ODC Cases

Case 1 United Products, Inc.Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis United Products, Inc., is a small office products and supply company, headed by the son of the founder, George Brown, President. Brown is a laissez-faire president/owner who is about to leave on a three-week European vacation. He doesn’t want much growth because he is unprepared to put forth extra effort. Growth is limited by his motivation to work harder. Students will tend to be critical of Brown, his management style, and organizational strategy and structure. Brown has a good track record as president: His company has grown at an enviable 20 percent a year, and the functional organizational structure works well. Brown knows how to delegate and decentralize control. He allows employees to demonstrate their abilities and rewards them for performance, and he creates an enjoyable organizational culture. His time on vacation or playing golf is a tribute to his management skills and ability to design a structure that allows for delegation. The case considers basic management issues such as what organizations do. Teaching Objectives 1. To familiarize students with small company operations and present the meaning of competition, strategy, and structure. 2. To critique the management style of a president who appears lazy, but is actually entrepreneurial. 3. To expose a functional organizational structure and a simple hierarchy and show role relationships in an organic structure. This case can be used after Chapter 1 or 2 as the first case of the semester. It is easy to analyze and understand, and is a good preview for many organizational theory topics in the text. Encourage a negative perspective of Brown and then show the opposite side of the picture. This strategy promotes debate, and also allows the students to begin to think creatively about management. Pop Quiz Questions 1. What kind of structure does United Products use? Answer: A functional structure 2. True or false: George Brown delegates too much authority to lower-level employees. Answer: False Issues and Discussion Questions 1. Critically evaluate George Brown’s management style. What does he do well or poorly? Discuss his personal attitudes and behaviors that appear to be somewhat negative: 1. By his own admission, he doesn’t work long hours. 2. Coming from a wealthy background, he lacks ambition and drive. 3. He is not willing to exert effort and energy to help the company grow faster than 20 percent per year. 184 4. His family comes first. 5. He took a 10-month vacation from his company a few years ago. Consider his managerial policies: 1. There are no formal job descriptions. 2. He has very conservative financial policies and avoids all debt. 3. There are no specific performance standards for employees; salespeople have no specific sales quotas, but are paid a percentage of sales. 4. There is no formal planning process. 5. There are no profit goals. 6. The size of the workforce and facilities is too large for the volume of business, thus increasing costs. 7. There are very weak training programs; employees train themselves. It is clear the company is not doing well, and that Brown is a lazy, spoiled millionaire. 2. How well is UPI doing? From a financial standpoint UPI is very successful. Sales have doubled in the last four years. In 1973 sales were up 22 percent, profits rose 40 percent above 1972, and net worth increased by $123,500. From the stakeholders' viewpoint, employees earned above-average wages; sales suggest customer satisfaction. Brown goes out of his way to create a good working atmosphere, and has a personal relationship with employees and high ethical standards. It seems that the organization is satisfying stakeholders. 3. What explains UPI’s level of performance; for example, is it Brown, luck and chance, or the strategy pursued by the company over time? The question arises as to why UPI is doing so well. There will be many reasons offered for the success of the company. Write them on the board before coming to any conclusions. Some students will attribute UPI’s success to Brown’s personal actions; play this down and focus on other factors. Maybe it is chance and luck, the highly motivated sales force, or the strategy developed by Brown’s father. Consider the company’s strategy. • • • • • • UPI’s product lines are broader than its competitors; it carries over 3,500 items in eight major product categories. This means its customers may need to deal only with UPI. Limiting contact with many suppliers gives UPI a competitive edge. None of its rivals offer such a wide range of products. UPI offers a very high level of service, is responsive to customer needs, maintains large inventory stocks to shorten delivery times, and offers good repair services. UPI continually adds new product lines and adds additional salespeople to meet customer needs. To provide the high level of quality service and maintain expensive inventory, UPI charges a price above the level of its competitors. Its prices are 10 percent higher than competitors—the premium customers pay for good-quality service. UPI is doing a good job of managing its environment and meeting stakeholder needs. UPI is pursuing a differentiation strategy and is offering a product and service that customers perceive to be unique and worth a premium price. Because the company operates only in the Northeast, its strategy could be called focused differentiation strategy as opposed to a strategy pursued at the national or global level. Its strategy could be the chief reason for its success, but the question arises as to who devised its strategy. 4. Who was responsible for orchestrating UPI’s strategy? 185 Brown, because he decided: • When to add product lines • To add new salespeople • On the differentiation, high-service/high-price strategy • On UPI’s structure to match strategy So, has Brown been a good leader? Students must reassess Brown’s role, and his apparent laziness has to be balanced against his successful strategy. Perhaps he doesn’t work 12 hours a day because he has done everything right, particularly in designing the structure to let people work independently. 5. How has the way Brown designed his structure helped UPI? How does UPI’s structure help explain his personal and managerial style? UPI’s structure can be analyzed, and it becomes obvious that Brown has designed UPI’s structure to allow his employees to perform roles effectively. Being a small company, UPI has a functional structure, like the B.A.R. and Grille. But unlike many entrepreneurs who are afraid to delegate responsibility and make all decisions themselves, Brown had recruited a general manager, Hank Stevens, and has decentralized operating responsibility to him. Brown retains responsibility for strategic decision-making and makes decisions for the future, but Stevens controls daily business, freeing up Brown to plan and think ahead. Brown created the new level of manager in the hierarchy and had all the functional managers report to Stevens. Stevens is also the sales manager and performs a dual role. UPI employs 34 people and has four levels in the hierarchy. In terms of the design challenges discussed in Chapter 2: 1. UPI is a simple company. It has a low degree of differentiation and needs only a low level of integration. 2. Brown has decentralized all day-to-day decision-making and centralized all strategic long-term decision-making. 3. Brown makes limited use of formalization and encourages the use of mutual adjustment, meeting with his managers regularly where issues get thrashed out. 6. Because it is a small company, the informal organization and organizational culture play very important roles in coordinating and motivating employees. Brown has designed a relatively organic structure in which his employees have freedom and autonomy to respond to customers’ needs and to search out new accounts. They are rewarded with a generous commission system. The structure allows UPI to perform well and meet its goals. It gives Brown the freedom to plan for the future. He may be taking European vacations, but UPI’s strategy is clearly on his mind. 186 7. What problems might Brown and his managers confront in the future in operating UPI’s structure as the company grows? Brown’s company is growing, and he has sought out other companies for mergers to become the dominant regional competitor. As his company grows, he needs to separate the general manager role from the sales manager role and employ a sales and marketing specialist for training. He may need to adopt a divisional form of organization, probably a product division structure, and divide up the 3,500 products UPI sells into three or four main product categories. Thus he may need to increase UPI’s level of differentiation, which will require increased integration and formalization and standardization. 187 Case 2 The Paradoxical Twins: Acme and Omega Electronics Teaching Notes Copyright © Gareth R. Jones, 1994 Synopsis Based on real events, this case is very useful for discussing the differences in the way organic and mechanistic structures work. It describes two organizations, Acme and Omega Electronics, that are bidding for the same contract for manufacturing a memory unit to be used in a photocopier. They have to meet a deadline to build 100 prototypes that satisfy the customer—a large photocopier manufacturer. Omega, which has an organic structure, wins the race and builds a more reliable memory unit than Acme, which has a mechanistic structure and is often late and relatively unreliable—many of its prototypes fail to work. Omega even corrects a design error in the original blueprint, which improves product quality. However, each company is given half the order, and Acme takes advantage of this opportunity to experiment to find ways to reduce its costs, whereas Omega does not. The result is that Acme learns to reduce its costs and offers the photocopier manufacturer a 20 percent price reduction so that it eventually wins the whole contract. Omega may have won the battle, but Acme has won the war because its mechanistic structure fosters a concern for technical efficiency and cost reduction in what is a routine manufacturing environment. Teaching Objectives 1. To examine the advantages of an organic structure compared to a mechanistic structure. 2. To understand the need to design a structure that is simultaneously mechanistic and organic. 3. To examine the different ways for organizational effectiveness. This case can be used in conjunction with another one in this section. It is best used after Chapter 2. Pop Quiz Questions 1. Does Acme have an organic or a mechanistic structure? Answer: Mechanistic 2. Which company, Acme or Omega, eventually won the contract for the memory unit? Answer: Acme 3. Which company produced a prototype quicker? Answer: Omega Issues and Discussion Questions 1. Using the mechanistic and organic structure arguments developed in Chapter 2, compare and contrast the management styles of Acme and Omega. Acme uses a mechanistic structure. Its president, John Tyler, has a centralized management style and runs a very tight ship. Communication is top down. Interfunctional coordination takes place through him, as the different functional managers relay information to him, and he decides what information and orders to give other functions. Acme has a typical functional structure. You may want to make an 188 What customer would not choose Omega and pay a higher price for speed and reliability? However. he believes. an error that required major design changes. 1 to show students what the structure is and how it works. 2. functions adjusted smoothly to the changes because of the high level of mutual adjustment in coordinating. Once the product was developed. How do the differences between the companies' management styles explain the way they coordinated the production of the memory unit prototypes for the photocopying customer? Which company did better? Because of its mechanistic structure. Tyler uses this structure to control his company’s high-volume mass-production technology. they went back to the drawing board. create barriers to communication and slow decision-making.” Rawls uses an internal systems approach to measure effectiveness and values the ability to respond quickly to changing events. they discovered an error in blueprints. It continued to ride down 189 . Acme manufactures and assembles circuit boards. Following product development. Omega did not reduce costs. believes that the company is small enough for people in different functions to coordinate and solve problems themselves. in Omega. the president. some managers feel they spend too much time in meetings “filling everybody in on what is going on. and a highly reliable prototype—much more reliable than Acme’s. The case relates that when functional managers finalized assembly plans. however. There was a longer start-up time. Omega’s decentralized. The management team as a whole makes decisions. Omega was more effective when evaluated by these criteria. Tyler believes that Omega is in business only because demand is high for circuit boards. Acme did. correction of errors. the prototype order was the prelude to a routine manufacturing contract for hundreds of thousands of memory units. the rules changed because the issue was the cost of the product. When Acme learned of the changes Omega had discovered. for example. Acme’s different functions contributed separately to the planning needed to produce the memory unit. organic approach allowed for the building of prototypes 10 days faster than Acme. Organizational charts. which had a 10 percent failure rate. and activities were coordinated sequentially through Tyler. Tyler has a technical approach and values efficiency. If Omega was so much more effective than Acme.overhead of Fig. pointing out the way communication takes place within the hierarchy up to Tyler. however. by working out efficient manufacturing procedures or seeking lower-cost inputs. Omega has an organic structure. because Jim Rawls. but problems encountered later were solved quickly because of a high level of coordination. The changes they recommended not only improved quality but also prevented a bottleneck in production (a problem Acme experienced) and a delay. however. although Acme’s prices were lower than Omega’s. Here Acme excelled. and apparently Tyler believes that a mechanistic structure allows him to control costs. He has a decentralized management approach and fosters lateral communication between functions. It is related in the case that Acme’s costs have been consistently below those of Omega and that his company has consistently beaten Omega for contracts of efficiency. why didn’t it win the final contract? How can you account for the photocopier manufacturer’s decision? An organic structure has advantages over a mechanistic structure as to innovation and adjusting quickly and smoothly to customer demands. each function’s planning was interrupted and sent each back to figure out how to assemble the memory unit. When unexpected problems arose during planning. a routine manufacturing activity. In Omega the functions all planned for the new product from the beginning. Were they low enough to make up for lower reliability? 3. as alluded to in Chapter 2 and fully discussed in Chapter 5. Each company has something the other needs—Acme needs Omega’s skills in cross-functional coordination. mechanistic and organic structures have different values—different organizational cultures that might make merger very difficult. Acme won the final race over Omega. Omega values cooperation and innovation and uses participation. 190 . to speed product development and manufacturing. Its mechanistic structure provided it with the management system and incentives needed to improve and reduce its manufacturing process. or will managers leave after a merger? A discussion of the problems involved in marrying two different organizational cultures ends the analysis. Omega needs to standardize activities and to develop better monitoring and evaluation systems—using TQM—to reduce costs. 4. more effective organization. Do you think Acme and Omega should merge to better compete in the future? What problems might be encountered in such a merger? The question can be raised about a merger to bring out the problems surrounding mergers. What changes would you recommend to Acme and Omega if they are to survive in the future in this increasingly competitive industry? Both companies need to become simultaneously mechanistic and organic in structure to survive. Omega needs to realize that too much integration slows decision-making and raises costs. On the other hand. and increase integration by establishing cross-functional teams. so that like the tortoise. Acme has a concern for economy and frugality and uses an autocratic. Each company needs to move more toward the middle so that flexibility and innovation balance technical efficiency. However. As the pace of change in the industry quickens. centralized way of getting the job done.the experience curve to find new and better ways of reducing costs. the hare. Is it possible to harmonize these values and create a new. Omega needs Acme’s skills in controlling operating costs. 5. Acme must coordinate between its functions better. Manufacturing has all the power. Inc. and 6. This sequence exposes the meaning and significance of the mechanistic-organic distinction and provides an example of contingency theory. (CCC) is about a routine mass-production organization that is experiencing conflict between the manufacturing and sales departments. To show the power of a budget in shaping expectations and behavior. What structure does the Continental Can Company as a whole use? Answer: Geographic structure Issues and Discussion Questions 1. 3. Continental Can Company of Canada. To link organizational design to the contingency approach. Pop Quiz Questions 1. changing environment. The issue is how to change the way the company operates and improve its effectiveness. 4. CCC is in a stable environment. Ltd. employs highly skilled people. has simple tasks. 5. They have no incentive to be responsive to the needs of the sales department. It should be used after Chapter 6. What kinds of organizational design choices has CCC made about the four design challenges discussed in Chapter 4? 191 . Teaching Objectives 1. and uses an organic structure. Ltd. Jones 1994 Synopsis The case allows an in-depth analysis of a mechanistic structure and allows students to apply the organizational theory concepts from Chapters 4. 2. Students should not be asked to provide a written report on this or the TRW case. and the TRW Systems case should follow (a two-class sequence) to illustrate the workings of an organic matrix structure. Teaching Notes Copyright © Gareth R. or Bennett’s Machine Shop. It takes about an hour to analyze the issues and see how organizational structure operates. Sales are declining somewhat and quality is going down. These cases should be presented by the instructor to bring out interesting and valuable implications and protect their teaching value. uses a mass-production technology. To show the design choices that create a mechanistic structure.Case 3 Continental Can Company of Canada. while TRW is a high-tech company. Use this case after United Products. Laurent plant use? Answer: Functional structure 2. 5. and uses a mechanistic structure. operates an intensive technology in a dynamic. To demonstrate a classic example of production-sales conflict. What structure does the St. To use organizational theory concepts to analyze an organization. and managers are rewarded for reducing costs and increasing efficiency. subordinates are all doing similar. There is a low level of horizontal differentiation. the other functions are manufacturing support functions like production control and quality control. the St. The point is to look at where important or significant decisions are made in the hierarchy. one large plant might experience diseconomies. The information gives the impression that foremen have a high level of decision-making authority. the assistant plant manager. The needs of regional markets differ. What kind of structure is it? A functional structure: The main function is manufacturing. it is a simple organization or a low level of complexity.a. Fox. Standardization—Mutual Adjustment 192 . There is a large variety of different products. CCC makes a wide variety of different kinds of cans. research and development. so it is easy to monitor and evaluate activities. and they are all in manufacturing-related functions. To obtain economies of scale. d. People lower in the hierarchy handle only routine problems. the plant manager. This means that CCC has a relatively tall structure. Integration Mechanisms Integrating mechanisms include: • • • • Budget Bi-weekly production control meetings at which quality control is not present Formal once-a-month budget meeting Some unscheduled meetings Conventional integrating mechanisms fit the low level of differentiation—when a company has a low level of differentiation. it requires only a low level of integration. and 500 employees. Laurent plant has a tall. b. but all are manufacturing oriented—no sales. Is this too big? No. it uses a geographic structure because different plants are located in different parts of Canada. including shop floor employees. simple. routine work. So. is there a high or a low level of horizontal differentiation—division of labor and specialization? There are many different departments shown in Exhibit 1. c. Why does it have many plants? Why not just one big functional structure? • • • • There are high costs of transporting bulk commodities like cans. At the company level. Horizontal Differentiation Inside the St. Is CCC centralized or decentralized? CCC is highly centralized: Fox and Andrews solve problems at the top. has a span of control of 8 subordinates and Andrews. and some students will argue that this implies decentralization. or finance. centralized functional structure. CCC is tall and centralized. has a span of control of 15 subordinates (there are three shifts). Vertical Differentiation There are six levels in the hierarchy. and this is always higher up in CCC. Laurent plant. and CCC has a geographic structure. 3. The result is that the budget limits their behavior because they must meet the budget and reduce costs. how would you describe CCC’s approach to coordinating and motivating employees? With its tall. the contingency approach can be drawn out in more detail. control the manufacturing process. 2. Customer responsiveness and quality are not rewarded—only reducing costs—so managers have 193 . Its relatively routine. From a contingency perspective it matches: • • • • Its routine mass-production technology. Manufacturing managers share a common language of efficiency and economy. The material on technology and the environment has not been covered yet. highly centralized. including the budget. Managers at the St. Social networks among managers are based on the ability to influence and affect the manufacturing process. What problems are occurring in the St. The St. and simple functional structure. but in general the mechanistic structure is appropriate. stable environment. 4. There is little cross-functional communication. so this discussion can only be brief. e. the company has created a mechanistic structure to coordinate and motivate employees.Rules and procedures. There is a high level of standardization. This orientation results from their interests. This is the typical structure for a mass-production setting. if the case is used late in the course. backgrounds. and experience. Are CCC’s organizational structure and design choices appropriate? The company has specific problems. b. The budget. Given these design choices. However. and a strict budget is used to evaluate plant performance. Its low-cost strategy The low level of skills and participation it expects from its workforce. given CCC’s efficiency-driven approach. All the manufacturing managers’ yearly bonuses are linked to targets set in the budget. roles and authority relationships are clearly defined. Subunit orientation. With the structure identified and the reasons why it is appropriate outlined. and little use of mutual adjustment. they have little interest in sales. Why are these problems occurring? a. Laurent plant? The basic problems are: • • • • High level of conflict and lack of integration between manufacturing and sales Falling sales and a lack of response to customer needs Deteriorating product quality Lack of cooperation and trust between foreman and schedulers 5. The emphasis is on top-down communication. Formal-Informal Organization The informal organization parallels the formal. highly standardized. and there is a high level of personal supervision and control. Laurent plant is organized as a profit center. the analysis can consider the company’s problems and how its structure contribute to them. Laurent plant have a manufacturing subunit orientation. and the budget gives all the power to manufacturing. not to Fox. falling quality. Attempting to maximize production runs means that manufacturing is unresponsive to customer needs. reports to Fox. Changing the budget. production orientation compound the problem produced by the budget and employees’ backgrounds. and quality control. by maximizing the length of production runs to minimize the downtime to retool to produce different kinds of products. students want to alter the hierarchy and give sales more power than production. The low level of differentiation at the plant level—sales is not even inside the plant—promotes manufacturing. and they control operations. who reports to a corporate executive. but Fox and Andrews want to reduce costs. Changing the budget changes the incentives and motivation of production managers. What changes should be made to the way the St. however. so that the nearest common point of authority between Fox and sales is two levels up in the corporate hierarchy. Or a sales-related goal can be added. The tall. the needs of sales are not being met. who are out of cans. It is easy to see that production is in control. Quality control is similar to production control: Quality is falling. Andrews. or increased customer responsiveness rewarded by measuring decreases in the time to satisfy customer requests. Draw a map of the key reporting relationships to illustrate where problems occur. Structure. Manufacturing is pursuing efficiency goals at the expense of effectiveness goals. Some common suggestions include: 194 . Production control’s responsibility is to plan the manufacturing process to mediate between manufacturing’s cost reduction and sales’ customer responsiveness. This makes it difficult for sales to exert power over Fox. How can the power balance be altered? How can CCC’s structure and the budget encourage a concern for sales and customer responsiveness? 6. the plant manager. Manufacturing’s goal is to reduce costs. There is a power imbalance resulting in falling sales. Usually. and this reduces quality and results in customer returns. meet the budget. Increased product quality could be rewarded by measuring reductions in the number of returns. plant managers have no incentive to respond to sales’ requests. and increased returns. Inside the plant. but no formal reporting relationships. however. and who have a dotted-line relationship with the foreman. Plant managers have all the power in the tall. Changing the structure. Laurent plant is operating to solve its problems? a. Downtime raises costs. d. headed by Whitelaw. centralized functional structure and the mechanistic. this is difficult without upsetting the balance of power. centralized hierarchy and sales has none. Andrews oversees the foremen who are responsible for the production process in three shifts. The other key functions or departments are production control. Some conflict between sales and manufacturing is inevitable because of incompatible goals. c. Only manufacturing goals are pursued in the St. 7. Machines are not serviced enough. Laurent plant.no incentive to respond to the needs of sales. In CCC. Students can offer suggestions about changing reporting relationships to force Fox to pay attention to sales and to change manufacturing managers’ orientations. The budget is an important mechanism for maintaining cost control. targets could be relaxed. Because manufacturing has the power. This means that foremen-schedulers have an informal responsibility to coordinate activities. particularly to late customers. The district sales manager is outside the plant and also reports to a corporate executive. So sales suffer when manufacturing refuses to meet customers’ requests. Draw a diagram of the key roles in the plant to show where problems are occurring. b. Whitelaw is in charge of those who schedule the production runs. Incompatible goals. These corporate executives report to a common superior. and get their bonuses. the assistant plant manager. production control. Making Fox responsible for sales forces him into a sales viewpoint and brings sales into weekly and monthly meetings. 195 . who can put pressure on Fox. and show concern for efficiency and effectiveness. Problem— this lengthens the hierarchy. Both Fox and the district sales manager report to the same corporate executive. Problem—this would further reduce sales’ power because sales is lower in the hierarchy. Problem—it’s a manufacturing plant. Put the sales manager in charge of the whole plant. Bring in a new plant manager and have sales and Fox report to the new person. Sales. With a new budget. and quality control can band together to put emphasis on sales and quality goals in meetings. production managers may change orientations. This gives more power to sales and balances power. There is the possibility of assigning a sales manager who reports to Fox and to the district sales manager.• • • Have sales report to Whitelaw. the production controller. production people must be in control. operations. a. To show the design choices that create an organic structure. its design choices. To link organizational design to the contingency approach. the functional and program or project manager. What techniques does TRW Systems use to help its project groups work together better? Answer: T-groups and team building Issues and Discussion Questions Discuss how the matrix structure works. What industry is TRW Systems in? Answer: The aerospace industry 2. but what design choices are involved in a matrix structure? Exhibit 2 in the case shows the organizational chart in 1963. Teaching Objectives 1. the heart of the United States Intercontinental Ballistic Missile (ICBM) Program in the 1960s. 196 . 4. Synopsis TRW Systems Group pioneered the matrix structure to develop the Atlas and Titan missiles.Case 4 TRW Systems Group (A and B Condensed) Teaching Note Copyright © Gareth R. the ones closest to the problems. Jones. or Bennett’s Machine Shop and the Continental Can Company case. Authority and decision-making responsibility are decentralized. the opposite of the Continental Can Co. actually work in the teams. It usually takes 45 minutes to an hour and can be used with the Paradoxical Twins case. It explains why TRW needed this complicated structure to manage its activities and provides an example of contingency theory. 1. 2. To illustrate the workings of cross-functional teams. to illustrate the mechanistic-organic organizational design continuum. Vertical Differentiation There are three levels in the hierarchy: President Rube Mettler. and why it is used from a contingency perspective. Use the case after United Products Inc. make important decisions. It is best used after the Continental Can Company. TRW is flat and decentralized. It offers an in-depth account of the workings of a matrix structure with its advantages and disadvantages. 1994. The number of employees is not stated. but there is a flat structure. Pop Quiz Questions 1. and subproject managers. and the subproject manager. What kinds of organizational design choices has TRW made about the five design challenges discussed in Chapter 2? TRW used a matrix structure. 3. Case 3. Then consider the advantages and disadvantages of the structure. To use organizational theory concepts to analyze an organization. Two programs shown in Exhibit 2 are the Titan and Atlas Missile Programs. since these groups are constantly changing. decentralized hierarchy and focus on mutual adjustment and cross-functional communication. Given the complex nature of tasks. task forces. Standardization-Mutual Adjustment Standardization and formalization play a small role in coordinating and motivating employees in TRW. As a group. Integration mechanisms • • • • TRW’s level of integration should be high also. Vertically. There are not many managers. The informal network of social relationships developed over time is important in determining how teams perform. division of labor is very high. With its flat.b. In terms of Chapter 2. Subproject managers have a functional and program boss. rules and procedures cannot coordinate functional activities. functions are called divisions). TRW’s matrix structure has a high level of differentiation. which means being a part of mechanics. TRW relies on mutual adjustment between scientists. What about the other design choices? d. Informal-Formal Organization TRW makes minimal use of formal hierarchical reporting relationships to coordinate activities. and systems. The matrix is a form of integrating mechanism and is designed to improve coordination. perform an integrating role and coordinate the functions with projects. Thus the matrix structure has a high level of differentiation and integration. how would you describe TRW’s approach to coordinating and motivating employees? TRW designed a structure that provides freedom and autonomy for employee decision-making and uses the project teams to coordinate and motivate members. Horizontal Differentiation TRW’s matrix is based on horizontal and vertical grouping. Given these design choices. Team values and norms derive from informal interactions between scientists and are spread as members move between teams. c. tasks are grouped by functional specialization. Horizontally. 3. but is based on a functional and a project logic and changes as projects change. physical research. and the teams provide the setting for mutual adjustment. Is it? What are the major integrating mechanisms? Using Galbraith’s model: The two boss managers. and informal status relationships between scientists is important as a means of coordination. tasks are grouped according to the current project. e. Are the design choices that TRW has made appropriate for the organization? TRW’s complex matrix design and its organic structure are appropriate because from a contingency perspective they match: • Its very uncertain environment —“a large job shop subject to frequent changes” —rapid changes in technology —increased competition as it gives up protected government contracts • Its complex and rapidly changing products 197 . in TRW. (In the book. 2. TRW has created an organic structure. electronics. the subproject managers working on a project form a team or. the subproject managers. 5. matrix like relationships. what are the implications of this for working relationships? There is an important statement in the case that there is a large gap between authority and responsibility that forces subproject managers and functional and project managers to cooperate to get the job done. 4. role conflict and role ambiguity occur. On the advantage side. and then come to the conclusion that they have equal power. Here. Many employees do not like ambiguous. So. stable environment for routine technology and employees with routine tasks. The nearest point of authority above functional and project managers is the president. under budget. On the disadvantage side. program managers “buy” the time of functional experts who move from project to project as needed. In terms of Thompson’s model. no matter what the cost. the matrix structure matches its activities and environment. This has advantages and disadvantages. Functional and subproject managers are quality and research oriented: they want the best rocket. The functional managers appraise and reward the subproject managers and control functional experts. TRW and the Continental Can Co.• • Its high-tech approach and complex nonroutine research emphasis. and many authority and status problems exist. values. so people lower down solve problems through mutual adjustment. The members of the matrix need strong bonds developed through shared norms and values— values from a cohesive organizational culture. The power balance forces a compromise between cost and quality or efficiency and effectiveness that improves performance. and socialization. From a contingency perspective. What are the sources of power to get things done in a matrix organization? How does this affect relationships among team members and between functional and project managers? Explore the workings of the matrix in depth and consider the power relationships between functional and project managers to expose problems. This paralyzes action and polarizes attitudes. It employs highly educated professionals who respond to freedom to experiment and to make decisions. A matrix would not be suitable in a simple. TRW is high in task variability and low in task analyzability. Another advantage relates to organizational effectiveness. This analysis suggests that a power balance exists between the two roles—they are mutually dependent —but ask students which role has more power. Lack of agreement might lead to conflict and a breakdown of cooperation. Ask students about the goals of project managers and the goals of functional managers. Project managers’ goals are efficiency oriented: they want projects on time. when authority is undefined. In terms of Perrow’s model. that allows them control over activities. it uses intensive technology and has reciprocal interdependence. use different design approaches because they face different contingencies. employees with more responsibility than authority are more flexible and the organization more organic. In a matrix. What other problems does a matrix cause for TRW? • Other problems mentioned in the case include: 198 . There is no appeal to formal authority. it would promote coordination and motivation problems and raise bureaucratic costs. Ask the students to list the sources of power of the functional and project or program managers: Program Managers Functional Managers Money and funding Expertise Scheduling and planning Functional personnel The program managers control the purse strings and project scheduling issues. Professionals are controlled through norms. TRW grew into a huge multidivisional corporation. Formal committees encouraged the cross-fertilization of ideas as the matrix was reestablished. 199 . so promotion opportunities opened up. Between 1961 and 1982. People don’t like ambiguity and prefer their present teams. He introduced a multidivisional matrix structure and reshaped culture by monitoring and rewarding divisional performance according to productivity. What problems might TRW have with its matrix structure as it grows? One major problem is whether a matrix structure is suitable for a large organization and whether TRW can maintain its organic approach as it grows. 6. Different divisions started to compete and refused to share R&D knowledge. Their view was “Why should I give away this information free to another division when it cost us billions to develop?” Mettler had to recapture the cooperation of the early days and increase integration between divisions.• • • • The time spent getting new project teams to run. TRW uses team building and T-groups to develop group cohesiveness and shared values and norms. quality. This is difficult to achieve. Promoting successful people is difficult in a flat hierarchy. Shifting teams causes stress. Stress for team members. and TRW faced problems as it grew. and cooperation between divisions. TRW grew to a multidivisional company as different projects became divisions. attempting to increase profitability by sharing resources and skills among divisions. 3. processing and refining. Pop Quiz Questions 1. It was fully vertically integrated and internalized the value added by petroleum operations. Issues and Discussion Questions 1. The company experienced stiff competition in its core petroleum business when other oil companies 200 . and selling petroleum products through a chain of company-operated service stations. To familiarize students with the problems of managing a multidivisional structure. and politics and the pursuit of divisional selfinterest. The oil company was involved in exploring. What kind of structure does Texana use? Answer: Multidivisional 2. To provide a setting for changing structure to match strategy. To show how organizational politics and conflict result from organizational structure and control systems. so it could be used after the chapter on strategy. The case also brings out the meaning of the strategy and structure relationship and underscores the message that strategy and structure should fit. How has Texana’s strategy changed over time? What is the rationale behind the changes? Texana originally pursued a strategy of vertical integration. This case can be used after Chapter 6 to show the problems of a multidivisional structure. 4. The division. Texana Petroleum is a multidivisional company. 2.Case 5 Texana Petroleum Corporation Teaching Notes Copyright © Gareth R. It illustrates how conflict and politics develop in multidivisional structures with inappropriate integration and control systems. Jones. The case examines how a corporate center solves problems and how organizational conflict and politics emerge. Texana pursues a vertical integration strategy in the oil industry and related diversification in the plasticbased consumer products industries. responsible for coordinating company resources—the Polychemicals Division—enjoys its power as the “resource controller” and frustrates attempts to develop new products to increase their market share and profitability. It is best used at the end of the course. Teaching Objectives 1. after the lecture on politics and conflict. What was Texana’s original strategy and what did it change to? Answer: It was vertical integration. preventing synergies from emerging. The divisions are in conflict. it changed to related diversification. to provide an example of how politics and conflict occur in a multidivisional structure. 1994 Synopsis This case introduces the problems of managing a multidivisional structure. To show how a matrix structure at the multidivisional level can solve problems of politics and conflict. 3. Which is (are) the most powerful division(s). In changing strategy. The corporate center’s policy of evaluating divisions separately against ROI criteria created transferpricing problems between divisions. Control was decentralized to the managers of the various divisions. packaging. including research and development. Texana built upon existing skills in chemical processing and developed the polychemicals division. Polychemicals had no incentive to help the endusing divisions’ business-level strategies because it was not rewarded for cooperation.competed for customers. Lack of control created the context in which politics and conflict could flourish. Texana developed the molded products division. and building products. Texana entered the consumer products businesses of plastic. Because the central polychemicals division controlled the supply of chemicals to the end-using divisions. So. 201 . Polychemicals would be harmed by developing products with uncertain returns. Because the corporate center was uninvolved. Texana was poised to expand market share by providing new and improved chemical and plastic products developed through skills in polychemical processing. Each division had a functional structure with support functions. The philosophy was that decentralized control would allow maximum growth. responsible for developing chemicals for these divisions. Finally. The rationale was to obtain synergies because resources flowed from the petroleum business to the polychemicals division and to the end-using divisions. Profit margins fell as price competition increased. unable to obtain resources to expand their business. by diversifying outside one industry. Decentralized control permitted the divisions to grow. b. It sold the service stations and abandoned oil production for the consumer petroleum market. Each division was a separate profit center. c. Texana’s structure did not match its strategy—integration and control systems were not in place to reap the gains from related diversification. The company changed its strategy to related diversification and expanded into processing petroleum for chemical and plastics products. no integrating mechanisms were in place to foster cooperation. The corporate center’s failure to help create synergies between divisions created a vacuum of power at the top of the organization and allowed divisions to behave according to self-interest. It acquired packaging and building products by buying existing firms to enter these industries. but there were serious problems: a. gains from synergy were not achieved. 2. and the company decided to change its strategy. it maximized ROI and hurt end-users. As a result. which used raw materials provided by Texana’s Polymer and Chemical Division. Another rationale was to enter industries where competition was less severe and profit margins higher than in the petroleum business. and corporate management did not interfere in each division’s businesslevel strategy. Divisional managers were evaluated by return on investment against the budget. and aggressive new managers were recruited to maximize the growth potential of each division. Chart the sources of power of the various divisions in Texana. Texana exploited its competences in chemical processing and was no longer tied to one industry. What structure did Texana employ to pursue its new strategy? What problems did this structure cause the organization? Texana used a multidivisional structure to manage strategy. Scarcity of resources. Status inconsistencies. so polychemicals is unwilling to risk supplying new chemicals with limited demand. The evaluation system is causing problems and provoking transfer-pricing problems. Top management is looking for solutions. It is substitutable for chemicals acquired in the open market. It is nonsubstitutable because the chemicals can only be supplied by the polychemicals division. Polychemicals is more powerful than the end-users because it has the following sources of power: a. Because of its centrality and nonsubstitutability. there is a fight for limited resources. As all the divisions wish to expand. and there is a power imbalance. which have a marketing orientation and are concerned with increasing market share. b. What are the main sources of conflict between divisions in Texana? a. d. This depends on the ability to develop new products from the chemicals supplied by the polychemicals division. In contrast. It is central to other divisions because it supplies resources to the end-using divisions and knows about their demands and needs. The ability of the divisions to grow depends on capital from the corporate center. e. Because of the resource flows through polychemicals. Task interdependencies. 202 . Incompatible evaluation systems. The scientists regard themselves above the marketers. It can cope with the uncertainty facing the end-using divisions. The power of the corporate center is a consequence of its ability to control financial resources. What is the effect of the distribution of power in the organization on interdivisional relations and corporate performance? The power imbalance has led to a high level of politicking and conflict between divisions. The result is the loss of synergies and lower organizational performance. Divisions are rewarded on return on investment. b. c. the ability to generate revenues and increase market share. the polychemicals division views itself as the elite division. It responds to end-users’ needs when it wishes. It has the power. and the corporate center does not intervene. c. d. 4. It is powerful because it has the expertise to produce the chemicals. It can reduce uncertainty because it can supply or withhold resources—the chemicals. The corporate center has decentralized control to the divisions. so polychemicals’ unwillingness to respond to the end-users’ needs leads to conflict. the only power of the end-using divisions is control over contingencies — namely. with polychemicals holding the most power. as this raises costs. 5. Differences in divisional orientations. Polychemicals has a research and development orientation and operates in a centralized way. including polychemicals.Looking at the sources of power of the divisions makes clear a power play between the polychemicals division and the end using divisions. The end-using divisions lack the knowledge or resources to produce chemicals. end-users are dependent on this division. It uses language very different from that of the end-using divisions. Texana can employ more liaison roles between divisions and establish task forces and teams to enhance cooperation. or on how much cost savings are achieved each year against a budgeted target. d. f. marketing. It can centralize R&D at corporate headquarters so that the polychemicals lose some power. 203 . This would remove the division’s incentive to compete with the end-users and allow for its R&D aspirations. It can change the way polychemicals is evaluated. Students can recommend solutions. such as existing divisional orientations or balance of power and lack of by corporate managers. the new CEO alter the design of Texana’s structure to create synergies and improved performance? 6.The way Texana is managing its multidivisional structure is promoting problems between divisions and corporate performance is suffering. • • • • First they decide what to change in the corporation. It can introduce integrating roles and create new positions to feed information between divisions and enhance product development as well as resource transfer between divisions. finance. This structure would increase the power of corporate headquarters. How should Prentice. c. The matrix would involve the top officers of the divisions and corporate center. it can centralize divisional headquarters in one building in Chicago so that managers can easily meet and interact with each other and with corporate managers. Rather than evaluate polychemicals on ROI. and suggest a plan for changing the organization’s structure. a. g. The case generates discussion on the relationship between strategy and structure. Hold a discussion of the utility of these different solutions. e. This would ensure that end-using divisions’ requests for materials are in the interests of the corporation. it could be evaluated on a cost basis. b. The culture is an obstacle to change. and soon. on how efficiently it produces chemicals. Prentice must change the multidivisional structure to reduce the power of polychemicals and increase integration between divisions. On the horizontal axis would be the various divisions. Should the firm move to a multidivisional matrix structure and start with integrating roles and task forces and build a matrix? Or implement a matrix immediately and centralize headquarters in Chicago? Finally. Students can devise a plan for change. they would decide how to evaluate the change effort and how to choose measures to assess the effects of the changes. Next they can chart the obstacles to change. The firm could introduce a multidivisional matrix structure at the corporate level. and balance power among divisions since polychemicals becomes just another division. Then they can decide about top-down or bottom-up change. The debate over the best combination of solutions can be interesting and provocative. on the vertical axis would be the corporate staff offices of research and development (to be created). New managers can change the corporate culture to foster more cooperative values and develop the culture necessary for pursuing related diversification. To enhance cooperation. How should George Prentice change the way Texana manages its multidivisional structure to improve corporate performance? Discuss possible solutions to the problem. Wilbert (Bill) Gore. Used in conjunction with one or both of the other cases on organizational culture. 3. What influenced the Gore system of “unmanagement”? The major influence on the Gore system of unmanagement was the strong leadership of W. Bob Gore. medical products. To illustrate the role of leadership and entrepreneurial vision in creating a culture for an organization. He and more recently his son. it mirrors the position taken in Chapter 7 that cultural values result from people. Teflon. Gore & Associates. arranged into four divisions: electronics. To show how an organization’s culture can be a source of competitive advantage and to demonstrate how organizational structure and culture can facilitate innovation. property rights. and ethics. manufactures a wide range of products derived from polytetrafluoroethylene. Bill Gore exemplifies the visionary.L. PTFE is best known by Du Pont’s brand name. and industrial products. To illustrate the nature of terminal and instrumental values and to show how these are transmitted to an organization’s members. This case is best used directly after Chapter 5 to illustrate the origins and nature of organizational culture. Gore began in 1958 to use PTFE for insulating electric cables. property rights. he envisioned an organization where people were not inhibited by such traditional principles of management as hierarchical levels of authority. 2. 1994 Synopsis This case examines the origin of cultural values and norms. Gore? Answer: Lattice structure 2. W. an artificial fiber frequently referred to as PTFE.L. Gore & Associates Teaching Notes Copyright © Gareth R. Gore himself. Pop Quiz Questions 1. By 1990 it manufactured a wide range of related products. To illustrate how culture results from people. Teaching Objectives 1.L. and ethics. 204 . structure.. fabrics. Inc. charismatic leader who founds an organization that functions according to the founder’s values. It also illustrates how an organic structure works and the design challenges that an organization confronts when it chooses to use this structure. organizational structure. W. Do Gore employees enjoy strong or weak property rights? Answer: Strong Issues and Discussion Questions 1. Jones.Case 6 W. reporting channels. From the very beginning. This case depicts an organic approach and a highly decentralized organization.L. What was the name given to the structure created by W. The case chronicles the growth of the company and the nature of the structure and culture created by its founder. best known for its Gore-Tex fabric. and subordinate relationships. it provides examples of the importance of culture in organizational design and shows that culture can be created to achieve a competitive advantage. Each of these four factors is considered. 4.L. The entrepreneurial culture shows the relationship between organizational structure and culture. to take risks. People. freedom. focus on the four factors that cause cultural values: people. Property Rights and Personnel Policies. What are the values of the Gore culture? The terminal values of the Gore company are high quality. to invest new employees. There are no job titles and minimal emphasis on superior-subordinate distinctions and differences between functions. to respond creatively to new product development or improvement. the people attracted to Gore accept these values. How are these values transmitted to Gore associates? The very word associate–employee is not used by Gore—it is a part of the language that has emerged in the Gore company to transmit terminal and instrumental values. and to use the company’s resources responsibly for innovation and excellence. He made them central to his organization and transmitted them to his associates. The case discusses the norms and rules that indicate appropriate behavior at Gore. A leader who can communicate an organizational direction does not have to use authoritarian approaches and generates greater loyalty. Other ways of transmitting the company’s values are the design of offices and factories. structure. freedom. 2. There is turnover by those who find ambiguity in company operations. innovation. no separate dining facilities. no plush offices for a management elite. no organizational charts. Gore epitomizes the meaning of individualized socialization practices. and the minimum of status differences. and excellence. The instrumental values that guide the achievement of terminal values are fairness. and discretion. freedom. There are no status differentials at Gore: no reserved parking spots except for customers and the handicapped. Employees learn their own roles in the organization. commitment. such as behavior governing travel expenses. Gore saw how the four instrumental values of fairness. What are the origins of Gore’s cultural values? Following the discussion of Gore’s culture and how it is transmitted. The strength of the property rights given to employees can be seen in personnel policies. 3. commitment. the central communal eating areas. The organizational language mirrors the company’s guiding values—fairness. no lengthy policy 205 . and ethics. Based on his experiences in many other organizations. and discretion. This case illustrates the importance of leadership in shaping a company’s development and culture. so using the attraction-selection-attrition framework. Presumably.have carried forward this vision. Gore avoids the we/they atmosphere and has achieved its culture by practicing equality from the parking lot to the office. These policies are based in company culture and explain company success. 4. The vision and values of the founder play a major role in explaining the origin of this company’s culture. New employees are left alone to discover how the organization works and what their role should be. Both Bob and Bill Gore show that strong leadership does not have to be authoritarian. Individualized socialization tactics encourage an innovative role orientation that supports terminal values. and to provide guidance to help newcomers discover their role and behavior. these values become stronger as people become more homogeneous. property rights. The role of existing Gore associates is to be supportive. such as Du Pont. commitment. a direct product of the founder’s leadership and vision. and discretion resulted in entrepreneurship and excellence. their location in attractive areas. Gore’s employees have freedom to experiment. The emphasis is on the maximum amount of self-control and the minimum amount control and direction from written rules and procedures. and no job titles (everyone is an associate). make suggestions. a profit-sharing scheme. Associates are encouraged to make commitments. The interaction of the personal and professional characteristics. Gore’s employees get formal feedback twice a year on their performance from a compensation committee that includes their peers. Gore demonstrates its values to stakeholders by recalling products and absorbing the costs. Gore has reaped the benefits of being a first mover. a flat hierarchy. 1. PTFE-based materials manufactured by Gore have found applications in areas as diverse as insulation cables for the space shuttle. As a major supplier of medical products. They regularly receive informal feedback from their sponsors. To recognize and reward associates’ achievements. giving associates 20 percent of the company. Gore’s decentralized culture. characterized by direct lines of communication. the company has a core competence in applying PTFE to numerous applications. 2. and in general improve themselves on the job. 5. Clearly. Second. Gore’s flat hierarchy and minimum supervision reinforce property rights. (2) promotes innovation—demonstrated 206 . and use of self-managing teams. and an Associates Stock Ownership Program. Gore has a clear and unambiguous set of ethical values that guide behavior. and medical products. Structure. Both are based on the philosophy that employees control their behavior and work effort.manuals. and structure demonstrates the power of culture in shaping behavior and in motivating and coordinating employees. 4. The third source of Gore’s competitive advantage is its culture. The flexible nature of the system allows employees to find suitable roles within the organization The lattice structure demonstrates how an organic structure works and the importance of mutual adjustment as people are responsible for communicating and coordinating to solve problems. Strong property rights encourage a feeling of ownership. (1) facilitates employee commitment. join teams. create new products or production processes. The lattice structure illustrates the design challenges outlined in Chapter 4 and shows how design choices create an organic structure. What does exist is a flexible organization based on fairness and contribution. Gore’s property rights system leads to values that encourage commitment. and employees are encouraged to contribute in whatever way they feel best suits them. 3. Its first-mover advantage is protected by patents and by keeping processes secret. cables in computers. the Gore family clearly articulated a company vision and has pursued it without variation since 1958. What is the source of Gore’s competitive advantage? Gore’s competitive advantage stems from three company features. property rights. really a product team structure in which teams are formed and disbanded as products are developed and marketed. Differentiation—Gore keeps this to a minimum to reduce the problems of integration Decentralization of authority Mutual adjustment The importance of the informal organization Ethics. Gore reinforces these values by using its very flat. no separate compensation systems. outdoor clothing. First. decentralized lattice structure. Gore has established a property rights system that compensates everyone through six-month salary reviews. no fixed or assigned authority. Its first-mover advantage allows for a premium price charged for many products and has helped develop a strong brand name. To have an organization in which everyone has access to others. 8. or the company could fall upon hard times. If the raw material required to make PTFE became expensive or the product or production process were found to be environmentally unsafe or a low-cost or technically superior substitute became available. Subordinates could see these practices as a revolt. Gore could face difficulties.300 employees. The company has not tried to sustain itself through a period of slow growth and/or market reversals. such as IBM. Third. the benefits of limiting facility size outweigh the costs. Gore must innovate. so the size of any one facility is held to manageable proportions. Gore’s culture has been sustained through a prolonged period of corporate growth. divided among 44 plants worldwide. Of course. other companies cannot imitate Gore’s culture without radical destructuring and a change of established cultures. The company exceeds 5. 7. Gore has grown big while remaining small. and (3) allows a quick response to market demands and crisis situations. It is not clear how well Gore’s culture would stand up to adversity. So far. Can Gore maintain its culture as it continues to grow? Gore’s culture is best suited to a small organization. Second. in which people find their niche. Because many of Gore’s products serve niche markets. To reduce risk. and motivated workforce. the number of people must be small. Others could follow the Gore model. but it is doubtful whether an established organization could adopt Gore’s radical structure. the lack of scale economies might not be serious. Other companies. 6. in which teams play a large role. for manufacturing a high percentage of its products. To grow and remain profitable. 207 . Gore’s culture seems ideally suited for innovation. By following this policy. Gore might diversify its material base. and in which formal authority structures are absent. Gore’s personnel practices would at best be unsettling to those in power. Are there any clouds on Gore’s horizon? There are three clouds on Gore’s horizon. Can the Gore management culture work in other companies? Other companies send managers to Gore to learn how to produce a creative. First. have had real difficulties trying to sustain their culture in such circumstances. Yet. PTFE.by Gore’s history of new products. In an established organization with a well-developed structure and hierarchy of authority relationships. Gore is dependent on a single basic material. loyal. Gore has built its culture from its inception. there is a cost to this policy: It limits economies of scale and leads to duplication. Gore’s products are vulnerable to imitation by competitors. Bill Gore recognized this when he decided that no facility should exceed 150–200 associates. To show how interactions among people.L. To achieve this ideal end state. structure. Teaching Objectives 1. It describes the various programs and techniques that 3M has developed to support entrepreneurship.Case 7 Three Roads to Innovation Teaching Notes Copyright © Gareth R. and autonomy to encourage experimentation. a company whose lifeblood is innovation. b. 2. This case is best used after the W. What are the main ways in which 3M tries to create a culture that supports innovation? 3M creates a culture for innovation in the following ways: a. whereby senior managers encourage and support innovation. 2. 3M encourages employees to use 15 percent of their time on projects they choose. To show how a company maintains a culture of innovation. 208 . What percentage of time does 3M encourage its researchers to use on projects of their own choosing? Answer: 15 percent 2. and ethics produce organizational culture. What are the terminal and instrumental values of 3M’s culture? 3M’s main terminal value seems to be innovation—pushing its employees to excel at inventing new and improved products and processes that benefit customers. including cross-functional teams and recognition and reward of employees. and recognize and reward failure. 1994 Synopsis This short case introduces students to the way in which 3M. seeks to promote and maintain a culture of innovation among its employees. Gore case in the same class period. 3M’s goal is that 25 percent of its growth each year should come from new products. Management sponsorship. Jones. 3M develops norms and practices to encourage these values. including the expectation that 15 percent of employee time is for projects they choose with resources provided for these projects. risk-taking. Providing employees with freedom and resources for risk-taking. What is the structural innovation that 3M uses to encourage product innovation? Answer: A product team structure or cross-functional teams Issues and Discussion Questions 1. property rights. It provides a succinct account of 3M’s product development process and how this entrepreneurial company maintains its ability to innovate new products. it promotes the instrumental values of entrepreneurship. Pop Quiz Questions 1. Teams provide autonomy and allow risk-taking and individual decisionmaking. Property rights can be seen. Teams bring about the rapid development of shared norms and values that increase communication and reduce problems of subunit orientations to speed the development process. and provides the resources needed to meet team goals. as 3M tangibly rewards employees through promotion into management in 3M’s dual promotion system. and intangible rewards like its scientists’ hall of fame. manufacturing. f. and the Carleton Society. A product champion supports group members. Ethics can be seen through 3M’s concern for customers and in extensively testing and developing products to meet customer needs. How do the interactions among people. so people from different functions can cooperate and develop the shared norms and values that enhance innovation. process development. which provides tangible rewards. Rewarding and honoring cross-functional teams who introduced successful new products through the 3M Golden Step Program. and structure and ethics combine to influence 3M’s cultural values? Values contribute to culture as product champions and management sponsors provide leadership and support to teams for experimentation. and other functions. 209 . 3. Cross-functional teams and the product team structure provide an organic structure. packaging. empowered to design and develop products to meet customer needs. encourages shared group norms. d.c. Rewarding innovators with promotions. using its dual-ladder system of promotion and the practice of promoting from within the organization. Using product champions to head each team and providing entrepreneurial leadership needed for product development. in research or management. Creation of cross-functional teams from product development. a hall of fame for 3M scientists. property rights. marketing. bonuses for successful new product development. e. and finds that the lumber order is intended to be used as scaffold plank. Teaching Objectives The Scaffold Plank Incident is appropriate for a stimulating lively discussion about ethical behavior and corporate social responsibility. in an offhand conversation with a fellow trader. Students will have different perspectives on the case depending upon which model they use to view and frame the issues.2 in the book in order to bring this point out. and Justice models of ethics. there is no scaffold plank in stock in the city. has made this a test of Bob’s loyalty to the company by writing up a sales order for the lumber and putting Bob’s name on it. It is a short case. Bob becomes concerned that the rough-sawn lumber might be intended to be used as scaffold plank. What position did John White. Bob calls Stan back anyway. Bob has to decide whether he should listen to John White. 2. the owner of the company. and make sure he understands that his quote was not for scaffold plank. This case illustrates well the different styles of thinking associated with the Utilitarian. Later. Draw upon Table 2. Bob’s boss. Malone and Brad Brown. Synopsis A young “trader. but the discussion is sometimes quite intense and can easily fill a regular 50. is inspected and certified to stringent standards to ensure its strength. Bob’s first dilemma is whether or not he should call back his customer. John White.to 75-minute class period. Quality Lumber. Scaffold plank while 3 x 12 and rough-sawn. or follow his own conscience. It is also much more expensive than the lumber Bob gave the quote on. What is scaffold plank used for? Answer: It is a higher-grade lumber generally used by construction workers or window washers that stand on the planks high above the ground.” Bob Hopkins. but the end customer wants to save some money. Used with permission. Moral Rights. quotes a price on a fairly large order of 3 x 12 rough-sawn planks to one of his wholesale lumber company’s best retail customers. Pop Quiz Questions 1. Besides. have regarding whether or not to sell the lumber? Answer: He was in favor of selling it. a well-respected businessman. 1994. Issues and Discussion Questions 210 . knowing it is going to be used for a purpose for which it is not certified.Case 8: The Scaffold Plank Incident Teaching Notes Copyright © Stewart C. It is best used after Chapter 2. Stan. Now Bob’s dilemma is whether or not he should sell the lumber. Bob is advised against calling because it is none of his business what his customer is ordering: Bob’s company has the lumber for sale and somebody wants to buy it. • • The economy is slow and White Lumber Company needs this sale as well as future sales that might be foregone if Quality Lumber is lost as a customer. (Board feet are calculated as the product of the thickness in inches. Bob could agree to sell the lumber. If White Lumber does not sell the 3 x 12 planking. the width in feet. Moberg. Quality Lumber. 1. $13. The order represents a substantial. but not incredible. and the length in feet. should Bob even try to confirm his suspicion that this perfectly legal order o f lumber will be used for a purpose it is not legally certified for? Should the lumber be sold once its intended use is determined? What should Bob do if he decides not to participate in this lumber sale? 3. or the contractor foreman. This Teaching Note will follow that format because it provides an organized vehicle for bringing out all of the relevant aspects of the case. 2. What are the ethical issues? • • • First. and Manual Velasquez. Employees of White Lumber Company—many of whom are far less employable than Bob Hopkins if White Lumber has to have a lay-off. Dennis J.536. the end customer may end up using 2 x 12 planking—an even worse scaffolding solution—because there is no scaffold plank readily available. The foreman at the end-purchaser’s firm The workers who will be standing on the scaffolding • 4.” Academy of Management Review 6 (1981) 363-78. and sell the lumber. 1 211 .536.” (This option would not please Mr. but ensure that the invoice is clearly marked “not certified for use as scaffold plank. Bob’s customer.We generally follow the “seven step moral reasoning model” that was used as the discussion framework for ethical vignettes at the Arthur Andersen & Co. And it would not really do anything for the end- This model is based on an extension of Gerald F. this order is calculated as: Price = [3”x 1’x 16’x 600 pc. White. is going to sell the lumber to a contractor who will use the lumber as scaffold plank. What are the relevant facts in the case? • • Bob Hopkins has a straightforward order for lumber that his company regularly sells without question.] x $470/1000 Bd Ft = $13. Thus. series of Conferences on Teaching Business Ethics1. Cavanagh. What are the possible alternatives? • • Bob could sign the order. “The ethics of organizational politics. sum of money. as is. Quality Lumber. Who are the primary players? • • • • • Bob Hopkins John White—owner of White Lumber Company Stan Parrish—the buyer at Quality Lumber Co. 6. In this case the characters seem to think that OSHA regulations are overcautious. this will be a popular suggestion from the students in your class. (These simplifying assumptions often give rise to criticisms that this model is simplistic. and unable to appropriately consider impacts that are not easily reduced to dollars and cents. The probability of this lumber causing an accident and the severity of that accident should be assessed. fairness. How do you place a dollar value on a life (or limbs)? Students have trouble wrestling with this issue even though we do it all the time in society. The classic case concerning the “exploding” gas tanks in Ford Pintos can be brought up at this part of the discussion as an example of a utilitarian decision that was viewed as unacceptable in retrospect. In the Scaffold Plank Incident. and buyers is being traded off against the safety of the poor worker on the plank. but are they? How can they justify this belief? Justice Approach: The justice approach holds that moral decisions must be made on the basis of equity.) In this Scaffold Plank Incident. 5. often self-serving. If he does this. the actual calculations can be complex when the costs and benefits to all of society must be considered. While appealing conceptually. For instance. because they are not likely to see the invoice. Bob Hopkins has the moral right to not be forced to sign the purchase order. For that reason.) Bob could refuse to sign the order. What are the ethics of the alternatives? Three philosophical approaches can be introduced to students as a way of analyzing the ethics of the alternatives. What are the practical constraints? 212 . In this case the workers have the right to know they are risking their lives on substandard planking material.” attempting to expose the whole situation to protect the lives of unknown workers. especially to quantitatively oriented students who understand cost/benefit analysis. the workers on the planks. and impartiality. the benefits are fairly easily measured once the societal dimension is reduced to the primary stakeholders. These probabilities can then be multiplied times the “cost” of the accident to develop the probabilistic “cost” of using uncertified lumber as scaffold planks. Those rights include: • • • The right of free consent. But the costs can be complicated. brokers. The right of freedom of conscience. at least not immediately. And a decision must not make the least advantaged portions of society worse off. However. the justice model would lead us to conclude that the incomes of the lumber yard owners. In this case. The right to life and safety. Individuals may refrain from carrying out any order that violates their moral or religious norms.• • users. simplifying assumptions are generally made to limit the calculations to only those directly impacted. Moral-Rights Approach: The moral-rights approach asserts that people have fundamental rights as human beings that cannot be taken away by another’s decisions. the installation of seat belts and air bags in automobiles can be projected to save a certain number of lives. Utilitarian Approach: The utilitarian approach to ethical decision-making holds that moral decisions should produce the greatest good for the greatest number in society as a whole. but we generally delay implementation for several years because of costs. he may be fired—or he may not be fired. Bob could be a “whistle-blower. One might want to calculate the cost to the contractor of having to wait for certified scaffold plank to be delivered (an alternative almost never suggested in class). the widow of construction worker. accidents will happen. Our students always want to know what should be done. Are we responsible for righting all the wrongs in the world.15 million dollars to Schree Toth. If they do that. On the other hand.” If the class seems to want to sign the purchase order because “it’s legal.) The article recounts how in 1991. then just remaining “uninvolved” does not really solve any problems. 7. If the discussion lags or the class seems overwhelmingly committed to one course of action. and to agonize over their decision. Would that make a difference?” Or. “How would you feel if you read in the paper that someone was killed in an accident because of uncertified scaffold plank?” (A former student mailed us just such an article from the Johnstown. Joseph Toth. If he cannot do that. a Pittsburgh jury awarded $1. because someone else in his company will sell the lumber to Stan and the dangerous scaffolding will be put up anyway. (We hope. won’t they? This tends to be a lively discussion. We want the students to be developing an ethical reasoning framework for decision-making. rather than just stating their “feelings” without some grounding model. Pennsylvania. It was discovered that Mellon-Stuart had used common planking instead of higher quality scaffold planking in the project. Is there a point where the risk of danger is so small that we don’t have an ethical dilemma? After all.a. who fell to his death when a rotten plank snapped on a construction project managed by Mellon-Stuart. John White has turned this incident into a loyalty test. the instructor may need to play the role of “devil’s advocate. if the whole class seems too willing to refuse to sign the purchase order without facing the seriousness of the consequences. Tribune Democrat dated October 1991. b. what’s the problem?” ask a question such as “What if your brother worked on scaffolding? This might be his company. we can accept the decision. What actions should be taken? Here the discussion must be managed sensitively to ensure that attacks on other people’s positions do not become personal attacks on their character. Bob Hopkins’s job may be jeopardized if he does not cooperate. we want them to identify the issue and alternatives.) 213 . or only those we are directly in contact with? You could also introduce the concept of risk. keep pressing them to see how far they could follow up on ensuring worker safety. It is very difficult for Bob Hopkins to find out who the end-user is in order to protect the workers’ interests. have an ethical framework in their minds to give them guidance. We avoid a direct answer and state that when they are in a situation where they have to make a difficult ethical decision. 214 . Gallo Brothers introduced a new product—a wine cooler—through a new subsidiary..Case 9 Beer and Wine Industries: Bartles & Jaymes Teaching Notes Copyright © Gareth R. It shows how a strategy evolved into a new industry. The case clarifies competition issues in the industry environment. 1994 Synopsis This case is about a new industry—the wine cooler industry—and the manner in which Bartles & Jaymes. 3. The case considers how Gallo Company manages its environment and strategy as the leading wine company in the United States. It links the industry environment to organizational strategy and shows how competition develops in a new industry. It points out that a distinctive competence (e. To demonstrate how strategy develops from a distinctive competence and how firms use their strengths to manage the industry environment. 5. a subsidiary of Gallo Wines. What corporate-level strategy contributes most to Gab’s competitive advantage? Answer: Vertical Integration 2. Then examine how Gallo used its distinctive competences to exploit environmental opportunities by founding Bartles & Jaymes to enter the wine cooler industry. Examine threats and opportunities in the alcoholic beverage industry and the development of the wine cooler industry.g. became the market leader. increasing its competitive advantage. Pop Quiz Questions 1. Jones. The parent company’s strategy helped the new subsidiary’s strategy. marketing and distribution) leads to competitive advantage. This case offers insights into many organization-environment issues and is best used after Chapters 8. To illustrate the importance of developing a distinctive competence to compete in an industry. which became the market leader. To analyze the organizational environment. Teaching Objectives 1. To show how vertical integration helps defend competitive advantage and manage the environment. 4. To show how new industries through new products and how environmental competition changes. 2. It demonstrates the importance of using distinctive competences to manage the organizational environment and allows for an evaluation of Bartles & Jaymes’s strategy. Bartles & Jaymes. Did Bartles & Jaymes pursue a low-cost or a differentiation strategy? Answer: Differentiation strategy Issues and Discussion Questions Begin with an analysis of Gallo and look at the development and nature of its strategy at all levels in the firm. Its functional strategy matches its business strategy. and even the distributors it does not own conform to Gallo marketing practices to sell and distribute Gallo wines. bottled under other names. On the output side. Gallo’s control over the environment through vertical integration illustrates resource dependence theory. They brought out such brands as Thunderbird (a cheap wine. it focused on selling bulk wine. thus increasing productivity. strategy followed the development of these distinctive competences. All levels are complementary and 215 . their image was connected with the jug wine business. Its strategy of vertical integration allows it to control and protect its resources because (1) it avoids the problems of using the market. Besides cheap jug wines.1. Beginning in 1975. they changed their image and became broad differentiators in the wine industry.and business-level strategies occurs as well at the corporate level. The brothers seemed to be in competition: one tried to produce more than the other could sell. It owns more of its distributors than competitors. the Gallo brothers bottled their own wine and concentrated on the inexpensive jug wine end of the market. Gallo’s strategy now is to act as a broad differentiator. such as the expense of middlemen. when the company concentrated on increasing output. Gallo has coopted distributors who rely on it for wine supplies and has power over them. business-. Gallo decides how its wines are marketed in supermarkets. high in alcohol content). From the beginning. (2) it controls the value added at each stage of production. Student can see the reason for Gallo’s success. Gallo enjoys extensive control over product marketing and can promote its own products rather than competitors’. Gallo has pursued a strategy of vertical integration that has contributed in many ways to its business-level strategy. enabling Gallo to become the full-line differentiator. They have expanded their domain and serve niches in the wine market by pursuing a product proliferation strategy. the two Gallo brothers took different roles in the company. Though it is a closely held company. and ships the raw materials needed for glass production (such as lime and sand) in its trucking fleet. and (3) controls distribution complements marketing skills. From the beginning. Their marketing skills have contributed to this change in strategy. Gallo operates in almost every value-added stage in the wine industry. such as Cabernet Sauvignon and Chardonnay. Chart the development of Gallo’s functional-. See Exhibit I. and as a result. They have moved from a focused to a differentiated strategy by serving all market segments. in both the premium. The fit between functional. makes its own bottles. they market a full range of varietal wines. It ships its grapes to its winemaking facilities. Gallo is probably the most profitable wine company in the market today. and how do they fit together to provide the firm with its competitive advantage? At the functional level. medium-priced end of the market. At first. It also makes its aluminum bottle tops in its own manufacturing unit. high-priced end of the market and the good-quality. Gallo’s distinctive competences have been in manufacturing and marketing. It has used strategy to control the environment—each level of strategy reinforces the next and feeds back to the other levels. the other tried to sell more than his brother could produce. The two competences were complementary and resulted in Gallo’s being the largest vintner in the United States today. and to a degree. Gallo controls marketing and distribution. First. it owns one of the biggest intrastate trucking companies in California to handle transportation needs. their jug wine image is fading. Julio became responsible for increasing the output of wine from the family’s vineyards. and Ernest became responsible for finding innovative marketing techniques. and corporate-level strategies. What are the strengths and weaknesses of these strategies. At the business level. with many product lines aimed at all market segments. As marketing skills developed. Gallo owns many of its distributors. 3. Some points to note are: • • • The threat of entry is low. are protected in this respect by their distinctive competence in marketing. At this point. In what ways did the Bartles & Jaymes venture enable Gallo to use its distinctive competences to introduce a new product and expand its domain? The emergence of the wine cooler industry was tailor made for Gallo. discussion can turn to the wine industry and the opportunities and threats the firm is facing from the specific and general environmental forces. Small firms can enter the market. Large. but within each price bracket there is little price competition. Industry competition is high. one of the principal barriers to entry for new firms is the huge marketing expenditures needed to enter these industries. and its top-quality varietals in different price brackets. Large firms with large share of the market dominate both industries. here was an opportunity to add to its product line and capitalize on its distinctive competences in manufacturing. realizing that beer and wine are high in calories. Each large wine firm has its jug wine. It was a perfect opportunity to exploit a new industry. 216 . beer and wine firms responded with light or alcohol-free beers and wines. and as yet there were no barriers to entry. Tough drunk-driving laws and the emergence of organizations such as MADD (Mothers Against Drunk Driving) have affected consumer attitudes toward alcohol and the level of consumption. and corporate-level strategies. Competition is not principally by price. With the consumption of wine expected to level off or even decline. It was precisely this context that provided an opportunity for Gallo and other wine producers—the wine cooler industry. Wine coolers capitalized on the increasing popularity of soda. And firms such as Gallo and Miller Brewing Co. and so on. bottles. but by image and differentiation. and they can counter threats by introducing competing brands. as the resulting mixture was sweet and carbonated. and distribution. suppliers. marketing. (People under 34 are typically the biggest consumers of alcoholic beverages.) To these threats in the general environment. • • b. business-.allow the firm to reap gains from the fit among functional-. Large. powerful suppliers pose not problem for Gallo because it is vertically integrated backwards. its middle-of-the-road brand. half as strong as wine but 30–40 percent stronger than beer). What forces in the specific and general environments of the beer and wine industry result in threats and opportunities for Gallo? a. powerful customers can be a problem in that large distributors control the distribution and marketing of beers and wines. In addition. • • An increasingly health-conscious consumer. General Environment Several forces in the general environment cause problems for beer and wine firms. and so on. It controls the supply of grapes. The product itself was simple to produce (50 percent wine mixed with 50 percent fruit juice to produce a 6 percent level of alcohol. customers. 2. but dominant firms are not threatened. Specific Environment Forces in the specific environment include competitors. demand lower-calorie beers and “healthier” alcohol products. so it faces no threats. The raising of the legal age for drinking and the increasing age of the population are reducing alcohol consumption. Firms are competing for market share. but beer (Stroh’s) or bourbon (Jack Daniels). California Cooler. so should wine coolers change? Similarly. or will it need to introduce new products to compete? The number of flavored wine coolers is increasing. Can Gallo maintain its status by marketing alone. what is the future of the industry? Are wine coolers a fad. Should Bartles & Jaymes expand its product range or concentrate on its present formula? After all. its core business. Bartles & Jaymes was given a multimillion dollar advertising budget to establish the product and achieve market leader status.Gallo quickly exploited this opportunity by creating the product and using its marketing strengths to position the product to appeal to the wine cooler consumer. 4. as is the number of coolers whose base is not wine. but fun and refreshing to drink. The company is expanding California wines to enter the European and the Far East markets. The case documents how competitors have positioned their products and attempted to segment the market to protect and enlarge their domains.” rather than a California beach scene. Maybe Gallo’s should expand globally. no one would want Miller Lite to change. contributed to the differentiated image. Barriers to entry include huge marketing budgets needed to establish new products—Bartles & Jaymes’s 1986 budget was $30 million. there are many competitors in the market. because it had less alcohol. or will they continue to grow in demand as consumers switch from beer and wine to the new product? Answers will vary. What business-level strategy would you recommend that Bartles & Jaymes pursue in the future? How should Gallo continue to exploit its competitive advantage in this new industry environment? Although Gallo has now achieved market leader status. Can wine coolers be far behind? 217 . but the case can be brought to a close by reviewing the way Gallo seized environmental opportunities and used its strategy of staying with the wine industry. By 1986 its combination of marketing and distribution skills had enabled it to replace the former industry leader. An innovative marketing campaign featuring two “good old boys. The product was marketed to the more sophisticated consumer as being healthier. Gallo’s control over sales and distribution gave it an enormous advantage in terms of ability to reach the consumer. opportunities. To show how both strategy and structure are important in managing a small company effectively. What is Bennett’s core competence? Answer: Rebuilding and installing engines 2. 3. threats) analysis to achieve a fit between strategy and structure. and the pitfalls surrounding it. 1994 Synopsis The case chronicles the progress of a small firm in the automotive machining and repair business that has grown and developed as a result of the entrepreneurial abilities of its founder. Jones. weaknesses. Inc. To illustrate the process of small business management. These problems are not obvious in a large corporation because organizational design remedies them over time. To demonstrate how business-level strategy flows directly from a company’s distinctive competences. There are problems due to a lack of consistency in strategy and the inattention to managing structure. Ask students to present a synopsis of Bennett’s mission. and current business-level strategy and then to do a full-scale SWOT analysis of the company’s present situation. What strategy does Bennett’s pursue? Answer: Differentiation or focused differentiation Issues and Discussion Questions The overriding strategic issue raised by this case is the need for the entrepreneur (1) to be in control of the company’s strategy and structure and (2) not to let routine operational problems dictate the development of the company’s mission and goals. this case allows students to understand how strategy relates to structure. Teaching Objectives 1. Pop Quiz Questions 1. entrepreneurship. It also is a good illustration of how structure must change as the organization grows. 4. The case demonstrates how a company’s founder can hurt the company by becoming too closely involved in the day-to-day management to make decisions strategically. In this case. Pat Bennett. This is an excellent case to use after the lecture on strategy. goals.Case 10 Bennett’s Machine Shop. Teaching Notes Copyright © Gareth R. we have an entrepreneurial business owner whose organization has grown to the point that more structure and more management is needed. What are Bennett’s current mission and business-level strategies? How have these developed over time from the company’s beginnings? Bennett’s Machine Shop specialized in rebuilding auto engines—taking old and worn-out engines and machining them by grinding and lathing to create renewed engines. 1. 2. Very straightforward and easy to analyze. The company went into auto repair 218 . To provide students with the opportunity to do a SWOT (strengths. rebuilding and installing engines because of involvement in the Boeing tool-servicing contract. and the company was now involved in a third business. Over time the customer groups served by Bennett’s have grown to reflect the different activities that Bennett’s now provides. 2. Now he is contemplating even more ventures in machining. Pat Bennett. Bennett’s inattention to formulating and implementing strategy. These two activities were its main line of business for several years until an opportunity arose to machine and resharpen aircraft tools for the Boeing Corporation. installing the rebuilt engines along with other mechanical systems. Bennett underestimated the time. Over time. and management burden. The company has no established structure and control system. The danger is that over time the firm has lost its core business activity. Customers form a market segment. Pat Bennett. b. This mission is a direct consequence of the interests of the company’s founder. • The company’s ability to price its product below competitors’ (except for Hi-Lo Auto Parts. but supervising employees keep him from doing strategic planning. In terms of its mission. although many simply sell rebuilt engines. This is too little too late. Bennett’s inability to delegate and establish a good operating structure. • The company’s ability to provide complete engine service. Weaknesses • Poor new venture management. Armed with a degree in engineering. There is only one supervisor (Jack Beard. requiring rebuilt engines or general machining tasks. The lack of control is illustrated by Bennett’s decision to position his office on the shop floor to supervise employees directly. a. Strengths • The ability of the founder to find new ways to exploit the firm’s distinctive competence in machining. and use it to outline the problems the company is presently experiencing. which does not install engines) and still make above-average profits. The weaknesses are symptomatic of this larger problem: a lack of strategic thinking. A SWOT analysis examines environmental opportunities or threats how distinctive competences lead to specific strengths or weaknesses that can help or harm the ability to manage the environment. such as air conditioning. Bennett’s business-level strategy is built on the following: • • • It provides full-service rebuilding and installing of engines in customers’ cars. resources. and Bennett questions his ability to supervise employees efficiently. Bennett has no clear concept of goals and how to achieve a fit between strategy and structure. giving the firm a unique advantage. with the same set of resources. Bennett is interested in all aspects of the machining business and is constantly searching for new ways to exploit his core competences. No other business in the local area offers such a complete service. This opportunity allowed the company to build on its distinctive competence in machining and provide a profitable opportunity for expansion. Its distinctive competence is the entrepreneurial ability and engineering competence of its founder. opportunities to offer new products for new customers are the direct result of the company’s distinctive competence. No other firm in the area can duplicate Bennett’s scale of activities. Bennett’s has extended customer service by finding new ways of exploiting its distinctive competence in machining. Bennett’s is in the business of finding ways of repairing or renewing mechanical equipment and operating systems of all kinds. The danger is that for each new venture. Whenever the company • • 219 . So Bennett’s bought new machine tools to meet Boeing’s needs.work. Do a SWOT analysis of Bennett’s. the shop coordinator). In this company. On the basis of this SWOT analysis. This person could have responsibility for marketing and for finding out how customers heard about Bennett’s. An incentive structure should be introduced to improve productivity. He does not strengthen his existing supervision of employees or introduce control systems. Payroll and expenses data should • 220 . However. Be sure to link strategy and structure issues in your recommendation. The profit made on parts would pay this person’s salary after the system is implemented. even at lower profit rates. A sustained effort to smooth over periods of slack demand with increased advertising would stabilize the core business. Purchasing and inventory control is almost nonexistent. this venture should not be expanded until the core business is on a sure footing. The company should concentrate on establishing a good reputation with customers through advertising and on improving the quality of its work and customer service. At present. customer service. This could be tied to company profits. 3. As financial circumstances permit. and expand the machine side of operations.generates excess cash. New ventures should be left alone until this business is a consistently strong performer. Bennett needs to overhaul and redesign organizational structure. and cleanliness. Threats • A rival company might establish an engine rebuilding machine shop. suggest a plan for turning the company around. Bennett needs to increase standardization and formalization and introduce rules and procedures for control. The shop coordinator position should be eliminated and replaced with a supervisory position. Demand falls because of a lack of innovative marketing. General skills are an asset and can generate revenues and support the overhead costs that cause the current cash flow problem. Bennett either spends the money or embarks on a new venture. it may become increasingly dependent and locked in as a captive supplier. there is no sign of competition. However. improve the company’s position in its core business of engine rebuilding by embarking on a marketing strategy to maintain demand. He needs a supervisory hierarchy. Finally. any service station could seize the opportunity to install engines obtained from suppliers such as Hi-Lo if Bennett’s lost credibility with consumers. This is left to part-time people who give him no feedback on performance or payroll costs. a production controller could handle the books and accounting systems. Opportunities • • The company should pursue the Boeing work. There are several business areas for expansion. Concentrate on expanding sales in the core business of engine rebuilding and installation. Bennett’s is an intrinsically strong company with a distinctive competence that can be exploited with a cohesive business-level strategy and structure. a new person should control this activity. d. Because the equipment and machinery to satisfy Boeing’s demands is paid off. with supervisors or team leaders in each area of activity. • Boeing might become a powerful customer and act opportunistically toward Bennett. Bennett’s should continue to bid for Boeing’s custom work to defray overhead and contribute to profits. If Bennett continues devoting resources to Boeing. • • • On the strategy side. such as accounting and personnel systems to monitor performance and provide feedback. Bennett must ensure that his core business is not neglected by expanding work for Boeing. c. and workers could receive monthly and yearly bonuses in addition to their weekly paychecks. The company has a unique competence and an established market niche for its central business activity. With operational procedures. Focusing on strategy and the core business plus adopting an effective structure should provide a solid foundation for growth. Bennett’s can innovate and increase company revenues. • Given the above changes. Bennett should be able to focus on the strategic needs of the business because the changes in strategy and structure should free him from routine decisionmaking. He should use of budgets to control operations. 221 . The company can exploit its distinctive competence and maximize the founder’s entrepreneurial talents.be given to Bennett weekly to maintain control of operations. and San Antonio. Though they lost their legal battle. in expanding into many market niches it pursues a K-generalist strategy (See below). Houston’s Hobby airport. market.S. These early moves became major strengths for Southwest.Case 11 Southwest Airlines Teaching Notes Copyright © Gareth R. however. It charts the way Herb Kelleher. Since then. Recognizing the potential threat from the upstart airline. Intrastate flights were expensive. It had to increase the efficiency of the planes and develop the “10 minute turnaround” that allowed the operation of three planes with the same efficiency as the competitors’ operation of four. Chart the development of Southwest’s strategy over time. 2. what forces in the environment most affected Southwest Airlines and what opportunity was Southwest founded to take advantage of? Southwest Airlines owes its start to the fact that in 1970 the Civil Aeronautics Board or CAB regulated competition in the interstate U.S. The instructor can ask about experiences flying Southwest. American Airlines and Braniff. airlines. The case shows the uncertainty surrounding organizational birth. At the beginning. seeing it as an appendage to interstate operations. 2. Houston. Dallas’s Love Field. orchestrated company growth and strategy since its founding in 1968 and first flight in 1971 to its status today as one of the most profitable U. They delayed the airline for two years. Teaching Objectives This case can be used after the chapters on the environment and strategy or the chapter on birth. Remember. They established Southwest to meet the need for cheap flights in Texas. the airline had to keep costs low. To discuss how the environment is a force affecting organizations. From the beginning. To show how strategy develops over time. Discussion Questions 1. To survive. Jones. attempting to drive the cash-starved carrier out of business. decline and death to show that challenges change over time. the major air carriers in Texas. To illustrate the issues and problems surrounding the founding or birth of a new organization. Major airlines showed little interest in intrastate travel. the major carriers launched a price war against Southwest. 222 . but Southwest fought back and survived. 3. Kelleher and his colleagues saw the opportunity for efficient in-state operations between Dallas. airline market and would not allow new airlines into the U. 1. and eventually Chicago’s Midway airport. intense competition and a lack of resources drove Kelleher’s strategy for the airline. Southwest’s well-known CEO. that the focus of this case is on the early years of Southwest’s development and illustrates how to manage in a complex environment. growth. Southwest entered the industry late with a K-specialist strategy. 1996 Synopsis This case illustrates the challenges facing a new organization in a hostile environment. inconvenient. and knowledge of the carrier to generate lively discussion. but in 1971 the first Southwest Airlines flight took off. launched a legal battle to stop Southwest. or it could not charge the low fares on which survival hinged. To keep costs low. and had poor service. Southwest operated out of the less-popular hub in a city.S. Taking advantage of Southwest’s low-cost strengths. In this uncertain environment. Only those airlines with reduced costs have been profitable. less-efficient. Kelleher. Kelleher took advantage of another change in the macro-environment. Change is tied to change in the macro-environment. The low-cost structure has allowed for this. and the increased competition due to deregulation. Jones. Demand is increasing as the economy booms. when Midway Airlines. To pursue its market development strategy. to expand. characterized by price wars as airlines match prices to retain customers. 4. Kelleher’s strategy has been to turn Southwest into a national carrier and move from a focused low-cost strategy to an industry wide low-cost strategy. airline. 1999 Synopsis 223 . Kelleher and his colleagues seized the opportunity of securing the gates controlled by Midway and establishing a hub in the Midwest. Boeing continues to supply Southwest with new versions of the efficient 737. the airline has developed its operating route structure and taken over small airlines to become a national carrier. closed due to vigorous industry competition. Southwest’s low-cost structure protected it and generated revenues and profits for expansion. In terms of the three sources of uncertainty (complexity. Southwest expanded into major Western markets. The next opportunity came in 1991. it can pursue this strategy. Southwest pursued a market development strategy. airlines. It sets the prices in many of its markets and has built its cost advantage by using Boeing 737 aircraft and cross-training employees to help speed the turnaround of planes. Case 12 Pharmacia & Upjohn Teaching Notes Copyright © Gareth R. How would you describe the airline industry after deregulation? Since deregulation the airline industry has been very uncertain. which affects demand. The environment has changed rapidly as new airlines are born and some airlines go bankrupt. dynamism and richness): • • • The environment is very complex. 3. meeting intense resistance from the high-cost airlines. Southwest began service in Florida and made inroads on the eastern seaboard. and west using Phoenix as a hub. particularly the economy. It could become a major player and a threat to other. The environment has been poor. and Southwest does not compete in a market without a cost advantage. Because Southwest has the lowest costs of any U. and many have gone bankrupt or been subject to takeovers in the last decade.S. Kelleher expanded east into Louisiana. has avoided the crises that characterize the growth of many organizations. In 1995. since its goal has been to find new market segments for its basic product—a low-priced airline ticket.With its focused low cost business-level strategy established. Southwest enjoys a national reputation and has secured scarce gates in most large cities. During the 1980s. in delegating considerable operating authority to his employees. the Federal Airline Deregulation Act of 1978. The airlines compete head to head and the actions of one company directly affect the actions of others. What do you think the future holds for Southwest? The future looks bright. operating from Chicago’s Midway airport. and develop new research areas.S. 3. partner to become a strong player in that market. This case is best used towards the end of the course. market. It is important that students understand that the source of this is a complex environment. which is critical in this industry. Upjohn was not as successful as they had hoped at keeping new drugs in the market. It details the rich history of Upjohn. Why did Upjohn appeal to Pharmacia as a good merger candidate. and adapting to change. A. To show the power of complex environmental forces. such as this case. they were not able to compete effectively in the 1990s due to the lack of new drugs in the pipeline. when better types of pills were introduced. they can be beneficial by giving two organizations access to new markets. but needed a U. 1. and a sweet laxative that was a big seller for over 4 decades. strategy and structure. Despite heavy investment in R&D. and how it adapted. which is critical in this industry. They had the systems in place to give Pharmacia access to the U. To illustrate how organizations manage in dynamic. To illustrate how strategy develops from distinctive competences. While they have successfully adapted to the environment through most decades. 2. • They focused on introducing creative products such as providing pleasantly flavored drugs. Despite all their attempts. Product development. 224 . 2. Pharmacia was an organization that had a very strong product development process. It illustrates many issues related to organizational structure. Upjohn then had to imitate the technologies of competing organizations. not bad management. changing environments. a family owned company that had been in business since 1885.This case is about the merger of two pharmaceutical companies. • The first competence was the invention of a new pill that released medication better in the body. What was Pharmacia’s core competence? A. managing in a global environment. This is to illustrate how companies grow and adapt to the environment. 4. The patent on this lasted for 15 years. and their effects on how organizations compete. which generally have a bad connotation to many students. To show how mergers can create synergies between two organizations by combining core competences. Teaching Objectives 1. This is a good lead in to the value of mergers and acquisitions. the pharmaceutical industry in the 1990s had become very complex. The early 1900s also saw Upjohn add quite a few new product lines. Pop Quiz Questions 1. Issues and Discussion Questions Begin by focusing on Upjohn and its rich history. List the environmental challenges that Upjohn has faced in its history.S. Point out that many times. they expanded in the 1960s and 70s through sales offices and production facilities worldwide. It costs about $150 million to develop a new drug. It recognized that it could not continue to be a global player on their own. • By the 1950s. such as the merger between Merck and Medco. they were considered to be a leader in R&D. note that the solution was to merge with other organizations. Why did Upjohn seek a partner for a merger? Despite its best efforts at diversification and R&D. Pharmacia had a very strong product development process. and many countries passed legislation to reduce drug prices. 225 . 3. They were considered a leader in nutritional supplements. market. • Growth in the 1930s and 1940s was through vitamins. and health services. • As with most industries. • Now a public company. it was not able to keep new drugs in the pipeline.• They aggressively marketed through doctors. • More countries were tightening regulations on the drug approval process. • Health maintenance organizations (HMOs) emerged. 2. which are like national chains that by drugs in bulk. chemicals. lengthening tremendously the time it takes to introduce a new drug to market. This eroded profitability in that the patent time is reduced. What changes occurred in the pharmaceutical environment in the 1970s and 1980s? • It is important to chart the changes to show how difficult it is even for large and successful organizations to adapt. • This caused prices to go up. global competition also became intense in this industry. and it did not want to be taken over. • By the 1980s. which kept them successful through the 1930s. which is still critical in this industry. This forced companies into bargaining and negotiating. and it must pay for this development through drug sales. What has occurred because of these changes in this industry? After detailing and discussing these changes. • It pursued vertical integration by establishing its own chemical manufacturing division. This was primarily an attempt to vertically integrate. The merger between Pharmacia and Upjohn was a win-win for both organizations. • The introduction of the generic drug after patents expire puts tremendous pressure on the developing companies. it had become a global research-based manufacturer and marketer of pharmaceuticals. with 421 employees in that department alone. and Upjohn had the systems to allow Pharmacia to be a strong player in the U. 4. the mail order company. agriculture products. which lowered profits.S. 226 .This would allow both companies to offer a much wider product line to HMOs and the national drug supply companies. This put them in a much better bargaining position. global strategies. To discuss the relative merits of multidomestic. The case opens with the history of Philips from its founding in 1891 until the early 1980s when it evolved into a classic multidomestic company. Ask why Philips had low profits during the 1970s. making the multidomestic strategy inappropriate. Teaching Objectives 1. To demonstrate the importance of achieving a close fit among strategy. This opens the discussion of Philips’ strategic and organizational changes needed to survive in the 1980s and 1990s. The conclusion is that Philips must pursue transformational change in strategy and structure to become a transnational corporation. 4. N. Matsushita and Sony used a global strategy to drive down production costs and price competitively.L. 3. Teaching Notes Copyright © Charles W. The best teaching plan is to identify environmental changes facing Philips in the 1970s. 1994 Synopsis This case considers the large Dutch multinational electronics company. Specifically: a. structure. Philips made organizational and strategic changes during the 1980s and early 1990s to transform the company from a multidomestic to a transnational corporation. and the result was poor performance. Philips NV. To show how changes in the competitive environment require to change company strategy and structure. and organizational change. This leads to the next issue—the impediments to organizational and strategic change at Philips—and this discussion reveals the sources of organizational inertia. To build appreciation for the difficulties of transforming the strategy and structure of an organization as large and complex as Philips. and transnational strategies and structures to compete in the global marketplace. b. Falling trade barriers as a result of GATT and the EC paved the way for greater international competition and facilitated the emergence of companies pursuing a global strategy. 2. The Philips case is best used after Chapter 3 on the international environment. global. Matsushita originally produced its products in Japan and exported globally. It can be an in-class discussion about global competition. Hill. the discussion takes a full class period.Case 13 Philips. Rapid changes took place in the operating environment during the 1960s and 1970s. How did the environment that Philips faced change during the 1960s and 1970s? What were the implications of those changes? A number of key changes took place in the operating environment during the 1960s and 1970s. transformation of global strategy and structure during the 1980s and early 1990s to meet environmental competition. Issues and Discussion Questions 1. Although the case is short. and environment. By serving the world market from a 227 . The answer is that its strategy and structure were no longer appropriate to its environment.V. Japanese companies emerged as world-class competitors in Philips’ major markets. The dominance of the national organizations over the product divisions resulted in duplication of manufacturing facilities and a lack of coordinated global strategy for new products. The pace of innovation accelerated. This became clear in the battle between the Betamax and VHS formats for videocassette recorders. and product life cycles became shorter. and excel at new product development. profits were low. At the same time. The increased pace of innovation in electronics requires that companies be fast and successful innovators. The national organizations were responsible for day-to-day operations (manufacturing and marketing) and strategy implementation.single. issues of dominant design became important. Philips had a global matrix structure based on national organizations and product divisions.e. low-cost location to capture all possible scale economies. competition based on innovation increased. which helped undercut Philips’s prices. national organization’s decision to reject Philips’s own V2000 VCR format in favor of Matsushita’s VHS format. low-cost location. Although the board was to arbitrate disputes between worldwide product divisions and national organizations. The rapid obsolescence of products made it important to serve the world market from a single. b. leaving a coordination gap between the two functions. establish their technology as a dominant industry design.. national organizations were dominant. within this global matrix structure. 2. This is shown by the U. c. c. The changes implemented during the 1980s were only cosmetic. As global markets emerged in the electronics industry. products were poorly commercialized). As a result. The fixed costs of developing new products rose. Philips was not optimally organized for product innovation— as a company competing in the electronics industry needs to be. amortize the fixed costs associated with product development. thereby amortizing development costs. These changes made the world electronics industry more global. 228 . Specifically: a.S. while R&D was carried out in the product divisions. companies had to realize location and scale economies. Marketing was carried out in the national organizations. This duplication led to a lack of location and scale economies plus high operating costs. which in turn implied that a global strategy was optimal. This gap harmed product development (i. the pressures for global integration increased while the pressures for local responsiveness declined. Amortizing these fixed costs required companies to reap substantial scale economies. In the language of Chapter 8. despite protest by the product division. The lack of global coordination limited Philips’ ability to establish worldwide technological standards. Managers from national organizations populated Philips’ 10-person board. putting it at a competitive disadvantage vis-à-vis Matsushita and Sony. d. Philips was a multidomestic company in a global environment. e. whereas product strategy was determined jointly by worldwide product divisions and national organizations. structure. The product divisions were responsible for new product development—although some R&D was undertaken within major national organizations. In practice. it was biased toward the national organizations. The basic character of Philips was still rooted in strongly independent national organizations and a top-heavy bureaucracy in Eindhoven. Setting global technological standards became a key source of competitive advantage. Matsushita reaped economies of scale and location. Why did Philips have low profits during the 1970s? Why did this situation persist during the 1980s? The basic theme here is the lack of fit among strategy. and environment. To succeed in consumer electronics in the 1980s and 1990s. c. (2) improve core competences. engineer simultaneous worldwide product introductions to establish technical standards. and (3) help achieve new technical standards. the technical and commercial sides of the business were split. The company should seek strategic alliances with other major consumer electronics companies to achieve three goals: (1) share the costs and risks associated with developing new products. the company will engineer worldwide simultaneous new product introductions. poorly aligned with its environment. Reduce costs by eliminating duplication and enhancing location and scale economies. The product divisions should have the most power in the global matrix. The company must reduce it headquarters bureaucracy. The root cause of Philips’ poor performance is a dysfunctional structure. Most of the head office staff had experience with and were loyal to the national organizations. This requires management education (reeducation) on a massive scale within Philips. When product divisions dominate. necessary for technical standards. They were out of touch with customers and protected their own interests rather than value creation. For historical reasons. Philips must do the following. d. With regard to structure. c. The company must become more innovative. The consequences were poorly commercialized products and a slowness in bringing products to market. Somehow the company must eliminate the damaging intracompany conflict between product divisions and national organizations and between the commercial and technical sides of the business. a. b. Competition between technical and commercial managers paralleled the lack of integration between production and R&D hand and marketing. It must build a culture of shared values. Demands for local responsiveness—particularly in consumer electronics—indicate that the company must retain its national organizations. A further organizational drain on efficiency was the top-heavy headquarters bureaucracy. perhaps. this aspect of Philips’ structure and administrative heritage could explain the low profit rate. but one in which the product divisions dominate. There may be a need for some customization of marketing strategy and. Philips can rationalize production and eliminate duplication. Philips needs to do the following: a. e. b. Philips needs a matrix. Under Van de Klugt and Timmer.) 229 . introduce products more quickly. (Philips is currently pursuing just such a management education program. and better commercialize its technology. The company probably still needs local responsiveness. When the product divisions dominate the organization. This should improve the new product development process. Since product innovation is important in this industry. What must Philips do to survive? Philips must adopt a transnational strategy and manage its global matrix and structure better. Making product divisions major units can build ties between marketing and R&D. It should serve the world market from a few choice manufacturing plants based in optimal locations (from a factor cost perspective).d. product attributes. Strategically. They prevented a shift in the matrix from national organizations to product divisions. 3. The national organizations need some control over marketing and national strategies. the company has moved rapidly in this direction. The administrative heritage of Philips includes a value system that pits the technical and commercial sides of the business against each other. Cultural change. Philips must overcome internal inertia. Structural change. Overcoming these inertia forces requires a number of steps: a. yet Philips has been slow in this area. Its power must be cut by downsizing and reassigning staff personnel to product divisions. and most have a long history of service at Philips. Philips needs to change its culture. Philips must change its structure. This bureaucracy is a major source of resistance to change. All studies of organizational change emphasize the importance of leadership for transformational change. b. This is a must. at least. Managers need a massive reeducation program to socialize them into a new value system that stresses cooperation between the technical and commercial side and emphasizes the dominance of the product divisions. Philips’ administrative heritage was reinforced by a design that gave the heads of national organizations more power and influence than divisional heads. the company is really run by the so-called Dutch Mafia. The appointment of Timmer as CEO in 1990 signaled change.4. As a consequence of this inbreeding. d. The top managers are all Dutch. which is based on its own heritage. b. Large. starting at the top. It rates experience in the national organizations over experience in the product divisions. Philips must change its culture. Inertia forces within Philips have slowed the change process and contributed to poor performance. Downsize the Eindhoven bureaucracy. and this has been the greatest area of progress. In 1987 Van de Klugt initiated a restructuring that increased the power of the product divisions by placing product division heads in the main management group and removing the heads of national organizations. How can inertia be overcome? To change its strategy and its structure. Organizational Design. Note though that even Timmer was reluctant to introduce significant restructuring until the investment community insisted. Bold leadership and vision. The inertia forces are: a. The heads of national organizations would resist a decrease in their power and an increase in that of product division managers. 230 . Resistance by the Eindhoven bureaucracy to change makes sense—managers have the most to lose from a company realignment that increases the power of the product divisions. Lack of new blood. The Eindhoven bureaucracy. Although Philips has a global reach. This value system and cognitive biases act as a barrier to change. Timmer was the first Philips CEO to have come from the product divisions—an important symbolic change. and with close ties to the national organizations. Identify the sources of inertia within Philips. Philips’ managers lack the ability to see things from a different perspective. entrenched. d. Until the mid-1980s. c. New blood from outside Philips must be added plus promotion of non-Dutch nationals to senior management positions. Their existing cognitive schemes prevent change. the headquarters bureaucracy has stifling change at Philips. c. Administrative heritage. on conflict and politics. What is Ramrod Stockwell’s title? Answer: Vice president for production 2. who are exasperated with his uncooperativeness and refusal to supply them with reliable information concerning delivery dates. Jones. 3. To expose students to the sources of conflict in organizational settings. 1994 Synopsis This case considers conflict and politics in organizational settings. his obstinacy and “rough diamond” personality. and with the Rondell Data case. only produced because of skills in manufacturing. is becoming very uncooperative and difficult. More company revenues come from the production and specialty steels. Most students feel the problems stem from Ramrod. sales has been the most important function in Benson. The case illustrates the difference between personal and institutional power. Ramrod is having frequent run-ins with sales. Teaching Objectives 1. It highlights the need to analyze the context of behavior. unchanged in a changed environment with more importance placed on production than on sales. 2. Which function is Ramrod having the most problems with? Answer: Sales 231 . Based on real people and events. vice president for Production at Benson Metals. Pop Quiz Questions 1. To show students how the power structure in an organization changes as contingencies—from the environment and technology—change. Ramsey “‘Ramrod” Stockwell. Ramrod is fighting to protect the integrity of his department by being uncooperative and hoarding power to make others dependent on him. not just the behavior itself.Case 14 “Ramrod” Stockwell Teaching Notes Copyright © Gareth R. To provide a vehicle for an action plan to resolve organizational conflict and devise a strategy for change. the case is best used after Chapter 14. Backed into a corner. and it is not willing to relinquish power and prerogatives and adjust to changing realities. Historically. It takes from 45 minutes to an hour to analyze. it provides good exposure to managing organizational politics and conflict. The problem is due to the internal power structure. so students have can analyze the power structure. and production scheduling. They favor firing to reducing conflict and getting Benson Metals back on track. Managers in different functions are taking sides. a medium-sized maker of specialty steel products. He does not follow the chain of command. He has a centralized management style and does not share information. metallurgical analysis. 2. Violating lines of authority reduces the authority of his managers and also leaves them uninformed. yet it is continually fighting with sales. and examine what he is doing wrong. this approach makes the later analysis of power more dramatic. knowledge. Sales wants a rapid response to unexpected customer requests or tries to discover production’s plans or when the finished product will be ready. skill. Companies cannot imitate these skills. because he also does not allow subordinates to share any but routine information. especially sales. he goes to people only when he needs them. and he is too busy to do so (and too proud since he would have to admit 232 . has traditionally used a craftslike technology to produce a variety of metals. as there is still guesswork. In his own function he fails to delegate authority and keeps the reins of power in his own hands. subordinates do not possess information. these steels require more research skills. Both technology and environment have changed. usually siding with sales against Ramrod and production. What is causing these problems in Benson Metals? The sources of the conflict can be isolated. In terms of Perrow’s model of technology. The attitudes and behavior of Ramrod Stockwell cause the problem. can get information from Ramrod. task variety has increased and task analyzability has fallen—production is more nonroutine and research oriented and depends more on the skills. Although he is competent. In terms of Perrow’s model. What kinds of products and technologies does Benson Metals use? How have these been changing recently? Benson Metals. he causes conflict within his own function and other functions. 3. and the skills and knowledge of production people are more important than machines in getting the job done—task complexity is low. which makes it impossible for subordinates to provide salespeople with the information they need. and delicate handling in all stages of production. Integration between functions is falling. Not only are they difficult to produce. and judgment of production personnel. Morale is falling as the effects of these conflicts spread. His attitudes affect relationships with other functions. Benson also produces metals in very small quantities—pounds not tons—so that in terms of Woodward’s model it is small batch. the company has moved into making sophisticated and technically difficult steels for the aerospace industry.Issues and Discussion Questions 1. principally Ramrod. affecting the contingencies facing the company. The environment surrounding the company has changed to more uncertainty because a new range of products is manufactured. and even some “black magic” in manufacturing products. This is dangerous for nonroutine technology that requires a high level of differentiation and integration to be effective. Because of the centralization of authority in production. Keep the discussion focused on the people. What problems is Benson Metals encountering as it changes products and technologies? An increased level of conflict between sales and production poses a problem. Only Rob Bronson. and increasing potential risks and returns. Communication and decision-making have slowed as a result of uncooperative attitudes. They are produced to very stringent specifications. Recently. Production is responding to the new pressures facing the organization. task variety and task analyzability are low. experience. the vice president of sales. so they form a competitive advantage. Recently the environment has changed and production has become more important—only production can produce the kinds of steels customers want. this causes significant problems that will increase as the sophistication of the metals increases. The traditional power of sales reflects the fact that in the past. Even though the power of production is increasing. as in the Continental Can case. the instructor can turn the discussion to the issue of the company power structure. Sales can slip orders into the production process. developing customer relationships and servicing customers is very important. 4. Benson’s internal power structure does not reflect this change. not vice versa. it is Benson’s unchanged internal power structure in a changed environment. Managers have suggested sensitivity training to help him better communicate and delegate. Ramrod. which function has had the most power in Benson Metals? How has the power relationship between production and sales been changing recently? Traditionally. sales has enjoyed most of the power: • • • • • President Tom Hollis worked with Fred Benson and was the sales director. The conclusion is that Ramrod is the problem—his attitudes and values. Production reduces the uncertainty facing sales. A strong CEO would understand this and might 233 . Most of the “assistant to” managers groomed for promotion come from sales. Production managers play second fiddle to salespeople: They have inferior facilities and limited access to resources and to top managers. Stockwell says something can be done but fails to provide an accurate time frame. which further isolates him. the sales manager realizes the change but deliberately avoids a change in the status of sales. Production has become central and nonsubstitutable. The message is that maybe Ramrod is not the problem. consciously or unconsciously. students rarely raise this issue. In the new competitive environment: • • • Production controls the main contingencies. What is the solution? Fire Ramrod? After the pros and cons have been considered (the firm would lose his valuable skills and expertise). is withholding information to increase the dependence of others on him and to change the balance of power in his favor. Rob Bronson. the main contingency facing Benson was to sell its products in a competitive market against four or five other companies who compete for the same customers. Information is a power resource. In the past. Ramrod is a “rough diamond” and has little social contact with other top managers at Benson Metals. This increases his power and makes him nonsubstitutable. He agrees to all requests but gives no feedback.dependency on Ramrod). In this environment. Sales gets the credit for good work while production is blamed in the bad years. and by hoarding information he can increase the uncertainty of other departments and their dependence on him. Ramrod’s attitudes and behaviors seem logical once it is understood that he wants to increase his function’s power and status in the organization: • • • He doesn’t delegate authority and share information to increase his power over sales. making planning difficult for sales and other departments—making them dependent on Ramrod. and the result is conflict. although. and top management needs to recognize the increased status of production publicly. The level of conflict is escalating as sales fights back. which transmits them to production. then fire him. The support of top management is vital for a change in attitudes. Create a task force to examine how environmental changes affect working relationships and to increase perceptions of the importance and status of production. The chairman and his son are weak and the president is from sales. Send Stockwell to a management training course to improve his skills at delegation. Suggest some ways to try to solve the problems the company is experiencing. top management can improve manufacturing facilities and give Ramrod a bigger office and staff. • • • • • • Like Continental Can. a more central location. To increase the status of production. All requests should flow through production control. If these changes don’t work. 5. and greater access to top management. 234 . What would be a good strategy for change? There are several ways of increasing the power of production vis-à-vis sales. This reduces sales’ traditional power over production and helps promote a power balance.publicly recognize the importance of production and correct the imbalance. so nothing is being done. Benson should create a production control department to buffer sales and production and reduce or eliminate sales’ ability to slip new customer orders into the production process. who is fired before Christmas because the CEO blames him and not Rondell’s structure for not resolving the conflict. the level of conflict in the organization increases. To analyze the different sources of conflict in an organization. Bill Hunt. each has developed subunit orientations. Teaching Objectives 1. Engineering handles all conflicting demands and interests of the other functions and integrates activities. Discussion can fill an entire class period if attention is given to redesigning the structure. Pop Quiz Questions 1. so students can pick out the sources of organizational conflict. The company structure is not sufficient to manage the breadth and depth of activities. 1994 Synopsis The Rondell Data Corporation is an innovative electronic products company that manufacturers two major lines of electronic products. Students sympathize with Frank Forbus.Case 15 Rondell Data Corporation Teaching Notes Copyright © Gareth R. 235 . Power results from informal working relationships built up over time. and the engineering department. As different functions pursue their own goals and fight for their own interests. but without power. The president. The company has grown from 100 employees in 1947 to over 800 employees in 1978. It shows how the interests of functions differ and defines differentiation. not to the failure of organizational structure. 3. What are Rondell’s main product lines? Answer: Broadcast and data transmission equipment 2. it is having problems coordinating activities. broadcast equipment and data transmission equipment. finds itself in the crossfire. To examine how conflict can emerge between functions because of poor organizational design. Rondell’s last director of engineering (Rondell has had three directors in four years). 2. attributes the lack of cooperation to problems with the head of engineering. What happened to Frank Forbus at the end? Answer: He was fired. This case is best used after the lecture on conflict. As it has grown and increased the number of new products developed and manufactured. To analyze how different kinds of structure can be used to reduce conflict and speed product development. Jones. The issue is that the company needs a new structure to coordinate its activities and reduce conflict. As functions have grown and differentiated. Yet. It also wants new products on time without shipping delays. routinely sending flawed plans back to engineering. and the control department (containing accounting. Sales has a history of optimism about delivering new products quickly.Issues and Discussion Questions 1. More redesign becomes necessary. Manufacturing itself contributes. Sales is to supply information to R&D for use in product development. Engineering services takes the inputs from sales and R&D—new customer requests or improved component designs—and builds the final product design with production specifications. purchasing. The production manager constantly returns the product design plans sent to manufacturing because engineers have not worked out the bugs. Its orientation is toward meeting the changing needs of Rondell’s customers—it is focused on the environment. sales. creating problems for engineering services. a. Growing complexity of the company’s business and the wide range of products it produces resulted in engineering services as the linchpin of the product development because it coordinates other functions. and manufacturing is slowed down. Sales’ goal is to supply customers with new and innovative products to retain their business. This causes conflict. other functions. The control department controls purchasing and materials control. The goal is to obtain products from the engineering design department for easy and inexpensive manufacturing. Its orientation is toward long-run product development. like R&D and sales. Each function pursues its goals at the expense of the others. Dave Schwab. Engineering service’s job is to coordinate and integrate activities. but R&D is purely new product oriented. Some R&D functions try to improve the manufacturing process to reduce costs or increase reliability. R&D is considered the most important function because the company has been 236 . which designs the assembly process to produce inexpensively and efficiently. and that optimism pressures other functions. 2. and materials control). c. b. R&D’s goal is to find innovative ways of improving existing products and creating new products. causing sales problems as product introductions are delayed. Each function contributes something unique and has a distinct subunit orientation. It sends these plans to production. Production’s orientation is short-term technical efficiency. R&D causes problems by introducing new innovations into the design process at an advanced stage. The manager in charge of production. What are the goals and subunit orientations of the different functions in Rondell? The five principal functions in Rondell that must work together to produce new products are production. Production minimizes manufacturing costs. d. which always sides with R&D or sales against engineering. engineering services (part of engineering). Sales can set ambitious targets for introducing new products over engineering’s objections. influence the new product development process. and resists attempts by other departments to interfere with manufacturing. Both sales and R&D can intervene late in the design process and make changes. What are the sources of conflict in Rondell and why is the conflict among functions a major problem? Although engineering services is responsible for product development. It is a service department to the manufacturing and engineering services and has an internal systems orientation. e. though many errors could be corrected during the preproduction setup. is concerned about protecting his turf. research. Its orientation is to improve the effectiveness of internal systems. this function is considered crucial by top management. so when slow engineering design raises manufacturing costs or results in lost customers or penalty clauses in customer contracts. Each function is evaluated according to its goals. not for integrating among the functions. Competition for scarce resources. There is no separate production control department to coordinate manufacturing. so he deliberately causes problems for other managers to increase his power and status. and Rondell’s structure provides no coordination and integration necessary to pull activities together. Because structure is the source of the problem. b. can command whatever resources they want. Subunits have become competitive as the attempts of one to achieve goals thwart the attempts of another. Each subunit’s desire for autonomy conflicts with the organization’s desire for coordination. there is a power imbalance. The arrangement of functions has grown rather haphazardly over time. and sales. and preproduction engineering is weak and underdeveloped. Although the head of R&D. The manufacturing manager is concerned about his lack of a degree. Manufacturing seems to do its own scheduling. Going through Galbraith’s list of integrating mechanisms shows few formal links between functions such as task forces and teams. formally reports to Frank Forbus. It is helpful to use the material on conflict in Chapter 14 and discuss the five main sources of conflict: a. “Doc” Reeves. functions come into conflict. the rationale for having purchasing and materials control in the control department while quality control is in engineering services developed as a temporary wartime need. As Rondell has grown. Bureaucratic factors. and no resources for an effective preproduction unit. not between lower level personnel. There are few formal integrating mechanisms. c. which will worsen the problems. Interdependence. d.driven by technical developments that result in new products. Rondell’s structure has evolved historically and status inconsistencies have developed among different groups and managers—between the heads of R&D and engineering. which promotes conflict. Some functions. the company must understand how structure works and see how it has contributed to problems. each function pursues its own interests at the expense of the others. The rationale for having both R&D and engineering services report to the director of engineering is historical precedent. informally Reeves has more status and power. Rondell’s pattern of differentiation contributes to its problems because task and role relationships among functions are not well defined. Just as in the Ramrod Stockwell case. the director of engineering. What kinds of organizational design choices and structure does Rondell use to control its activities? How do these contribute to the problems it is experiencing? Rondell uses a functional structure to coordinate its activities. e. Incompatible performance criteria. and different functions compete for power and control of resources. Similarly. such as R&D. competition for resources might increase. 237 . Heterogeneous goals and priorities. Most cross-functional contact is high up in the organization between the heads of the functions. with only 800 employees. as the head of R&D also has a dotted-line relationship to the president. counting first-line supervisor and shop floor employees. Each function’s different goal and subunit orientation causes it to view problems differently. 3. Engineering services is running very lean. It was not working well because the president used it to pass on routine information. and it appears to have about five levels in the hierarchy. It is clear that the company needs to take action. The single high-level executive committee was the brainchild of the controller and a relatively recent development. which he believes lowers his status. It is a relatively small company. engineering services. Given that profits have fallen. its engineers stretched thin. In building this barrier between manufacturing and the other functions. responsible for a new product from development to manufacturing. but because of the informal decision-making. Engineering services has become the most central function. where Schwab has developed a very mechanistic structure. this might coordinate what is still a relatively small organization. R&D. Rondell could increase integration among functions. How might you change Rondell’s structure to reduce conflict and speed product development? There are many ways of changing structure and redefining task and role relationships. How can its power be increased? How can a new power balance be achieved? The company could use cross-functional teams and create a product team. and the pros and cons of each of these can be discussed. Team leaders would report to the executive vice president. Each team would be responsible for new product development activities. and this causes conflict. Many of Rondell’s problems come from the design choices by top managers and especially by Hunt. including preproduction planning. R&D would be split off from engineering design and kept centralized. Not much use is made of formalization or standardization except inside manufacturing. Rondell is not making the best use of its managers’ functional skills and abilities. This solution would require Hunt to change his management style. If integration increases. involving a change in the level of differentiation to change the power of different functions and realign them. or manufacturing when they cause problems at any stage of the design process—hence the conflict problem. Forbus should have considerable formal power. the production manager. This centralized style prevents lower-level managers from solving their own problems through mutual adjustment. has caused major coordination and communication problems that foster conflict. An engineering services manager who is responsible for coordinating teams and other functions would head each cross-functional team. Even though the organizational chart shows that “Doc” Reeves reports to Frank Forbus.Both differentiation and integration in Rondell promote conflict among functions because the structure is not complex enough to coordinate the growing need for cross-functional communication. It could create product development committees from different functions who discuss product development and solve problems. Members of the R&D department might be assigned responsibility for liaison with each team and for transferring knowledge to each team. 4. Schwab would supervise the assembly of the final product and not cause problems. and Hunt is involved in all important decisions between himself and key functional managers. Higher up the organization. This would be a radical change. who has paid little attention to design. Schwab. He must decentralize authority to functional level managers and avoid siding with one function over another. 238 . The power of the key managers results from their historical contribution to the company. Rondell uses the informal more than the formal organization to coordinate activities. he is powerless to resist sales. Given the history of the company. which would become a resource. the executive committee could function more effectively with an agenda and by holding the functions accountable for meeting goals. reporting directly to the president. Decision-making is centralized. Reeves has more power and has the ear of the president. and would assume many responsibilities of the manufacturing department. this is unlikely. Thus. A more radical solution might be necessary. The arrangement is flexible because as each product proceeds to the routine manufacturing stage. the power of engineering services is increased because its managers lead the product teams. Here. A third option would be to keep the functional structure and to formalize the product development process by creating written guidelines that govern how a new product passes from stage to stage with minimal intervention from other functions. and speed product development. and the power of the other functions is reduced as their members report to the team leaders. reduce conflict. the goal would be to increase the level of standardization to control cross-functional activities. 239 . members can be reassigned to new teams.In this arrangement. Such a structure would break down the functional boundaries that cause Rondell’s present problems.