25 Aug A Look Inside General Electric General Electric (GE) has a glorious heritage. Founded by Thomas Edison in 1878 to generate and distribute electric power, GE became a world leader as a diversified industrial company.

Chapter 1

1.1 A Look Inside General Electric General Electric (GE) has a glorious heritage. Founded by Thomas Edison in 1878 to generate and distribute electric power, GE became a world leader as a diversified industrial company. For decades, GE had a reputation for excellent and innovative management practices that other companies copied. As a model industrial company, General Electric’s stock had been part of the Dow Jones Industrial Average since 1907. Since the late 1800s, GE moved in and out of multiple businesses as a key part of its strategy and success. In 2019, GE was still a diversified worldwide conglom-erate. Its industrial businesses included the power segment (gas and steam power systems), renewable energy (wind turbines), oil and gas (drilling systems), aviation (jet engines), healthcare (MRI machines), transportation (locomotives), and capital (loans to buy equipment). However, by 2019 GE’s value had fallen precipitously from its earlier prosperity, hitting a low of about 10 percent of its former value. How could a company that rose to fame as the best managed company in the world fall on such hard times? The answer to GE’s ups and downs lies partly with how its leaders used organiza-tion design. Reginald Jones was CEO from 1972 to 1981 and helped build GE’s sophisticated strategic planning system. The GE conglomerate was composed of 43 autonomous businesses, within which it had 10 groups, 46 divisions, and 190 departments that participated in strategic planning. To help manage the massive amounts of paperwork and information required from 43 strategic plans, GE added a management layer to its structure to oversee sectors or groupings of businesses and reduce the load on top management. GE was a respected and highly successful company, and paperwork and bureaucracy seemed to increase along with organization size and complexity. 1.1a The Jack Welch Era 1981–2001 When he was hired as an engineer at GE in the early 1960s, Jack Welch hated the company’s bureaucracy so much that he submitted his resignation after only six months on the job. Fortunately for GE, Welch’s boss convinced him to stay and make a difference. After rising to CEO, Welch was quick to begin busting the ever-growing GE bureaucracy. Near the end of his two-decade run as CEO, in 2001, Fortune magazine named Welch “Manager of the Century” to recognize his aston-ishing record at GE and also named GE the “Most Admired Company in the United States.” What changes did Welch and GE managers make to achieve these accolades? Strategy Changes. GE had begun using the advertising slogan “We bring good things to life” in the late 1970s and it continued in the Welch era, with Welch maintaining the strategy of being a conglomerate of diverse businesses. But Welch added a new key objective: each business must become the No. 1 or No. 2 competitor in its industry or risk being cut. GE’s new strategy was to be a leader in each of its industries. Changes in Structure. Welch attacked the bureaucratic layers within GE by first eliminating the sector level of management hierarchy that Reginald Jones created. He continued to fight the over-managed hierarchy until the number of levels was reduced from nine to as few as four. In many cases, department managers, sub-sector managers, unit managers, and sometimes supervisors were eliminated along with the sector managers. Now the CEO and top managers could deal directly with each business without going through multiple layers of hierarchy. Moreover, Welch stretched senior managers’ span of control to 15 or more direct reports to force more delegation and autonomy downward. Downsizing. Welch’s assault on the bureaucracy also involved cutting down the num-ber of employees. GE eliminated tens of thousands of managers and employees through delayering and de-staffing and even more through divestitures. The number of GE employees declined from about 404,000 in 1982 to 292,000 by 1989. Welch was given the nickname “Neutron Jack” because a neutron bomb killed people and left buildings intact. The nickname was reinforced by the CEO’s replacement of 12 of his 14 business heads. During this period, Welch was named “toughest boss in America.” A New Culture. Welch wanted a corporate culture based on direct conversations of openness and candor, eyeball to eyeball, between managers and direct reports rather than via formal meetings and bureaucratic paperwork. A practice called Work-Out was one answer. Groups of up to 100 employees from a business unit would gather in a town meeting-style atmosphere. The business unit boss presented a challenge and left the room. Employees divided into teams and attacked problems and bureaucratic inefficiencies in their business unit with new, often dramatic, solu-tions. On the third day, bosses returned and listened to the teams’ presentations. Bosses had about one minute to decide whether to accept or reject each proposal. One boss from an aircraft engine factory accepted 100 of 108 proposals, enabling a transformation in factory operations. Bosses often lost their jobs if they were unable to accept the dramatic change proposals from subordinates. Over 10 years, about 200,000 GE members participated in Work-Out. Going Global. Welch also focused GE on global expansion. The U.S. market was not big enough. Welch encouraged international expansion by increasing the stan-dard for business unit performance from being the “No. 1 or No. 2” business in your industry to being the No. 1 or No. 2 business in the world! To support each company’s global effort, he hired a senior manager of International Operations to facilitate each business’s overseas expansion. GE managers had to learn to think and act globally. Performance Management, Stretch Goals, and Control. Welch and his most senior executives were responsible for the progress of GE’s top 3,000 executives. They visited each company to review progress toward stated targets, often including “stretch” goals, another concept Welch introduced. Stretch goals used managers’ “dreams” as targets that might be impossible to reach but would motivate exceptional accomplishment. In another move, Welch installed a manager evaluation system on a “vitality curve.” This annual review process became known as “rank and yank,” because the top 20 percent received generous rewards, the vital 70 percent were largely left alone, and the bottom 10 percent were encouraged to leave the company. E-Business. About two years from retirement, Welch saw the potential of the Inter-net as “the biggest change I have ever seen.” He thought a big, traditional company like GE might be afraid of the new technology, so he required each business unit to establish a full-time team charged with including strategic opportunities for the Internet. Digitizing the company was Welch’s final major initiative. To summarize, the Jack Welch era at GE was the most phenomenal in company history. Welch and GE earned prestigious awards, such as Financial Times naming GE the “Most Admired Company in the World.” Moreover, Jack Welch became an icon for brilliant management and his name became known in popular culture. GE’s market value increased an astonishing 27 times from $18 billion to $500 billion under Welch’s guidance. In the year 2000, GE was the most valuable company in the world. 1.1b The Jeff Immelt Era 2001–2017 Welch personally chose Jeff Immelt to become GE’s new CEO. Immelt had broad experience at GE, changing jobs often across GE Appliance, GE Plastics, and GE Healthcare, eventually running the healthcare unit. The External Environment. Immelt and GE faced major environmental challenges almost from Day 1—starting with the September 11, 2001 terrorist attacks that stunned the world. GE also endured the 2002 stock market crash, an oil price collapse, and the 2008 collapse of Wall Street and the long global recession that followed. Strategy Changes. Immelt shifted GE toward an industrial business focus consis-tent with GE’s industrial roots while simultaneously learning to thrive in the Inter-net age. He added software capability to GE and predicted GE would become a major software company. Immelt also placed special emphasis on globalization and on more innovations via greater investments in research and development. Innovation. Under Immelt’s watch, GE developed a new concept called “reverse innovation.” GE’s innovation strategy for decades had been to develop high-end products in the United States and then sell the products internationally with modest adaptations to fit local conditions. Reverse innovation means to develop low-end products in poor countries and then sell those products in wealthy, well-developed countries. One example was the development of a cheap, portable ultrasound machine in China that was also sold successfully in the United States and Europe. Sustainability. At GE, sustainability means aligning business strategy to meet soci-etal needs, while minimizing environmental impact and advancing social develop-ment. Immelt pushed GE to embed sustainability at every level, from high-visibility initiatives such as Ecomagination (building machines that produce cleaner energy, reduce greenhouse gas emissions, and reduce clean water use) down to day-to-day safety management for employees. Sustainability also means promoting diversity, investing for affordable healthcare, investing in clean energy, and meeting ambitious environmental goals to reduce emissions. Big Decisions. Immelt’s biggest decisions were to sell most of GE Capital and to acquire the French energy business Alstom. GE Capital provided a variety of financial services—credit cards, car loans, real estate loans, subprime mortgages, and equipment leasing. GE Capital was a highly profitable business. After the 2008 financial crisis, however, GE Capital was designated “too big to fail.” Investors feared huge losses, so large parts of GE Capital were divested. This was a tough decision because in some pre-vious good years GE Capital provided nearly half of GE’s revenue and profits. The Alstom acquisition decision proved to be something of a disaster. At $13 billion, it was GE’s largest industrial acquisition. Managers soon realized not only that Alstom was operating inefficiently, but the demand for its gas-powered generation equipment was in decline. Immelt ordered Alstom to downsize by 12,000 employees. After paying $13 billion for Alstom, GE later took a write down of almost $20 billion. More Globalization. Immelt pushed international business beyond Welch’s earlier goals. He increased global revenue to 55 percent of total revenue compared to 30 percent when he took over. He explained that 90 percent of aircraft engines, 100 percent of gas turbines, and 50 percent of locomotives that GE manufactures leave the country. “That is where the customers are,” he said. Immelt championed the launch of GE’s Global Growth Organization (GGO), designed to work across the business units to increase sales in markets outside the United States. Digitalizing for Big Data Analytics. Immelt sponsored a large research effort into a sophisticated data analytics platform called Predix. This cloud-based operating system would allow GE to put sensors on industrial equipment sold to customers (e.g., jet engines, locomotives) that would provide huge volumes of data to ana-lyze machine performance and predict maintenance requirements. These data would enable GE to offer new and profitable services to customers. To summarize Immelt’s era at General Electric, most analysts thought GE fell behind rather than moved ahead. Immelt did all he could over his time as CEO to increase the value of GE stock, but over those 17 years share price declined by close to 30 percent while comparable companies (the S&P 500) rose by 124 percent. GE shed more than $150 billion in value compared to the $480 billion increase during Jack Welch’s reign. Some analysts argued that the GE conglomerate should be bro-ken up or dramatically slimmed down by selling its pieces and killing all invest-ments in R&D and innovation. They criticized Immelt for being overly optimistic in his decisions and for not confronting the reality of GE’s problems. 1.1c Events Since 2017 In 2017, GE announced that John Flannery, head of GE Healthcare, would follow Immelt as CEO. GE’s stock price soon dropped 45 percent. GE hit rock bottom during late 2018 and early 2019—its market value was about 1/10 of its peak under Jack Welch. The stock dividend that had supported GE widows and seniors for decades was cut to a single penny. The icing on the not-so-pretty cake was when GE was cut from its coveted position in the prestigious Dow Jones Industrial Average. GE’s Board of Directors soon decided that Flannery lacked the experience to han-dle the flow of crises at GE while he was still learning the company. The new CEO was 55-year-old Larry Culp, Lead Director on GE’s Board, who had 14 years’ expe-rience as CEO of Danaher Corporation. People are counting on Culp to reinstate the kind of business culture at GE that inspired other companies to copy it. Culp thought GE had become too large and complicated to be managed effectively, and he decided to slim down the company, including selling GE’s biotechnology business for $21 billion. During Culp’s first few months as CEO in 2019, GE’s stock started moving in a positive direction. With hope and hard work, managers, employees, and analysts expect the renewal of GE into an image of its former self will continue.1 1.2 Organization Design in Action Welcome to the real world of organization design. The shifting fortunes of GE illus-trate organization design in action. GE managers were deeply involved in organiza-tion design each day of their working lives—but many never realized it. Company managers didn’t fully understand how the organization related to the environment or how it should function internally. Organization design gives us the tools to evaluate and understand how and why some organizations grow and succeed while others do not. It helps us explain what happened in the past, as well as what might happen in the future, so that we can manage organizations more effectively. Organization design concepts can help Larry Culp and other GE managers analyze and diagnose what is happening and the changes that will help GE keep pace with a fast-changing world. Organization design gives people the tools to explain the decline of GE and recognize the steps managers might take to keep the company competitive. Similar problems have challenged numerous organizations. Toyota Motor Corporation, for example, had the best manufacturing system in the world and was the unchallenged auto quality leader for decades. But when top managers started implementing high-pressure goals for extensive global growth, the famous quality system was strained to a breaking point. By 2009, Toyota found itself in the middle of a crisis that culminated in the recall of more than 9 million cars due to quality problems.2 Sales at Papa John’s pizza chain dropped after a highly-publicized inci-dent of founder John Schnatter using a racial slur led to the exposure of a corpo-rate culture that belittled women and minorities. Schnatter resigned. The Board of Directors asked an outside firm to oversee an audit of the corporate culture, and the company began holding workshops on diversity and inclusion to try to fix the dysfunctional culture.3 Or consider Kodak, the company that once ruled the pho-tographic film business. Kodak invented one of the first digital cameras and spent hundreds of millions of dollars developing digital technology, but the fear of canni-balizing their lucrative film business paralyzed managers when the time came to go to market. Kodak filed for bankruptcy in 2012 and is now a shell of the company it was prior to the digital camera revolution.4 1.2a Topics Each of the topics to be covered in this book is illustrated in the opening General Electric case. Indeed, managers at organizations such as General Electric, Toyota, Kodak, and Papa John’s are continually faced with a number of challenges. For example: • How can the organization adapt to or control such external elements as compet-itors, customers, government, and creditors in a fast-paced environment? • What strategic and structural changes are needed to help the organization attain effectiveness? • How can the organization avoid management ethical lapses that could threaten its viability? • What changes are needed to address the growing demand for organizations to pay attention to sustainability issues? • How can managers cope with the problems of large size and bureaucracy? • What is the appropriate use of power and politics among managers? • How should internal conflict and coordination between work units be managed? • What kind of corporate culture is needed and how can managers shape that culture? • How much and what type of innovation and change is needed? BRIEFCASE As an organization manager, keep these guidelines in mind: Do not ignore the external environment or protect the organization from it. Because the environment is unpre-dictable, do not expect to achieve complete order and rationality within the organization. Strive for a balance between order and flexibility. These are the topics with which organization theory and design is concerned. Organization design concepts apply to all types of organizations in all industries. Man-agers at Hyundai, for example, turned the Korean auto manufacturer once known for producing inexpensive no-frills cars with a poor reputation into the world’s third largest automaker by relentlessly focusing on quality, cost-control, and customer satis-faction. After Google pulled its search engine and Gmail out of China in protest over censorship and government hacking, managers found a way to keep a foothold in the lucrative market by building relationships with local partners such as Mobvoi, Ten-cent Holdings Ltd., and others. Google has been negotiating to provide software and cloud-hosting services that would run on a data center owned by a Chinese local part-ner. Managers at the Swedish furniture giant IKEA are undertaking the most dramatic restructuring in company history to cope with rapid changes in shopping habits.5 All of these companies are using concepts based in organization design. Organization design also applies to nonprofit organizations such as United Way, Best Friends Ani-mal Society, local arts organizations, colleges and universities, and the Make-A-Wish Foundation, which grants wishes to terminally ill children. Organization design draws lessons from organizations such as GE, Google, and United Way and makes those lessons available to students and managers. As our opening example of GE shows, even large, successful organizations are vulnerable, lessons are not learned automatically, and organizations are only as strong as their decision makers. Research shows that many new companies don’t survive past their fifth birthday, yet some organizations thrive for 50 or even 100 years. Organiza-tions are not static; they continuously adapt to shifts in the external environment. Today, many companies are facing the need to transform themselves into dramati-cally different organizations because of new challenges in the environment. 1.2b Purpose of This Chapter The purpose of this chapter is to explore the nature of organizations and organi-zation design today. Organization design has developed from the systematic study of organizations by scholars. Concepts are obtained from living, ongoing organi-zations. Organization theory and design has a practical application, as illustrated by the GE case. It helps managers understand, diagnose, and respond to emerging organizational needs and problems. We first take a deeper look at the challenges today’s managers and organiza-tions face. The next section begins with a formal definition of the organization as an open system and then explores introductory concepts for describing and ana-lyzing organizations, including various structural dimensions and contingency fac-tors. We introduce the concepts of efficiency and effectiveness and describe the most common approach to measuring organizational performance. Succeeding sections examine the history of organization design, the distinction between mechanistic and organic designs, and how organization theory can help people manage complex organizations in a rapidly changing world. The chapter closes with a brief overview of the themes to be covered in this book. 1.2c Current Challenges Research into hundreds of organizations provides the knowledge base to make GE and other organizations more effective. Challenges organizations face today are different from those of the past, and thus the concept of organizations and orga-nization design is evolving. This chapter’s BookMark describes two recent organi-zational forms that are altering the organizational landscape. The world is changing more rapidly than ever before, and managers are responsible for positioning their organizations to adapt to new needs. Some specific challenges today’s managers and organizations face are globalization, intense competition, rigorous scrutiny of sus-tainability and ethical practices, the need for rapid response, and incorporating dig-ital business and big data analytics. Globalization. The cliché that the world is getting smaller is dramatically true today. Markets, technologies, and organizations are becoming increasingly intercon-nected.6 Managers who can help their companies develop a global perspective are in high demand. For example, consider Ramon Laguarta, a native of Barcelona, Spain, who took over as CEO of PepsiCo in 2018, Indian American Sundar Pichai, CEO of Google, or Medtronic CEO Omar Ishrak, a Bangladesh native who was educated in the United Kingdom and worked in the United States for nearly two decades. Today’s successful organizations feel “at home” anywhere in the world. Com-panies can locate different parts of the organization wherever it makes the most business sense: top leadership in one country and technical brainpower and pro-duction in other locales. Related trends are global outsourcing, or contracting out some functions to organizations in other countries (Nike), and strategic partnering with foreign firms to gain a global advantage (Google). Cross-border acquisitions and the development of effective business relationships in other countries are vital to many organizations’ success. Yet doing business on a global scale is not easy. After a new European Union privacy law went into effect in mid-2018, the French data protection authority fined Google 50 million euros (about $57 million) for not properly disclosing to users how it collected data to provide personalized ads.7 Uber has pulled out of several global markets, including China, Russia, and Southeast Asia, after it got into trouble defying government regulations in various countries.8 Another issue concerns outsourcing and contractor relationships. Several garment factory fires in Bangladesh and the collapse of another apparel plant that killed more than 1,100 workers put the spotlight on poor working conditions in that countryThe problem for organizations such as Walmart, H&M, Target, Apple, Amazon and other big companies that outsource is that similar poor working conditions exist in other low-wage countries such as Pakistan, Cambodia, Indonesia, and Vietnam that produce much of the world’s clothing and other products.9 Intense Competition. The growing global interdependence creates new advan-tages, but it also means that the environment for companies has become extremely complex and extremely competitive. Customers want low prices for quality goods and services, and the organizations that can meet that demand will win. Outsourc-ing firms in low-wage countries can often do work for 50 to 60 percent less than companies based in the United States, for instance, so U.S. firms that provide similarservices have to search for new ways to compete or go into new lines of business.10 One entrepreneur who developed a new type of battery for notebook computers decided to have it manufactured by a factory in Shenzhen, China. She wanted to produce the product in the United States, but U.S. contract manufacturers wanted millions of dollars up front, a demand not made by any of the manufacturers she met with in China.11 Companies in all industries are feeling pressure to drive down costs, keep prices low, and meet shifting demands. Retailers provide a stark example. Tesco, the larg-est supermarket chain in the United Kingdom, implemented a price-cutting cam-paign and is slashing thousands of jobs to trim costs as it faces growing competition from discount chains Aldi and Lidl and online shopping sites. Executives at firms including Macy’s, J. C. Penney, Family Dollar, and Gap announced the closing of additional stores in early 2019, reflecting a failure to adapt as competition and shopping habits change. Other traditional retailers, including Walmart, Target, and Best Buy, on the other hand, have seen sales increase as their managers have found ways to compete with Amazon online while also finding the right mix of products and services to bring people into their physical stores.12 Sustainability, the Green Movement, and Ethics. Today’s managers face tremen-dous pressure to “dial down their single-minded pursuit of financial gain and pay closer attention to [the organization’s] impact on employees, customers, commu-nities, and the environment.”13 People are demanding a stronger commitment by organizations to balance profit and public interest. Many companies are embracing the philosophy of sustainability, which refers to economic development that gener-ates wealth and meets the needs of the current generation while saving the environ-ment so future generations can meet their needs as well.14 Sustainable development has emerged as a key goal for organizational growth and development.15 As men-tioned in the chapter opening case, Jeff Immelt pushed GE to embed sustainability at every level of the company. Going green has become a new business imperative, driven by shifting social attitudes, new government policies, climate change, and the information technology that quickly spreads news of a corporation’s negative impact on the environment. At Interface, an Atlanta-based carpet manufacturer, founder and former chairman Ray C. Anderson implemented “Mission Zero,” a pledge to reduce the use and pro-duction of virgin raw materials and eliminate the company’s impact on the environ-ment. Current CEO Jay Gould is following in Anderson’s footsteps, with Interface becoming in 2018 one of the first flooring manufacturers to announce a goal of carbon neutrality. “We really talk about four key stakeholders” Gould says about the company’s commitment to sustainable business practices. “Our customers, our employees, our shareholders—and the environment.”16 Managers are also feeling pressure from the government and the public to hold their organizations and employees to high ethical and professional standards. Following widespread moral lapses and corporate financial scandals, organizations are under scru-tiny as never before. Facebook and other tech companies, for instance, have frequently been targeted in recent years by regulators and others demanding more oversight. In early 2019, a British parliamentary committee issued a blistering report concluding that internal Facebook e-mails prove that the company is willing to sacrifice user privacy for the sake of generating more advertising and increasing its revenue. “Social media companies cannot hide behind the claim of being merely a ‘platform’ and maintain that they have no responsibility themselves in regulating the content of their sites,” the report said, calling for new laws regulating the industry. 17 Non-tech companies aren’t immune to the scrutiny. Consulting firm McKinsey & Company recently agreed to a $15 million settlement with the U.S. Justice Department to resolve an investigation into charges that the company failed to properly disclose its financial connections to other parties while working on bankruptcy cases.18 Speed and Responsiveness. A fourth significant challenge for organizations is to respond quickly and decisively to environmental changes, organizational crises, or shifting customer expectations. For much of the twentieth century, organizations operated in a relatively stable environment, so managers could focus on designing structures and systems that kept the organization running smoothly and efficiently. There was little need to search for new ways to cope with increased competition, volatile environmental shifts, or changing customer demands. Today, new products, new companies, and even entirely new industries rise and fall faster than ever. As previously mentioned, the retail industry is undergoing a rapid and dramatic transformation. In what has been called the “retail apocalypse,” dozens of retailers, including Payless, Aeropostale, Mattress Firm, Sears, Radio Shack, Bon Ton, and Toys “R” Us, have filed for bankruptcy in recent years. Some have gone out of busi-ness entirely, while others are closing stores and struggling to survive.19 Online retail giant Amazon continues to change the game. Amazon is continuously experiment-ing with new ideas, pulling the plug quickly on those that don’t work out. In early 2019, managers announced that Amazon would shut down all 87 of its U.S. pop-up stores, small kiosk stores that operated in locations such as malls, Kohl’s stores, and Whole Foods Market locations. Meanwhile, the company continues to explore a brick-and-mortar strategy, opening more bookstores and 4-Star Stores (which sell products rated 4 stars or higher by Amazon.com customers) and planning for a new line of grocery stores. Founder and CEO Jeff Bezos believes most business decisions have to be made quickly “with somewhere around 70 percent of the information you wish you had.”20 Managers in other industries must also think fast and act fast. The large consumer products firm Procter & Gamble is cutting its divisions from 10 to 6 and giving manag-ers of those divisions more control and decision-making authority. “There is a need for greater agility,” said CEO David Taylor. “Frankly, the volatility we see in many parts of the world . . . has increased meaningfully the speed of change.”21 Considering the tur-moil and flux inherent in the world, managers and companies need a mindset of contin-uous reinvention to succeed, which typically means giving people on the frontlines the power to experiment and make decisions.22 Digital Organizations and Big Data Analytics. Today’s realm of the Internet, social networking, blogs, online collaboration, web-based communities, podcasting, mobile devices, Twittering, Facebooking, YouTube-ing, and Skype-ing is radically different from the world many established managers are familiar and comfortable with.23 The digital revolution has changed everything—not just how we communicate with one another, find information, and share ideas, but also how organizations are designed and man-aged, how businesses operate, and how employees do their jobs. One significant aspect of the digital revolution is the use of big data analytics, which refers to technologies, skills, and processes for searching and examining massive sets of data to uncover hidden patterns and correlations.24 GE attached data sensors to inter-nal moving parts on its massive machines to analyze billions of data bits to assess wear and predict maintenance needs. Facebook uses the personal data you put on your page and tracks and monitors your online behavior along with everyone else’s, then searches through all those data to identify and suggest potential friends. That kind of datacollected by Facebook and Google also explains why ads pop up on your computer screen when you use an Internet browser. Netflix drills through tons of data it collects on its subscribers interests to determine which new shows and movies to offer and how to promote them.25 However, big data is not just for online companies. Walmart collects more than 2.5 petabytes of data every hour from customer transactions and uses those data to make better decisions (a petabyte is about a million gigabytes or the equivalent of about 20 million filing cabinets full of written data).26 The example of how Foot Locker uses data analytics illustrates the benefits and the challenges it can brin1.3 What Is an Organization? Organizations are hard to see. We see outcroppings, such as a tall building, a com-puter workstation, or a friendly employee, but the whole organization is vague and abstract and may be scattered among several locations, even around the world. We know organizations are there because they touch us every day. Indeed, they are so common that we take them for granted. We hardly notice that we are born in a hospital, have our birth records registered in a government agency, are educated in schools and universities, are raised on food produced on corporate farms, use our phones to hail a ride, purchase clothes, or have groceries delivered, buy a house built by a construction company and sold by a real estate agency, borrow money from a bank, turn to police and fire departments when trouble erupts, use moving companies to change residences, and receive an array of benefits from various gov-ernment agencies.28 Most of us spend many of our waking hours working in an organization of one type or another. 1.3a Definition Organizations as diverse as a bank, a consumer products company, a ride-hailing service, a corporate farm, a social networking site, and a government agency have characteristics in common. The definition used in this book to describe organiza-tions is as follows: organizations are (1) social entities that (2) are goal-directed, (3) are designed as deliberately structured and coordinated activity systems, and (4) are linked to the external environment. An organization is a means to an end and it has to be designed to accomplish that end. It might be thought of as a tool or machine to get things done and achieve a specific purpose. The purpose will vary, but the central aspect of an organization is the coordination of people and resources to collectively accomplish desired goals.29 An organization is not a building or a set of policies and procedures; organizations are made up of people and their relationships with one another. An organization exists when people interact with one another to perform essential functions that help attain goals. Managers and owners deliberately structure organizational resources to achieve the organization’s purpose. However, even though work may be structured into separate departments or sets of activities, most organizations today are striving for greater horizontal coordination of work activities, often using teams of employ-ees from different functional areas to work together on projects. Boundaries between departments, as well as those between organizations, are becoming more flexible and diffuse as companies face the need to respond to changes in the external environment more rapidly. An organization cannot exist without interacting with customers, sup-pliers, competitors, and other elements of the external environment. Some companies are even cooperating with their competitors, sharing information and technology to their mutual advantage. Exhibit 1.1 shows the organization as an open system that obtains inputs from the external environment, adds value through a transformation process, and discharges products and services back to the environment. 1.3b From Multinationals to Nonprofits Some organizations are large, multinational corporations, such as General Electric, Google, and American Express; others are small, family-owned businesses; and still others are nonprofit organizations or governmental agencies. Some manufacture products such as jet engines, flat-panel televisions, or smartphones, whereas others provide services such as legal representation, Internet and telecommunications ser-vices, mental health resources, or car repair. Later in this text, Chapter 8 will look at the distinctions between manufacturing and service technologies. Chapter 10 discusses size and life cycle and describes some differences between small and large organizations. Another important distinction is between for-profit businesses and nonprofit organizations. All of the topics in this text apply to nonprofit organizations such as United Way, the Nature Conservancy, Habitat for Humanity, and St. Jude Children’s Research Hospital, just as they do to businesses such as General Electric, Uber, Netflix, and Taco Bell. However, there are some important distinctions to keep in mind. The primary difference is that managers in businesses direct their activities toward earning money for the company and its owners, whereas managers in non-profits direct much of their effort toward generating some kind of social impact. The unique characteristics and needs of nonprofit organizations present unique challenges for organizational leaders.30 Financial resources for government and charity nonprofits typically come from government appropriations, grants, and donations, rather than from the sale of products or services to customers. In businesses, managers focus on improving the organization’s products and services to increase sales revenues. In nonprofits, however, services are typically provided to nonpaying clients, and a major problem for many organizations is securing a steady stream of funds to continue operating. Nonprofit managers, committed to serving clients with limited funds, must focus on keeping organizational costs as low as possible and demonstrating a highly efficient use of resources. Moreover, for-profit firms often compete with nonprofits for lim-ited donations through their own philanthropic fundraising efforts.31 New forms of social welfare organizations, called hybrid or dual-purpose orga-nizations, are designed to earn a profit and be self-sufficient rather than raise funds. Balancing the profit-seeking and social welfare sides of the organization is discussed in Chapter 7. Moreover, many nonprofit organizations, such as hospitals and pri-vate universities, do have a “bottom line” in the sense of having to generate enough revenues to cover expenses, buy new equipment, upgrade technology, and so forth, so managers often struggle with the question of what constitutes organizational effectiveness. It is easy to measure dollars and cents, but the metrics of success in dual-purpose and nonprofits are much more ambiguous. Managers have to measure intangible goals such as “improve public health,” “make a difference in the lives of the disenfranchised,” or “enhance appreciation of the arts.” Managers in nonprofit organizations also deal with many diverse stakeholders and must market their services to attract not only clients (customers) but also vol-unteers and donors. This can sometimes create conflict and power struggles among organizations, as illustrated by the Make-A-Wish Foundation, which has found itself at odds with smaller, local wish-granting groups as it expands to cities across the United States. The more kids a group can count as helping, the easier it is to raise funds. Local groups don’t want Make-A-Wish invading their turf, particularly at a time when charitable donations in general have declined. “We should not have to compete for children and money,” says the director of the Indiana Children’s Wish Fund. “They [Make-A-Wish] use all their muscle and money to get what they want.”32 Thus, the organization design concepts discussed throughout this book, such as dealing with issues of power and conflict, setting goals and measuring effectiveness, coping with environmental uncertainty, implementing effective control mechanisms, and satisfying multiple stakeholders, apply to nonprofit organizations such as the Indiana Children’s Wish Fund just as they do to businesses such as General Electric. These concepts and theories are adapted and revised as needed to fit the unique needs and problems of various small, large, profit, or nonprofit organizations. 1.3c Importance of Organizations It may seem hard to believe today, but organizations are relatively recent in the history of humankind. Even in the late nineteenth century there were few organi-zations of any size or importance—no labor unions, no trade associations, and few large businesses, nonprofit organizations, or governmental agencies. What a change has occurred since then! The development of large organizations transformed all of society, and, indeed, the modern corporation may be the most significant innovation of the past 150 years.33 Organizations are all around us and shape our lives in many ways. But what contributions do organizations make? Why are they important? Exhibit 1.2 indi-cates seven reasons organizations are important to you and to society. First, recall that an organization is a means to an end. Organizations bring together resources to accomplish specific goals. A good example is Northrup Grumman, which builds nuclear-powered, Nimitz-class aircraft carriers. Putting together an aircraft carrier is an incredibly complex job involving 47,000 tons of precision-welded steel, more than 1 million distinct parts, 900 miles of wire and cable, and more than seven years of hard work by 17,800 employees.34 How could such a job be accomplished with-out an organization to acquire and coordinate these varied resources? Organizations also produce goods and services that customers want at competi-tive prices. Companies look for innovative ways to produce and distribute desirable goods and services more efficiently. Many manufacturing companies, for example, have redesigned their production processes, applying artificial intelligence, 3-D printing, advanced robotics, and other emerging technologies, to provide products more efficiently and at lower cost.35 Redesigning organizational structures and man-agement practices can also contribute to increased efficiency. Organizations create a drive for innovation rather than a reliance on standard products and outmoded approaches to management and organization design. Organizations adapt to and influence a rapidly changing environment. Motorcy-cle maker Harley-Davidson, in business for well over a century, has been struggling for several years to adapt to a shifting environment. Motorcycle sales overall are declining, and Harley’s customer base is made up largely of aging baby-boomers. Although Harley has improved efficiency at many of its plants and come out with new models to attract younger riders, the company is still under pressure. In early 2019, Harley announced that its profit for the fourth quarter of 2018 was effec-tively zero.36 One company that illustrates how organizations adapt to a changing environment is the fast fashion company Zara. Zara opened its first clothing retail store in Spain in 1975. During the 1980s, Zara initiated “instant fashions” via a new design, manufacturing, and distribution process that dramati-cally reduced lead times for new trends. The new process made greater use of information technology and designers worked in teams rather than as individuals. Zara grew rapidly. The company started expanding throughout Europe in the 1980s and to the United States in 1989. In 2014, Zara adopted a chip technology that allows the company to quickly take inventory via radio signals. The stockroom is notified when an item is sold so the item can be immediately replaced. Zara has nearly perfected a fast-response operation. Just four weeks are needed to design a new product and get finished goods into stores, compared with up to six months for other clothing retailers. It launches about 12,000 new designs each year. Shortening the product cycle means greater success responding to changing customer tastes. Zara also responds quickly to concerns from customers and others in the environment. Zara received criticism for selling a small child’s T-shirt that a customer said closely resem-bled uniforms worn by concentration camp inmates. Zara immediately removed the shirt and apologized. Greenpeace started a dialogue with Zara about toxic chemicals from cloth-ing production. Zara committed to eradicating hazardous chemicals from its supply chain, becoming the largest retailer to raise awareness for the Greenpeace Detox Campaign and switching to toxic-free production.37 Although Harley has improved efficiency at many of its plants and come out with new models to attract younger riders, the company is still under pressure. In early 2019, Harley announced that its profit for the fourth quarter of 2018 was effec-tively zero.36 One company that illustrates how organizations adapt to a changing environment is the fast fashion company Zara. Zara opened its first clothing retail store in Spain in 1975. During the 1980s, Zara initiated “instant fashions” via a new design, manufacturing, and distribution process that dramati-cally reduced lead times for new trends. The new process made greater use of information technology and designers worked in teams rather than as individuals. Zara grew rapidly. The company started expanding throughout Europe in the 1980s and to the United States in 1989. In 2014, Zara adopted a chip technology that allows the company to quickly take inventory via radio signals. The stockroom is notified when an item is sold so the item can be immediately replaced. Zara has nearly perfected a fast-response operation. Just four weeks are needed to design a new product and get finished goods into stores, compared with up to six months for other clothing retailers. It launches about 12,000 new designs each year. Shortening the product cycle means greater success responding to changing customer tastes. Zara also responds quickly to concerns from customers and others in the environment. Zara received criticism for selling a small child’s T-shirt that a customer said closely resem-bled uniforms worn by concentration camp inmates. Zara immediately removed the shirt and apologized. Greenpeace started a dialogue with Zara about toxic chemicals from cloth-ing production. Zara committed to eradicating hazardous chemicals from its supply chain, becoming the largest retailer to raise awareness for the Greenpeace Detox Campaign and switching to toxic-free production.37 Zara and many other organizations have entire departments charged with mon-itoring the external environment and finding ways to adapt to or influence that environment. Through all of these activities, organizations create value for their owners, cus-tomers, and employees. Managers analyze which parts of the operation create value and which parts do not; a company can be profitable only when the value it creates is greater than the cost of resources. Finally, organizations must cope with and accommodate today’s challenges of work-force diversity and growing concerns over sustainability and ethics, as well as find effec-tive ways to motivate employees to work together to accomplish organizational goals1.4 Dimensions of Organization Design Organizations shape our lives, and well-informed managers can shape organiza-tions. The first step for understanding organizations is to examine the features that describe specific organizational design traits. These features describe organizations in much the same way that personality and physical traits describe people. Exhibit 1.3 illustrates two types of interacting features of organizations: struc-tural dimensions and contingency factors. Structural dimensions provide labels to describe the internal characteristics of an organization. They create a basis for mea-suring and comparing organizations. Contingency factors encompass larger elements that influence structural dimensions, including the organization’s size, technology, environment, culture, and goals. Contingency factors describe the organizational setting that influences and shapes the structural dimensions. Contingency factors can be confusing because they represent both the organization and the environment. These factors can be envisioned as a set of overlapping elements that shape an orga-nization’s structure and work processes, as illustrated in Exhibit 1.3. To understand and evaluate organizations, one must examine both structural dimensions and con-tingency factors.38 These features of organization design interact with one another and can be adjusted to accomplish the purposes listed earlier in Exhibit 1.2. 1.4a Structural Dimensions Key structural dimensions of organizations include formalization, specialization, hierarchy of authority, complexity, and centralization.391. Formalization pertains to the amount of written documentation in the organi-zation. Documentation includes procedures, job descriptions, regulations, and policy manuals. These written documents describe behavior and activities. For-malization is often measured by simply counting the number of pages of docu-mentation within the organization. Large universities, for example, tend to be high on formalization because they have several volumes of written rules for such things as registration, dropping and adding classes, student associations, dormitory governance, and financial assistance. A small, family-owned busi-ness, in contrast, may have almost no written rules and would be considered informal. 2. Specialization is the degree to which organizational tasks are subdivided into separate jobs. If specialization is extensive, each employee performs only a nar-row range of tasks. If specialization is low, employees perform a wide range of tasks in their jobs. Specialization is sometimes referred to as the division of labor. 3. Hierarchy of authority describes who reports to whom and the span of control for each manager. The hierarchy is depicted by the vertical lines on an organiza-tion chart, as illustrated in Exhibit 1.4. The hierarchy is related to span of con-trol (the number of employees reporting to a supervisor). When spans of control are narrow, the hierarchy tends to be tall. When spans of control are wide, the hierarchy of authority will be shorter. 4. Complexity refers to the number of distinct departmental units or activities within the organization. For example, GE was incredibly Vertical complexity is the number of levels in the hierarchy. Different organiza-tional levels possess different stores of knowledge and expertise.40 Horizontal complexity is the number of departments or occupational specialties existing horizontally across the organization. Spatial complexity is the degree to which an organization’s departments and personnel are dispersed geographically. The organization in Exhibit 1.4 has a vertical complexity of five levels. Its horizontal complexity at level 3 would be seven departments. Spatial complexity would be 1 since the offices are all in the same location. 5. Centralization refers to the hierarchical level that has authority to make deci-sions. When decision making is kept at the top level, the organization is cen-tralized. When decisions are delegated to lower organizational levels, it is decentralized. Examples of organizational decisions that might be centralized or decentralized include purchasing equipment, establishing goals, choosing sup-pliers, setting prices, hiring employees, and deciding marketing territories. Jack Welch worked to decentralize GE. To understand the importance of paying attention to structural dimensions of organization design, consider the following examples. One newspaper reporter described Japan as “a rule-obsessed nation with a penchant for creat-ing bureaucracy, designating titles and committees for even the most mundane of tasks.” When the fishing village of Minamisanriku was ravaged by a tsunami, that propensity served a valuable purpose. The creation of rules, procedures, and authority structures helped create a sense of normalcy and comfort at the Shizugawa Elementary School Evacuation Center, for example. The group of evacuees created six divisions to oversee various aspects of daily life, such as cooking, cleaning, inventory control, and medical care, and each function had detailed rules and proce-dures to follow. The exhaustive and meticulous procedures kept the Center running smoothly and helped people cope with a devastating situation. Contrast that smooth operation to what happened after a Transocean oil rig drilling a well for oil giant BP at Deepwater Horizon exploded in the Gulf of Mexico, killing 11 crew members and setting off an environmental disaster. Setting aside the question of what caused the explosion in the first place, once it happened the structure aboard the rig exac-erbated the situation. Activities were so loosely organized that no one seemed to know who was in charge or what their level of authority and responsibility was. Twenty-three-year-old Andrea Fleytas issued a mayday (distress signal) over the radio when she realized no one else had done so, but she was chastised for overstepping her authority. One manager said he didn’t call for help because he wasn’t sure he had authorization to do so. Still another said he tried to call to shore but was told the order needed to come from someone else. Crew members knew the emergency shutdown needed to be triggered, but there was confu-sion over who had the authority to give the OK. “The scene was very chaotic,” said worker Carlos Ramos. “There was no chain of command. Nobody in charge.”41 1.4b Contingency Factors Understanding structural dimensions alone does not help us understand or appro-priately design organizations. It is also necessary to look at contingency factors, including size, organizational technology, the external environment, goals and strat-egy, and organizational culture. 1. Size can be measured for the organization as a whole or for specific compo-nents, such as a plant or division. Because organizations are social systems, sizecomplex. Complex-ity can be measured along three dimensions: vertical, horizontal, and spatialis typically measured by the number of employees. Other measures such as total sales or total assets also reflect magnitude, but they do not indicate the size of the human part of the system. GE was very large, with hundreds of thousands of employees. 2. Organizational technology refers to the tools, techniques, and actions used to transform inputs into outputs. It concerns how the organization actually pro-duces the products and services it provides for customers and includes such things as flexible manufacturing, digital information systems, and the Internet. An automobile assembly line, a social media platform, a college classroom, a ride-hailing app, and an overnight package delivery system are technologies, although they differ from one another. 3. The environment includes all elements outside the boundary of the organiza-tion. Key elements include the industry, government, customers, suppliers, and the financial community. The environmental elements that affect an organiza-tion the most are often other organizations. 4. The organization’s goals and strategy define the purpose and competitive tech-niques that set it apart from other organizations. Goals are often written down as an enduring statement of company intent. A strategy is the plan of action that describes resource allocation and activities for dealing with the environment and for reaching the organization’s goals. Goals and strategies define the scope of operations and the relationship with employees, customers, and competitors. 5. An organization’s culture is the underlying set of key values, beliefs, understand-ings, and norms shared by employees. These underlying values and norms may pertain to ethical behavior, commitment to employees, efficiency, or customer service, and they provide the glue to hold organization members together.42 At GE, for example, Jack Welch implemented Work-Out sessions to create a culture of open and direct conversation among employees and managers. The five structural dimensions and five contingency factors discussed here are interdependent. Certain contingency factors will influence the appropriate degree of specialization, formalization, and so forth for the organization. For example, large organization size, a routine technology, and a stable environment all tend to create an organization that has greater formalization, specialization, and centralization. More detailed relationships among contingency factors and structural dimensions are explored throughout this book. ASSESS YOUR ANSWER 1 An organization can be understood primarily by understanding the people who make it up. ANSWER: Disagree. An organization has distinct characteristics that are independent of the nature of the people who make it up. All the people could be replaced over time while an organization’s structural dimen-sions and contingency factors would remain similar. The organizational features illustrated in Exhibit 1.3 provide a basis for mea-suring and analyzing characteristics that cannot be seen by the casual observer, and they reveal significant information about an organization. Consider, for example, the dimensions of Valve Software compared with those of WalmarMike Harrington, former Microsoft employees, wanted to create a flat, fast organization that allowed employees maximum flexibility. It sounds like a dream for employees, but many people don’t adapt to the “no-structure structure” and leave for more traditional jobs. At Valve, everyone has a voice in making important decisions. Any employee can participate in hiring decisions, which are usually made by teams. There are no promotions, only new projects, with someone emerging as the de facto leader. Firings are rare, but teams decide together if someone isn’t working out. Team meetings are highly informal and people are invited to share feelings as well as business ideas. Compare Valve’s approach to that of Walmart, which achieves its competitive edge through internal cost efficiency. A standard formula is used to build each store, with uni-form displays and merchandise. Walmart’s administrative expenses are the lowest of any chain. The distribution system is a marvel of efficiency. Goods can be delivered to any store in less than two days after an order is placed. Stores are controlled from the top, although store managers have some freedom to adapt to local conditions. Employees follow standard procedures set by management and have little say in decision making. However, performance is typically high, and most employees consider that the company treats them fairly.43 Exhibit 1.5 illustrates several structural dimensions and contingency factors of Valve Software and Walmart. Valve is a small organization that ranks very low with respect to formalization and centralization and has a medium degree of special-ization. Horizontal collaboration to serve customers with innovative products is emphasized over the vertical hierarchy. Walmart is much more formalized, special-ized, and centralized, with a strong vertical hierarchy. Efficiency is more important than new products and services, so most activities are guided by standard regu-lations. Rules are dictated from the top and communication flows down a strong vertical chain of command. Structural dimensions and contingency factors can thus tell a lot about an organization and about differences among organizations. These various organiza-tion design features are examined in more detail in later chapters to determine the appropriate level of each structural dimension needed to perform effectively based on various contingency factors. 1.4c Performance and Effectiveness Outcomes The whole point of understanding structural dimensions and contingency factors is to design the organization in such a way as to achieve high performance and effec-tiveness. Managers adjust various aspects of the organization to most efficientlyand effectively transform inputs into outputs and provide value. Efficiency refers to the amount of resources used to achieve the organization’s goals. It is based on the quantity of raw materials, money, and employees necessary to produce a given level of output. Effectiveness is a broader term, meaning the degree to which an organiza-tion achieves its goals. Defining goals and measuring the organization’s progress toward attaining them is the most common way managers assess effectiveness. For example, at GE, described in the opening case, Jeff Immelt set new goals for sustainability, as well as goals in other areas, such as innovation and global growth. A small hard-ware store might set weekly sales goals. In a manufacturing company, managers might set specific targets in areas such as conformity-to-specifications quality, flexibility (both product mix and volume), and speed and timeliness of deliv-ery.44 To be effective, all organizations need clear, focused goals and appropriate strategies for achieving them. The concept of effectiveness, including goals and strategies and various approaches to measuring effectiveness, will be discussed in detail in Chapter 2. An alternative approach to measuring effectiveness, the stakeholder approach, assesses diverse organizational activities by looking at what various organizational stakeholders want from the organization, and the satisfaction level of each. A stakeholder is any group within or outside of the organization that has a stake in the organization’s outcomes. Examples of stakeholders include: • Customers, who want high quality products and services provided in a timely manner at a reasonable price. • Employees, who want adequate pay and benefits, good working conditions, and appropriate supervision. • Stockholders, who want a good financial return on their investment. Managers carefully balance the needs and interests of various stakeholders in set-ting goals and striving for effectiveness. The satisfaction level of each group can be assessed as an indication of the organization’s performance.45 The stakeholder approach will be discussed in detail in Chapt.5 The Evolution of Organization Design Organization design is not a collection of facts; it is a way of thinking about orga-nizations and how people and resources are organized to collectively accomplish a specific purpose.46 Organization design is a way to see and analyze organizations more accurately and deeply than one otherwise could. The way to see and think about organizations is based on patterns and regularities in organizational design and behavior. Organization scholars search for these regularities, define them, mea-sure them, and make them available to the rest of us. The facts from the research are not as important as the general patterns and insights into organizational func-tioning gained from a comparative study of organizations. Insights from organi-zation design research can help managers improve organizational efficiency and effectiveness, as well as strengthen the quality of organizational life.47 One area of insight is how organization design and management practices have varied over time in response to changes in the larger society. 1.5a Historical Perspectives You may recall from an earlier management course that the modern era of manage-ment theory began with the classical management perspective in the late nineteenth and early twentieth century. The emergence of the factory system during the Indus-trial Revolution posed problems that earlier organizations had not encountered. As work was performed on a much larger scale by a larger number of workers, people began thinking about how to design and manage work in order to increase pro-ductivity and help organizations attain maximum efficiency. The classical perspec-tive, which sought to make organizations run like efficient, well-oiled machines, is associated with the development of hierarchy and bureaucratic organizations and remains the basis of much of modern management theory and practice. In this section, we will examine the classical perspective, with its emphasis on efficiency and organization, as well as other perspectives that emerged to address new con-cerns, such as employee needs and the role of the environment. Elements of each perspective are still used in organization design, although they have been adapted and revised to meet changing needs. These different perspectives can also be associ-ated with different ways in which managers think about and view the organization, called manager frame of reference. Complete the questionnaire in the “How Do You Fit the Design?” box to understand your frame of reference. Efficiency Is Everything. Pioneered by Frederick Winslow Taylor, scientific management emphasizes scientifically determined jobs and management practices as the way to improve efficiency and labor productivity. Taylor proposed that workers “could be retooled like machines, their physical and mental gears recalibrated for better productivity.”48 He insisted that management itself would have to change and emphasized that decisions based on rules of thumb and tradition should be replaced with precise procedures developed after careful study of individual situations.49 To use this approach, managers develop precise, standard procedures for doing each job, select workers with appropriate abilities, train workers in the standard proce-dures, carefully plan work, and provide wage incentives to increase output. Taylor’s approach is illustrated by the unloading of iron from railcars and reloading finished steel for the Bethlehem Steel plant in 1898. Taylor calculated that with correct movements, tools, and sequencing, each man was capable of loading 47.5 tons per day instead of the typical 12.5 tons. He also worked out an incentive system that paid each man $1.85 per day for meeting the new standard, an increase from the previous rate of $1.15. Productivity at Bethlehem Steel shot up overnight. These insights helped to establish organizational assumptions that the role of man-agement is to maintain stability and efficiency, with top managers doing the think-ing and workers doing what they are told. The ideas of creating a system for maximum efficiency and organizing work for maximum productivity are deeply embedded in our organizations. A Harvard Busi-ness Review article discussing innovations that shaped modern management put scientific management at the top of its list of 12 influential innovations.50 How to Get Organized. Another subfield of the classical perspective took a broader look at the organization. Whereas scientific management focused primarily on the technical core—on work performed on the shop floor—administrative principles looked at the design and functioning of the organization as a whole. For exam-ple, Henri Fayol proposed 14 principles of management, such as “each subordinate receives orders from only one superior” (unity of command) and “similar activities in an organization should be grouped together under one manager” (unity of direc-tion). These principles formed the foundation for modern management practice and organization design. The scientific management and administrative principles approaches were pow-erful and gave organizations fundamental new ideas for establishing high produc-tivity and increasing prosperity. Administrative principles in particular contributed to the development of bureaucratic organizations, which emphasized designing andmanaging organizations on an impersonal, rational basis through such elements as clearly defined authority and responsibility, formal recordkeeping, and uniform application of standard rules. Although the term bureaucracy has taken on negative connotations in today’s organizations, bureaucratic characteristics worked extremely well for the needs of the Industrial Age. One problem with the classical perspective, however, is that it failed to consider the social context and human needs. What About People? Early work on industrial psychology and human relations received little attention because of the prominence of scientific management. How-ever, a major breakthrough occurred with a series of experiments at a Chicago elec-tric company, which came to be known as the Hawthorne Studies. Interpretations of these studies at the time concluded that positive treatment of employees improved their motivation and productivity. The publication of these findings led to a revolu-tion in worker treatment and laid the groundwork for subsequent work examining treatment of workers, leadership, motivation, and human resource management. These human relations and behavioral approaches added new and important con-tributions to the study of management and organizations. However, the hierarchical system and bureaucratic approaches that developed during the Industrial Revolution remained the primary approach to organiza-tion design and functioning well into the 1980s. In general, this approach worked well for most organizations until the past few decades. During the 1980s, though, it began to cause problems. Increased competition, especially on a global scale, changed the playing field.51 North American companies had to find a better way. BRIEFCASE As an organization manager, keep these guidelines in mind: Be cautious when applying something that works in one situation to another situation. All organizational systems are not the same. Use organization design concepts to identify the correct structure and management systems for each organization. Can Bureaucracies Be Flexible? The 1980s produced new corporate cultures that valued lean staff, flexibility and learning, rapid response to the customer, engaged employees, and quality products. Organizations began experimenting with teams, flattened hierarchies, and participative management approaches. For example, in 1983, a DuPont plant in Martinsville, Virginia, cut management layers from eight to four and began using teams of production employees to solve problems and take over routine management tasks. The new design led to improved quality, decreased costs, and enhanced innovation, helping the plant be more competitive in a changed environment.52 Rather than relying on strict rules and hierarchy, managers began looking at the entire organizational system, including the external environment. Since the 1980s, organizations have undergone even more profound and far-reaching changes. Flexible approaches to organization design have become prevalent. Recent influences on the shifting of organization design include the Internet and other advances in information technology and big data analytics; globalization and the increasing interconnection of organizations; the rising educational level of employees and their growing quality-of-life expectations; and the growth of knowledge-and information-based work as primary organizational activities.53 1.5b It All Depends: Key Contingencies Many problems occur when all organizations are treated as similar, which was the case with scientific management and administrative principles that attempted to design all organizations alike. The structures and systems that work in the retail division of a conglomerate will not be appropriate for the manufacturing division. The organization charts and financial procedures that are best for an entrepreneur-ial Internet firm like Instagram will not work for a large food processing plant at Oscar Mayer or a large nonprofit organization such as United Way. A basic premise of this text is that effective organization design means under-standing various contingencies and how organizations can be designed to fit contingency factors. Contingency factors include organization size, technology, envi-ronment, goals and strategy, and organizational culture, as defined previously and shown in Exhibit 1.3. Contingency means that one thing depends on other things, and for organizations to be effective there must be a “goodness of fit” between their design and various contingency factors.54 What works in one setting may not work in another setting. There is no “one best way.” Contingency theory means it depends. For example, a government agency may experience a certain environment, use a routine technology, and desire efficiency. In this situation, a management approach that uses bureaucratic control procedures, a hierarchical structure, and formalized communications would be appropriate. Likewise, free-flowing design and management processes work best in a high-tech company that faces an uncer-tain environment with a non-routine technology. The correct approach is contingent on the organization’s situation. In the following section, we examine two fundamen-tal approaches to organization design, along with the typical contingency factors associated with each approach. 1.6 The Contrast of Organic and Mechanistic Designs Organizations can be categorized along a continuum ranging from a mechanis-tic design to an organic design. Tom Burns and G. M. Stalker first used the terms organic and mechanistic to describe two extremes of organization design afterobserving industrial firms in England.55 In general, a mechanistic design means that the organization is characterized by machine-like standard rules, procedures, and a clear hierarchy of authority. Organizations are highly formalized and are also cen-tralized, with most decisions made at the top. A mechanistic design is concerned primarily with efficiency. An organic design means that the organization is much looser, free-flowing, and adaptive. Rules and regulations often are not written down or, if written down, are loosely applied. People may have to find their own way through the system to figure out what to do. The hierarchy of authority is looser and not clear-cut. Decision-making authority is decentralized. The organic design is concerned primarily with learning and adaptation. Managers communicate a clear sense of direction and purpose and then empower employees at all levels. Knowl-edge and information are widely shared, and challenging the status quo is encour-aged.56 Various contingency factors will influence whether an organization is more effective with a primarily mechanistic or a primarily organic design. Exhibit 1.6 summarizes the differences in organic and mechanistic designs based on five ele-ments: structure, tasks, formalization, communication, and hierarchy. The exhibit also lists the typical contingency factors associated with each type of design. • Centralized Versus Decentralized Structure. Centralization and decentraliza-tion pertain to the hierarchical level at which decisions are made. In a mech-anistic design, the structure is centralized, whereas an organic design uses decentralized decision making. Centralization means that decision authority is located near the top of the organizational hierarchy. Knowledge and control of activities are centralized at the top of the organization, and employees are expected to do as they are told. With decentralization, decision-making authority is pushed down to lower organizational levels. In a highly organic organization, knowledge and control of activities are located with employ-ees rather than with supervisors or top executives. People are encouraged to take care of problems by working with one another and with customers, using their discretion to make decisions. • Specialized Tasks Versus Empowered Roles. A task is a narrowly defined piece of work assigned to a person. With a mechanistic design, tasks are broken down into specialized, separate parts, as in a machine, with each employee performing activities according to a specific job description. A role, in contrast, is a part in a dynamic social system. A role has discretion and responsibility, allowing the person to use his or her judgment and ability to achieve an outcome or meet a goal. In an organization with an organic design, employees play a role in the team or department and roles may be continually redefined or adjusted. • Formal Versus Informal Systems. With a mechanistic design, there are numerous rules, regulations, and standard procedures. Formal systems are in place to man-age information, guide communication, and detect deviations from established standards and goals. With an organic design, on the other hand, there are few rules or formal control systems. Communication and information sharing are informal. • Vertical Versus Horizontal Communication. Mechanistic organizations emphasize vertical communication up and down the hierarchy. Top man-agers pass information downward to employees about goals and strategies, job instructions, procedures, and so forth, and in turn ask that employees provide information up the hierarchy concerning problems, performance reports, financial information, suggestions and ideas, and so forth. In an organic organization, there is greater emphasis on horizontal communica-tion, with information flowing in all directions within and across depart-ments and hierarchical levels. The widespread sharing of information enables all employees to have complete information about the company so they can act quickly. In addition, organic organizations maintain open lines of com-munication with customers, suppliers, and even competitors to enhance learning capability. • Hierarchy of Authority Versus Collaborative Teamwork. In organizations with a mechanistic design, there is a close adherence to vertical hierarchy and the formal chain of command. Work activities are typically organized by common function from the bottom to the top of the organization and there is little col-laboration across functional departments. The entire organization is controlled through the vertical hierarchy. An organic design, on the other hand, empha-sizes collaborative teamwork rather than hierarchy. Structure is created around horizontal workflows or processes rather than departmental functions, with people working across department and organizational boundaries to solve prob-lems. Organic design thus encourages intrapreneurship, so that people across the organization are coming up with and promoting new ideas that respond to needs of customers.57 Self-directed teams are the fundamental work unit in highly organic organizations. 1.7 The Emerging Bossless Design Trend To some extent, organizations are still imprinted with the hierarchical, formalized, mechanistic approach that arose in the nineteenth century with Frederick Taylor. Yet current challenges require greater flexibility for most organizations.58 One issue pushing the trend toward extreme decentralization is the growth of knowledge-based work, where ideas and expertise are the primary sources of value creation. In a knowledge-based organization, managers rarely have all the expertise needed to solve problems or create the products and services the organization needs to succeed. People at all levels must be continually contributing ideas. The need for rapid response as the environment or customer needs change quickly, and the ability to share information throughout the company with information technology are other factors leading to greater decentralization. When everyone has access to the information they need and the training to make good decisions, having layers of managers just eats up costs and slows down response time. A few organizations have shifted to an extremely organic, “bossless” design.59 In a bossless company, there are typically no job titles, no seniority, and no managers or executives. People work together on an equal basis, as illustrated in the visual in Exhibit 1.7 and described previously in the exam-ple of Valve. A few bossless work environments, such as W. L. Gore and the French company FAVI, have existed for decades, and this has become a real trend in recent years. Many bossless com-panies, such as Valve, Netflix (video streaming and rentals), and Peakon (human resources and employee engagement software) are in technology-related industries, but companies as diverse as GE Aviation (aviation manufacturing), W. L. Gore & Associates (best known for Gore-Tex fabrics), Whole Foods (supermarkets), and Semco (diversified manufacturing) have succeeded with bossless structures. Morning Star provides one of the most interesting examples of a bossless work environment. Many people are surprised to learn that the world’s largest tomato processor is a company that has no titles or promotions, no hierarchy, and no managers. Morning Star, where 400 or so employees (called colleagues) produce over $700 million a year in revenue, relies on contract-style agreements called Colleague Letters of Understanding (CLOUs). If a colleague needs an expensive piece of equipment to fulfil her CLOU, she can buy it without seeking permission. Similarly, if someone needs an additional worker, he can go ahead and hire one. Founder Chris Rufer organized Morning Star based on the principles of self-management: • No one has a boss • Employees negotiate responsibilities with their peers • Everyone can spend the company’s money • There are no titles or promotions • Compensation is decided by peers How does such a system work? As the company grew from the original 24 colleagues to around 400, problems occurred. Some people had trouble working in an environment with no bosses and no hierarchy. Thus, Rufer created the Morning Star Self-Management Institute to provide training for people in the principles and systems of self-management. Every colleague now goes through training, in groups of 10 to 15 people, to learn the skills of how to work effectively as part of a team, how to handle the responsibilities of “planning, organizing, leading, and controlling” that were formerly carried out by managers, how to balance freedom and accountability, how to understand and effectively communicate with others, and how to manage conflicts. “Around here,” one colleague said, “nobody’s your boss and everybody’s your boss.”60 In a bossless work environment such as that at Morning Star, nobody gives orders, and nobody takes them. Accountability is to the customer and the team rather than to a manager. There can be many advantages to a bossless work envi-ronment, including increased flexibility, greater employee initiative and commit-ment, and better, faster decision making.61 However, bossless work environments also present new challenges. Costs may be lower because of reduced overhead, but money has to be invested in ongoing training and development for employees so they can work effectively within a bossless system and manage themselves. The cul-ture also must engage employees and support the non-hierarchical environ1.8 Framework for the Book How does a course in organization design differ from a course in management or organizational behavior? The answer is related to the concept called level of analysis. 1.8a Levels of Analysis Each organization is a system that is composed of various subsystems. Organiza-tion systems are nested within systems, and one level of analysis has to be chosen as the primary focus. Four levels of analysis normally characterize organizations, as illustrated in Exhibit 1.8. The individual human being is the basic building block of organizations. The human being is to the organization what a cell is to a bio-logical system. The next higher system level is the group or department. These are collections of individuals who work together to perform group tasks. The next level of analysis is the organization itself. An organization is a collection of groups or departments that combine into the total organization. Organizations themselves can be grouped together into the next higher level of analysis, which is the interorganizational set and community. The inter-organizational set is the group of organizations with which a single organization interacts. Other organizations in the community make up an important part of an organization’s environment. Organization design focuses on the organizational level of analysis, but with concern for groups and the environment. To explain the organization, one should look not only at its characteristics but also at the characteristics of the environment and of the departments and groups that make up the organization. The focus of this book is to help you understand organizations by examining their specific character-istics, the nature of and relationships among groups and departments that make up the organization, and the collection of organizations that make up the environment. Are individuals included in organization design? Organization design does con-sider the behavior of individuals, but in the aggregate. People are important, butthey are not the primary focus of analysis. Organization design is distinct from organizational behavior. Organizational behavior is the micro approach to organizations because it focuses on the individuals within organizations as the relevant units of analysis. Organiza-tional behavior examines concepts such as motivation, leadership style, and per-sonality and is concerned with cognitive and emotional differences among people within organizations. Organization theory and design is a macro examination of organizations because it analyzes the whole organization as a unit. Organization design is concerned with people aggregated into departments and organizations and with the differences in structure and behavior at the organization level of analysis. Organization design might be considered the sociology of organizations, while organizational behavior is the psychology of organizations. Organization design is directly relevant to top-and middle-management con-cerns and partly relevant to lower management. Top managers are responsible for the entire organization and must set goals, develop strategy, interpret the external environment, and decide organization structure and design. Middle management is concerned with major departments, such as marketing or research, and must decide how the department relates to the rest of the organization. Middle managers must design their departments to fit work-unit technology and deal with issues of power and politics, intergroup conflict, and information and control systems, each of which is part of organization theory and design. Organization design is only partly con-cerned with lower management because this level of supervision is concerned with employees who operate machines, create services, or sell goods. Organization design is concerned with the big picture of the organization and its major departments. 1.8b Plan of the Book The topics within the field of organization design are interrelated. Chapters are pre-sented so that major ideas unfold in logical sequence. The framework that guides the organization of the book is shown in Exhibit 1.9. Part 1 introduces the basic idea of organizations as social systems and the essential concepts of organization design. This discussion provides the groundwork for Part 2, which is about strategic management, goals and effectiveness, and the fundamentals of organization structure. This section examines how managers help the organization achieve its purpose, including the design of an appropriate structure, such as a functional, divisional, matrix, or horizontal struc-ture. Part 3 looks at the various open system elements that influence organization struc-ture and design, including the external environment, interorganizational relationships, the global environment, and designing for social impact. Parts 4 and 5 look at processes inside the organization. Part 4 describes how organization design is related to the contingency factors of manufacturing and ser-vice technology, and organizational size and life cycle. Part 5 shifts to dynamic pro-cesses that exist within and between major organizational departments and includes topics such as innovation and change, culture and control, decision-making pro-cesses, managing intergroup conflict, and power and politics. 1.8c Plan of Each Chapter Each chapter begins with opening questions to immediately engage the student in the chapter content. Theoretical concepts are introduced and explained in the body of thechapter. Several In Practice segments are included in each chapter to illustrate the con-cepts and show how they apply to real organizations. Each chapter also contains a How Do You Fit the Design? questionnaire that draws students more deeply into a particu-lar topic and enables them to experience organization design issues in a personal way. A BookMark is included in each chapter to present organizational issues that today’s managers face in the real world. These short book reviews discuss current concepts and applications to deepen and enrich the student’s understanding of organizations. The examples and book reviews illustrate the dramatic changes taking place in management thinking and practice. Key points for designing and managing organizations are high-lighted in the Briefcase items throughout the chapter. A Remember This section at the end of each major section reviews and explains important theoretical concepts. chapter. Several In Practice segments are included in each chapter to illustrate the con-cepts and show how they apply to real organizations. Each chapter also contains a How Do You Fit the Design? questionnaire that draws students more deeply into a particu-lar topic and enables them to experience organization design issues in a personal way. A BookMark is included in each chapter to present organizational issues that today’s managers face in the real world. These short book reviews discuss current concepts and applications to deepen and enrich the student’s understanding of organizations. The examples and book reviews illustrate the dramatic changes taking place in management thinking and practice. Key points for designing and managing organizations are high-lighted in the Briefcase items throughout the chapter. A Remember This section at the end of each major section reviews and explains important theoretical concepts. The rough mill (raw lumber processed into useful pieces) foreman reviewed the batch of production orders he was given each week and decided on the “panels” of wood the plant would need. A panel is a sheet of wood milled to a desired thickness and with length and width dimensions needed for specific products. The necessary panels would be made in the rough mill from lumber or obtained by purchasing glued panels from vendors. Craft Originalities spent about as much on purchased pan-els as it did on raw lumber, paying about twice as much for a square-foot of panel as for a square-foot of lumber. Employees in the Surfacing department worked the wood to the desired thickness for the final product, which was the finished dimension plus some excess for sanding. Rip-saws cut the lumber to the needed width and cut-off saws took care of the length. The plant superintendent worked with the machine room foreman to decide on the sequence in which orders would be processed. Scheduled due-dates for each depart-ment were written on the orders by the production control supervisor, who followed up on the actual flow of orders only if a crisis developed in the machine room, where workers shaped panels into the final form. The tools in the machine room included shapers, molders, routers, and bor-ers, which required some skill to master. Work that used patterns and jigs lowered the skill requirements, although still needing skills that were higher than for most jobs in the plant. This part of the plant was the noisiest and dustiest. In the third department, sanding, the wood pieces were sanded by women working mainly at individual stations. The sanded components were moved to a nearby tempo-rary storage area on carts, which originated at machining. There were six to eight wooden parts in an average item. In addition, there were purchased items such as glass or metal parts. The assembly foreman checked on the arrival of all parts for an order. Assembly began when all parts were available. Workers assembled the items using glue, screws, nail guns, or hammer and nails. Jigs assisted the work where possible, and usually only one person worked on an order. Little skill was needed for assembly, and dust and noise were not a problem in this area. The assembled items moved to the separate finish-ing area. Here they were dipped by hand into stains and sprayed with several clear coats. After oven drying, the items proceeded to packing. Most items were packed indi-vidually into cartons made in the company’s separate small plant. Finishing and packing employed about 50 people. The new finished goods warehouse was two miles away. Most jobs did not require high skill levels. The aver-age jobs in the rough mill and machine room, where the skilled jobs were located, required no more than five weeks to master because the workers usually had developed some skills in previous positions. Elsewhere in the plants, a week of training was usually adequate. Everyone but the super-visors and workers considered the work pace quite slow. Production Problems Bob felt that production efficiency was a major prob-lem. From talking with machinery salespeople and other visitors to the plant, he believed the machinery was gen-erally adequate. Based on what he knew about compet-itors’ operations, he felt his labor cost must be reduced. His initial attempts to work with the plant superinten-dents and the various supervisors to systematically speed up output met with no success. The supervisors saw no need to identify improvements in the plant or to develop techniques for bringing about more efficiency. To help the supervisors begin to improve their operations, Bob sched-uled a weekly production meeting starting in June 2010. At the meeting the supervisors were to examine the total dollar output and total costs for each plant for the past week, compare it to the labor goal of 32 percent, which was set by Bob, and think about what could be done to improve operations. Unfortunately, good data on each department’s performance were not available. The plant superintendent and his supervisors volunteered no ideas about what specifically limited last week’s output. Bob persisted and some discussion of problems began after about three months. Bob’s opinion was that this kind of thinking and planning was not required under his father’s management. The supervisors in general felt nothing was wrong in the plant and seemed puzzled at the thought of doing anything except continuing what they had always done. They had no experience working in other plants. In March of 2011, after a good deal of thought and search, Bob hired two college-educated employees to help with the production system. The first was Jim Schneider, age 38, who was hired to be general superintendent over everyone in production in both plants, replacing the cur-rent superintendent, who went back to his previous job as a foreman. The other, Max Wilson, age 27, was to be manufacturing engineer. It appeared to Bob that the plant simply needed better management rather than any single big change that could be purchased from the out-side. Both new people were college trained in business and engineering and had work experience in the wood industry. Bob expected some resistance to the new hires from the replaced superintendent and most of the supervisors. The new hires were briefed on this problem. As expected, the change did not advance smoothly. Complaints and rumors were frequent, and Bob ignored them to the extent possible. However, after three months with the new peo-ple in place, the complaints persisted and—perhaps more importantly—the new superintendent did not appear to have command of people in the plants. He had not developed an assessment of what needed to be changed and had no comprehensive plan for improvement. Bob also saw evidence that Jim had some major difficulties super-vising people. One of the supervisors who did not appear to be part of the rumor campaign and was conscientiously concerned about the company, gave Bob examples of the new superintendent’s mistakes. Bob felt that he may have made a mistake hiring Jim. Max’s responsibilities had nar-rowed to mostly technical tasks. He was supervising the five-person repair crew, engineering some new products, examining procedures for producing samples of new prod-ucts, and beginning to examine a major redesign of the rough mill area. Major Competitor Craft Originalities’ major regional competitor was Saint Crafters, Inc. A manager of outside sales reps who was familiar with both Craft Originalities and Saint Craft-ers provided a comparison of the two companies to Bob. Demand for Saint Crafters’ products exceeded their capac-ity, and the overflow demand, in this person’s opinion, was the main reason Craft Originalities existed. Saint Crafters had no debt and its equipment was described as new. The company was located in a small community where the workers were highly skilled for this kind of business. The manager characterized the average Originalities worker as about two-thirds as capable as Saint Crafters’ workers. The quality of manufacture of Saint Crafters’ products was considered better than Craft Originalities. Moreover, Saint Crafters’ manufacturing superintendent scheduled long runs in manufacturing with the objective of having three months’ inventory of top priority items. It sounded like more of a mass production process rather than producing separate small batches for each new order the way Craft Originalities did. The observer also noted that two-thirds of the equip-ment at Craft Originalities sat idle at any given time and that neither capacity nor optimum production mix had ever been analyzed. The largest production run he claimed to have seen had been about 250 pieces. The cost of each new setup was notable. He commented that Craft Origi-nalities had the most informal and least structured or sys-tematic operation he had ever seen, with the slowest pace for this type of work. The observer felt that the employees knew only the simplest way of doing a job. Only one per-son in the company, for example, was able to count the board feet of lumber. He stated that this was a skill that the smallest cabinet shop would have and that it was essential for any kind of usage control. The Workforce Bob was interested in newer concepts of management. He frequently referred to the latest book or sent a copy of an article to his managers. The behavioral writings made a lot of sense to him and he was interested in the concept of corporate culture. Participative management systems and teamwork environments were things Bob wanted Craft Originalities to try. However, he recognized his managers and the workforce were not ready for this approach. His managers manipulated more than cooperated, and the workers for the most part were neither highly skilled nor educated. When he discussed the workers’ desires with the supervisors, he was told they just wanted a retirement pro-gram and higher pay, nothing else. Bob wondered whether this was what the supervisors wanted for themselves. As a basis for considering a change in management style and culture, Bob contacted a professor from his alma mater and hired him to conduct an employee attitude sur-vey. All employees completed the written questionnaire in small groups. The survey included questions developed specifically to assess the Craft Originalities’ culture and employee attitudes. Although the wording was considered simple, when answering open-ended questions several of the workers did not understand words such as “stimulat-ing” or “ambitious,” and it sometimes became necessary to read the entire questionnaire to them. The study showed that minorities accounted for 80 percent of the employees, with white females the larg-est group at 40 percent. The workforce was 58 percent female, 57 percent white, and 39 percent over 45 years old. Roughly as many people had been with the company under two years as over 10 years. The pay was only a little above the legal minimum, but many workers felt fortunate to have their jobs. There did not appear to be a morale cri-sis. Many of the questions pertained to aspects of the work culture that could be improved. A few of the statements and answer scores to the closed-ended questions are below. Each question was answered on a scale of 1 = strongly dis-agree to 5 = strongly agree: My pay is fair for this kind of job. My coworkers are good to work with. I enjoy my work. Morale is good here. I like the way my supervisor treats me. My complaints are heard by management. The supervisors do a poor job. Chapter 2

Kim Kardashian uses it. So does Donald Trump, Taylor Swift, Michelle Obama, David Beckham, and Queen Elizabeth II. When the Queen made her debut on Insta-gram in March 2019, the post showcasing her visit to the London Science Museum got more than 57,000 likes within a few hours. The Queen decided it was time she hopped on Instagram, the popular photo and video sharing social platform that had grown to more than a billion active users worldwide. That rapid growth has far outpaced the growth of rival Snapchat, as well as that of Instagram’s parent com-pany Facebook. Instagram created a short, lofty mission statement—to capture and share the world’s moments—soon after it was acquired by Facebook in 2012, but within a few years, then-CEO Kevin Systrom and his Instagram co-founder Mike Krieger realized they needed help if the company was going to grow and start mak-ing money. Enter Marne Levine, who joined Instagram as chief operating officer in 2016. One of Levine’s talents is bringing order out of chaos by helping set clear goals. For instance, she discovered that Instagram didn’t even have a formal budget, so one of her first tasks was creating a budget so people had guidelines and ways to keep track of spending in their pursuit of goals. Levine also worked with managers to set well-defined goals for hiring employees and creating new products, which has helped Instagram mature from a pell-mell operation into a full-fledged business bringing in billions in revenue.1 One of the primary responsibilities of managers is to position their organiza-tions for success by establishing goals and strategies that can keep the organization competitive. Establishing mission, goals, and strategy is the first step for any busi-ness to achieve its purpose. Managers have to know where they want the organi-zation to go before they can take it there. When managers don’t have clear goals, or have conflicting goals, the organization finds itself in a difficult position and achieving anything may seem improbable. Consider the situation at Yahoo, which had early success on the Internet (it was the most trafficked website in early 2000) but has steadily fallen behind over the past two decades as a succession of CEOs have failed to define a clear direction and purpose for the organization. “If you’re everything, you’re kind of nothing,” said Brad Garlinghouse, a former Yahoo exec-utive, suggesting that Yahoo has been in a slow decline because “it never solved its core identity crisis.”2Purpose of This Chapter Top managers give direction to organizations. They set goals and develop the plans for their organization to attain them. The purpose of this chapter is to help you understand the types of goals that organizations pursue and some of the competitive strategies managers use to reach those goals. We provide an overview of strategic management, examine two significant frameworks for determining strategic action, and look at how strategies affect organization design. The chapter also describes the most popular approaches to measuring the effectiveness of organizational efforts. To manage organizations well, managers need a clear way to measure how effective the organization is in attaining its goals. 2.1 The Role of Strategic Direction in Organization Design The choice of goals and strategy influences how an organization should be designed. An organizational goal is a desired state of affairs that the organization attempts to reach.3 A goal represents a result or end point toward which organizational efforts are directed. Top executives decide the end purpose the organization will strive for and determine the direction it will take to accomplish it. It is this purpose and direction that shapes how the organization is designed and managed. Indeed, the primary responsibility of top management is to determine an organization’s goals, strategy, and design, thereby adapting the organization to a changing environment.4 Middle managers do much the same thing for major departments within the guidelines provided by top management. Exhibit 2.1 illustrates the relationships through which top managers provide direction and then design. The direction-setting process typically begins with an assessment of the opportunities and threats in the external environment, including the amount of change, uncertainty, and resource availability, which we discuss in more detail in Chapter 4. Top managers also assess internal strengths and weaknesses to define the company’s distinctive competence compared with other firms in the industry. SWOT analysis (in which “SWOT” stands for “strengths, weaknesses, opportunities, and threats”) includes a careful assessment of the strengths, weaknesses, opportunities, and threats that affect organizational performance. This competitive analysis of the internal and external environments is one of the central concepts in strategic management. Leaders obtain information about external opportunities and threats from a variety of sources, including customers, government reports, professional journals, suppliers, bankers, friends in other organizations, consultants, and association meetings. Information about internal strengths and weaknesses comes from company budgets, financial ratios, profit and loss statements, and surveys of employee attitudes and satisfaction, among other reports. Executives at The Kroger Company, like those at other grocery retailers, have been dealing with strong and swift changes in the industry in recent years. A brief SWOT analysis can give leaders a guide for how to position the company as it adapts to these changes. The Kroger Company is the largest supermarket chain in the United States, with around 2,800 stores in 35 states and the District of Columbia. Top executives have been revamp-ing strategy and overhauling operations to adapt to a variety of changes, including increased competition and shifting consumer interests. One of Kroger’s primary strengths is the company’s broad array of products and services, including groceries, jewelry, fuel, pharmacy services, and home products, that provides one-stop shopping for customers. Kroger also has a strong line of private label brands, and sales of the company’s own brands are growing faster than national brands in almost every category. One weakness is that the organization has a high debt load on its balance sheet compared to many of its competitors. In addition, falling prices for mainstay products such as eggs, milk, and meats affect Kroger along with other retailers. Leaders identified an opportunity to expand the line of organic foods offered in its grocery stores, and to address growing customer concerns over food waste. They found that customers responded favor-ably to the addition of natural and organic products and that Kroger was able to offer many of them at a lower cost than competitors such as Whole Foods. A significant threat is the aggressive expansion of non-traditional rivals such as Walmart, Target, and Amazon into the grocery business. Kroger leaders are positioning the company to provide consumers with “anything, anytime, anywhere.” The company has invested in new technology to launch a direct-tostrengthens Kroger’s ability to offer convenience, simplicity, and fresh food solutions. The company is also increasing its offerings of natural and organic products. It expanded its private label brands and introduced the Pickuliar Picks brand, selling “ugly” fruits and veg-etables. Selling misshapen or unusual-looking tomatoes, bell peppers, and other produce that would otherwise be thrown out lowers costs for customers and helps Kroger achieve an ambitious goal of zero food waste. A second approach leaders use in setting direction is a forecasting technique known as scenario planning.6 Scenario planning involves looking at current trends and discontinuities and visualizing future possibilities. Rather than looking only at history and thinking about what has been, managers think about what could be. The events that cause the most damage to companies are those that no one even conceived of. Managers can’t predict the future, but they strengthen their ability to cope with uncertainty by rehearsing a framework within which future events can be managed.7 Organizations can be disrupted by any number of events. A survey by the Chartered Management Institute and the Business Continuity Institute found that some of the top events for which managers might need scenario plans include extreme weather, loss of IT systems, loss of key employees, loss of access to offices or plants, failure of communications systems, and supply chain disruptions.8 Sce-narios are like stories that offer alternative vivid pictures of what the future will be like and how managers will respond. Typically, two to five scenarios are developed for each set of factors, ranging from the most optimistic to the most pessimistic view. Royal Dutch Shell has long used scenario planning and has been preparing for a world in which oil prices continue to decrease. Scenario planning has helped steer Shell’s strategy of moving toward producing fuel for electricity, such as natural gas and renewable sources, and focusing on keeping its costs low.9 After direction-setting, the next step, as shown in Exhibit 2.1, is to define and artic-ulate the organization’s strategic intent, which includes defining an overall mission and official goals based on the correct fit between external opportunities and internal strengths. Leaders then formulate specific operational goals and strategies that define how the organization is to accomplish its overall mission. In Exhibit 2.1, organization design reflects the way goals and strategies are implemented so that the organization’s attention and resources are consistently focused toward achieving the mission and goals. Organization design is the administration and execution of the strategic plan. Managers make decisions about structural form, including whether the organiza-tion will be designed primarily for learning and innovation (an organic approach) or to achieve efficiency (a mechanistic approach), as discussed in Chapter 1. Other choices are made about information and control systems, the type of production technology, human resource policies, culture, and linkages to other organizationsChanges in structure, technology, human resource policies, culture, and interorga-nizational linkages will be discussed in subsequent chapters. Also note the arrow in Exhibit 2.1 running from organization design back to strategic intent. This means that strategies are often made within the current structure of the organization so that current design constrains, or puts limits on, goals and strategy. More often than not, however, the new goals and strategy are selected based on environmental needs and then top managers attempt to redesign the organization to achieve those ends. Finally, Exhibit 2.1 illustrates how managers evaluate the effectiveness of organi-zational efforts—that is, the extent to which the organization realizes its goals. This chart reflects the most popular ways of measuring performance, each of which is dis-cussed later in this chapter. It is important to note here that performance measurements feed back into the internal environment so that past performance of the organization is assessed by top managers in setting new goals and strategic direction for the future. Procter & Gamble (P&G) provides an example of how these ideas translate into organization practice. Former CEO A. G. Lafley wanted to provide a framework for organizing the discussion about goals and strategic direction so he used the OGSM (Objectives, Goals, Strategies, and Measures) tool illustrated in Exhibit 2.2. Notethat a broad objective such as “Be the operating TSR (total shareholder return) leader in North American tissue/towel and value creator for P&G” is translated into more specific goals and strategies, such as “Grow Bounty and Charmin margin.”10 In addition, the chart lists measures that managers will use to determine the success of their efforts. This is the essence of strategic management: setting goals, defining strategies for achieving the goals, and measuring the effectiveness of efforts. The role of top management is important because managers can interpret the environment differently and develop different goals and strategies. Several years ago, in the midst of a U.S. sales slump, top executives at Walmart tried a new direc-tion. Instead of sticking with goals of strict operational efficiency and everyday low prices, they decided to court upscale customers with remodeled, less cluttered stores, organic foods, and trendy merchandise. Instead of offering everyday low prices, the retailer raised prices on many items and promoted price cuts on select merchan-dise. Walmart succeeded in meeting its goal of attracting more upscale clientele, but many of its core customers decided they’d start shopping at other discount and dol-lar store chains. Walmart’s sales took a sharp downturn. “I think we tried to stretch the brand a little too far,” said William Simon, head of the U.S. division.11 The choices top managers make about goals, strategies, and organization design have a tremendous impact on organizational effectiveness. Remember that goals and strategies are not fixed or taken for granted. Top managers and middle managers must select goals for their respective units, and the ability to make good choices largely determines a firm’s success. Organization design is used to implement goals and strategy and also determines organization success. 2.2 Organizational Purpose All organizations, including Instagram, Walmart, Procter & Gamble, Uber, Stanford University, Google, the Catholic Church, the U.S. Department of Agriculture, the local laundry, and the neighborhood deli, exist for a purpose. This purpose may be referred to as the overall goal or mission. Different parts of the organization estab-lish their own goals and objectives to help meet the overall goal, mission, or purpose of the organizat2.2a Strategic Intent Many types of goals exist in organizations, and each type performs a different func-tion. To achieve success, however, organizational goals and strategies are focused with strategic intent. Strategic intent means that all the organization’s energies and resources are directed toward a focused, unifying, and compelling overall goal.12 Examples of ambitious goals that demonstrate strategic intent are Microsoft’s early goal to “Put a computer on every desk in every home,” Komatsu’s motto, “Encircle Caterpillar,” and Coca-Cola’s goal “To put a Coke within ‘arm’s reach’ of every consumer in the world.”13 Strategic intent provides a focus for management action. Three aspects related to strategic intent are the mission, core competence, and com-petitive advantage. Mission. The overall goal for an organization is often called the mission—the organization’s reason for existence. The mission describes the organization’s shared values and beliefs and its reason for being. For example, the long-standing mission of Berrett-Koehler Publishers is stated as, “Connecting People and Ideas to Create a World That Works for All.” An organization’s mission is sometimes called the official goals, which refers to the formally stated definition of business scope and outcomes the organization is trying to achieve. Official goal statements typically define business operations and may focus on values, markets, and customers that distinguish the organization. Whether called a mission statement or official goals, the organization’s general statement of its purpose and philosophy is often written down in a policy manual or the annual report. Exhibit 2.3 shows the mission statement for CVS Health. CVS defines its mission (or purpose, as shown in the exhibit) as “Helping people on their path to better health.” The statement also defines the company’s core values. One of the primary purposes of a mission statement is to serve as a commu-nication tool.14 The mission statement communicates to current and prospective employees, customers, investors, suppliers, and competitors what the organization stands for and what it is trying to achieve. A mission statement communicates legit-imacy to internal and external stakeholders, who may join and be committed to the organization because they identify with its stated purpose and values. Most top leaders want employees, customers, competitors, suppliers, investors, and the local community to look on the organization in a favorable light, and the concept of legitimacy plays a critical role. CVS Caremark changed its name to CVS Health and redefined its purpose to reflect a broader healthcare commitment and the com-pany’s vision to “drive innovations needed to shape the future of health.”15 CVS, which provides health clinics as well as pharmacy and retail sales, stopped selling cigarettes and other tobacco products in all its stores by October of 2014. For a company involved in promoting health and wellness, managers say, selling tobacco products didn’t make sense and hurt the company’s reputation. Other pharmacies involved in providing healthcare have also stopped selling tobacco products because of the need to communicate legitimacy. Companies where managers are sincerely guided by mission statements that focus on a larger social purpose, such as Medtronic’s “To restore people to full life and health” or Liberty Mutual’s “Helping people live safer, more secure lives,” typ-ically attract better employees, have better relationships with external parties, and perform better in the marketplace over the long term.16 Competitive Advantage. The overall aim of strategic intent is to help the orga-nization achieve a sustainable competitive advantage. Competitive advantage refers to what sets the organization apart from others and provides it with a distinctive edge for meeting customer or client needs in the marketplace. Strategy necessar-ily changes over time to fit environmental conditions, and good managers pay close attention to trends that might require changes in how the company operates. Managers analyze competitors and the internal and external environments to find potential competitive openings and learn what new capabilities the organization needs to gain the upper hand against other companies in the industry.17 Competitive openings might be thought of as spaces that a company can potentially fill. This chapter’s BookMark describes how organizations can move from competing in “red oceans,” crowded markets where companies chew each other up for smaller and smaller chunks of market share, toward “wide open blue oceans,” where there is more promise and less competition. Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency, or exceptional customer service.18 Mimeo, an online printing and copying company, for example, excels with core competencies of superb cus-tomer service and the application of technology to ensure internal process effi-ciency. Mimeo can handle rush jobs that larger companies can’t. At Apple, strategy focuses on core competencies of superior design and marketing skills.19 In each case, managers identified what their company does especially well and built the strategy around it. 2.2b Operating Goals The organization’s mission and overall goals provide a basis for developing more specific operating goals. Operating goals designate the ends sought through the actual operating procedures of the organization and explain what the organization is actu-ally trying to do.20 Operating goals describe specific measurable outcomes and are often concerned with the short run. Operating goals typically pertain to the primary tasks an organization must perform.21 For example, one of the critical tasks at tech-nology companies is fixing bugs, but the work is tedious and most programmers prefer designing new features to fixing bugs in current ones. To motivate employees, top leaders at Mozilla Corporation, maker of the Firefox Web browser, gave them two goals: to close 40 high-priority bugs on the browser between February 2017 and the next beta release of Firefox in September, and to bring Mozilla’s perfor-mance within 20 percent of Chrome’s score on a browser benchmarking service. The goals worked! By late August, Mozilla’s programmers had closed nearly 400 bugs and were close to the goal of closing the performance gap with rival Chrome.22 Specific goals for each primary task provide direction for the day-to-day deci-sions and activities within departments. Typical operating goals that define what an organization is trying to accomplish include performance goals, resource goals, market goals, employee development goals, productivity goals, and goals for inno-vation and change, as illustrated in Exhibit 2.4. Overall Performance. Profitability reflects the overall performance of for-profit organizations. Profitability may be expressed in terms of net income, earnings per share, or return on investment. Other overall performance goals are growth and output volume. Growth pertains to increases in sales or profits over time. Volume pertains to total sales or the number of products or services delivered. Government and nonprofit organizations such as social service agencies or labor unions do not have goals of profitability, but they do have goals that attempt to spec-ify the delivery of services to clients or members within specified expense levels. Internal Revenue Service has a goal of providing accurate responses to 85 percent of taxpayer questions about new tax laws. Growth and volume goals also may be indi-cators of overall performance in nonprofit organizations. Expanding their services to new clients is a primary goal for many social service agencies, for example. Resources. Resource goals pertain to the acquisition of needed material and finan-cial resources from the environment. They may involve obtaining financing for the construction of new plants, finding less expensive sources for raw materials, or hiring top-quality technology graduates. Starbucks formed an alliance with India’s Tata Group to obtain Indian premium Arabica coffee beans for use in Starbucks stores. Eventually, the alliance will also enable Starbucks to find prime locations for outlets in India, which can also be considered valuable resources.23 A new resource goal for Walmart is to hire every veteran who wants a job, provided the person left the military in the previous year and did not have a dishonorable discharge.24 For nonprofit organizations, resource goals might include recruiting dedicated volun-teers and expanding the organization’s funding base. Market. Market goals relate to the market share or market standing desired by the organization. Market goals are largely the responsibility of marketing, sales, and advertising departments. At L’Oreal SA, the world’s largest cosmetics company, executives set a goal of adding one billion customers by 2020. As one step to achieve the goal, managers are making changes in marketing and selling approaches designed to win over more customers in Brazil. Women there are some of the biggest spenders on beauty products, but L’Oreal has had trouble adapting to the Brazilian market.25 Market goals can also apply to nonprofit organizations. Cincinnati Children’s Hospital Medical Center, not content with a limited regional role in healthcare, has gained a growing share of the national market by developing expertise in the niche of treating rare and complex conditions and relentlessly focusing on quality.26 Employee Development. Employee development pertains to the training, promotion, safety, and growth of employees. It includes both managers and workers. Strong employee development goals are one of the characteristics common to organizations that regularly show up on Fortune magazine’s list of “100 Best Companies to Work For.” Moreover, employee learning goals have been found to be related to higher levels of department performance.27 Wall Street banks have long been known for encouraging long work hours, but some are now taking a critical look at that hard-charging culture. Bank of America Merrill Lynch (rebranded BofA Securities), for example, issued an internal memo saying junior bankers should have two weekends off a month. To expand employee development, the bank also intends to “make certain that junior bankers work on a wider variety of different assignments . . . and ensure that the development of core skills is an important factor in making staffing assignments.”28 Productivity. Productivity goals concern the amount of output achieved from available resources. They typically describe the amount of resource inputs required to reach desired outputs and are thus stated in terms of “cost for a unit of production,” “units produced per employee,” or “resource cost per employee.” Illumination Entertainment, the production company behind the hit movie “Hop,” has productivity goals that help the company make animated films at about half the cost of those made by larger studios. CEO Christopher Meledandri believes strict cost controls and successful animated films are not mutually exclusive, but it means Illumination’s 30 or so employees have to be highly productive.29 Innovation and Change. Innovation goals pertain to internal flexibility and readi-ness to adapt to rapid changes in the environment. Innovation goals are often defined with respect to the development of specific new services, products, or production pro-cesses. Kraft Heinz has been falling behind competitors since leaders cut funding and attention for research and development. After the Brazilian private-equity firm 3G Capital acquired H.J. Heinz and Kraft Foods, executives focused heavily on goals of cost-cutting. There have been some positive results, but weak attention to goals of innovation and change has limited the company’s ability to adapt to the shift away from processed foods toward fresher, simpler and more natural products.30 Successful organizations use a carefully balanced set of operating goals. For example, some of today’s best companies recognize that a single-minded focus on bottom-line profits may not be the best way to achieve high performance. Innova-tion and change goals are increasingly important, even though they may initially cause a decrease in profits. Employee development goals are critical for helping to maintain a motivated, committed workforce. 2.2c Goal Conflict Organizations perform many activities and pursue many goals simultaneously to accomplish an overall mission. But who decides what mission and goals to strive for? Pursuing some goals means that others have to be delayed or set aside, which means managers often disagree about priorities.31 Employee development goals might conflict with productivity goals; goals for innovation might hurt profitability. As one real-life example of goal conflict, recent analyses of company operations at Facebook reveal that goals of protecting user privacy and personal data have long been in con-flict with goals of growth and increased advertising revenue. While Facebook has pub-licly presented an idealistic mission of “bringing people together by making the world more open and connected,” internal e-mails and other reports reveal a long-stand-ing pattern of exploiting and deceiving users, undermining competitors, strong-arm-ing development partners, and other ruthless and sometimes unscrupulous business practices designed to increase the company’s profits. The founders of WhatsApp, Facebook’s largest acquisition, left the company because of conflicts with Facebook executives over issues such as data privacy and ways to increase ad revenue.32 The Facebook example illustrates that many companies mix value systems and behaviors that represent different sectors of society, which leads to tensions and conflict within the organization over goals and priorities.33 For example, a social mission, such as helping the community, often conflicts with business goals of mak-ing money. Differences in goal orientation can trigger manipulation, avoidance, or defiance on the part of one side versus the other unless managers can balance the conflicting demands. When the goals and values of the two sides are mutually exclu-sive, managers must negotiate and come to some agreement on which direction the company will take. Chapter 7 will discuss organizing for social impact in detail. 2.2d The Importance of Goals Both official goals and operating goals are important for the organization, but they serve very different purposes. Official goals and mission statements describe a value system for the organization and set an overall purpose and vision; operating goals represent the primary tasks of the organization. Official goals legitimize the organi-zation; operating goals are more explicit and well defined. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third parOperating goals serve several specific purposes, as outlined in Exhibit 2.5. For one thing, goals provide employees with a sense of direction so that they know what they are working toward. This can help to motivate employees toward specific targets and important outcomes. Numerous studies have shown that specific high goals can significantly increase employee performance.34 A recent study verified that departments perform significantly better when employees are committed to the goals.35 People like having a focus for their activities and efforts. Jennifer Dulski, currently head of Groups and Community at Facebook, talks about how she moti-vated people at a previous organization. “One quarter we had three big goals. I said, ‘If we hit all three, it’s the trifecta and we’re going to all go to the horse races.’ And I gave everybody $50 to bet with at the races. I learned as a teacher that everybody has a little kid inside them, and people really love these fun, silly things. They may not admit they love them, but they do.”36 A recent scandal at Wells Fargo provides a negative example of just how powerful goals can be as a motivational tool. Wells Fargo has been battling a series of scandals since it was discovered that employees were opening fake bank accounts and forcing customers into unnecessary products. Even after man-agers began firing known offenders, the actions continued. Why would they do such a thing? Former employees say the answer is simple: people were breaking the rules and engaging in unethical practices in order to meet high sales goals set by top management. “They warned us about thistype of behavior [in ethics workshops] and said, ‘You must report it,’ but the reality was that people had to meet their goals,” said Khalid Taha, a former Wells Fargo personal banker. Another former employee says his branch managers were continually asking people how many banking solutions (such as checking and savings accounts, credit cards, home equity loans, personal loans, and so forth) they had sold that day. “They wanted three to four a day. In my mind, that was crazy—that’s not how people’s financial lives work,” said Sharif Kellogg. District managers gathered and discussed daily sales for each branch and each individual sales employee four times a day. The aggressive goals pushed some employees to bend the rules by asking friends or local business owners to open additional accounts and promising to close them later. Others opened fake accounts. Eventually, the U.S. Con-sumer Financial Protection Bureau revealed that more than 5,000 lower-level employees had engaged in the illegal activity. At the time, top executives said the sham accounts were the result of poor decisions by unethical employees, but Kellogg speaks for other employ-ees when he says, “It seems that [managers would] have to be wilfully ignorant to believe that these goals are achievable through any other means.”37 As shown by this example, another important purpose of goals is to act as guide-lines for employee behavior and decision making. Managers can establish appropri-ate goals that act as a set of constraints on individual behavior and actions so that employees behave within boundaries that are acceptable to the organization and the larger society.38 As shown in Exhibit 2.5, goals also help to define the appropriate decisions con-cerning organization structure, innovation, employee welfare, or growth. Finally, goals provide a standard for assessment. The level of organizational performance, whether in terms of profits, units produced, degree of employee satisfaction, level of innovation, or number of customer complaints, needs a basis for evaluation. Oper-ating goals provide this standard for measuremen2.3 Two Frameworks for Selecting Strategy and Design To support and accomplish the organization’s strategic intent and keep people focused in the direction determined by organizational mission, vision, and oper-ating goals, managers select specific strategy and design options that can help the organization achieve its purpose and goals within its competitive environ-ment. In this section, we examine a couple of practical approaches to selecting strategy and design. The questionnaire in this chapter’s “How Do You Fit the Design?” box will give you some insight into your own strategic management competencies. A strategy is a plan for interacting with the competitive environment to achieve organizational goals. Some managers think of goals and strategies as interchange-able, but for our purposes goals define where the organization wants to go and strategies define how it will get there. For example, a goal might be to achieve 15 percent annual sales growth; strategies to reach that goal might include aggressive advertising to attract new customers, motivating salespeople to increase the aver-age size of customer purchases, and acquiring other businesses that produce similar products. Strategies can include any number of techniques to achieve the goal. The essence of formulating strategies is choosing whether the organization will perform different activities than its competitors or will execute similar activities more effi-ciently than its competitors do.39 Two models for formulating strategies are the Porter model of competitive strat-egies and the Miles and Snow strategy typology. Each provides a framework for competitive action. After describing the two models, we discuss how the choice of strategies affects organization design. 2.3a Porter’s Competitive Strategies Michael E. Porter studied a number of business organizations and proposed that managers can make the organization more profitable and less vulnerable by adopt-ing either a differentiation strategy or a low-cost leadership strategy.40 Using a low-cost leadership strategy means managers choose to compete through lower costs, whereas with a differentiation strategy the organization competes through the abil-ity to offer unique or distinctive products and services that can command a pre-mium price. These two basic strategies are illustrated in Exhibit 2.6. Moreover, each strategy can vary in scope from broad to narrow. Differentiation. With a differentiation strategy the organization attempts to distin-guish its products or services from others in the industry. Managers may use adver-tising, distinctive product features, exceptional service, or new technology to achieve a product perceived as unique. This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable. A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand. However, managers must remember that successful differentiation strat-egies require a number of costly activities, such as product research and design and extensive advertising. Companies that pursue a differentiation strategy need strong marketing abilities and creative employees who are given the time and resources to seek innovations. One good illustration of a company that benefrom a differentiation strategy is Apple. Apple has never tried to compete on price and likes being perceived as an “elite” brand. The company has built a loyal customer base by providing innovative, stylish products and creating a prestigious image. Service firms can use a differentiation strategy as well. Trader Joe’s, started in 1967 as a typical convenience store, was quickly modified by founder Joe Cou-lombe into a novel business serving unique food and drink, and expanded to 17 stores in southern California. Today, there are more than 480 Trader Joe’s nation-wide, and people are begging for more. But managers are very, very careful about how they expand. TJ’s doesn’t carry any national brands, but instead offers inno-vative, high quality, health-conscious food and beverage products at modest prices. About 80 percent of products carry TJ’s private label, and the company is secre-tive about who makes products for them. Many TJ’s stores carry only about 2,500 items, compared to a traditional supermarket that has more than 40,000, and the selection is constantly changing. What keeps people coming back is the novelty and sense of adventure—you never know what you’re going to find—and the friendly service you might expect at the mom-and-pop shop around the corner. Managers evaluate every decision with an eye to how it fits with the goal of maintaining a neighborhood store feel.41 Low-Cost Leadership. The low-cost leadership strategy tries to increase market share by keeping costs low compared to competitors. With a low-cost leadership strategy, the organization aggressively seeks efficient facilities, pursues cost reduc-tions, and uses tight controls to produce products or services more efficiently than its competitors. Low cost doesn’t necessarily mean low price, but in many cases cost leaders provide goods and services to customers at cheaper prices. For example, Michael O’Leary, CEO of Irish airline Ryanair said of the company’s strategy: “It’s the oldest, simplest formula: Pile ’em high and sell ’em cheap. . . . Nobody will beat us on price. EVER.” Ryanair can offer low fares because it keeps costs at rock bottom, lower than any other airline in Europe. The company’s watchword is cheap tickets, not customer care or unique services.42The low-cost leadership strategy is concerned primarily with stability rather than taking risks or seeking new opportunities for innovation and growth. A low-cost leadership position means a company can achieve higher profits than competi-tors because of its efficiency and lower operating costs. Cost leaders such as Ryanair can undercut competitors’ prices and still earn a reasonable profit. In addition, if substitute products or potential new competitors enter the picture, the low-cost pro-ducer is in a better position to prevent loss of market share. Porter found that companies that did not consciously adopt a low-cost or differ-entiation strategy achieved below-average profits compared to those that used one of the strategies. Many Internet companies have failed because managers did not develop competitive strategies that would distinguish them in the marketplace.43 On the other hand, Google became highly successful with a coherent differentiation strategy that distinguished it from other search engines. Competitive Scope Can Be Broad or Narrow. With either strategy, the scope of competitive action can be either broad or narrow. That is, an organization can choose to compete in many market and customer segments or to focus on a specific market or buyer group. For example, Walmart uses a low-cost leadership strategy and competes in a broad market, selling to many market segments. A good example of a narrowly focused low-cost leadership strategy is Allegiant Air. IN PRACTICE Allegiant Air “We want to be considered the hometown airline of all the little cities around the country,” Andrew Levy, former president of Allegiant Air, once said. Allegiant flies just 85 jets and specializes in flying people from small, underserved cities such as Minot, North Dakota, and Plattsburg, New York, to warm-weather tourist destinations such as Orlando, Las Vegas, and Honolulu. Although the company has expanded to serve larger cities and other destinations—even announcing flights to Anchorage, Alaska beginning in May 2019—serving small regional airports remains its focus. Allegiant’s focused low-cost leadership strategy has made it one of the most profitable airlines in the industry. Managers believe in “attacking niche opportunities.” For example, Allegiant moved in when other airlines left the shrinking cities of the Rust Belt and lures Canadian fliers just across the border to fly out of small U.S. airports. The airline has now set its sights on Mexico, hoping to fly middle-class Mexicans from cities such as Zacatecas or Culiacán to tourist destinations such as Las Vegas in the United States. Allegiant goes to extremes to meet its goals of low cost. It depends largely on word-of-mouth advertising rather than paying travel agents. It offers a no-frills base fare and charges for nearly everything else, from carry-on luggage to water. Managers also say they “only fly when we can make money.” “On Tuesdays, we look like a bankrupt airline,” the former CEO said, but “who wants to start their vacation on a Tuesday?” Analyzer. The analyzer tries to maintain a stable business while innovating on the periphery. It seems to lie midway between the prospector and the defender. Some products will be targeted at stable environments in which an efficiency strategy designed to keep current customers is used. Others will be targeted at new, more dynamic environments, where growth is possible. The analyzer attempts to balance efficient production for current product or service lines with the creative development of new product lines. Amazon.com provides an example. The company’s current strategy is to defend its core business of selling books and other physical goods over the Internet, but also to build businesses in multiple other areas, including a digital book service, new book content publishing, music and video streaming, games, and consumer electronics. Amazon is also exploring a limited brick-and-mortar presence with physical stores as part of its analyzer strategy.50 BRIEFCASE As an organization manager, keep these guidelines in mind: Design the organization to support the firm’s competitive strategy. With a low-cost lead-ership or defender strategy, select design characteristics associ-ated with an efficiency orientation. For a differ-entiation or prospector strategy, on the other hand, choose charac-teristics that encourage learning, innovation, and adaptation. Use a balanced mixture of characteristics for an analyzer strategy. Reactor. The reactor strategy is not really a strategy at all. Rather, reactors respond to environmental threats and opportunities in an ad hoc fashion. With a reactor strategy, top management has not defined a long-range plan or given the organiza-tion an explicit mission or goal, so the organization takes whatever actions seem to meet immediate needs. Although the reactor strategy can sometimes be successful, it can also lead to failed companies. Some large, once highly successful companies, such as Blockbuster, have all but disappeared because managers failed to adopt a strategy consistent with consumer trends. In March 2019, there was only one video rental store left for the once ubiquitous video and game rental chain. What remains of the Blockbuster organization is now owned by Dish Network. The Miles and Snow typology has been widely used, and researchers have tested its validity in a variety of organizations, including hospitals, colleges, banking insti-tutions, industrial products companies, and life insurance firms. In general, research-ers have found strong support for the effectiveness of this typology for organization managers in real-world situations.51 The ability of managers to devise and maintain a clear competitive strategy is considered one of the defining factors in an organization’s success, but many man-agers struggle with this crucial responsibility. 2.3c How Strategies Affect Organization Design Choice of strategy affects internal organization characteristics. Organization design characteristics need to support the firm’s competitive approach. For example, a company wanting to grow and invent new products looks and “feels” different from a company that is focused on maintaining market share for long-established prod-ucts in a stable industry. Exhibit 2.7 summarizes organization design characteristics associated with the Porter and Miles and Snow strategies. With a low-cost leadership strategy, managers take a primarily mechanistic, efficiency approach to organization design, whereas a differentiation strategy calls for a more organic, learning approach. Recall from Chapter 1 that mechanistic organizations designed for efficiency have different characteristics from organic organizations designed for learning. A low-cost leadership strategy (efficiency) is associated with strong, centralized authority and tight control, standard operat-ing procedures, and emphasis on efficient procurement and distribution systems. Employees generally perform routine tasks under close supervision and control and are not empowered to make decisions or take action on their own. A differentiation strategy, on the other hand, requires that employees be constantly experimenting and learning. Structure is fluid and flexible, with strong horizontal coordination. Empowered employees work directly with customers and are rewarded for creativ-ity and risk-taking. The organization values research, creativity, and innovativeness over efficiency and standard procedures. The prospector strategy requires characteristics similar to a differentiation strategy, and the defender strategy takes an efficiency approach similar to low-cost leadership. Because the analyzer strategy attempts to balance efficiency for stable product lines with flexibility and learning for new products, it is asso-ciated with a mix of characteristics, as listed in Exhibit 2.7. With a reactor strategy, managers have left the organization with no direction and no clear approach to design. 2.3d Other Contingency Factors Affecting Organization Design Strategy is one important factor that affects organization design. Ultimately, however, organization design is a result of numerous contingencies, which will be discussedthroughout this book. The emphasis given to efficiency and control (mechanistic) ver-sus learning and flexibility (organic) is determined by the contingencies of strategy, environment, size and life cycle, technology, and organizational culture. The organiza-tion is designed to “fit” the contingency factors, as illustrated in Exhibit 2.8. In a stable environment, for example, the organization can have a traditional mechanistic structure that emphasizes vertical control, efficiency, specializa-tion, standard procedures, and centralized decision making. However, a rap-idly changing environment may call for a more flexible, organic structure, with strong horizontal coordination and collaboration through teams or other mech-anisms. Environment will be discussed in detail in Chapter 4 and Chapter 5. In terms of size and life cycle, young, small organizations are generally informal and have little division of labor, few rules and regulations, and ad hoc budgeting and performance systems. Large organizations such as Coca-Cola, Samsung, or General Electric, on the other hand, have an extensive division of labor, numer-ous rules and regulations, and standard procedures and systems for budgeting, control, rewards, and innovation. Size and stages of the life cycle will be dis-cussed in Chapter 10. Design must also fit the workflow technology of the organization. For example, with mass production technology, such as a traditional automobile assembly line, the organization functions best by emphasizing efficiency, formalization, specialization, centralized decision making, and tight control. An e-business, on the other hand, would need to be more informal and flexible. Technology’s impact on design will be discussed in detail in Chapter 8 and Chapter 9. A final contingency that affects organization design is corporate culture. An organizational culture that values teamwork, collaboration, creativity, and open communication, for example, would not function well with a tight, vertical structure and strict rules and regulations. The role of culture is discussed in Chapter 11. One responsibility of managers is to design organizations that fit the contin-gency factors of strategy, environment, size and life cycle, technology, and culture. Finding the right fit leads to organizational effectiveness, whereas a poor fit can lead to decline or even the demise of the organization. 2.4 Assessing Organizational Effectiveness Understanding organizational goals and strategies, as well as the concept of fitting design to various contingencies, is a first step toward understanding organizational effectiveness. Organizational goals represent the reason for an organization’s exis-tence and the outcomes it seeks to achieve. The rest of this chapter explores the topic of effectiveness and how effectiveness is measured in organizations. 2.4a Definition of Organizational Effectiveness Recall from Chapter 1 that organizational effectiveness is the degree to which an organization realizes its goals. Effectiveness is a broad concept. It implicitly takes into consideration a range of variables at both the organizational and departmen-tal levels. Effectiveness evaluates the extent to which multiple goals—whether official or operating—are attained. Efficiency is a more limited concept that per-tains to the internal workings of the organization. Organizational efficiency is the amount of resources used to produce a unit of output.52 It can be measured as the ratio of inputs to outputs. If one organization can achieve a given production level with fewer resources than another organization, it would be described as more efficient.53 Sometimes efficiency leads to effectiveness, but in other organizations efficiency and effectiveness are not related. An organization may be highly efficient but fail to achieve its goals because it makes a product for which there is no demand. Likewise, an organization may achieve its profit goals but be inefficient. Efforts to increase efficiency, particularly through severe cost cutting, can also sometimes make the organization less effective. Recall the previous example of Kraft Heinz, where a new focus on goals of cost-cutting and efficiency have hurt innovation and the compa-ny’s ability to adapt. As another example, a regional fast food chain wanting to 2.4b Who Decides? Key people in charge of the organization, such as top executives or board members, have to make a conscious decision about how they will determine the organization’s effectiveness. Just as people determine goals, they also determine when the organiza-tion is successful. Organizational effectiveness is a social construct, meaning that it is created and defined by an individual or group rather than existing independently in the external world.56 An employee might consider the organization is effective if it issues accurate paychecks on time and provides promised benefits. A customer might consider it effective if it provides a good product at a low price. A CEO might consider the orga-nization effective if it is profitable. Effectiveness is always multidimensional, and thus assessments of effectiveness are typically multidimensional as well. Managers in businesses typically use profits and stock performance as indicators of effective-ness, but they also give credence to other measures, such as employee satisfaction, customer loyalty, corporate citizenship, innovativeness, or industry reputation.57 As open systems, organizations bring in resources from the environment, and those resources are transformed into outputs delivered back into the environment, as shown in Exhibit 2.9. In addition, recall from Chapter 1 that organizations inter-act with a number of stakeholder groups inside and outside the organization. Four key approaches to measuring effectiveness look at different parts of the organization and measure indicators connected with outputs, inputs, internal activities, or key stakeholders, also called strategic constituents.58 These four possible approaches to measuring effectiveness are: • The Goal Approach • The Resource-Based Approach • The Internal Process Approach • The Strategic Constituents Approach Managers often use indicators from more than one of the four approaches (goal, resource, internal process, strategic constituents) when measuring effectiveness. Exhibit 2.10 lists a sample of 15 indicators that managers of large, multinational organizations reported using to assess effectiveness. As you read the descriptions of the four approaches to measuring effectiveness in the following sections, try to decide which approach each of these 15 indicators falls under.59 As the items in Exhibit 2.10 reveal, indicators of effectiveness are both quanti-tative and qualitative, tangible and intangible. An indicator such as achieving sales targets or percentage of market share is easy to measure, but indicators such as employee engagement, quality, or customer satisfaction are less clear-cut and often must be measured qualitatively.60 Relying solely on quantitative measurements can give managers a limited or distorted view of effectiveness. Albert Einstein is2.4c Goal Approach The goal approach to effectiveness consists of identifying an organization’s goals and assessing how well the organization has attained those goals.62 This is a logical approach because organizations do try to attain certain levels of output, profit, or client satisfaction. For example, one major goal for Uber was to regain its license to operate in London, one of the company’s most profitable markets outside the United States. Under the direction of a new CEO, Dara Khosrowshahi, Uber is toning down its “grow-at-any-cost” culture, and the company’s goals now include proving to government officials that Uber can comply with local rules and regulations. Uber won its appeal to have the London license renewed after managers agreed to stricter government oversight, includ-ing new systems for reporting problems to regulators.63 The goal approach measures progress toward the attainment of those goals. Indicators. The important goals to consider are operating goals, because official goals (mission) tend to be abstract and difficult to measure. Operating goals reflect activities the organization is actually performing.64 Indicators tracked with the goal approach include: • Profitability—the positive gain from business operations or investments after expenses are subtracted • Market share—the proportion of the market the firm is able to capture relative to competitors • Growth—the ability of the organization to increase its sales, profits, or client base over time • Social responsibility—how well the organization serves the interests of society as well as itself • Product quality—the ability of the organization to achieve high quality in its products or services Usefulness. The goal approach is used in business organizations because output goals can be readily measured. Some nonprofit organizations that aim to solve social problems also find the goal approach useful. For example, Every Child Succeeds is a public-private partnership funded primarily by United Way that aims to reduce infant mortality and improve maternal health in the area surrounding Cincinnati, Ohio. In the seven Ohio and Kentucky counties around the city, 8.3 out of every 1,000 newborns die before they reach their first birthday, on par with countries such as Lithuania and Brunei. Yet among the mothers enrolled in Every Child Succeeds, that statistic is only 2.8 percent, lower than in virtually every industrialized country. Using a rigorous model of performance measurement based on some of the management practices at P&G, social workers and nurses visit at-risk mothers in their homes and help them stop smoking, control their diabetes or high blood pressure, and improve their health in other ways. Unlike many social improvement programs, Every Child Succeeds sets and measures a few narrow and specific goals organized under seven focus areas.65 In businesses as well as in nonprofit organizations such as Every Child Succeeds, identifying operating goals and measuring effectiveness are not always easy. Two problems that must be resolved are the issues of multiple goals and subjective indi-cators of goal attainment. Since organizations have multiple and sometimes conflict-ing goals, effectiveness cannot be assessed by a single indicator. High achievementon one goal might mean low achievement on another. Moreover, there are depart-ment goals as well as overall organizational goals. The full assessment of effective-ness should take into consideration several goals simultaneously. The other issue to resolve with the goal approach is how to identify operating goals for an organization and how to measure goal attainment. For business organizations, there are often objective indicators for certain goals, such as profit or growth. Every Child Succeeds can also use objective indicators for some goals, such as tracking how many infants are immunized or how many clients stop smoking during pregnancy. However, subjective assessment is needed for other goals, such as employee welfare, social responsibility, or client satisfaction. Top managers and other key people on the management team have to clearly identify which goals the organization will measure. Subjective perceptions of goal attainment must be used when quantitative indicators are not available. Managers rely on information from customers, competitors, suppliers, and employees, as well as their own intuition, when considering these goals. 2.4d Resource-Based Approach The resource-based approach looks at the input side of the transformation process shown in Exhibit 2.9. It assumes organizations must be successful in obtaining and managing valued resources in order to be effective because strategically valuable resources give an organization a competitive edge.66 From a resource-based per-spective, organizational effectiveness is defined as the ability of the organization, in either absolute or relative terms, to obtain scarce and valued resources and success-fully integrate and manage them.67 Indicators. Obtaining and successfully managing resources is the criterion by which organizational effectiveness is assessed. In a broad sense, resource indicators of effectiveness encompass the following dimensions:68 • Bargaining position—the ability of the organization to obtain from its environ-ment scarce and valued resources, including tangible resources such as a prime location, financing, raw materials, and quality employees, and intangible assets such as a strong brand or superior knowledge • The abilities of the organization’s decision makers to perceive and correctly interpret the real properties of the external environment and supply forces • The abilities of managers to use tangible (e.g., supplies, people) and intangi-ble (e.g., knowledge, corporate culture) resources and capabilities in day-to-day organizational activities to achieve superior performance • The ability of the organization to respond to changes in resource sectors of the environment Usefulness. The resource-based approach is valuable when other indicators of per-formance are difficult to obtain. In many nonprofit and social welfare organiza-tions, for example, it is hard to measure output goals or internal efficiency. The Shriners Hospitals for Children (SHC) system provides an example. The 22 Shriners Hospitals provide free treatment to thousands of children with orthopaedic condi-tions, burns, spinal cord injuries, and cleft lip and palette conditions. For most of its history, the SHC was highly successful in obtaining donations, the main source of funding for the hospitals’ operations. However, when the federal government launched a no-cost health insurance program for children of low-income families, Shriners began losing patients to traditional healthcare providers. With a decline in patient registrations, donations began to decline as well. Managers had to search for new ways to respond to the increased competition and obtain needed resources.69 Some for-profit organizations also use a resource-based approach because resources are critical to competitive success. For example, the British retail firm Marks & Spencer evaluates its effectiveness partly by looking at the company’s ability to obtain, manage, and maintain valued resources such as prime locations for stores, a strong brand, quality employees, and effective supplier relationships.70 Although the resource-based approach is valuable when other measures of effec-tiveness are not available, it does have shortcomings. For one thing, the approach only vaguely considers the organization’s link to the needs of customers. A superior ability to acquire and use resources is important only if resources and capabilities are used to achieve something that meets a need in the environment. Critics have challenged that the approach assumes stability in the marketplace and fails to ade-quately consider the changing value of various resources as the competitive environ-ment and customer needs change.71 2.4e Internal Process Approach In the internal process approach, effectiveness is measured as internal organizational health and efficiency. An effective organization has a smooth, well-oiled internal process. Employees are happy and satisfied. Department activities mesh with one another to ensure high productivity. This approach does not consider the external environment. The important element in effectiveness is what the organization does with the resources it has, as reflected in internal health and efficiency. Indicators. One indicator of internal process effectiveness is economic efficiency. However, the best-known proponents of an internal process model are from the human relations approach to organizations. Such writers as Chris Argyris, Warren G. Bennis, Rensis Likert, and Richard Beckhard have all worked extensively with human resources in organizations and emphasize the connection between human resources and effectiveness.72 Results from a study of nearly 200 secondary schools showed that both human resources and employee-oriented processes were import-ant in explaining and promoting effectiveness in those school organizations.73 Internal process indicators include:74 • A strong, adaptive corporate culture and positive work climate • Confidence and trust between employees and management • Operational efficiency, such as using minimal resources to achieve outcomes • Undistorted horizontal and vertical communication • Growth and development of employees • Coordination among the organization’s parts, with conflicts resolved in the interest of the larger organization Usefulness. The internal process approach is important because the efficient use of resources and harmonious internal functioning are good ways to assess orga-nizational effectiveness. At Campbell Soup’s Maxton, North Carolina-based fac-tory, hundreds of small changes and improvements, many suggested by employees, increased operating efficiency to 85 percent of what managers believe is the maxi-mum possible. UPS put devices on its delivery trucks to track how many left-turns against traffic its drivers have to make. By helping drivers optimize their routes with fewer left turns, the system will save UPS 1.4 million gallons of fuel per year.75Today, most managers believe that committed, actively involved employees and a positive corporate culture are also important internal measures of effectiveness. The internal process approach also has shortcomings. Total output and the organization’s relationship with the external environment are not evaluated. Another problem is that evaluations of internal health and functioning are often subjective because many aspects of inputs and internal processes are not quantifiable. Managers should be aware that this approach alone represents a limited view of organizational effectiveness. Follow-ing the merger of Burlington Northern Railroad and the Atchison, Topeka, and Santa Fe Railway, managers at BNSF Railway committed to creating an environment that provided overall organizational effectiveness, and they combine an internal process approach to measuring effectiveness with other approaches. As this example illustrates, many organizations use more than one approach to measuring effectiveness because organizations pursue many different types of activ-ities and serve many different interests. When faced with merging two operating systems, management systems, and cultures into one cohesive organization, managers at BNSF knew they could let the culture develop nat-urally over time or be active participants in creating the culture they wanted. They chose to take a deliberate role in building a positive internal environment. Indicators of internal effectiveness at BNSF are that people take pride in working at the railway and have opportunities for personal growth and development. Shared values include listening to customers and doing what it takes to meet their expectations. In addition, managers focus employees on continuous improvement and provide a safe working environment. Managers combine measures of internal process effectiveness with measures of how well BNSF meets goals for 100 percent on-time, damage-free customer service, accurate and timely information about their customer shipments, and giving customers the best value for their transportation dollar. Other goals are for shareholder returns that exceed other railroads and a return on invested capital that is greater than BNSF’s cost of capital. Other stakeholders are considered as well. BNSF considers its ethical and legal commit-ments to the communities it serves, as well as its sensitivity to the natural environment in evaluating overall effectiveness.76 IN PRACTICE BNSF Railway 2.4f Strategic Constituents Approach The strategic constituents approach is related to the stakeholder approach described in Chapter 1. Recall that organizations have a variety of internal and external stake-holders that may have competing claims on what they want from the organization. Several important stakeholder groups are also shown at the top of Exhibit 2.9. In reality, it is unreasonable to assume that all stakeholders can be equally sat-isfied. The strategic constituents approach measures effectiveness by focusing on the satisfaction of key stakeholders, those who are critical to the organization’s ability to survive and thrive. The satisfaction of these strategic constituents can be assessed as an indicator of the organization’s performance.77 Indicators. The initial work on evaluating effectiveness on the basis of strategic constituents looked at 97 small businesses and seven groups relevant to those orga-nizations. Members of each group were surveyed to determine the perception of effectiveness from each viewpoint.78 Each constituent group had a different crite-rion of effectiveness: If an organization fails to meet the needs of several constituent groups, it is probably not meeting its effectiveness goals. Although these seven groups reflect constituents that nearly every organization has to satisfy to some degree, each orga-nization might have a different set of strategic constituents. For example, indepen-dent software developers are key to the success of companies such as Facebook even though they are not necessarily customers, suppliers, or owners. Usefulness. Research has shown that the assessment of multiple constituents is an accurate reflection of organizational effectiveness, especially with respect to orga-nizational adaptability.79 Moreover, both profit and nonprofit organizations care about their reputations and attempt to shape perceptions of their performance.80 The strategic constituents approach takes a broad view of effectiveness and exam-ines factors in the environment as well as within the organization. It looks at several criteria simultaneously—inputs, internal processes, and outputs—and acknowledges that there is no single measure of effectiveness. The strategic constituents approach is popular because it is based on the under-standing that effectiveness is a complex, multidimensional concept and has no single measure.81 In the following section, we look at another popular approach that takes a multidimensional, integrated approach to measuring effectiveness. 2.5 An Integrated Effectiveness Model The competing values model tries to balance a concern with various parts of the orga-nization rather than focusing on one part. This approach to effectiveness acknowl-edges that organizations do many things and have many outcomes.82 It combines several indicators of effectiveness into a single framework. The model is based on the assumption that there are disagreements and com-peting viewpoints about what constitutes effectiveness. Managers sometimes dis-agree over which are the most important goals to pursue and measure. One tragic example of conflicting viewpoints and competing interests comes from NASA. After seven astronauts died in the explosion of the space shuttle Columbia in February 2003, an investigative committee found deep organizational flaws at NASA, includ-ing ineffective mechanisms for incorporating dissenting opinions between schedul-ing managers and safety managers. External pressures to launch on time overrode safety concerns with the Columbia launch.83 Similarly, Congressional investigations of the 2010 Deepwater Horizon oil rig explosion and oil spill in the Gulf of Mex-ico found that BP engineers and managers made a number of decisions that were counter to the advice of key contractors, putting goals of cost control and timeliness ahead of concerns over well safety.84 BP and NASA represent how complex organi-zations can be, operating not only with different viewpoints internally but also from contractors, government regulators, Congress, and the expectations of the American public. The competing values model takes into account these complexities. The model was originally developed by Robert Quinn and John Rohrbaugh to combine the diverse indicators of performance used by managers and researchers.85 Using a comprehensive list of performance indicators, a panel of experts in organizational effectiveness rated the indicators for similarity. Their analysis found underlying dimensions of effectiveness criteria that represented competing management values in organizations. Indicators. The first value dimension pertains to organizational focus, which is whether dominant values concern issues that are internal or external to the firm. Internal focus reflects a management concern for the well-being and efficiency of employees, and external focus represents an emphasis on the well-being of the organization itself with respect to the environment. The second value dimension pertains to organization structure and whether stability or flexibility is the domi-nant structural consideration. Stability reflects a management value for efficiency and top-down control, whereas flexibility represents a value for learning and change. The value dimensions of structure and focus are illustrated in Exhibit 2.11. The combination of dimensions provides four approaches to organizational effective-ness, which, though seemingly different, are closely related. In real organizations, these competing values can and often do exist together. Each approach reflects a different management emphasis with respect to structure and focus.86 A combination of external focus and flexible structure leads to an open systems emphasis. Management’s primary goals are growth and resource acquisition. The organization accomplishes these goals through the subgoals of flexibility, readiness, and a positive external evaluation. The dominant value is establishing a good rela-tionship with the environment to acquire resources and grow. This emphasis is simi-lar in some ways to the resource-based approach described earlier. The rational goal emphasis represents management values of structural control and external focus. The primary goals are productivity, efficiency, and profit. The organi-zation wants to achieve output goals in a controlled way. Subgoals that facilitate these outcomes are internal planning and goal setting, which are rational management tools. The rational goal emphasis is similar to the goal approach described earlier. The internal process emphasis is in the lower-left section of Exhibit 2.11; it reflects the values of internal focus and structural control. The primary outcome is a stable organizational setting that maintains itself in an orderly way. Organi-zations that are well established in the environment and simply want to maintain their current position would reflect this emphasis. Subgoals include mechanisms for efficient communication, information management, and decision making. Although this part of the competing values model is similar in some ways to the internal pro-cess approach described earlier, it is less concerned with human resources than with other internal processes that lead to efficiency. The human relations emphasis incorporates the values of an internal focus and a flex-ible structure. Here, management concern is for the development of human resources. Employees are given opportunities for autonomy and development. Management works toward the subgoals of cohesion, morale, and training opportunities. Organizations adopting this emphasis are more concerned with employees than with the environment. The four cells in Exhibit 2.11 represent opposing organizational values. Manag-ers decide which values will take priority in the organization. For example, manag-ers at Stryker Corporation, which makes surgical equipment and implants used in joint replacements, among other medical devices, emphasize values of openness and flexibility to keep people throughout the company innovating on a day-to-day basis. Yet the organization also has values of control and efficiency. Stryker keeps research and development costs relatively low compared to other device makers.87 The way two organizations are mapped onto the four approaches is shown in Exhibit 2.12.88Organization A is a young organization concerned with finding a niche and becom-ing established in the external environment. Primary emphasis is given to flexibility, innovation, the acquisition of resources from the environment, and the satisfaction of external strategic constituents. This organization gives moderate emphasis to human relations and even less emphasis to current productivity and profits. Satis-fying and adapting to the environment are more important. The attention given to open systems values means that the internal process emphasis is practically non-existent. Stability and equilibrium are of little concern. Organization B, in contrast, is an established business in which the dominant value is productivity and profits. This organization is characterized by planning and goal setting. Organization B is a large company that is well established in the envi-ronment and is primarily concerned with successful production and profits. Flexibil-ity and human resources are not major concerns. This organization prefers stability and equilibrium to learning and innovation because it wants to maximize the value of its established customers. Usefulness. The competing values model makes two contributions. First, it inte-grates diverse concepts of effectiveness into a single perspective. It incorporates the ideas of output goals, resource acquisition, and human resource development as goals the organization tries to accomplish. Second, the model calls attention to how effectiveness criteria are socially constructed from management values and shows how opposing values exist at the same time. Managers must decide which values they wish to pursue and which values will receive less emphasis. The four competing values exist simultaneously, but not all will receive equal priority. For example, a new, small organization that concentrates on establishing itself within a competitive environment will give less emphasis to developing employees than to the external environment. The dominant values in an organization often change over time as organizations experience new environmental demands, new top leadership, or other changes. For example, when Samsung Group managers shifted the company’s focus from quan-tity of sales to quality of products, it required a shift in dominant values. Chapter 3

Former Marine Captain Nate Fick compared the 13-person rifle squads of the United States Marine Corps to world-class dance troupes, saying, “Everybody’s movement depends on everybody else’s.” Each squad was composed of a leader and three fire teams of four riflemen each. Writer Sam Walker, author of The Captain Class: The Hidden Force That Creates the World’s Greatest Teams, called the Marine squads the “most brilliant tactical formation devised by any team in the last half century.” Marine Corps Commandant Robert Neller doesn’t necessarily disagree, but he blew up the long-standing structure of the squads by adding two new positions—an assistant squad leader and a systems operator focused on technology and intelli-gence—and reducing the squad size to 12. One rifleman was eliminated from each fire team. Today’s military operations depend on battlefield intelligence pouring in from new technology, such as drones. So, in May of 2018, Neller “unveiled the most sweeping changes to Marine infantry combat organization in 70 years” to address new fighting conditions.1 Like managers in all organizations, military leaders undertake structural changes from time to time to meet shifting needs. Organization structure is one vital fac-tor that helps organizations execute their strategies and achieve their goals. As men-tioned in Chapter 1 of this text, Procter & Gamble is cutting divisions and reducing levels of management to increase speed and agility in the global environment. The streaming service Spotify has added a new position to its management structure, hir-ing a chief content officer to help the company move beyond music. A new CEO at Ralph Lauren Corporation restructured operations so that design, merchandis-ing, sourcing, and marketing teams work together to move products from design to the sales floor more quickly.2 Many companies use structural innovations such as cross-functional teams and matrix designs to achieve the coordination and flexibility they need. Teams, for example, are part of the strategy used by the Federal Bureau of Investigation (FBI) to combat terrorism. Like other organizations, the FBI must find ways to accomplish more with limited resources. One innovation was the creation of Flying Squads, which are teams of volunteer agents and support staff from vari-ous offices who are ready to spring into action when minimally staffed FBI offices around the world request assistance.3 Some organizations, such as online retailer Zappos, have even moved to a bossless structure, in which all jobs, including those typically controlled and supervised by assigned managers, are handled by teams. Because of the complexity of today’s environment, many organizations are more complex and amorphous than they used to be. Wyeth Pharmaceuticals formed a joint venture with Accenture called the Alliance for Clinical Data Excellence, designed to “bring together the best of both Wyeth and Accenture” for managing Wyeth’s entire clinical testing operation—from protocol design to patient recruitment to site monitoring.4 Accenture doesn’t have a formal headquarters, no official branches, no permanent offices. The company’s chief technologist is located in Germany, its head of human resources is in Chicago, the chief financial officer is in Silicon Valley, and most of its consultants are constantly on the move.5 Wyeth and Accenture reflect the structural trend among organizations toward outsourcing, alliances, and virtual networking. Still other firms continue to be successful with traditional functional structures that are coordinated and controlled through the vertical hierarchy. Organizations use a wide variety of structural alternatives to help them achieve their purpose and goals, and nearly every firm needs to undergo reorganization at some point to help meet new challenges. Structural changes are needed to reflect new strategies or respond to changes in other contingency factors introduced in Chapters 1 and 2: environment, technology, size and life cycle, and culture. Purpose of This Chapter This chapter introduces basic concepts of organization structure and shows how to design structure as it appears on the organization chart. First, we define structure and provide an overview of structural design. Next, an information-sharing perspective explains how to design vertical and horizontal linkages to provide needed information flow and coordination. The chapter then presents basic design options, followed by strategies for grouping organizational activities into functional, divisional, matrix, virtual network, or holacracy team structures. The final section examines how the application of basic structures depends on the organization’s situation (various contingencies) and outlines the symptoms of structural misalignment. BRIEFCASE As an organization manager, keep these guidelines in mind: Develop organization charts that describe task responsibilities, reporting relationships, and the grouping of individuals into depart-ments. Provide suffi-cient documentation so that all people within the organization know to whom they report and how they fit into the total organization picture. 3.1 Organization Structure The following three key components define organization structure: 1. Organization structure designates formal positions and reporting relationships, including the number of levels in the hierarchy and the span of control of man-agers and supervisors. 2. Organization structure identifies the grouping together of individuals into departments and of departments into the total organization. 3. Organization structure includes the design of systems to ensure effective com-munication, coordination, and integration of efforts across departments.6 These three elements of structure pertain to both vertical and horizontal aspects of organizing. For example, the first two elements are the structural framework, which is the vertical hierarchy.7 The third element pertains to the pattern of interactions among organizational employees. An ideal structure encourages employees to provide horizontal information and coordination where and when it is neededOrganization structure is reflected in the organization chart. It isn’t possible to see the internal structure of an organization the way we might see its manufacturing tools, offices, website, or products. Although we might see employees going about their duties, performing different tasks, and working in different locations, the only way to actually see the structure underlying all this activity is through the organi-zation chart. The organization chart is the visual representation of a whole set of underlying activities and processes in an organization. Exhibit 3.1 shows a sim-ple organization chart for a traditional organization. An organization chart can be quite useful in understanding how a company works. It shows the various parts of an organization, how they are interrelated, and how each position and department fits into the whole. The concept of an organization chart, showing what positions exist, how they are grouped, and who reports to whom, has been around for centuries.8 For example, diagrams outlining church hierarchy can be found in medieval churches in Spain. However, the use of the organization chart for business stems largely from the Industrial Revolution. As we discussed in Chapter 1, as work grew more complex and was performed by greater numbers of workers, there was a pressing need to develop ways of managing and controlling organizations. The growth of the railroads provides an example. After the collision of two passenger trains in Massachusetts in 1841, the public demanded better control of the operation. As a result, the board of directors of the Western Railroad took steps to outline “definite responsibilities for each phase of the company’s business, drawing solid lines of authority and command for the railroad’s administration, maintenance, and operation.”9 Exhibit 3.2 shows an interesting example of an early organization chart created by Daniel McCallum for the Erie Railroad in 1855. Faced with financial strain and slumping productivity, McCallum created charts to explain the railroad’s operations to investors and to show the division of responsibilities for superintendents along hundreds of miles of rail lines. McCallum divided the railroad into geographic divisions of manageable size, with each division headed by a superintendent.10The type of organization structure that gradually grew out of these efforts in the late nineteenth and early twentieth centuries was one in which the CEO was placed at the top, and there was a clear hierarchy of authority extending to everyone else arranged in layers down below, as illustrated in Exhibit 3.1. The thinking and decision making are done by those at the top, and the physical work is performed by employees who are organized into distinct, functional departments. This structure was quite effective and became entrenched in business, nonprofit, and military organizations for most of the twentieth century. However, this type of vertical structure is not always effective, particularly in rapidly changing environments. Over the years, organizations have developed other structural designs, many of them aimed at increasing horizontal coordination and communication and encouraging adaptation to external changes. This chapter’s BookMark suggests that new approaches to organizing and managing people are crucial for companies to attain durable competitive advantages in the twenty-first century. 3.2 Information-Sharing Perspective on Structure The organization should be designed to provide both vertical and horizontal information flow as necessary to accomplish the organization’s overall goals. If the structure doesn’t fit the information requirements of the organization, people either will have too little information or will spend time processing information that is not vital to their tasks, thus reducing effectiveness.11 However, there is an inherent tension between vertical and horizontal mechanisms in an organization. Whereas vertical linkages are designed primarily for control, horizontal linkages are designed for coordination and collaboration, which usually means reducing control. 3.2a Centralized Versus Decentralized One question is the level at which decisions are made in the organization, because that determines where information is needed. Centralization and decentralization pertain to the hierarchical level at which decisions are made. Centralization means that decision authority is located near the top of the organization. With decentralization, decision authority is pushed downward to lower organization levels. Organizations can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical communication and control (a mechanistic design, as described in Chapter 1), or toward a more flexible learning organization, which emphasizes horizontal communication and coordination (an organic design). Exhibit 3.3 compares organizations designed for efficiency with those designed for learning and adaptation. An emphasis on efficiency and control is associated with specialized tasks, a hierarchy of authority, rules and regulations, formal reporting systems, few teams or task forces, and centralized decision making. Emphasis on learning and adaptation is associated with shared tasks; a relaxed hierarchy; few rules; face-to-face communication; many teams and task forces; and decentralized decision makingOrganizations may have to experiment to find the correct degree of centraliza-tion or decentralization to meet their needs. For example, a study by William Ouchi found that three large school districts that shifted to a more flexible, decentralized structure, giving school principals more autonomy, responsibility, and control over resources, performed better and more efficiently than large districts that were highly centralized.12 Walmart is experimenting with greater decentralization in some stores by having fewer managers and giving more decision-making authority to people on the sales floor. The company is testing several versions of the concept, called “Great Workplace,” in around 100 Walmart Neighborhood Markets and smaller supercen-ters.13 Even Japanese companies such as Toyota, which have a strong tradition of centralization, are seeing the power of decentralization for promoting a sense of ownership, as described in the following In Practice example“We didn’t have to go back to Japan for approval on everything,” said Randy Stephens, the chief engineer at the Toyota Technical Center near Ann Arbor, Michigan, where a new version of the Avalon was designed and engineered. “We might go back to review the status of the project, but there is a feeling of ownership of this car here.” The new version of the Avalon, designed and engineered in Michigan and built in Kentucky, was promoted as the company’s most American vehicle ever. It was the first proto-type not developed in Japan, and it was a test of how well Toyota can decentralize decision making to the company’s subsidiaries. Following years of crisis related to safety issues and recalls, Toyota managers have been gradually rebuilding a stronger company, which includes delegating responsibilities more globally. The company was strongly criticized for its need to coordinate every decision regard-ing the safety issues and recalls from headquarters. Executives have since overhauled the quality control process and decentralized more decision making to regional managers in charge of safety in North America, Europe, and Asia.14 Although many decisions will still rest with executives at headquarters, Toyota has real-ized that some decisions need to be made close to the action. Regional managers believe the problems Toyota went through have given top executives freedom to take risks they might not have taken otherwise.15 However, not every organization should decentralize all decisions. Wells Fargo executives say too much decentralization is partly to blame for the ethical and legal trouble the company got into when employees were opening fake bank accounts, as described in the previous chapter. Within many companies, there is often a “tug of war between centralization and decentralization” as top executives want to centralize some operations to eliminate duplication and provide greater oversight, while business managers want to maintain decentralized control.16 Managers are always searching for the best combination of vertical control and horizontal collaboration, centralization and decentralization, for their own situations.17 3.2b Vertical Information Sharing Organization design should facilitate the communication among employees and departments that is necessary to accomplish the organization’s overall task. Man-agers create information linkages to facilitate communication and coordination among organizational elements. Vertical linkages are used to coordinate activities between the top and bottom of an organization and are designed primarily for con-trol of the organization. Employees at lower levels should carry out activities con-sistent with top-level goals, and top executives must be informed of activities and accomplishments at the lower levels. Organizations may use any of a variety of structural devices to achieve vertical linkage, including hierarchical referral, rules and plans, and formal management information systems.18 Hierarchical Referral. The first vertical device is the hierarchy, or chain of com-mand, which is illustrated by the vertical lines in Exhibit 3.1. If a problem arises that employees don’t know how to solve, it can be referred up to the next level in the hierarchy. When the problem is solved, the answer is passed back down to lower levels. The lines of the organization chart act as communication channels. ules and Plans. The next linkage device is the use of rules and plans. To the extent that problems and decisions are repetitious, a rule or procedure can be established so employees know how to respond without communicating directly with their manager. Rules and procedures provide a standard information source enabling employees to be coordinated without actually communicating about every task. At PepsiCo’s Gemesa cookie business in Mexico, for example, managers carefully brief production workers on goals, processes, and procedures so that employees them-selves do most of the work of keeping the production process running smoothly, enabling the plants to operate with fewer managers.19 Plans also provide standing information for employees. The most widely used plan is the budget. With carefully designed and communicated budget plans, employees at lower levels can be left on their own to perform activities within their resource allotment. Vertical Information Systems. A vertical information system is another strategy for increasing vertical information capacity. Vertical information systems include the periodic reports, written information, and e-mails and other computer-based com-munications distributed to managers. Information systems make communication up and down the hierarchy more efficient. In today’s world of corporate financial scandals and ethical concerns, many top managers are considering strengthening their organization’s linkages for vertical information and control. The other major issue in organizing is to provide adequate horizontal linkages for coordination and collaboration. 3.2c Horizontal Information Sharing and Collaboration BRIEFCASE As an organization manager, keep these guidelines in mind: Provide vertical and horizontal information linkages to integrate diverse departments into a coherent whole. Achieve vertical link-age through hierarchy referral, rules and plans, and vertical information systems. Achieve hori-zontal linkage through cross-functional infor-mation systems, liaison roles, task forces, full-time integrators, and teams. Horizontal communication overcomes barriers between departments and provides opportunities for coordination and collaboration among employees to achieve unity of effort and organizational objectives.20 Collaboration means a joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose and that are typically greater than what any of the indi-viduals or departments could achieve working alone.21 To understand the value of collaboration, consider the 2011 U.S. mission to raid Osama bin Laden’s compound in Pakistan. The raid could not have succeeded without close collaboration between the Central Intelligence Agency (CIA) and the U.S. military. There has traditionally been little interaction between the nation’s intelligence officers and its military offi-cers, but the war on terrorism has changed that mindset. During planning for the bin Laden mission, military officers spent every day for months working closely with the CIA team in a remote, secure facility on the CIA campus. “This is the kind of thing that, in the past, people who watched movies thought was possible, but no one in the government thought was possible,” one official later said of the collabo-rative mission.22 Horizontal linkage refers to communication and coordination horizontally across organizational departments. Its importance is articulated by comments made by Lee Iacocca when he took over Chrysler Corporation in the 1980s. The following quote might be more than three decades old, but it succinctly captures a problem that still occurs in organizations all over the world: What I found at Chrysler were thirty-five vice presidents, each with his own turf. … I couldn’t believe, for example, that the guy running engineering departments wasn’t in constant touch with his counterpart in manufacturing. But that’s how it was. Everybody worked independently. I took one look at that system and Ialmost threw up. That’s when I knew I was in really deep trouble. … Nobody at Chrysler seemed to understand that interaction among the different functions in a company is absolutely critical. People in engineering and manufacturing almost have to be sleeping together. These guys weren’t even flirting!23 During his tenure at Chrysler, Iacocca pushed horizontal coordination to a high level. All the people working on a specific vehicle project—designers, engineers, and manufacturers, as well as representatives from marketing, finance, purchasing, and even outside suppliers—worked together on a single floor so they could easily com-municate. Horizontal linkage mechanisms often are not drawn on the organization chart, but nevertheless are a vital part of organization structure. Small organizations usually have a high level of interaction among all employees, but in a large organi-zation such as Chrysler, Google, Toyota, or Infosys, providing mechanisms to ensure horizontal information sharing is critical to effective collaboration, knowledge shar-ing, and decision making.24 For example, poor coordination and lack of informa-tion sharing has been blamed for delaying Toyota’s decisions and response time to quality and safety issues related to sticky gas petals, faulty brakes, and other prob-lems.25 The following devices are structural alternatives that can improve horizon-tal coordination and information flow.26 Each device enables people to exchange information. Information Systems. A significant method of providing horizontal linkage in today’s organizations is the use of cross-functional information systems. Com-puterized information systems enable managers or frontline workers throughout the organization to routinely exchange information and update each other about progress, problems, opportunities, activities, or decisions. For example, at Veterans Administration (VA) hospitals around the country, a sophisticated system called Vista enables people all across the organization to access complete patient infor-mation and provide better care. By enabling close coordination and collaboration, technology helped transform the VA into one of the most cost-effective medical pro-viders in the United States.27 Some organizations also encourage employees to use the company’s informa-tion systems to build relationships across the organization, aiming to support and enhance ongoing coordination across projects and geographical boundaries. CARE International, one of the world’s largest private international relief organizations, enhanced its personnel database to make it easy for people to find others with con-gruent interests, concerns, or needs. Each person in the database has listed past and current responsibilities, experience, language abilities, knowledge of foreign coun-tries, emergency experiences, skills and competencies, and outside interests. The database makes it easy for people working across borders to seek each other out, share ideas and information, and build enduring horizontal connections.28 Liaison Roles. A higher level of horizontal linkage is direct contact between man-agers or employees affected by a problem. One way to promote direct contact is to create a special liaison role. A liaison person, sometimes called a coordinator, is located in one department but has the responsibility for communicating and achiev-ing coordination and collaboration with another department. Liaison roles often exist between engineering and manufacturing departments because engineering has to develop and test products to fit the limitations of manufacturing facilities. An engineer’s office might be located in the manufacturing area so the engineer is readily available for discussions with manufacturing supervisors about engineeringproblems with the manufactured products. A research and development person might sit in on sales meetings to coordinate new product development with what salespeople think customers are wanting. Task Forces. Liaison roles usually link only two departments. When linkage involves several departments, a more complex device such as a task force is required. A task force is a temporary committee composed of representatives from each orga-nizational unit affected by a problem.29 Each member represents the interest of a department or division and can carry information from the meeting back to that department. Task forces are an effective horizontal linkage device for temporary issues. They solve problems by direct horizontal collaboration and reduce the information load on the vertical hierarchy. Typically, they are disbanded after their tasks are accomplished. Organizations have used task forces for everything from organizing the annual company picnic to solving expensive and complex manufacturing prob-lems. One example comes from Georgetown Preparatory School in North Bethesda, Maryland, which used a task force made up of teachers, administrators, coaches, support staff, and outside consultants to develop a flu preparedness plan.30 After it acquired Time Warner, AT&T created numerous task forces to work on issues rang-ing from programming to data analytics. IN PRACTICE AT&T WarnerMedia Things have been changing fast since AT&T bought Time Warner and rebranded it as WarnerMedia. At the time of the acqui-sition, Time Warner had three major divi-sions: HBO, Turner, and Warner Brothers. Soon after the acquisition deal was closed in 2018, AT&T executives created several committees, called “workstreams,” made up of people from each of the three units, to analyze the rapid changes in the media industry and brainstorm ideas for how to address them. One workstream focused on the future of television and came up with the initial plan for a subscription video service to compete with Netflix. The idea was to keep HBO’s stand-alone streaming service, HBO NOW, as a separate product, but introduce a new service with HBO at the center and additional content pulled from the rest of WarnerMedia’s film and television libraries. The workstreams were the beginning of AT&T’s efforts to break down boundaries and get the divisions working together. “I couldn’t remember many times over the years where you’d have all three companies deciding strategy together,” said a long-time Time Warner employee. John Stankey, WarnerMedia’s CEO, and Robert Greenblatt, the former NBC Entertainment Chairman that Stankey put in charge of programming as Chief Content Officer, want the company to be more like successful firms such as Walt Disney Company and Comcast’s NBC Universal, where there is much more cooperation and collab-oration across divisions. Greenblatt warned employees that competitors were “eating our lunch,” and pointed to the infighting and turf battles that had long characterized the relation-ships among Time Warner’s divisions as one major reason for it. For instance, insiders say Turner once tried to collaborate with HBO on a streaming service but rivalries squashed the efforts. “This company in the past has tended to be a collection of separate entities . . . .,” said Greenblatt. “It is really incumbent on us to figure out how to manage them in a really smart way together.”31Full-time Integrator. A stronger horizontal linkage device is to create a full-time position or department solely for the purpose of coordination. A full-time integrator frequently has a title, such as product manager, project manager, program manager, or brand manager. Unlike the liaison person described earlier, the integrator does not report to one of the functional departments being coordinated. He or she is located outside the departments and has the responsibility for coordinating several departments. The brand manager for Planters Peanuts, for example, coordinates the sales, distribution, and advertising for that product. The integrator can also be responsible for an innovation or change project, such as coordinating the design, financing, and marketing of a new product. An organization chart that illustrates the location of project managers for new product development is shown in Exhibit 3.4. The project managers are drawn to the side to indicate their separation from other departments. The arrows indicate project members assigned to the new product development. New Product A, for example, has a financial accoun-tant assigned to keep track of costs and budgets. The engineering member provides design advice, and purchasing and manufacturing members represent their areas. The project manager is responsible for the entire project. He or she sees that the new product is completed on time, is introduced to the market, and achieves other proj-ect goals. The horizontal lines in Exhibit 3.4 indicate that project managers do not have formal authority over team members with respect to giving pay raises, hiring, or firing. Formal authority rests with the managers of the functional departments, who have direct authority over subordinates within their departments. Integrators need excellent people skills. Integrators in most companies have a lot of responsibility but little authority. The integrator has to use expertise and persua-sion to achieve coordination. He or she spans the boundary between departments and must be able to get people together, maintain their trust, confront problems, and resolve conflicts and disputes in the interest of the organization.32 Cross-Functional Teams. Project teams tend to be the strongest horizontal linkage mechanism. Cross-functional teams are permanent task forces made up of members from different functional areas and are often used in conjunction with a full-time integrator. When activities among departments require strong coordination and collaboration over a long period of time, a cross-functional team is often the solution. These teams are often formed as a foundation for an innovation by bringing together people from research, engineering, marketing, supply chain, and finance—each department that an innovation would affect. In companies that have implemented cross-functional teams successfully, including Apple, IKEA, and LEGO, managers clearly detail a specific and limited set of innovation goals so the team knows what it must do to be successful.33 Special project teams may be used when organizations have a large-scale project, a major innovation, or a new product line. JetBlue Airwaysput together a special project team made up of crew schedulers, systems operators, dispatchers, reservations agents, and other employees to revise how the airline handles and recovers from “irregular operations,” such as severe weather. How effectively airlines manage and recover from these events dramatically affects performance and customer satisfaction, but effectiveness requires close coordination. The goal of JetBlue’s special project team is to work out solutions to help the airline improve both regular on-time performance and its recovery time from major events.34 Many of today’s companies use virtual cross-functional teams. A virtual team is one that is made up of organizationally or geographically dispersed members who are linked primarily through advanced information and communications technologies. Members use the Internet, collaboration software, and other digital technologies to work together rather than meet face to face.35 Most companies, especially those that have virtual team members working in several different countries across time zones and cultures, have a virtual work space that members can access 24 hours a day.36 An illustration of how teams provide strong horizontal coordination is shown in Exhibit 3.5. Wizard Software Company develops and markets software for various web, desktop, and mobile applications, from games and social media products to finan-cial services. Wizard uses teams to coordinate each product line across the research, programming, and marketing departments, as illustrated by the dashed lines and shaded areas in the exhibit. Members from each team meet at the beginning of each day as needed to resolve problems concerning customer needs, backlogs, programming changes, scheduling conflicts, and any other problem with the product line. Are you cuout for horizontal teamwork? Complete the questionnaire in the “How Do You Fit the Design?” box to assess your feelings about working on a team. Exhibit 3.6 summarizes the mechanisms for achieving horizontal linkages. These devices represent alternatives that managers can select to increase horizontal coordi-nation and collaboration in any organization. The higher-level devices provide more horizontal information capacity, although the cost to the organization in terms of time and human resources is greater. If horizontal communication is insufficient, departments will find themselves out of synchronization and will not contribute to the overall goals of the organization. When the amount of horizontal coordination needed is high, managers should select higher-level mechanisms. 3.2d Relational Coordination The highest level of horizontal coordination illustrated in Exhibit 3.6 is relational coordination. Relational coordination refers to “frequent, timely, problem-solving communication carried out through relationships of shared goals, shared knowl-edge, and mutual respect.”37 Relational coordination isn’t a device or mechanism like the other elements listed in Exhibit 3.6, but rather is part of the very fabric and culture of the organization. In an organization with a high level of relational coordination, people share information freely across departmental boundaries, and people interact on a continuous basis to share knowledge and solve problems. Coordination is carried out through a web of ongoing positive relationships rather than because of formal coordination roles or mechanisms.38 Employees coordinate and collaborate directly with each other across units. Building relational coordination into the fabric of the organization requires the active role of managers. Managers invest in training people in the skills needed to interact with one another and resolve cross-functional conflicts, build trust and credibility by showing they care about employees, and intentionally foster relation-ships based on shared goals rather than emphasizing goals of the separate depart-ments. People are given freedom from strict work rules so they have the flexibility to interact and contribute wherever they are needed, and rewards are based on team efforts and accomplishments. Frontline supervisors have small spans of control so they can develop close working relationships with subordinates and coach and men-tor employees. Managers also create specific cross-functional roles that promote coordination across boundaries. Southwest Airlines provides a good illustration. Airlines face many challenges, but one that they face hundreds of times a day is getting airplanes loaded and off the ground safely and on time. Flight departure is a highly com-plex process. It involves numerous employees from various departments—such as ticket agents, pilots, flight attendants, baggage handlers, gate agents, mechanics, ramp agents, and fuel attendants—performing multiple tasks within a limited time period, under uncertain and ever-changing conditions. If all these groups aren’t tightly coordinated, a successful on-time departure is difficult to achieve. Southwest Airlines has the shortest turnaround time in the business, partly because managers promote relational coordination to achieve superior on-time performance and a high level of customer satisfaction. In any airline, there can be serious disagreements among employees about who is to blame when a flight is delayed, so Southwest managers created what they call team delay. Rather than searching for who is to blame when some-thing goes wrong, the team delay is used to point out problems in coordination betweenvarious groups. Emphasis on the team focuses everyone on the shared goals of on-time departure, safety, accurate baggage handling, and customer satisfaction. Because delay becomes a team problem, people are motivated to work closely together and coordinate their activities rather than looking out for themselves and trying to avoid or shift blame. Supervisors work closely with employees, but their role is less about “being the boss,” and more about enabling learning and helping people do their jobs. Southwest uses a small supervisory span of control—about one supervisor for every eight or nine frontline employees—so that supervisors have the time to coach and assist employees, who are viewed as internal customers.39 By using practices that facilitate relational coordination, Southwest managers ensure that all the departments involved in flight departure are tightly coordinated. When relational coordination is high, people share information and coordinate their activities without having to have bosses or formal mechanisms telling them to do so. When he was deputy commander of U.S. forces in Afghanistan, four-star Army General David M. Rodriguez (currently commander of the United States Africa Command) was known to foster relational coordination among U.S. and Afghan military leaders as well as low-ranking commanders, civilian leaders, and others. His operations center had the feel of a newsroom, in which people eagerly talked to one another and shared their knowledge. Guidelines from high-ranking officers got bottom-up refinement from captains and sergeants. Rodriguez understood that people have to “work together and figure out how to maximize the effectiveness of the team.”403.3 Organization Design Alternatives The overall design of organization structure indicates three things: required work activities, reporting relationships, and departmental groupings. 3.3a Required Work Activities Departments are created to perform tasks considered strategically important to the company. In a typical manufacturing company, for example, work activities fall into a range of functions that help the organization accomplish its goals, such as a human resource department to recruit and train employees, a purchasing depart-ment to obtain supplies and raw materials, a production department to build prod-ucts, and a sales department to sell products. As organizations grow larger and more complex, managers find that more functions need to be performed. Organizations typically define new positions, departments, or divisions as a way to accomplish new tasks deemed valuable by the organization. Recall that Spotify has added a chief content officer to move beyond streaming music. British oil giant BP added a new safety division in the wake of the Deepwater Horizon oil spill. Amazon created an in-house logistics department to handle its own shipping and distribution. Some observers think Amazon’s delivery network will eventually become a business that will challenge UPS and FedEx in delivering merchandise and packages for other companies.41 3.3b Reporting Relationships Once required work activities and departments are defined, the next question is how these activities and departments should fit together in the organizational hierarchy. Reporting relationships, often called the chain of command, are repre-sented by vertical lines on an organization chart. The chain of command should be an unbroken line of authority that links all persons in an organization and shows who reports to whom. In a large organization such as General Electric, BP, Amazon, or L’Oreal, 100 or more charts might be needed to identify reporting relationships among thousands of employees. The definition of departments and the drawing of reporting relationships define how employees are to be grouped into departments. 3.3c Departmental Grouping Options Options for departmental grouping, including functional grouping, divisional grouping, multifocused grouping, virtual network grouping, and holacracy team grouping, are illustrated in Exhibit 3.7. Departmental grouping affects employees because they share a common supervisor and common resources, are jointly respon-sible for performance, and tend to identify and collaborate with one another.42 Functional grouping places together employees who perform similar functions or work processes or who bring similar knowledge and skills to bear. For exam-ple, all marketing people work together under the same supervisor, as do all manufacturing employees, all human resources people, and all engineers. For an Internet company, all the people associated with maintaining the website might be grouped together in one department. In a scientific research firm, all chemists may be grouped in a department different from biologists because they represent different disciplines. Divisional grouping means people are organized according to what the organiza-tion produces. All the people required to produce toothpaste—including personnel in marketing, manufacturing, and sales—are grouped together under one executive. In huge corporations, such as AT&T, some product or service lines may represent independent businesses, such as AT&T Communications (mobile and other commu-nication services), WarnerMedia (television and movies), and Xander (advertising solutions). Matrix grouping means an organization embraces two or more structural group-ing alternatives simultaneously. An organization may need to group by function and product divisions simultaneously or might need to combine characteristics of sev-eral structural options. This structural form is often called a matrix structure. The matrix structure will be discussed in more detail later in this chapter. With virtual network grouping, the organization is a loosely connected cluster of separate components. In essence, departments are separate organizations that are electronically connected for the sharing of information and completion of tasks. Departments can be spread all over the world rather than located together in one geographic location. Holacracy team grouping is the most recent approach to departmental grouping. With this grouping, the entire organization is made up of self-managing teams that include the people needed to accomplish a specific task or activity. The organizational forms described in Exhibit 3.7 provide the overall options within which a company’s organization chart is drawn and the detailed structure is designed. Each structural design alternative has significant strengths and weak-nesses, to which we now turn. 3.4 Functional, Divisional, and Geographic Designs Functional grouping and divisional grouping are the two most common approaches to structural design. 3.4a Functional Structure In a functional structure, also called a U-form (unitary), activities are grouped together by common function from the bottom to the top of the organization.43 All engineers are located in the engineering department, and the vice president of engi-neering is responsible for all engineering activities. The same is true in marketing, R&D, and manufacturing. An example of the functional organization structure was shown in Exhibit 3.1 earlier in this chapter. With a functional structure, all human knowledge and skills with respect to specific activities are consolidated, providing a valuable depth of knowledge for the organization. This structure is most effective when in-depth expertise is critical to meeting organizational goals, when the organization needs to be controlled and coordinated through the vertical hierarchy, and when efficiency is important. The structure can be quite effective if there is little need for hor-izontal coordination. Exhibit 3.8 summarizes the strengths and weaknesses of the functional structure. One strength of the functional structure is that it promotes economy of scale within BRIEFCASE As an organization manager, keep these guidelines in mind: When designing overall organization structure, choose a functional structure when effi-ciency is important, when in-depth knowl-edge and expertise are critical to meeting organizational goals, and when the orga-nization needs to be controlled and coor-dinated through the vertical hierarchy. Use a divisional structure in a large organization with multiple product lines and when you wish to give priority to product goals and coordination across functions. functions. Economy of scale results when all employees are located in the same place and can share facilities. Producing all products in a single plant, for example, enables the plant to acquire the latest machinery. Constructing only one facility instead of separate facilities for each product line reduces duplication and waste. The functional structure also promotes in-depth skill development of employees. Employees are exposed to a range of functional activities within their own department.44 The main weakness of the functional structure is a slow response to environmental changes that require coordina-tion across departments. The vertical hierarchy becomes overloaded. Decisions pile up, and top managers do not respond fast enough. Other disadvantages of the functional structure are that innovation is slow because of poor coordination, and each employee has a restricted view of overall goals. 3.4b Functional Structure with Horizontal Linkages Some organizations perform very effectively with a functional structure, and orga-nizing by functions is still the prevalent approach to organization design.45 How-ever, in today’s fast-moving world, very few companies can be successful with a strictly functional structure. For example, Watershed Asset Management is orga-nized by functions such as legal, accounting, and investment, but to ensure coor-dination and collaboration, founder Meridee A. Moore has everyone sit in one big open room. “There’s not much that is distilled or screened,” she says. “When we’re working on something, there’s a lot of back and forth.”46 For a small organization, this informal coordination works fine, but as organizations grow larger, they typi-cally need stronger mechanisms for horizontal linkage. Managers improve horizontal coordination by using information systems, liaison roles, full-time integrators or project managers (illustrated in Exhibit 3.4), task forces, or teams (illustrated in Exhibit 3.5), and by creating the conditions that encourage relational coordination. One interesting use of horizontal linkages occurred atKarolinska Hospital in Stockholm, Sweden, which had 47 functional departments. Even after top executives cut that down to 11, coordination was still inadequate. The top executive team set about reorganizing workflow at the hospital around patient care. Instead of bouncing a patient from department to department, Karolinska now envisions the illness to recovery period as a process with “pit stops” in admissions, X-ray, surgery, and so forth. The most interesting aspect of the approach is the position of nurse coordinator. Nurse coordinators serve as full-time integrators, troubleshooting transitions within or between departments. The improved horizontal coordination dramatically improved productivity and patient care at Karolinska.47 The hospital is effectively using horizontal linkages to overcome some of the disadvantages of the functional structure. 3.4c Divisional Structure With a divisional structure, also called an M-form (multidivisional) or a decentralized form, separate divisions can be organized with responsibility for individual products, services, product groups, major projects or programs, divisions, businesses, or profit centers.48 This structure is sometimes also called a product structure or strategic business unit structure. The distinctive feature of a divisional structure is that grouping is based on organizational outputs. For example, LEGO Group shifted from a functional structure to a divisional structure with three product divisions: DUPLO, with its big bricks for the youngest children; LEGO construction toys; and a third category for other forms of LEGO play materials such as buildable jewelry. Each division contained the functional departments necessary for that toy line.49 United Technologies Corporation (UTC), which is among the 50 largest U.S. industrial firms, has numerous divisions, including Carrier (air conditioners and heating), Otis (elevators and escalators), Pratt & Whitney (aircraft engines), and Collins Aerospace (technology products for the aerospace and defense industries).50 The Chinese online-commerce company Taobao, which is a division of Alibaba Group, is further separated into three divisions that provide three different types of services: linking individual buyers and sellers; a marketplace for retailers to sell to consumers; and a service for people to search across Chinese shopping websites.51 Organizations tend to shift from functional to divisional structures as they become more complex.52 The difference between a divisional structure and a functional struc-ture is illustrated in Exhibit 3.9. The functional structure can be redesigned into separate product groups, and each group contains the functional departments of R&D, man-ufacturing, accounting, and marketing. Coordination is maximized across functional departments within each product group. The divisional structure promotes flexibility and change because each unit is smaller and can adapt to the needs of its environment. Moreover, the divisional structure decentralizes decision making because the lines of authority converge at a lower level in the hierarchy. The functional structure, by con-trast, is centralized because it forces decisions all the way to the top before a problem affecting several functions can be resolved. Strengths and weaknesses of the divisional structure are summarized in Exhibit 3.10. The divisional organization structure is excellent for achieving coor-dination across functional departments. It works well when organizations can no longer be adequately controlled through the traditional vertical hierarchy and when goals are oriented toward adaptation and change. When Google grew from a small search engine into a giant company operating in areas as diverse as biotechnology and finance, co-founder and CEO Larry Page reorganized into a type of divisional structure to keep adaptation and innovation a thriving part of all the businesses. oogle was founded as a company that did Internet search. Yet by 2015, it was involved in everything from pharmaceu-ticals to self-driving cars. Google’s then-CEO Larry Page and his co-founder Sergey Brin decided to restructure the various businesses under a new parent company, called Alphabet, to give managers in the businesses more autonomy and keep the companies innovative and adaptable. The largest division of Alphabet is Google, which includes the traditional business of search and advertising along with other activi-ties. Other divisions include Verily, a life-sciences research organization; self-driving car unit Waymo; CapitalG, which provides late stage venture capital funding; and X Development, which focuses on various experimental products and services. Each business unit has its own goals and budget, each contains all the functions needed to perform its tasks, aneach has its own CEO and management team. Management style and culture may also vary among the divisions. For instance, although Google offers napping pods for employees, not all divisions of Alphabet follow suit. The idea behind Alphabet is that by being smaller and more independent, each unit can be nimbler and more innovative to serve the fast-moving needs and desires of customers. “There can be a lot of cross-company confusion when companies get too big, and this will allow people to build the right set of products for the right users . . .” said Wesley Chan, a Google veteran who is now a partner at venture capital firm Felicis Ventures.53 Google co-founders Page and Brin serve as CEO and President of Alphabet. Page says the structure will continue to evolve. Many companies find that they need to restructure every few years as they grow larger. Giant, complex organizations such as General Electric and Johnson & Johnson are subdivided into a series of smaller, self-contained organizations for better control and coordination. In these large, complex companies, the units are sometimes called divisions, businesses, or strategic business units. Johnson & Johnson is organized into three major divisions: Consumer Products, Medical Devices and Diagnostics, and Pharmaceuticals, yet within those three major divisions are more than 250 separate operating units in 57 countries.54 Some U.S. government organizations also use a divisional structure to better serve the public. One example is the Internal Revenue Service, which wanted to be more customer oriented. The agency shifted its focus to informing, educating, and serving the public through four separate divisions serving distinct taxpayer groups—individual taxpayers, small businesses, large businesses, and tax-exempt organizations. Each division has its own budget, personnel, policies, and planning staffs that are focused on what is best for each particular taxpayer segment.55 The divisional structure has several strengths.56 This structure is suited to fast change in an unstable environment and provides high product or service visibility. Since each product line has its own separate division, customers are able to contact the cor-rect division and achieve satisfaction. Coordination across functions is excellent. Each product or service can adapt to requirements of individual customers or regions. The divisional structure typically works best in organizations that have multiple products or services and enough personnel to staff separate functional units. Decision making is pushed down to the divisions. Each division is small enough to be quick on its feet, responding rapidly to changes in the market. Verizon reorganized into three divisions serving different types of customers—Verizon Consumer Group, VerizoOne disadvantage of using divisional structuring is that the organization loses economies of scale. Instead of 50 research engineers sharing a common facility in a functional structure, 10 engineers may be assigned to each of five product divi-sions. The critical mass required for in-depth research is lost, and physical facilities have to be duplicated for each product line. Another problem is that product lines become separate from each other, and coordination across product lines can be dif-ficult. As a Johnson & Johnson executive once said, “We have to keep reminding ourselves that we work for the same corporation.”57 Some companies that have a large number of divisions have had real prob-lems with cross-unit coordination. Sony lost the digital music player business to Apple partly because of poor coordination. With the introduction of the iPod, Apple quickly captured 60 percent of the U.S. market versus 10 percent for Sony. The digital music business depends on seamless coordination. Sony’s Walkman did not even recognize some of the music sets that could be made with the company’s SonicStage software and thus didn’t mesh well with the division selling music down-loads.58 Unless effective horizontal mechanisms are in place, a divisional structure can hurt overall performance. One division may produce products or programs that are incompatible with products sold by another division, as at Sony. Customers can become frustrated when a sales representative from one division is unaware of developments in other divisions. Task forces and other horizontal linkage devices are needed to coordinate across divisions. A lack of technical specialization is also a problem in a divisional structure. Employees identify with the product line rather than with a functional specialty. R&D personnel, for example, tend to do applied research to benefit the product line rather than basic research to benefit the entire organization. The problem of coordination and collaboration is amplified in the international arena because organizational units are differentiated not only by goals and work activities, but also by geographical distance, time differences, cultural values, and perhaps language. How can managers ensure that needed coordination and collab-oration will take place in their company, both domestically and globally? Coor-dination is the outcome of information and cooperation. Managers can design systems and structures, as described earlier, to promote horizontal coordination and collaboration. 3.4d Geographic Structure Another basis for structural grouping is the organization’s users or customers. The most common structure in this category is geography. Each region of the coun-try may have distinct tastes and needs. Each geographic unit includes all func-tions required to produce and market products or services in that region. Large nonprofit organizations such as the Girl Scouts of the USA, Habitat for Humanity, Make-A-Wish Foundation, and United Way of America frequently use a type of geographic structure, with a central headquarters and semiautonomous local units. The national organization provides brand recognition, coordinates fund-raising ser-vices, and handles some shared administrative functions, while day-to-day control and decision making is decentralized to local or regional units.59 World Bank uses a complex type of geographic divisional structure, organized country by country and region by region. To encourage greater coordination and collaboration across regions, Jim Yong Kim, who served as World Bank president from 2012 until early 2019, implemented a sweeping reorganization that overlaid the structure with 14n Business Group, and Verizon Media Group—to better respond to changing customer needs. “global practices,” including agriculture, energy, and education, that cut across the bank’s different projects, funds, and geographies.60 Similarly, multinational corporations may create self-contained units for different countries and parts of the world. Exhibit 3.11 shows an example of a geographic structure for a cosmetics company. This structure focuses managers and employees on specific geographic regions and sales targets. Walmart Stores are organized by geographic regions, such as Walmart Japan, Walmart India, Walmart Brazil, Walmart China, and Walmart Asia. Until recently, U.S. operations were organized largely by function, but managers restructured U.S. operations into three geographic divisions, West, South, and North, making the U.S. organization more like how Walmart operates internationally. Using a geographic structure helps the company expand into new markets and use resources more efficiently.61 The strengths and weaknesses of a geographic divisional structure are similar to the divisional organization characteristics listed in Exhibit 3.10. The organization can adapt to the specific needs of its own region, and employees identify with regional goals rather than with national goals. Horizontal coordination within a region is emphasized rather than linkages across regions or to the national office. 3.5 Matrix Structure Sometimes, an organization’s structure needs to be multifocused in that both prod-uct and function or product and geography are emphasized at the same time. One way to achieve this is through the matrix structure.62 The matrix can be used when both technical expertise and product innovation and change are important for meeting organizational goals. The matrix structure often is the answer when orga-nizations find that the functional, divisional, and geographic structures combined with horizontal linkage mechanisms will not work. The matrix is a strong form of horizontal linkage. The unique characteristic of the matrix organization is that both product divisions and functional structures (horizontal and vertical) are implemented simultaneously, as shown in Exhibit 3.12. The product managers and functional managers have equal authority within the organization, and mployees report to both of them. The matrix structure is similar to the use of full-time integrators or product managers described earlier in this chapter (Exhibit 3.4), except that in the matrix structure the product managers (horizontal) are given formal authority equal to that of the functional managers (vertical). 3.5a Conditions for the Matrix A dual hierarchy may seem an unusual way to design an organization, but the matrix is the correct structure when the following conditions are present:63 • Condition 1. Pressure exists to share scarce resources across product lines. The organization is typically medium-sized and has a moderate number of product lines. It feels pressure for the shared and flexible use of people and equipment across those products. For example, the organization is not large enough to assign engineers full-time to each product line, so engineers are assigned part-time to several products or projects. • Condition 2. Environmental pressure exists for two or more critical outputs, such as for in-depth technical knowledge (functional structure) and frequent new products (divisional structure). This dual pressure means a balance of power is needed between the functional and product sides of the organization, and a dual-authority structure is needed to maintain that balance. • Condition 3. The environmental domain of the organization is both complex and uncertain. Frequent external changes and high interdependence between departments require a large amount of coordination and information processing in both vertical and horizontal directions. Under these three conditions, the vertical and horizontal lines of authority must be given equal recognition. A dual-authority structure is thereby created so the bal-ance of power between them is equal. Referring again to Exhibit 3.12, assume the matrix structure is for a clothing manufacturer. Product A is footwear, product B is outerwear, product C is sleepwear, and so on. Each product line serves a different market and customers. As a medium-sized organization, the company must effectively use people from manufacturing, design, and marketing to work on each product line. There are not enough designers to warrant a separate design department for each product line, so the designers are shared across product lines. Moreover, by keeping the manufacturing, design, and marketing functions intact, employees can develop the in-depth expertise to serve all product lines efficiently. The matrix formalizes horizontal teams along with the traditional vertical hierarchy and tries to give equal balance to both. However, the matrix may shift one way or the other. Many companies have found a balanced matrix hard to implement and maintain because one side of the authority structure often dominates. Consequently, two variations of matrix structure have evolved—the functional matrix and the product matrix. In a functional matrix, the functional bosses have primary authority and the project or product managers simply coordinate product activities. In a product matrix, by contrast, the project or product managers have primary authority and functional managers simply assign technical personnel to projects and provide advisory expertise as needed. For many organizations, one of these approaches works better than the balanced matrix with dual lines of authority.64consulting firms, banks, insurance companies, government agencies, and many types of industrial firms.65 3.5b Strengths and Weaknesses The matrix structure is best when environmental change is high and when goals reflect a dual requirement, such as for both product and functional goals. The dual-authority structure facilitates communication and coordination to cope with rapid environmental change and enables an equal balance between product and functional bosses. The matrix facilitates discussion and adaptation to unexpected problems. It tends to work best in organizations of moderate size with a few prod-uct lines. The matrix is not needed for only a single product line, and too many product lines make it difficult to coordinate both directions at once. Exhibit 3.13 summarizes the strengths and weaknesses of the matrix structure based on what we know of organizations that use it.66 One strength of the matrix is that it enables an organization to meet dual demands from customers in the environment. Resources (people, equipment) can be flexibly allocated across different products, and the organization can adapt to changing external requirements.67 This structure also provides an opportunity for employees to acquire either functional or general management skills, depending on their interests. One disadvantage of the matrix is that some employees experience dual authority, reporting to two bosses and sometimes juggling conflicting demands. This can be frustrating and confusing, especially if roles and responsibilities are not clearly defined by top managers.68 Employees working in a matrix need excellent interpersonal and conflict-resolution skills, which may require special training in human relations. The matrix also forces managers to spend a great deal of time in meetings.69 Many people working in matrix structures say they spend two days a week in meetings and only 50 percent of the content is relevant to them or their jobs.70 If managers do not adapt to the information and powersharing required by the matrix, the system will not work. Managers must collab-orate with one another rather than rely on vertical authority in decision making. The successful implementation of one matrix structure occurred at a steel com-pany in Great Britain. As far back as anyone could remember, the steel industry in England was stable and certain. Then in the 1990s and 2000s, excess European steel capacity, an economic downturn, the emergence of the mini mill electric arc furnace, and competition from steelmakers in Germany and Japan forever changed the steel industry. Englander Steel employed 2,900 people, made 400,000 tons of steel a year (about one percent of Arcelor’s output), and was 180 years old. For 160 of those years, a functional structure worked fine. As the environment became more turbulent and competitive, however, Englander Steel managers realized they were not keeping up. Fifty percent of Englander’s orders were behind schedule. Profits were eroded by labor, material, and energy cost increases. Market share declined. In consultation with outside experts, the president of Englander Steel saw that the com-pany had to walk a tightrope. It had to specialize in a few high-value-added products tailored for separate markets, while maintaining economies of scale and sophisticated technology within functional departments. The dual pressure led to an unusual solution for a steel com-pany: a matrix structure. Englander Steel had four product lines: open-die forgings, ring-mill products, wheels and axles, and sheet steel. A business manager was given responsibility for and authority over each line and each manager had the authority needed to meet their targets and to make their lines profitable. Functional vice presidents were responsible for technical decisions. Functional managers were expected to stay abreast of the latest techniques in their areas and to keep personnel trained in new technologies that could apply to product lines. With 20,000 recipes for specialty steels and several hundred new recipes ordered each month, functional personnel had to stay current. Two functional departments—field sales and industrial relations—were not included in the matrix because they worked independently. The final design was a matrix structure with both product and functional relationships, as illustrated in Exhibit 3.14.71 This example illustrates the correct use of a matrix structure. The dual pres-sure to maintain economies of scale and to market four product lines gave equal emphasis to the functional and product hierarchies. Through continuous meet-ings for coordination, Englander Steel achieved both economies of scale and flexibility. 3.6 Virtual Network Structure and Outsourcing A recent development in organization design extends the concept of horizontal coordination and collaboration beyond the boundaries of the traditional organiza-tion. The most widespread design trend in recent years has been the outsourcing of various parts of the organization to outside partners.72 Outsourcing means to con-tract out certain tasks or functions, such as manufacturing, human resources, or credit processing, to other companies. All sorts of organizations are jumping on the outsourcing bandwagon. The Ohio State University outsourced its parking system. The City of Maywood, California, decided to outsource everything from street maintenance to policing and public safety.73 The U.S. military is also increasingly using private military company contractors to handle just about everything except the core activity of fighting bat-tles and securing defensive positions. In the business world, Honda once designed all its new technologies in-house but turned to outsourcing due to high costs and rapid technology advancements for electric vehicles and self-driving vehicles. For example, it has a deal with Chinese start-up SenseTime Company to build camera software for self-driving vehicles, uses a semi-autonomous driving system from Ger-man supplier Bosch, and farmed out the development of an electric motor to a joint venture between Honda and Hitachi’s auto parts division, in which Hitachi has the majority stake. In the 1960s, founder Soichiro Honda said, “We refuse to depend on anyone else,” but the industry has changed. Today, Honda’s CEO says, “We want to work with those that possess the best technology, regardless of whether they are Japanese suppliers or American ones or European ones.”74 Once, a company’s units of operation “were either within the organization and ‘densely connected’ or they were outside the organization and not connected at all,” as one observer phrased it.75 Today, the lines are so blurred that it can be difficult to tell what is part of the organization and what is not. IBM handles back-office operations for many large companies, but it also outsources some of its own activi-ties to other firms, which in turn may farm out some of their functions to still other organizations.76 A few organizations carry outsourcing to the extreme to create a virtual network structure. With a virtual network structure, sometimes called a modular structure, the firm subcontracts most of its major functions or processes to separate companies and coordinates their activities from a small headquarters organization.77 3.6a How the Structure Works The virtual network organization may be viewed as a central hub surrounded by a network of outside specialists. With a network structure, rather than being housed under one roof or located within one organization, services such as accounting, design, manufacturing, marketing, and distribution are outsourced to separate companies or individuals that are connected electronically to a cen-tral office. Organizational partners located in different parts of the world may use networked computers or the Internet to exchange data and information so rapidly and smoothly that a loosely connected network of suppliers, manufac-turers, and distributors can look and act like one seamless company. The virtual network form incorporates a free-market style to replace the traditional vertical hierarchy. Subcontractors may flow into and out of the system as needed to meet changing needsWhen a business chooses to use a network structure, the hub maintains control over processes in which it has world-class or difficult-to-imitate capabilities and then transfers other work activities—along with the control over them—to other organizations. These partner organizations organize and accomplish their work using their own ideas, assets, and tools.78 The idea is that a firm can concentrate on what it does best and contract out everything else to companies with distinctive competence in those specific areas, enabling the organization to do more with less.79 Nike was a pioneer in using the virtual network structure. Recall from the BookMark in Chapter 1 of this text that the widespread trend toward network structures has been referred to as Nikefication. Executives at Nike were quick to realize that design and marketing provided their company’s competitive advantage, so they kept these tasks in-house and formed a network of partners to handle other functions, such as manufacturing. The company’s founder, Phil Knight, came up with the idea of outsourcing manufacturing jobs to cut costs. Becoming an early adopter of the virtual organization design propelled Nike into one of the biggest athletic footwear and apparel companies in the world.80 With a network structure, it is difficult to answer the question “Where is the organization?” in traditional terms. The different organizational parts are drawn together contractually and coordinated electronically, creating a new form of orga-nization. Much like building blocks, parts of the network can be added or taken away to meet changing needs.81 Exhibit 3.15 illustrates a simplified network struc-ture for a business such as Nike, showing some of the functions that can be out-sourced to other companies. 3.6b Strengths and Weaknesses Exhibit 3.16 summarizes the strengths and weaknesses of the virtual network structure.82 One of the major strengths is that the organization, no matter how small, can be truly global, drawing on resources worldwide to achieve the best quality and price and then selling products or services worldwide just aseasily through subcontractors. The network structure also enables a new or small company to develop products or services and get them to market rapidly without huge investments in factories, equipment, warehouses, or distribution facilities. The ability to arrange and rearrange resources to meet changing needs and best serve customers gives the network structure extreme flexibility and rapid response. New technologies can be developed quickly by tapping into a worldwide network of experts. The organization can continually redefine itself to meet changing technologies and shifting product or market opportunities. A final strength is reduced administrative overhead. Large teams of staff specialists and administrators are not needed. Managerial and technical talent can be focused on key activities that provide competitive advantage while other activities are outsourced. The virtual network structure also has a number of weaknesses. The primary weakness is a lack of control. K’Nex Brands LP, a family-owned toy company near Philadelphia, brought most of the production of its plastic building toys back to its factory in the United States from subcontractors in China, for instance, to maintain greater control over quality and materials.83 The network structure takes decentral-ization to the extreme. Managers do not have all operations under their jurisdiction and must rely on contracts, coordination, and negotiation to hold things together. This also means increased time spent managing relationships with partners and resolving conflA problem of equal importance is the risk of failure if one organizational partner fails to deliver, has a plant burn down, or goes out of business. Manag-ers in the headquarters organization have to act quickly to spot problems and find new arrangements. Finally, from a human resource perspective, employee loyalty can be weak in a network organization because of concerns over job security. Employees may feel that they can be replaced by contract services. In addition, it is more difficult to develop a cohesive corporate culture. Turnover may be higher because emotional commitment between the organization and employees is low. With changing products, markets, and partners, the organiza-tion may need to reshuffle employees at any time to get the correct mix of skills and capabilities3.7 Holacracy Team Structure The most recent approach to organization design involves a shift toward self-management. One extreme self-management model is called a holacracy or holacracy team structure. The design trend toward self-management reflects a fundamental mind-shift in the way human organizations and management are viewed. Self-management goes beyond contemporary ideas such as employee empowerment, flatter organizations, distributed decision making, elimination of bureaucratic red tape, and pushing authority lower in the hierarchy. Complete self-management includes all these ideas, and even more. The traditional man-agement functions of planning, organizing, staffing, and controlling are assigned to all employees. There are no managers to perform these management func-tions. All organization members are personally responsible for planning their own work, coordinating their actions with others, developing their own per-sonal relationships, acquiring needed resources, and taking corrective action with respect to other members as needed.84 Companies such as Morning Star, Valve, W. L. Gore, and Zappos have adopted some form of extreme self-management. Morning Star emphasizes a few key ideas as the basis for its self-management philosophy:85 • PeopleChapter 3: Fundamentals of Organization Structure 127 • It does not make sense to give decision-making authority to the person furthest away from the actual work. • The traditional hierarchical model is a recipe for a slow painful death. • There is an undeniable link between freedom and economic prosperity. The most widely used model of self-management, the holacracy team struc-ture, has been adopted in about 300 organizations. In this organizational design, circles (the holacracy term for teams) are the basic unit and building block of structure, not individuals, departments, or divisions. Each circle shares a com-mon purpose and has decision-making authority over how to do its work and achieve its purpose. For example, there might be a circle for helping to hire new employees or a circle charged with motivating employee professional growth and recognizing employee achievements. Sub-circles can be created for tasks that do not require input from all team members. Members may choose to change cir-cles to follow their specific passions. The holacracy team structure is an extreme organic design composed of fluid teams and no managers. A few informal lead-ers may emerge within the circles based on who has expertise in the matter at hand. Employees decide when a new circle is needed or when a circle should be abandoned.86 Within each circle, individual roles are jointly negotiated with other mem-bers regarding the tasks needed to accomplish the circle’s purpose. People do not have “job descriptions.” Each individual has authority over how individual goals are achieved, discretion over resource use, ownership of knowledge related to the work, and accountability for work outcomes. In a holacracy team structure, each individual performs a variety of roles and probably has a role on three to four teams at the same time. The same individual might serve as a design tech-nologist on one team, act as finance advisor on another team, and perform as a meeting facilitator on a third team. The key is that employees discuss their own role with other circle members to define role boundaries and stay coordinated with one another and aligned with each circle’s purpose. Employees are encour-aged to make decisions at the point of origin. Conflicts are addressed face-to-face without a manager. If there is no resolution, the participants can appeal to a peer council.87 Autonomous self-managed team designs such as the holacracy team structure typically start with a written guideline. The circles are nested within a larger struc-ture that individuals can help define. In a holacracy, employees ratify the consti-tution outlining the rules by which circles are created, changed, or removed. The constitution does not tell people how to do their jobs. It is a broad-brush docu-ment describing how circles can form, operate, and govern themselves. The guide describes how to identify and assign roles, the boundaries the roles should have, and how circles interact with each other.88 At Morning Star, each employee consults with coworkers and writes up a formal agreement known internally as a “colleague letter of understanding.” Each employee talks with coworkers to develop an under-standing of what is needed. These letters outline jointly agreed upon responsibilities, goals, activities, and metrics for evaluating performance to spell out an employee’s work commitments.89 This structure is used primarily in small to medium size organizations that face a need for continuous learning and innovation to meet rapidly changing customer needs. One of the largest and most well-known companies using a holacracy team structure is online retailer Zappos. When Zappos shifted to a holacracy team structure, 150 departments disappeared and were replaced by around 500 self-managed circles and sub-circles that were designed around projects and tasks rather than hierarchy and job descriptions. Job titles were a thing of the past. There were no bosses. People would now perform multiple roles in a variety of ever-shifting teams. The “people managing” responsibilities previously held by managers would be split among three team roles—“lead links,” who would focus on guiding the spe-cific work; “mentors,” who would focus on employee growth and development; and “compen-sation appraisers,” who would concentrate on employees’ salaries. No one was assigned to these—or any other—roles. Rather, people would negotiate with one another and allocate duties to those who were best suited to performing them. Employees would move into and out of roles—just as they would move into and out of various circles—as needed to address perceived changes in ongoing needs. CEO Tony Hsieh had originally planned to shift Zappos to holacracy over a three-year period, but about mid-way through the process, he decided that a more radical approach was needed. He sent employees a memo stating the date when the change to holacracy would occur. Hsieh offered three months’ severance pay to anyone who felt that he or she just wasn’t interested in working in the new type of organization design. About 200 people took him up on the offer. Those who stayed have been working within and adapting the new structure since 2015.90 BRIEFCASE As an organization manager, keep these guidelines in mind: Consider a holacracy team structure when customer needs and demands change rap-idly and when learning and innovation are critical to organizational success. Train manag-ers and employees in the social and team skills to work effectively in a holacracy team structure. 3.7a Characteristics An illustration of a holacracy team structure appears in Exhibit 3.17. Such an orga-nization has the following characteristics:91 • Teams (circles), rather than individuals, tasks, departments, or other units, are the fundamental building blocks of the organization. Everyone works on a team in a holacracy. • Individual roles are collectively defined and assigned within the various teams as needed to accomplish the work. • Teams evolve, form, and disband as conditions change. As new opportunities, needs, problems, goals, and tasks emerge, organizational members create new teams or circles to address them. One example comes from KETC, the public television station in St. Louis, which forms temporary teams to bring commu-nity ideas into its programming surrounding major local or national events.92 • Teams design and govern themselves. Holacracy teams work inside a larger structure of circles that everyone has a hand in shaping. In a holacracy, people generate and agree to a governing constitution that defines the rules by which teams operate, such as the way they should form, how they identify and assign roles, and how members should interact among themselves and with other teams. • Leadership is distributed and contextual. No one is an assigned “manager.” The responsibilities of leadership are continually shifting as needs arise, teams change, and new roles are defined. 3.7b Strengths and Weaknesses As with all structures, the holacracy team structure has both strengths and weak-nesses, as listed in Exhibit 3.18. The most significant strength of the holacracy team structure is enhanced coordina-tion, which can dramatically increase the company’s flexibility and innovative response to shifts in customer needs. For example, Valve made the decision to expand from PC games to hardware because a few employees grew tired of repeated customer requests for hardware that enabled people to play games in their living room. People formed a team to investigate the ideas that resulted in a huge new hardware release.93 In addition, because there are no boundaries between functional departments, employees take a broader view of organizational goals rather than being focused on the goals of a single department. The holacracy team structure promotes an empha-sis on teamwork and cooperation so that team members share a commitment to meeting common objectives. Moreover, decisions are made close to the work which avoids the web of hierarchical titles and reporting relationship that make it hard to figure out who decides, requires written justification, and slows everything down, and the decision-maker does not understand the problem. Finally, the holacracy structure can improve the quality of life and personal growth for employees by giving them opportunities to share responsibility, make decisions, and contribute significantly to the organization. Employees are typically enthusiastic about their involvement in bigger projects rather than narrow departmental tasks. One weakness of the holacracy team structure is that it can be complicated and time-consuming to set up in an existing company because it requires signifi-cant changes in culture, job design, management philosophy, and information and reward systems. Traditional managers may baulk when they have to give up power and authority to serve instead as members of various teams. Employees have to be trained with the social skills to work effectively in a team environment. Finally, the team structure can limit in-depth knowledge and skill development in technical areas that could be attained in a functional structure. 3.8 Applications of Structural Design Each type of structure is applied in different situations and meets different needs. In describing the various structures, we touched briefly on conditions such as envi-ronmental stability or change and organizational size that are related to structure. Each form of structure—functional, divisional, matrix, network, and holacracy team—represents a tool that can help managers make an organization more effec-tive, depending on the demands of its situation. 3.8a Mix and Match As a practical matter, many structures in the real world do not exist in the pure forms we have outlined in this chapter.94 Most large organizations, in particular, often combine characteristics of various approaches tailored to different parts of the organization. By mixing characteristics of functional, divisional, geographic, virtual network, or holacracy team structures, managers can take advantage of the strengths of various structures and avoid some of the weaknesses. Mixing structural characteristics offers the organization greater flexibility in a shifting environment. One approach that is often used is to combine characteristics of the func-tional and divisional structures. When a corporation grows large and has sev-eral products or markets, it typically is organized into self-contained divisions of some type. Functions that are important to each division are decentralized to the self-contained units. However, some functions that are relatively stable and require economies of scale and in-depth specialization are centralized at head-quarters. For example, Starbucks has a number of geographic divisions, but func-tions such as marketing, legal, and supply chain operations are centralized.95 In a huge organization such as General Electric, Walmart, or Ford Motor Company, managers may use a variety of structural characteristics to meet the needs of the total organization. 3.8b Structural Alignment Ultimately, the most important decision that managers make about structural design is to find the right balance between vertical control and horizontal coordination, depending on the needs of the organization. Vertical control is associated with goals of efficiency and stability, while horizontal coordination is associated with learning, innovation, and flexibility. Exhibit 3.19 shows a simplified continuum that illustrates how structural approaches are associated with vertical control versus horizontal coordination. The functional structure is appropriate when the organization needs to be coordinated through the vertical hierarchy and when efficiency is important for meeting organizational goals. The functional structure uses task specialization and a strict chain of command to gain efficient use of scarce resources, but it does not enable the organization to be flexible or innovative. At the opposite end of the scale, the holacracy team structure is appropriate when the organization has a high need for coordination among functions to achieve innovation and promote learning. The holacracy team structure enables organizations to differentiate themselves and respond quickly to changes, but at the expense of efficient resource use. Exhibit 3.19 also shows how other types of structure defined in this chapter—functional with horizontal linkages, divisional, matrix, and virtual network—represent intermediate steps on the organization’s path to efficiency or innovation and learning. The exhibit does not include all possible structures, but it illustrates how organizations attempt to balance the needs for efficiency and vertical control with innovation and horizontal coordination. In addition, as described in the chapter, many organizations combine characteristics of various structural types. 3.8c Symptoms of Structural Deficiency Top executives periodically evaluate organization structure to determine whether it is appropriate to changing needs. Managers try to achieve the best fit between inter-nal reporting relationships and the needs of the external environment. As a general rule, when organization structure is out of alignment with organization needs, one or more of the following symptoms of structural deficiency appear.96 • There is an absence of collaboration among units. Organization structure should encourage collaboration when and where it is needed to meet organiza-tional goals. It should enable resolution of conflicting departmental needs and goals into a single set of goals for the entire organization. When departments act at cross-purposes or are under pressure to achieve departmental goals at the expense of organizational goals, the structure is often at fault. Horizontal link-age mechanisms are not adequate. • Decision making is delayed or lacking in quality. Decision makers may be over-loaded because the hierarchy funnels too many problems and decisions to them. Delegation to lower levels may be insufficient. Another cause of poor-quality decisions is that information may not reach the correct people. Information link-ages in either the vertical or horizontal direction may be inadequate to ensure decision quality. • The organization does not respond innovatively to a changing environment. One reason for lack of innovation is that departments are not coordinated horizontally. The identification of customer needs by the marketing depart-ment and the identification of technological developments in the research department must be coordinated. Organization structure also has to spec-ify departmental responsibilities that include environmental scanning and innovation. Employee performance declines and goals are not being met. Employee perfor-mance may decline because the structure doesn’t provide clear goals, respon-sibilities, and mechanisms for coordination and collaboration. The structure should reflect the complexity of the market environment yet be straightforward enough for employees to effectively work within.

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