain. The class is divided into four groups; each group works for a low-cost fast-food restaurant and uses one of the four strategies to enlarge its domain: market penetration, market development, product development, and diversification. Each group lists a specific way to enlarge its domain (e.g., market penetration through increased advertising). 3. In six groups, functional, product division, product team, geographic, conglomerate, and multidivisional, students match structure to strategy. The groups must be specific. If the strategy is differentiation, each states how the company differentiates (e.g., products or customers). 4. Invite a manager from a local company to speak to the class about the company’ strategies, culture and structure. If the company is large, have students get information from the company web site before the presentation (consider FedEx, UPS, or Wal-Mart). 5. A role-play with five students demonstrates the difficulties of a transnational strategy. One student is the CEO of the parent company and stresses divisional cooperation, low costs, and local responsiveness. One student is a foreign manager for France and one for England. One student is a product manager for Europe and one an individual business division manager. The product manager expects the division manager to coordinate resources globally. The manager for England wants to do what is good for England. England refuses to cooperate with France. This conflict prevents the organization from achieving the benefits of a transnational strategy, yet this structure increases bureaucratic costs. What can the company do? The class explains that an international culture and manager network could remedy the situation. 6. The class is divided into eight groups to show that strategies are chosen to respond to pressures for global integration and local responsiveness, and that structure and culture matched strategies. There are four companies, each assigned to two groups. 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How do these companies handle foreign operations? Report findings to the class. PHAM HOANG HIEN, MBA, PG. (CSU) CHAPTER 10 TYPES AND FORMS OF ORGANIZATIONAL CHANGE TEACHING OBJECTIVES 1. To define organizational change as the process by which organizations reach their desired goals. (10.1) 2. To examine the various targets of change. (10.1) 3. To discuss both the forces for change and the resistances to change. (10.2) 2. To contrast the revolutionary and evolutionary approaches to change. (10.3) 4. To explain Lewin’s Force Field Theory of Change. (10.4) 5. To explain and apply the basic steps of action research. (10.4) 6. To examine the various components of Organizational Development. (10.5) CHAPTER SUMMARY This chapter examines organizational change, including technological change. Technological change requires that organizations learn how to manage the innovation process. Organizational change is defined as the process by which organizations reach desired goals. Planned organizational change creates value for stakeholders. Several forces for change plus resistances to change are examined. The major forces for change are competitive, economic, political, global, demographic, social, and ethical forces. The major resistances to change at the organizational level are structure, culture, and strategy. Resistances at the functional level are differences in subunit orientation and power and conflict struggles. Resistances at the group level are norms, cohesiveness, and groupthink. Resistances at the individual level are cognitive biases, uncertainty and insecurity, selective perception and retention, and habit. Evolutionary change is distinguished from revolutionary change. Reengineering, downsizing, restructuring, and TQM are discussed as methods for change. Included in this are the use of flexible workers and flexible work teams. Change is also viewed through Lewin’s Force Field Theory of Change. The concepts and steps associated with action research are detailed to show how organizations reach a desired future state. Various concepts associated with organizational development are discussed as a tool to help both the organization and the individuals in the organization maximize their effectiveness and achieve their goals. CHAPTER OUTLINE 10.1 What Is Organizational Change? Organizational change occurs when an organization restructures resources to increase the ability to create value and improve effectiveness. A declining company seeks ways PHAM HOANG HIEN, MBA, PG. (CSU) and technology to improve the value created by functions. 4. PHAM HOANG HIEN. innovation. and create a core competence. Organizations can change structure. Thus. Organizations use human and functional resources to seize technological opportunities through structure and culture. Human resources are an organization’s most important asset. so changing one leads to a change in others. Targets of Change Organizational change includes changes in four areas: 1.to regain customers. These four resources are interdependent. monitoring promotion and reward systems. PG. changing norms to motivate a diverse workforce. (Fig. A product team culture increases development time. 2. change existing ones. key functions grow in importance. A. Q. quality. Organizations may need to restructure to achieve the benefits of new technology. Organizational capabilities are imbedded in operations. Changes include: investment in training. socializing employees. and changing top management.1) Forces of change require change or loss of competitive edge. 10. a growing organization designs new products. Give examples of structural and technology changes. Improving the reliability and quality of goods and services is an important capability. Functional resources can be transferred to maximize value creation as the environment changes. because an organization must equal or surpass rivals to sustain a competitive advantage in efficiency. 10. Managing change is crucial when competing for customers. In the past 10 years. . Technological capabilities provide new products. culture. What changes are made in human resources? A. or customer responsiveness. over 50 percent of all Fortune 500 companies have undergone significant restructuring. MBA.2 Forces for and Resistance to Organizational Change Organizations face both the forces of change and resistances to change. Change is prevalent. Competitive forces spur change. Q. Recruiting a team of scientists leads to restructuring a product team. Technology that uses selfmanaged work teams increases productivity and quality. (CSU) 3. (CSU) . Powerful divisions. Ethical forces place greater demands on firms for honest. In this case. hiring and promotion. it was primarily the general public. are significant forces of change. low-cost inputs. Europe. Production in an EU country eliminates tariffs. Organizations protect whistleblowers and foreign employees. such as the North American Free Trade Agreement (NAFTA) or other economic unions. Organizational-Level Power and conflict: If change benefits one function at the expense of another. Demographic and social forces include an increasingly diverse workforce. MBA. and the Sweatshops These companies came under scrutiny because the countries that they outsourced production to paid very low wages and had extremely poor working conditions. Adidas. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Resistances to Change can occur at the organizational level. and Asia—expect to have more trade within their arena than across spheres. Reebok. PG. The three distinct economic spheres—North America. The European Union (EU) has increased to 20 countries. and global forces. Low-cost competitors. can sabotage change. or individual level. changing. PHAM HOANG HIEN. Public outcry is a good example of a force that forces an organization to change. conflict impedes the change process. Organizations may need structural change to enter foreign markets and adapt to different cultures. and new technological developments are realities of global competition.Economic. Q. Companies need flexibility in scheduling to meet employee childcare needs.1: Nike. such as IBM’s mainframe division. so some firms have hired ethics officers to report offenses or give ethical advice. Organizational Insight 10. group level. corporate behavior. Transition into the resistances to change section to discuss what may prevent these organizations from changing immediately. so Japan produces cars in England to avoid foreign tariffs. political. Many workers want to balance work and leisure. What environmental forces caused these companies to change their practices? A. values and norms. In addition. making a new set of norms necessary. Groupthink occurs when members ignore negative information to achieve harmony. PG. the more complicated change is. the group may resist change. if property rights are strong.Differences in functional orientation mean that divisions or functions view problems from various perspectives and seek changes to benefit their own group. Q. If change doesn’t benefit them. (CSU) Group-level resistances to change Group norms: When change results in different task and role relationships. they do not endorse it. Individual-level resistances to change Uncertainty and insecurity: Resistance to the uncertainty and insecurity of change results in inertia. The greater the interdependence. The culture itself may cause resistance to change. MBA. Are mechanistic or organic structures more opposed to change? A. is helpful. Only revolutionary change may be strong enough to change culture. and are not given the freedom to change. R&D wants funding for product development while sales wants to hire more people. If sales fall. making change. Organizational culture. Sometimes revolutionary change is needed to adapt the structure. People may resist this. Selective perception and retention suggests that people perceive information consistent with their views. Some develop conservative cultures that make employees reluctant to take risks. Mechanistic structures are more resistant to change because people behave a certain way and do not adjust their behavior to changing conditions. It is more complicated at top levels by affecting the entire organization. People in a mechanistic structure are expected to act a certain way. The group may work to maintain its position even at the expense of other groups. people will protect their position. but if it is too high. A high level of task interdependence makes change difficult. Not maintaining the ability to act in an organic way results in inertia. PHAM HOANG HIEN. Mechanistic Structures are resistant to change by design. informal norms may become invalid. attraction to the group. Subunit orientations cause coordination problems and slow decision-making. Group cohesiveness. cause predictable behavior. Habit: People prefer familiar tasks and tend to return to original behaviors. . Three ways to implement revolutionary change are reengineering. gradual and incremental. Evolutionary Change II: Total Quality Management Total Quality Management First developed by a number of American consultants. Researchers suggest that a team-oriented system promotes values that enhance efficiency and product quality. total quality management (TQM) was developed to make flexible work teams more . and innovation. After World War II. For change to occur. PHAM HOANG HIEN. This led to the concept of socio-technical systems theory which argues that managers need to fit or jointly optimize the workings of the technical and social systems. they must analyze how the change will affect the organization. managers must ensure that technology. Then. a company remains in inertia without change. including Demming and Juran. goals and structure. and determine which type of change to pursue. Evolutionary change adds small adjustments to strategy and structure to handle environmental changes. structure.3 Evolutionary and Revolutionary Change in Organizations Change is classified as evolutionary change. (CSU) Evolutionary Change I: Socio-Technical Systems Theory Sociotechnical systems theory contends that managers need a fit between technical systems and social systems or technology and culture.Lewin’s Force Field Theory of Change shows the opposition between the forces for and against change. workers needed cooperation and adopted an informal structure. the forces for change must increase while resistance to change decreases.2) Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Managerial Implications Managers must continuously monitor the environment to identify the forces for change. sudden and drastic. PG. coal mining in Britain changed from small batch to mass production. or revolutionary change. With small batch. and culture are matched. Total quality management uses sociotechnical systems theory. MBA. If change occurs. (Fig. Consultants recommended decentralizing authority to the work group. The new technology did not meet productivity forecasts because the new structure abolished the support system and informal relationships that fostered group cohesiveness. 10. restructuring. 10. When the forces are in balance. Revolutionary change results in new operating methods. 2) The implementation of TQM begins with the commitment to quality. letting them design efficient procedures and control quality.efficient. There are many different reasons. Organizational Insight 10. enhance quality. What are the advantages of flexible workers? A. Culture must value TQM. replacing numerical targets with a focus on customer service. reduced boredom and increased incentives for quality. Control is attained by mutual adjustment and decentralization. the customer response time was reduced from several hours to 30 minutes. . TQM empowers employees. Q. Manufacturing aims for fewer defects. By examining the processes. and quality circles develop TQM norms in functional areas. It needs to become a way of life in an organization as opposed to a quick-fix program. The goal of TQM is continuous improvement to decrease costs. many organizations are finding it easier to achieve their goals by using flexible workers and teams. Flexible workers can be transferred between departments and functions as demand changes. it changes their routine (habit). Costs are reduced as workers aim to improve quality. Quality circles are groups of workers who meet regularly to discuss how to improve performance. MBA. (Table 10. Quick response to environmental changes. and eliminate waste. PG. (CSU) A. and is a much larger change than many organizations first anticipate.2: Citibank uses TQM to Increase Customer Loyalty Citibank implemented an organization-wide TQM program designed to address the main customer complaint that was associated with transactions taking too long. Why would managers resist this type of positive organizational change? PHAM HOANG HIEN. In addition. Q. Employees aim to improve customer service delivery. but some sources relate to managers having to give up power and decision-making ability. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Evolutionary Change III: Flexible Workers and Flexible Work Teams In implementing socio-technical systems theory and TQM. the TQM program reduced the number of handoffs needed to process a loan request by 75%. better understanding by learning one another’s tasks; and combining tasks to increase efficiency and reduce costs. Flexible work teams are groups of employees responsible for completing a stage of production. Groups of assembly line workers are assigned responsibility for one stage of manufacturing, such as producing a car transmission. A flexible work team is selfmanaged; members jointly assign tasks and transfer from one task to another. To produce cars, different teams assemble different components and deliver those components to the final-product work team. Customer demand determines team activities as each team alters activities to the pull coming from the output side of production. (Fig. 10.3) Organizational Insight 10.3: Flexible Work Teams at Globe Globe Metallurgical Inc., a specialty steel producer, wanted to implement flexible work systems, but the union refused to cooperate. Q. What happened when work teams were introduced at Globe? A. Globe wanted flexible work systems, so the union went on strike. During the strike, 10 managers and 35 employees controlled two of the five furnaces. Productivity increased through cooperation; seven workers, one from each function, operated one furnace. A team leader coordinated the work and schedules. After the strike, Globe needed 120 workers compared to the previous 350 to run five furnaces. Now, employees also participate in profit-sharing. Flexible work teams reduce costs because a quality control function is not necessary; employees control quality during the conversion process. Flexible work teams try to improve efficiency. New ideas begin in quality control circles, meetings to improve productivity. Experienced employees train new members, and everyone is responsible for hiring new workers. A team culture emerges, and managers merely facilitate activities and help develop improved procedures. Organizational Insight 10.4: GM and Toyota Give Plant a New Lease on Life GM closed its Freemont plant in 1981 due to poor productivity and then formed a joint venture with Toyota, New United Motors Manufacturing Inc. (NUMMI), using Japanese management techniques. Q. Describe the teams at NUMMI. A. NUMMI divided workers into 350 flexible work teams, consisting of five to seven members and a team leader. Each worker performs the tasks of others, and jobs are rotated. Workers try to improve on tasks and monitor quality. Teams design jobs, and managers offer support and supervise activities. NUMMI has no layoffs and provides training, plus control over the production line. By 1986 Fremont doubled its previous PHAM HOANG HIEN, MBA, PG. (CSU) productivity and surpassed any other GM plant. Drug abuse and absenteeism fell sharply. Flexible workers and teams result in reciprocal task interdependence. Research has shown that effective teams increase efficiency and organizational performance with no change in technology. These methods also apply to service organizations. McDonald’s uses a just-in-time inventory system. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Revolutionary Change I: Reengineering Reengineering, a term popularized by Hammer and Champy, involves rethinking business processes, activities that cross functional boundaries. Processes, not functions, are the focus of attention. Reengineering involves reorganizing a process, such as materials management, to create value. Vertical and horizontal communication and coordination are difficult because purchasing, production control, and distribution have their own hierarchies. Managers focus on business processes, which is any activity that cuts across functional boundaries. Slow production and increased costs lead companies to redesign materials management. (Fig. 10.4) Three areas of responsibility can be integrated into one function with one hierarchy of managers, and this arrangement improves communication and coordination. (Fig. 10.4b) Steps for successful reengineering: organize around outcomes not tasks; have those who use the output of the process perform the process; and decentralize decisionmaking to the point where the decision is made. Reengineering can improve integration between functions and solve control problems. If a company becomes involved in large, complex activities, it needs a more complex structure. Organizational Insight 10.5: How to Stay on Top in the Greeting Card Business Hallmark discovered that once a new design for a card was printed, it took about 3 years to get the product to the market. Work teams examined the business process, and now the product reaches the market in a matter of months. Q. Are these the result of TQM or reengineering? PHAM HOANG HIEN, MBA, PG. (CSU) A. The two concepts compliment each other. Hallmark needed to reengineer in order to provide customers with a higher quality product. TQM is a continuous process, so Hallmark should continue to find ways to produce products better, cheaper, and faster. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ E-Engineering is a term used to refer to companies attempts to use all kinds of information systems to improve performance. Revolutionary Change II: Restructuring Restructuring is a method used to change task and authority relationships to improve organizational effectiveness. The drive to decrease bureaucratic costs results from competitive pressures. Mergers and acquisitions in many industries such as banking have led to downsizing because fewer managers are needed. Other companies have reduced staff to match competitors. The negative effects of downsizing include overworked managers and lost opportunities. Companies that fail to control growth must downsize to remain competitive. Revolutionary Change III: Innovation Innovation is the successful use of skills and resources to create new technologies or new goods and services. 10.4 Managing Change: Action Research Lewin’s Force Field Theory of Change shows the opposition between the forces for and against change. When the forces are in balance, a company remains in inertia without change. For change to occur, the forces for change must increase while resistance to change decreases. (Fig. 10.5) Action research is a strategy for generating and acquiring knowledge that managers can use to define an organization’s desired future state. It consists of the following steps (Fig. 10.6): Diagnoses of the Organization Managers must first recognize the existence of a problem that needs to be solved. This is done by identifying a gap between desired performance and actual performance. PHAM HOANG HIEN, MBA, PG. (CSU) Evaluating the Action is the final step in the process.Determining the Desired Future State After identifying the present state. OD Techniques to Deal with Resistance to Change The following are tactics that managers can use to deal with resistance to change. Top-down change is implemented by managers at a high level in the organization. External change agents may be used. Managers assess the degree to which the changes have accomplished the desired objectives. First. change. members at all levels of the organization must be rewarded for being part of successful change efforts. managers identify possible impediments to change at all levels. The second step is to decide who will be responsible for actually making the changes. Internal change agents are managers from within that are knowledgeable about the situation. 10. Managerial Implications Managers must develop criteria to evaluate whether a change is necessary. PHAM HOANG HIEN. The third step is deciding which specific strategy to use to unfreeze. Implementing Action Implementation is a 4-step process. action research must be a habit or a norm for every organizational member in order to be effective. knowing that the change will reverberate at all organizational levels. The goal is to improve organizational effectiveness and to help people reach their potential. Bottom-up change is implemented by employees at low levels and will gradually rise through the organization.5 Organizational Development Organizational Development is a series of techniques and methods that managers can use in their action research program. PG. which are outside consultants who specialize in managing change. MBA. and refreeze the organization per Lewin’s model. Institutionalizing Action Research Like TQM. and carefully design a plan that minimize resistance. the next step is to identify where the organization needs to be in the future. To assist this. (CSU) . One impediment to change is that participants are uncertain about what is going to happen. Participation and Empowerment. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Facilitation. Bargaining and Negotiation. Empowerment has changed the nature of their jobs. People that are involved in the change and decision-making process are more likely to embrace rather than resist. PG.Recognizing that each individual is different also requires them to be treated or managed different. OD Techniques to Promote Change Counseling. MBA.Change causes conflict. Q.People need both training and time off to deal with the stressful effects of major organizational change. and Process Consultation. Manipulation. Sometimes counseling will help individuals understand that their own perceptions of a situation may be incorrect.7: Competitive Advantage Achieving Change Through Empowering Workgroups This case shows how Clorox empowered workers. and bargaining and negotiation are the major instrument used to resolve conflict. (CSU) . Providing them information reduces resistance. the manager was able to focus more on the needs of the customers and suppliers. Are these new “non-manager managers” needed now that the work group is making most decisions? A.Sometimes senior managers need to intervene. Coercion.When all else fails. but they have gained new responsibilities. Sensitivity Training. PHAM HOANG HIEN. Organizational Insight 10. In this case. creating middle managers that have new responsibilities now that the empowered workgroup is making more decisions.These are key elements of most TQM programs. as politics shows that powerful managers have considerable ability to resist change. some individuals need to be threatened with dire consequences in order to get them to change.Education and Communication. What is a business process. All managers get together and discuss whether the organization is effectively achieving its goals Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. In process consultation a trained consultant works with a manager on the job to help improve his or her interactions with other organizational members. Appreciating others’ perspectives allows the groups to work together more effectively. 2. and why is reengineering a popular instrument of change today? A business process is any function that cuts across functional boundaries. (CSU) Evolutionary change makes incremental changes consistently and uses a bottom-up strategy. Team Building and Intergroup Training. Organizational mirroring is a technique designed to get both interdependent groups to see the perspective of the other side. Evolutionary change facilitates learning and response to environmental changes. Reengineering is popular today because all organizations need to continuously find ways to do things better in order to compete. The starting point is to fundamentally rethink how tasks are completed.At the organizational level. They examine their perceptions of the other group. MBA. How do evolutionary change and revolutionary change differ? PHAM HOANG HIEN. Revolutionary change takes radical steps with a top-down change strategy. Revolutionary change overcomes inertia.These techniques are designed to manage change with or between groups. Team building is similar to process consultation except that it involves the entire group worker together. PG. Total Organizational Interventions. organizational confrontation meetings can be used. Why is restructuring sometimes necessary for reengineering to take place? . Intergroup training goes a step further and looks at how different functions or divisions work together. Employees suggest improvements. 3.Sensitivity training is an intense type of training designed for those who have problems working with other groups. can be a very intense experience in that innermost thoughts and feelings are brought to light. and what is its goal? It is a series of techniques that managers can use in their action research programs to increase adaptability. functional. This case shows how dynamic the retail market is. evolutionary. What is organizational development. (CSU) . and what types of changes have been occurring. and the sources of resistance when it will mean the layoff of over 30% of the employees. The plan includes changing from a multidivisional structure to a cross-functional product team structure and implementing a total quality management program. Discuss ways to overcome obstacles to change to move the organization to its desired future state. The students should: 1. They explain why the organization is making the change and what its change strategy is. CASE FOR ANALYSIS Sears Changes Again and Again This case details some major structural and market changes that Sears underwent in the early 1990s. and individual level. and this often involves restructuring the task relationships. What are the main steps in action research? The steps are detailed in Figure 10. They examine whether the changes are revolutionary. a more efficient structure often emerges. PHAM HOANG HIEN. The point is that organizations need to continuously look for more efficient processes. ORGANIZATIONAL THEORY IN ACTION Each small group of students represents one of the big three automakers and plans a change to remain competitive. for example. The Ethical Dimension Students assess the ethics of reengineering. Discuss the obstacles to change at the divisional. are using flexible work teams in place of a mechanistic hierarchy.6 5. Many organizations.Because by completely rethinking a business process. Analyzing the Organization Students examine the extent to which their organization has been involved in major change efforts. 2. Making the Connection Students will find an example of an organization undergoing a major change. MBA. 4. PG. The goal is to improve organizational effectiveness and to help people in organizations reach their potential and achieve their goals. like sunglasses. Engineering designs sunglasses. You are a customer who wants a certain product. As a follow up. Martinez sold off unprofitable ventures. PG. and marketing.” When the CEO changed in 2000. divide the class into two groups. They all cooperate to design and commercialize the product. PHAM HOANG HIEN. including emphasizing “hard side” appliances and tools as opposed to clothing. TEACHING SUGGESTIONS 1. coercion can sometimes have really negative effects. Search for recent articles on Sears that describe the impact of these changes. attempting to sell women’s clothes and market to the “middle-American mom. Manufacturing produces the product and gives it to marketing. Ask a student in the back row to come and sit up front. Group one can produce what you want quickly and at a lower cost. The point is that students need to match the technique with the situation. 4. (CSU) . MBA.1. They ask you what you want and you describe it. but simply providing more information may not be effective. 3. 2. This allows students to see how dynamic the retail environment is. 2. Group two is organized into the following functions: manufacturing. To illustrate the importance of cross-functional teams. How effective have its recent change efforts been? Answers will vary. What were the major changes that Sears made over time? The major changes involved altering dramatically the strategy and structure. engineering. the new CEO made more dramatic changes. He also dramatically changed the target market. and watch the reaction. R&D. Engineering redesigns the product and sends it back to manufacturing. For example. Manufacturing complains about the high costs. Marketing says this product is not what customers want. R&D comes up with the idea. Group two takes longer. You could also have them examine how the competitors respond to the changes that Sears makes. Group one consists of 10 members who represent various functions. Discuss all techniques through coercion. ask students how they would manage the above changes. and how even small changes can make us uncomfortable. This a good illustration of habit. Assign the models in the chapter to individuals or groups to explain to the entire class with examples. including the famous Sears Tower. Ask students how they would respond to changes in the structure of the class.