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Chapter 15 Foundations of Organization Structure Page

Chapter 15Foundations of Organization Structure(Click on the title while connected to the Internet for Teaching Notes)

LEARNING OBJECTIVES (PPT 15-2)

After studying this chapter, students should be able to:

1. Identify the six elements of an organization’s structure.2. Identify the characteristics of a bureaucracy.3. Describe a matrix organization.4. Identify the characteristics of a virtual organization.5. Show why managers want to create boundaryless organizations.6. Demonstrate how organizational structures differ and contrast mechanistic and

organic structural models.7. Analyze the behavioral implications of different organizational designs.

INSTRUCTOR’S RESOURCES

Text Exercises GlOBalization: The Global Organization (p. 489, IM p. 617) An Ethical Choice: Downsizing with a Conscience (p. 496, IM p. 618) Myth or Science?: Employees Resent Outsourcing (p. 500, IM p. 620) Point/CounterPoint: The End of Management (p. 503, IM p. 621) Questions for Review (p. 504, IM p. 623) Experiential Exercise: Dismantling a Bureaucracy (p. 504, IM p. 626) Ethical Dilemma: Directing the Directors (p. 505, IM p. 628)

Text Cases Case Incident 1 Creative Deviance: Bucking the Hierarchy? (p. 506, IM p. 630) Case Incident 2 Siemen’s Simple Structure—Not (p. 506, IM p. 631)

Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

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http://www.baclass.panam.edu/imob/ch15.html

http://www.baclass.panam.edu/imob/ch15.html


Instructor’s Choice (IM p. 634)

This section presents an exercise that is NOT found in the student's textbook. Instructor's Choice reinforces the text's emphasis through various activities. Some Instructor's Choice activities are centered around debates, group exercises, Internet research, and student experiences. Some can be used in-class in their entirety, while others require some additional work on the student's part. The course instructor may choose to use these at anytime throughout the class—some may be more effective as icebreakers, while some may be used to pull together various concepts covered in the chapter.

WEB EXERCISES (IM p. 635)

At the end of each chapter of this instructor’s manual, you will find suggested exercises and ideas for researching the WWW on OB topics. The exercises “Exploring OB Topics on the Web” are set up so that you can simply photocopy the pages, distribute them to your class, and make assignments accordingly. You may want to assign the exercises as an out-of-class activity or as lab activities with your class.

SUMMARY AND IMPLICATIONS FOR MANAGERS

The theme of this chapter is that an organization’s internal structure contributes to explaining and predicting behavior. That is, in addition to individual and group factors, the structural relationships in which people work has a bearing on employee attitudes and behavior. What’s the basis for this argument? To the degree that an organization’s structure reduces ambiguity for employees and clarifies concerns such as “What am I supposed to do?” “How am I supposed to do it?” “To whom do I report?” and “To whom do I go if I have a problem?” it shapes their attitudes and facilitates and motivates them to higher levels of performance. Exhibit 15-10 summarizes what we’ve discussed. There are a few other take-home messages worth considering:

Although specialization can bring efficiency, excessive specialization also can breed dissatisfaction and reduced motivation.

Formal hierarchies offer advantages like unification of mission and goal while employees in excessively rigid hierarchies can feel they have no power or autonomy. As with specialization, the key is striking the right balance.

Virtual and boundaryless forms are changing the face of many organizations. Contemporary managers should thoroughly understand their implications and recognize advantages and potential pitfalls.

Organizational downsizing can lead to major cost savings and focus organizations around their core competencies, but it can leave workers dissatisfied and worried about the future of their jobs.


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When determining an appropriate organizational form, managers will need to consider scarcity, dynamism, and complexity of the environment and balance the organic and mechanistic elements appropriate to their organization’s environment.

Chapter 15 begins with a discussion about the restructuring of General Motors Corporation. It details the financial and operating problems faced by the automaker as it suffered decline because of its organizational structure. The antiquated structure led to labor agreements that were not sustainable on top of creating almost impossible conditions for GM to innovate or respond rapidly to environmental threats. Terry Woychowski, Global Vehicle Program Management vice-president, has begun the process of redesigning GM’s structure and processes to eliminate the bureaucracy that is believed to have caused the GM decline.

BRIEF CHAPTER OUTLINE

I. What Is Organizational Structure?A. Introduction

1. An organizational structure defines how job tasks are formally divided, grouped, and coordinated.

2. There are six key elements (Exhibit 15-1): B. Work Specialization

1. Henry Ford became rich and famous by building automobiles on an assembly line, demonstrating that work can be performed more efficiently by using a work specialization strategy.

2. By the late 1940s, most manufacturing jobs in industrialized countries were being done this way. Management saw this as a means to make the most efficient use of its employees’ skills.

3. Managers also looked for other efficiencies that could be achieved through work specialization:

4. For much of the first half of this century, managers viewed work specialization as an unending source of increased productivity. By the 1960s, there became increasing evidence that a good thing can be carried too far.

5. The human diseconomies from specialization—boredom, fatigue, stress, low productivity, poor quality, increased absenteeism, and high turnover—more than offset the economic advantages. (Exhibit 15-2)

6. Most managers today recognize the economies specialization provides in certain jobs and the problems when it’s carried too far.

C. Departmentalization1. Grouping jobs together so common tasks can be coordinated is called

departmentalization. 2. One of the most popular ways to group activities is by functions performed.


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3. Tasks can also be departmentalized by the type of product or service the organization produces.

4. Another way to departmentalize is on the basis of geography or territory. 5. Process departmentalization can be used for processing customers as well as

products. 6. A final category of departmentalization is by type of customer. 7. The assumption is that customers in each department have a common set of

problems and needs that can best be met by having specialists for each. D. Chain of Command

1. The chain-of-command was once a basic cornerstone in the design of organizations, it is far less important today.

2. The chain of command is "an unbroken line of authority that extends from the top of the organization to the lowest echelon and clarifies who reports to whom."

3. Two complementary concepts: authority and unity of command. a. Authority—"the rights inherent to management to give orders and expect

the orders to be obeyed." b. The unity-of-command principle helps preserve the concept of an

unbroken line of authority. It states that a person should have only one superior to whom he/she is directly responsible.

4. Times change, and so do the basic tenets of organizational design. The concepts of chain of command have less relevance today because of technology and the trend of empowering employees.

5. A low-level employee today can access information in seconds that 30 years ago was available only to top managers.

6. Operating employees are empowered to make decisions previously reserved for management.

7. Add the popularity of self-managed and cross-functional teams and the creation of new structural designs that include multiple bosses, and you can see why authority and unity of command hold less relevance.

8. Many organizations still find they can be most productive by enforcing the chain of command.

E. Span of Control 1. How many employees a manager can efficiently and effectively direct is an

important question. 2. All things being equal, the wider or larger the span, the more efficient the

organization. 3. Exhibit 15–3 illustrates that reducing the number of managers leads to

significant savings. 4. Wider spans are more efficient in terms of cost. 5. However, at some point, wider spans reduce effectiveness. 6. Narrow or small spans have their advocates. By keeping the span of control to

five or six employees, a manager can maintain close control. 7. Narrow spans have three major drawbacks:

a. First, as already described, they are expensive because they add levels of management.


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b. Second, they make vertical communication in the organization more complex.

c. Third, narrow spans of control encourage overly tight supervision and discourage employee autonomy.

8. The trend in recent years has been toward wider spans of control. F. Centralization and Decentralization

1. Centralization refers to the degree to which decision-making is concentrated at a single point in the organization.

2. The concept of centralization includes only formal authority—that is, the rights inherent in a position.

3. An organization characterized by centralization is inherently different structurally from one that’s decentralized.

4. Research investigating a large number of Finnish organizations demonstrates that companies with decentralized research and development offices in multiple locations were better at producing innovation than companies that centralized all research and development in a single office.

G. Formalization1. Formalization refers to the degree to which jobs within the organization are

standardized. 2. Low formalization—job behaviors are relatively nonprogrammed, and

employees have a great deal of freedom to exercise discretion in their work.3. The degree of formalization can vary widely between organizations and

within organizations.

II. Common Organizational DesignsA. The Simple Structure

1. The simple structure is characterized most by what it is not rather than what it is: a. It is not elaborated. b. It has a low degree of departmentalization, wide spans of control,

authority centralized in a single person, and little formalization. c. The simple structure is a “flat” organization; it usually has only two or

three vertical levels. d. One individual has the decision-making authority.

2. The simple structure is most widely practiced in small businesses in which the manager and the owner are one and the same. (See Exhibit 15–4, an organization chart for a retail men’s store.)

3. The strength of the simple structure lies in its simplicity. It is fast, flexible, inexpensive to maintain, and accountability is clear.

4. One major weakness is that it is difficult to maintain in anything other than small organizations.

5. It becomes increasingly inadequate as an organization grows because its low formalization and high centralization tend to create information overload at the top.

6. When an organization begins to employ 50–100 people, it is very difficult for the owner-manager to make all the choices.


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7. The simple structure’s other weakness is that it is risky—everything depends on one person. Illness can literately destroy the information and decision making center of the company.

B. The Bureaucracy1. Standardization—the key concept for all bureaucracies. 2. The bureaucracy is characterized by:

a. Highly routine operating tasks achieved through specializationb. Very formalized rules and regulationsc. Tasks that are grouped into functional departmentsd. Centralized authoritye. Narrow spans of controlf. Decision-making that follows the chain of command

3. Its primary strength is in its ability to perform standardized activities in a highly efficient manner.

4. Weaknesses a. Specialization creates subunit conflicts; functional unit goals can override

the organization’s goals. b. Obsessive concern with following the rules.c. The bureaucracy is efficient only as long as employees confront familiar

problems with programmed decision rules.C. The Matrix Structure

1. It is used in advertising agencies, aerospace firms, research and development laboratories, construction companies, hospitals, government agencies, universities, management consulting firms, and entertainment companies.

2. It combines two forms of departmentalization—functional and product.3. Product departmentalization facilitates coordination. 4. It provides clear responsibility for all activities related to a product, but with

duplication of activities and costs. 5. The most obvious structural characteristic of the matrix is that it breaks the

unity-of-command concept. (Exhibit 15–5 shows the matrix form as used in a college of business administration.)

6. Its strength is its ability to facilitate coordination when the organization has a multiplicity of complex and interdependent activities:

7. The dual lines of authority reduce tendencies of departmental members to protect their worlds.

8. It facilitates the efficient allocation of specialists. 9. The major disadvantages of the matrix lie in the confusion it creates, its

propensity to foster power struggles, and the stress it places on individuals: 10. Violation of unity-of-command concept increases ambiguity that often leads

to conflict. 11. Confusion and ambiguity also create the seeds of power struggles. 12. Reporting to more than one boss introduces role conflict, and unclear

expectations introduce role ambiguity.

III. New Design OptionsA. The Virtual Organization


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1. The essence of the virtual organization is that it is typically a small, core organization that outsources major business functions: a. Also referred to as modular or network organization b. It is highly centralized, with little or no departmentalization.

2. Exhibit 15–6 shows a virtual organization in which management outsources all of the primary functions of the business. a. The dotted lines in this exhibit represent those relationships typically

maintained under contracts. b. In essence, managers in virtual structures spend most of their time

coordinating and controlling external relations, typically by way of computer-network links.

3. The major advantage to the virtual organization is its flexibility. a. The primary drawback is that it reduces management’s control over key

parts of its business. 4. Virtual organizations’ drawbacks have become increasingly clear as their

popularity has grown. a. They are in a state of perpetual flux and reorganization, which means

roles, goals, and responsibilities are unclear, setting the stage for political behavior.

b. Cultural alignment and shared goals can be lost because of the low degree of interaction among members.

c. Team members who are geographically dispersed and communicate infrequently find it difficult to share information and knowledge, which can limit innovation and slow response time.

5. Ironically, some virtual organizations are less adaptable and innovative than those with well-established communication and collaboration networks.

B. The Boundaryless Organization1. General Electric’s former chairman, Jack Welch, coined the term

boundaryless organization. 2. The boundaryless organization seeks to eliminate the chain of command, have

limitless spans of control, and replace departments with empowered teams. 3. By removing vertical boundaries, management flattens the hierarchy

and minimizes status and rank. 4. Functional departments create horizontal boundaries. 5. When fully operational, the boundaryless organization also breaks down

geographic barriers. 6. One way to do so is through strategic alliances. 7. And some companies allow customers to perform functions previously done

by management. 8. Finally, telecommuting is blurring organizational boundaries.

C. The Learner Organization: Organizational Downsizing1. The goal of the new organizational forms we’ve described is to improve

agility by creating a lean, focused, and flexible organization.2. Downsizing is a systematic effort to make an organization leaner by selling

off business units, closing locations, or reducing staff.


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3. Despite the advantages of being a lean organization, the impact of downsizing on organizational performance has been very controversial.

4. Part of the problem is the effect of downsizing on employee attitudes.5. In companies that don’t invest much in their employees, downsizing can also

lead to more voluntary turnover so vital human capital is lost. 6. Companies can reduce negative impacts by preparing for the post-downsizing

environment in advance, thus alleviating some employee stress and strengthening support for the new strategic direction.

7. The following are some effective strategies for downsizing and suggestions for implementing them. a. Investment. Companies that downsize to focus on core competencies are

more effective when they invest in high-involvement work practices afterward.

b. Communication. When employers make efforts to discuss downsizing with employees early, employees are less worried about the outcomes and feel the company is taking their perspective into account.

c. Participation. Employees worry less if they can participate in the process in some way. In some companies, voluntary early retirement programs or severance packages can help achieve leanness without layoffs.

d. Assistance. Providing severance, extended health care benefits, and job search assistance demonstrates a company does really care about its employees and honors their contributions.

8. Companies that make themselves lean can be more agile, efficient, and productive—but only if they make cuts carefully and help employees through the process.

IV. Why Do Structures Differ? A. Introduction

1. The mechanistic model (Exhibit 15-7)—synonymous with the bureaucracy—has extensive departmentalization, high formalization, a limited information network (mostly downward), and little participation in decision-making.

2. The organic model (Exhibit 15-7) looks a lot like the boundaryless organization; it uses cross-hierarchical and cross-functional teams, low formalization, a comprehensive information network, and high participation in decision-making.

3. Why are some organizations structured along mechanistic lines while others are organic?

B. Organizational Strategy1. An organization’s structure is a means to help management achieve its

objectives. 2. Most current strategy frameworks focus on three strategy dimensions—

innovation, cost minimization, and imitation—and the structural design that works best with each. a. An innovation strategy means a strategy for meaningful and unique

innovations. This strategy may appropriately characterize 3M Company.


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b. A cost-minimization strategy tightly controls costs, refrains from incurring unnecessary innovation or marketing expenses, and cuts prices in selling a basic product. This describes Wal-Mart’s strategy.

c. An imitation strategy tries to capitalize on the best of both minimize risk and maximize opportunity for profit.

3. Exhibit 15-8 describes the structural option that best matches each strategy.a. Innovators need the flexibility of the organic structure, whereas cost

minimizers seek the efficiency and stability of the mechanistic structure. Imitators combine the two structures.

b. They use a mechanistic structure to maintain tight controls and low costs in their current activities but create organic subunits in which to pursue new undertakings.

C. Organizational Size1. There is considerable evidence to support that an organization’s size

significantly affects its structure. 2. Large organizations—employing 2,000 or more people—tend to have more

specialization, more departmentalization, more vertical levels, and more rules and regulations than do small organizations.

3. The impact of size becomes less important as an organization expands. D. Technology

1. The term refers to how an organization transfers its inputs into outputs. a. Every organization has at least one technology for converting financial,

human, and physical resources into products or services. b. Ford Motor Company predominantly uses an assembly-line process to

make its products. c. Colleges may use a number of instruction technologies—the ever-popular

formal lecture method, the case analysis method, the experiential exercise method, the programmed learning method, etc. to educate its students.

2. Numerous studies have examined the technology–structure relationship. a. What differentiates technologies is their degree of routineness.

i. Routine activities are characterized by automated and standardized operations.

ii. Nonroutine activities are customized and require frequent revision and updating.

E. Environment1. An organization’s environment includes outside institutions or forces that can

affect its performance, such as suppliers, customers, competitors, government regulatory agencies, and public pressure groups.

2. Dynamic environments create significantly more uncertainty for managers than do static ones.

3. Any organization’s environment has three dimensions: capacity, volatility, and complexity. a. Capacity

i. "The degree to which it can support growth." b. Volatility


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i. Refers to "the degree of instability in an environment characterized by a high degree of unpredictable change."

c. Complexity i. "The degree of heterogeneity and concentration among environmental

elements." d. In contrast, environments characterized by heterogeneity and dispersion

are called complex. 4. Exhibit 15-9 summarizes our definition of the environment along its three

dimensions. a. The arrows indicate movement toward higher uncertainty. b. Thus, organizations that operate in environments characterized as scarce,

dynamic, and complex face the greatest degree of uncertainty because they have high unpredictability, little room for error, and a diverse set of elements in the environment to monitor constantly.

5. Given this three-dimensional definition of environment, we can offer some general conclusions about environmental uncertainty and structural arrangements.

V. Organizational Designs and Employee BehaviorA. We opened this chapter by implying that an organization’s structure can have

significant effects on its members. 1. A review of the evidence leads to a pretty clear conclusion: you can’t

generalize! 2. Not everyone prefers the freedom and flexibility of organic structures. 3. Some people are most productive and satisfied when work tasks are

standardized and ambiguity minimized—that is, in mechanistic structures.4. So, any discussion of the effect of organizational design on employee

behavior has to address individual differences. B. Let’s consider employee preferences for work specialization, span of control, and

centralization. 1. The evidence generally indicates that work specialization contributes to higher

employee productivity—but at the price of reduced job satisfaction. 2. It is probably safe to say no evidence supports a relationship between span of

control and employee satisfaction or performance. 3. We find fairly strong evidence linking centralization and job satisfaction.

C. Our conclusion: to maximize employee performance and satisfaction, managers must take individual differences, such as experience, personality, and the work task, into account. 1. We can draw one obvious insight: other things equal, people don’t select

employers randomly. 2. They are attracted to, are selected by, and stay with organizations that suit

their personal characteristics. 3. Job candidates who prefer predictability are likely to seek out and take

employment in mechanistic structures, and those who want autonomy are more likely to end up in an organic structure.


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4. Thus, the effect of structure on employee behavior is undoubtedly reduced when the selection process facilitates proper matching of individual characteristics with organizational characteristics.

D. Although research is slim, it does suggest national culture influences the preference for structure. 1. Organizations that operate with people from high power-distance cultures,

such as Greece, France, and most of Latin America, find their employees are much more accepting of mechanistic structures than are employees from low power-distance countries.

2. So consider cultural differences along with individual differences when predicting how structure will affect employee performance and satisfaction.

VI. Summary and Implications for Managers A. The theme of this chapter is that an organization’s internal structure contributes to

explaining and predicting behavior. 1. That is, in addition to individual and group factors, the structural relationships

in which people work has a bearing on employee attitudes and behavior. 2. What’s the basis for this argument?

a. To the degree that an organization’s structure reduces ambiguity for employees and clarifies concerns such as “What am I supposed to do?” “How am I supposed to do it?” “To whom do I report?” and “To whom do I go if I have a problem?” it shapes their attitudes and facilitates and motivates them to higher levels of performance.

3. Exhibit 15-10 summarizes what we’ve discussed. There are a few other take-home messages worth considering:a. Although specialization can bring efficiency, excessive specialization also

can breed dissatisfaction and reduced motivation.b. Formal hierarchies offer advantages like unification of mission and goal

while employees in excessively rigid hierarchies can feel they have no power or autonomy. As with specialization, the key is striking the right balance.

c. Virtual and boundaryless forms are changing the face of many organizations. Contemporary managers should thoroughly understand their implications and recognize advantages and potential pitfalls.

d. Organizational downsizing can lead to major cost savings and focus organizations around their core competencies, but it can leave workers dissatisfied and worried about the future of their jobs.

e. When determining an appropriate organizational form, managers will need to consider scarcity, dynamism, and complexity of the environment and balance the organic and mechanistic elements appropriate to their organization’s environment.

EXPANDED CHAPTER OUTLINE

I. What Is Organizational Structure?A. Introduction


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1. An organizational structure defines how job tasks are formally divided, grouped, and coordinated.

2. There are six key elements (Exhibit 15-1): a. Work specializationb. Departmentalizationc. Chain of commandd. Span of controle. Centralization and decentralizationf. Formalization

B. Work Specialization 1. Henry Ford became rich and famous by building automobiles on an assembly

line, demonstrating that work can be performed more efficiently by using a work specialization strategy. a. Every Ford worker was assigned a specific, repetitive task. b. By breaking jobs up into small standardized tasks, Ford was able to

produce cars at the rate of one every ten seconds, while using employees who had relatively limited skills.

c. Work specialization, or division of labor, describes the degree to which activities in the organization are subdivided into separate jobs.

d. In essence, an entire job is broken into a number of steps, each completed by a separate individual.

2. By the late 1940s, most manufacturing jobs in industrialized countries were being done this way. Management saw this as a means to make the most efficient use of its employees’ skills.

3. Managers also looked for other efficiencies that could be achieved through work specialization: a. Employee skills at performing a task successfully increase through

repetition. b. Training for specialization is more efficient from the organization’s

perspective. c. It increases efficiency and productivity, encouraging the creation of

special inventions and machinery. 4. For much of the first half of this century, managers viewed work

specialization as an unending source of increased productivity. By the 1960s, there became increasing evidence that a good thing can be carried too far.

5. The human diseconomies from specialization—boredom, fatigue, stress, low productivity, poor quality, increased absenteeism, and high turnover—more than offset the economic advantages. (Exhibit 15-2)a. In such cases, enlarging the scope of job activities could increase

productivity. 6. Most managers today recognize the economies specialization provides in

certain jobs and the problems when it’s carried too far. a. High work specialization helps McDonald’s make and sell hamburgers

and fries efficiently and aids medical specialists in most health maintenance organizations.


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b. Amazon’s Mechanical Turk program, TopCoder, and others like it have facilitated a new trend in microspecialization in which extremely small pieces of programming, data processing, or evaluation tasks are delegated to a global network of individuals by a program manager who then assembles the results.

c. For example, a manager who has a complex but routine computer program to write might send a request for specific subcomponents of the code to be written and tested by dozens of subcontracted individuals in the network (which spans the entire globe), enabling the project to be completed far more quickly than if a single programmer were writing the parts.

d. This emerging trend suggests there still may be advantages to be had in specialization.

C. Departmentalization1. Grouping jobs together so common tasks can be coordinated is called

departmentalization. 2. One of the most popular ways to group activities is by functions performed.

a. For example, a manufacturing manager might organize his/her plant by separating engineering, accounting, manufacturing, personnel, and purchasing specialists into common departments.

b. The advantage to this type of grouping is obtaining efficiencies from putting like specialists together.

3. Tasks can also be departmentalized by the type of product or service the organization produces. a. Procter & Gamble recently reorganized along these lines. Each major

product—such as Tide, Pampers, Charmin, and Pringles—will be placed under the authority of an executive who will have complete global responsibility for that product.

b. The major advantage to this type of grouping is increased accountability for product performance under a single manager.

4. Another way to departmentalize is on the basis of geography or territory. a. The sales function, for instance, may have western, southern, mid-western,

and eastern regions. 5. Process departmentalization can be used for processing customers as well as

products. For example, at the state motor vehicles office you might find: a. Validation by motor vehicles divisionb. Processing by the licensing departmentc. Payment collection by the treasury department

6. A final category of departmentalization is by type of customer. a. Microsoft, for instance, recently reorganized around four customer

markets: consumers, large corporations, software developers, and small businesses.

7. The assumption is that customers in each department have a common set of problems and needs that can best be met by having specialists for each.

D. Chain of Command1. The chain-of-command was once a basic cornerstone in the design of

organizations, it is far less important today.


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2. The chain of command is "an unbroken line of authority that extends from the top of the organization to the lowest echelon and clarifies who reports to whom."

3. Two complementary concepts: authority and unity of command. a. Authority—"the rights inherent to management to give orders and expect

the orders to be obeyed." b. The unity-of-command principle helps preserve the concept of an

unbroken line of authority. It states that a person should have only one superior to whom he/she is directly responsible.

4. Times change, and so do the basic tenets of organizational design. The concepts of chain of command have less relevance today because of technology and the trend of empowering employees.

5. A low-level employee today can access information in seconds that 30 years ago was available only to top managers.

6. Operating employees are empowered to make decisions previously reserved for management.

7. Add the popularity of self-managed and cross-functional teams and the creation of new structural designs that include multiple bosses, and you can see why authority and unity of command hold less relevance.

8. Many organizations still find they can be most productive by enforcing the chain of command. a. Indeed, one survey of more than 1,000 managers found that 59 percent of

them agreed with the statement, “There is an imaginary line in my company’s organizational chart. Strategy is created by people above this line, while strategy is executed by people below the line.”

b. However, this same survey found that buy-in to the organization’s strategy by lower-level employees was inhibited by too much reliance on hierarchy for decision-making.

E. Span of Control 1. How many employees a manager can efficiently and effectively direct is an

important question. 2. All things being equal, the wider or larger the span, the more efficient the

organization. 3. Exhibit 15–3 illustrates that reducing the number of managers leads to

significant savings. 4. Wider spans are more efficient in terms of cost. 5. However, at some point, wider spans reduce effectiveness. 6. Narrow or small spans have their advocates. By keeping the span of control to

five or six employees, a manager can maintain close control. 7. Narrow spans have three major drawbacks:

a. First, as already described, they are expensive because they add levels of management.

b. Second, they make vertical communication in the organization more complex.

c. Third, narrow spans of control encourage overly tight supervision and discourage employee autonomy.


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8. The trend in recent years has been toward wider spans of control. a. They are consistent with recent efforts by companies to reduce costs, cut

overhead, speed up decision-making, increase flexibility, get closer to customers, and empower employees.

b. To ensure that performance does not suffer because of these wider spans, organizations have been investing heavily in employee training.

F. Centralization and Decentralization 1. Centralization refers to the degree to which decision-making is concentrated at

a single point in the organization. a. In centralized organizations, top managers make all the decisions, and

lower-level managers merely carry out their directives.b. In organizations at the other extreme, decentralized decision-making is

pushed down to the managers closest to the action.2. The concept of centralization includes only formal authority—that is, the

rights inherent in a position. 3. An organization characterized by centralization is inherently different

structurally from one that’s decentralized. a. A decentralized organization can act more quickly to solve problems,

more people provide input into decisions, and employees are less likely to feel alienated from those who make decisions that affect their work lives.

b. Management efforts to make organizations more flexible and responsive have produced a recent trend toward decentralized decision making by lower-level managers, who are closer to the action and typically have more detailed knowledge about problems than top managers.

c. Sears and JCPenney have given their store managers considerably more discretion in choosing what merchandise to stock. i. This allows those stores to compete more effectively against local

merchants. d. Similarly, when Procter & Gamble empowered small groups of employees

to make many decisions about new-product development independent of the usual hierarchy, it was able to rapidly increase the proportion of new products ready for market.

4. Research investigating a large number of Finnish organizations demonstrates that companies with decentralized research and development offices in multiple locations were better at producing innovation than companies that centralized all research and development in a single office.

G. Formalization1. Formalization refers to the degree to which jobs within the organization are

standardized. a. A highly formalized job gives the job incumbent a minimum amount of

discretion over what is to be done, when it is to be done, and how he or she should do it. Employees can be expected always to handle the same input in exactly the same way.

b. The greater the standardization, the less input the employee has into how the job is done.


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2. Low formalization—job behaviors are relatively nonprogrammed, and employees have a great deal of freedom to exercise discretion in their work.

3. The degree of formalization can vary widely between organizations and within organizations.

II. Common Organizational DesignsA. The Simple Structure

1. The simple structure is characterized most by what it is not rather than what it is: a. It is not elaborated. b. It has a low degree of departmentalization, wide spans of control,

authority centralized in a single person, and little formalization. c. The simple structure is a “flat” organization; it usually has only two or

three vertical levels. d. One individual has the decision-making authority.

2. The simple structure is most widely practiced in small businesses in which the manager and the owner are one and the same. (See Exhibit 15–4, an organization chart for a retail men’s store.)

3. The strength of the simple structure lies in its simplicity. It is fast, flexible, inexpensive to maintain, and accountability is clear.

4. One major weakness is that it is difficult to maintain in anything other than small organizations.

5. It becomes increasingly inadequate as an organization grows because its low formalization and high centralization tend to create information overload at the top.

6. When an organization begins to employ 50–100 people, it is very difficult for the owner-manager to make all the choices. a. If the structure is not changed and made more elaborate, the firm often

loses momentum and can eventually fail. 7. The simple structure’s other weakness is that it is risky—everything depends

on one person. Illness can literately destroy the information and decision making center of the company.

B. The Bureaucracy1. Standardization—the key concept for all bureaucracies. 2. The bureaucracy is characterized by:

a. Highly routine operating tasks achieved through specializationb. Very formalized rules and regulationsc. Tasks that are grouped into functional departmentsd. Centralized authoritye. Narrow spans of controlf. Decision-making that follows the chain of command

3. Its primary strength is in its ability to perform standardized activities in a highly efficient manner. a. Putting like specialties together in functional departments results in

economies of scale, minimum duplication of personnel and equipment, etc.


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b. Bureaucracies get by nicely with less talented and less costly middle- and lower-level managers.

4. Weaknesses a. Specialization creates subunit conflicts; functional unit goals can override

the organization’s goals. b. Obsessive concern with following the rules.c. The bureaucracy is efficient only as long as employees confront familiar

problems with programmed decision rules.C. The Matrix Structure

1. It is used in advertising agencies, aerospace firms, research and development laboratories, construction companies, hospitals, government agencies, universities, management consulting firms, and entertainment companies.

2. It combines two forms of departmentalization—functional and product: a. The strength of functional departmentalization—putting like specialists

together and the pooling and sharing of specialized resources across products

b. Its major disadvantage is the difficulty of coordinating the tasks. 3. Product departmentalization facilitates coordination. 4. It provides clear responsibility for all activities related to a product, but with

duplication of activities and costs. 5. The most obvious structural characteristic of the matrix is that it breaks the

unity-of-command concept. (Exhibit 15–5 shows the matrix form as used in a college of business administration.)

6. Its strength is its ability to facilitate coordination when the organization has a multiplicity of complex and interdependent activities:

7. The dual lines of authority reduce tendencies of departmental members to protect their worlds.

8. It facilitates the efficient allocation of specialists. 9. The major disadvantages of the matrix lie in the confusion it creates, its

propensity to foster power struggles, and the stress it places on individuals: 10. Violation of unity-of-command concept increases ambiguity that often leads

to conflict. 11. Confusion and ambiguity also create the seeds of power struggles. 12. Reporting to more than one boss introduces role conflict, and unclear

expectations introduce role ambiguity.

III. New Design OptionsA. The Virtual Organization

1. The essence of the virtual organization is that it is typically a small, core organization that outsources major business functions: a. Also referred to as modular or network organization. b. It is highly centralized, with little or no departmentalization. c. The prototype of the virtual structure is today’s movie-making

organization: i. In Hollywood’s golden era, movies were made by huge, vertically

integrated corporations.


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(a) Nowadays, most movies are made by a collection of individuals and small companies who come together and make films project by project.

(b) This structural form allows each project to be staffed with the talent most suited to its demands, rather than having to choose just from those people the studio employs.

d. Philip Rosedale runs a virtual company called LoveMachine that lets employees send brief electronic messages to one another to acknowledge a job well done that can be then used to facilitate company bonuses. i. The company has no full-time software development staff—instead,

LoveMachine outsources assignments to freelancers who submit bids for projects like debugging software or designing new features.

ii. Programmers come from around the world, including Russia, India, Australia, and the United States.

e. Similarly, Newman’s Own, the food products company founded by Paul Newman, sells hundreds of millions of dollars in food every year yet employs only 28 people. i. This is possible because it outsources almost everything:

manufacturing, procurement, shipping, and quality control.2. Exhibit 15–6 shows a virtual organization in which management outsources

all of the primary functions of the business. a. The dotted lines in this exhibit represent those relationships typically

maintained under contracts. b. In essence, managers in virtual structures spend most of their time

coordinating and controlling external relations, typically by way of computer-network links.

3. The major advantage to the virtual organization is its flexibility. a. The primary drawback is that it reduces management’s control over key

parts of its business. 4. Virtual organizations’ drawbacks have become increasingly clear as their

popularity has grown. a. They are in a state of perpetual flux and reorganization, which means

roles, goals, and responsibilities are unclear, setting the stage for political behavior.

b. Cultural alignment and shared goals can be lost because of the low degree of interaction among members.

c. Team members who are geographically dispersed and communicate infrequently find it difficult to share information and knowledge, which can limit innovation and slow response time.

5. Ironically, some virtual organizations are less adaptable and innovative than those with well-established communication and collaboration networks.a. A leadership presence that reinforces the organization’s purpose and

facilitates communication is thus especially valuable.B. The Boundaryless Organization

1. General Electric’s former chairman, Jack Welch, coined the term boundaryless organization.


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a. Welch wanted to turn his company into a “family grocery store.” b. He wanted to eliminate vertical and horizontal boundaries and break down

external barriers. 2. The boundaryless organization seeks to eliminate the chain of command, have

limitless spans of control, and replace departments with empowered teams. 3. By removing vertical boundaries, management flattens the hierarchy

and minimizes status and rank. a. Uses cross-hierarchical teams b. Uses participative decision-making practices c. Uses 360-degree performance appraisals

4. Functional departments create horizontal boundaries. The way to reduce these barriers is to: a. Replace functional departments with cross-functional teams and organize

around processes. b. Use lateral transfers and rotate people into and out of different functional

areas. 5. When fully operational, the boundaryless organization also breaks down

geographic barriers. a. Today, most large U.S. companies see themselves as global corporations;

many, like Coca-Cola and McDonald’s, do as much business overseas as in the United States, and some struggle to incorporate geographic regions into their structure.

b. The boundaryless organization provides one solution because it considers geography more of a tactical, logistical issue than a structural one.

c. In short, the goal is to break down cultural barriers.6. One way to do so is through strategic alliances.

a. Firms such as NEC Corporation, Boeing, and Apple each have strategic alliances or joint partnerships with dozens of companies.

b. These alliances blur the distinction between one organization and another as employees work on joint projects.

7. And some companies allow customers to perform functions previously done by management. a. Some AT&T units receive bonuses based on customer evaluations of the

teams that serve them. 8. Finally, telecommuting is blurring organizational boundaries.

a. The security analyst with Merrill Lynch who does her job from her ranch in Montana or the software designer in Boulder, Colorado, who works for a San Francisco firm are just two of the millions of workers operating outside the physical boundaries of their employers’ premises.

C. The Learner Organization: Organizational Downsizing1. The goal of the new organizational forms we’ve described is to improve

agility by creating a lean, focused, and flexible organization2. Downsizing is a systematic effort to make an organization leaner by selling

off business units, closing locations, or reducing staff. a. It has been very controversial because of its potential negative impacts on

employees.


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b. The radical shrinking of Chrysler and General Motors in recent years was a case of downsizing due to loss of market share and changes in consumer demand.

c. Some companies downsize to focus on their core competencies.d. Some companies focus on lean management techniques to reduce

bureaucracy and speed decision-making. 3. Despite the advantages of being a lean organization, the impact of downsizing

on organizational performance has been very controversial.a. Reducing the size of the workforce has an immediately positive outcome

in the huge reduction in wage costs. b. Companies downsizing to improve strategic focus often see positive

effects on stock prices after the announcement. c. On the other hand, among companies that only cut employees but don’t

restructure, profits and stock prices usually decline. 4. Part of the problem is the effect of downsizing on employee attitudes.

a. Those who remain often feel worried about future layoffs and may be less committed to the organization.

b. Stress reactions can lead to increased sickness absences, lower concentration on the job, and lower creativity.

5. In companies that don’t invest much in their employees, downsizing can also lead to more voluntary turnover so vital human capital is lost. a. The result is a company that is more anemic than lean.

6. Companies can reduce negative impacts by preparing for the post-downsizing environment in advance, thus alleviating some employee stress and strengthening support for the new strategic direction.

7. The following are some effective strategies for downsizing and suggestions for implementing them. a. Investment. Companies that downsize to focus on core competencies are

more effective when they invest in high-involvement work practices afterward.

b. Communication. When employers make efforts to discuss downsizing with employees early, employees are less worried about the outcomes and feel the company is taking their perspective into account.

c. Participation. Employees worry less if they can participate in the process in some way. In some companies, voluntary early retirement programs or severance packages can help achieve leanness without layoffs.

d. Assistance. Providing severance, extended health care benefits, and job search assistance demonstrates a company does really care about its employees and honors their contributions.

8. Companies that make themselves lean can be more agile, efficient, and productive—but only if they make cuts carefully and help employees through the process.

IV. Why Do Structures Differ? A. Introduction


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1. The mechanistic model (Exhibit 15-7)—synonymous with the bureaucracy—has extensive departmentalization, high formalization, a limited information network (mostly downward), and little participation in decision-making.

2. The organic model (Exhibit 15-7) looks a lot like the boundaryless organization; it uses cross-hierarchical and cross-functional teams, low formalization, a comprehensive information network, and high participation in decision-making.

3. Why are some organizations structured along mechanistic lines while others are organic?

B. Organizational Strategy1. An organization’s structure is a means to help management achieve its

objectives. a. Objectives derive from the organization’s overall strategy.b. Structure should follow strategy.

2. Most current strategy frameworks focus on three strategy dimensions—innovation, cost minimization, and imitation—and the structural design that works best with each. a. An innovation strategy means a strategy for meaningful and unique

innovations. This strategy may appropriately characterize 3M Company. b. A cost-minimization strategy tightly controls costs, refrains from incurring

unnecessary innovation or marketing expenses, and cuts prices in selling a basic product. This describes Wal-Mart’s strategy.

c. An imitation strategy tries to capitalize on the best of both minimize risk and maximize opportunity for profit: i. It moves into new products or new markets only after viability has

been proven by innovators. ii. It copies successful ideas of innovators. iii. Manufactures mass-marketed fashion goods that are rip-offs of

designer styles 3. Exhibit 15-8 describes the structural option that best matches each strategy.

a. Innovators need the flexibility of the organic structure, whereas cost minimizers seek the efficiency and stability of the mechanistic structure. Imitators combine the two structures.

b. They use a mechanistic structure to maintain tight controls and low costs in their current activities but create organic subunits in which to pursue new undertakings.

C. Organizational Size1. There is considerable evidence to support that an organization’s size

significantly affects its structure. 2. Large organizations—employing 2,000 or more people—tend to have more

specialization, more departmentalization, more vertical levels, and more rules and regulations than do small organizations.

3. The impact of size becomes less important as an organization expands. 4. Once an organization has around 2,000 employees, it’s already fairly

mechanistic. An additional 500 employees will not have much impact.


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5. However, adding 500 employees to a 300-employee firm is likely to result in a mechanistic structure.

D. Technology1. The term refers to how an organization transfers its inputs into outputs.

a. Every organization has at least one technology for converting financial, human, and physical resources into products or services.

b. Ford Motor Company predominantly uses an assembly-line process to make its products.

c. Colleges may use a number of instruction technologies—the ever-popular formal lecture method, the case analysis method, the experiential exercise method, the programmed learning method, etc. to educate its students.

2. Numerous studies have examined the technology–structure relationship. a. What differentiates technologies is their degree of routineness.

i. Routine activities are characterized by automated and standardized operations. (a) Examples are injection-mold production of plastic knobs,

automated transaction processing of sales transactions, and the printing and binding of this book.

ii. Nonroutine activities are customized and require frequent revision and updating. (a) They include furniture restoring, custom shoemaking, genetic

research, and the writing and editing of this book. (b) In general, organizations engaged in nonroutine activities tend to

prefer organic structures, while those performing routine activities prefer mechanistic structures.

E. Environment1. An organization’s environment includes outside institutions or forces that can

affect its performance, such as suppliers, customers, competitors, government regulatory agencies, and public pressure groups.

2. Dynamic environments create significantly more uncertainty for managers than do static ones. a. To minimize uncertainty, managers may broaden their structure to sense

and respond to threats. b. For example, most companies, including Pepsi and Southwest Airlines,

have added social networking departments to counter negative information posted on blogs.

c. Or companies may form strategic alliances, such as when Microsoft and Yahoo! joined forces to better compete with Google.

3. Any organization’s environment has three dimensions: capacity, volatility, and complexity. a. Capacity

i. "The degree to which it can support growth." ii. Rich and growing environments generate excess resources, which can

buffer times of relative scarcity. b. Volatility


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i. Refers to "the degree of instability in an environment characterized by a high degree of unpredictable change."

ii. The environment is dynamic, making it difficult for management to predict accurately the probabilities associated with various decision alternatives.

iii. At the other extreme is a stable environment. c. Complexity

i. "The degree of heterogeneity and concentration among environmental elements."

ii. Simple environments are homogeneous and concentrated. d. In contrast, environments characterized by heterogeneity and dispersion

are called complex. 4. Exhibit 15-9 summarizes our definition of the environment along its three

dimensions. a. The arrows indicate movement toward higher uncertainty. b. Thus, organizations that operate in environments characterized as scarce,

dynamic, and complex face the greatest degree of uncertainty because they have high unpredictability, little room for error, and a diverse set of elements in the environment to monitor constantly.

5. Given this three-dimensional definition of environment, we can offer some general conclusions about environmental uncertainty and structural arrangements.a. The more scarce, dynamic, and complex the environment, the more

organic a structure should be. b. The more abundant, stable, and simple the environment, the more the

mechanistic structure will be preferred.

V. Organizational Designs and Employee BehaviorA. We opened this chapter by implying that an organization’s structure can have

significant effects on its members. 1. A review of the evidence leads to a pretty clear conclusion: you can’t

generalize! 2. Not everyone prefers the freedom and flexibility of organic structures. 3. Different factors stand out in different structures as well.

a. In highly formalized, heavily structured, mechanistic organizations, the level of fairness in formal policies and procedures is a very important predictor of satisfaction.

b. In more personal, individually adaptive organic organizations, employees value interpersonal justice more.

4. Some people are most productive and satisfied when work tasks are standardized and ambiguity minimized—that is, in mechanistic structures.

5. So, any discussion of the effect of organizational design on employee behavior has to address individual differences.

B. Let’s consider employee preferences for work specialization, span of control, and centralization.


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1. The evidence generally indicates that work specialization contributes to higher employee productivity—but at the price of reduced job satisfaction. a. However, work specialization is not an unending source of higher

productivity. b. Problems start to surface, and productivity begins to suffer, when the

human diseconomies of doing repetitive and narrow tasks overtake the economies of specialization.

c. As the workforce has become more highly educated and desirous of jobs that are intrinsically rewarding, we seem to reach the point at which productivity begins to decline more quickly than in the past.

d. There is still a segment of the workforce that prefers the routine and repetitiveness of highly specialized jobs.

e. Some individuals want work that makes minimal intellectual demands and provides the security of routine; for them, high work specialization is a source of job satisfaction.

f. The question, of course, is whether they represent 2 percent of the workforce or 52 percent.

g. Given that some self-selection operates in the choice of careers, we might conclude that negative behavioral outcomes from high specialization are most likely to surface in professional jobs occupied by individuals with high needs for personal growth and diversity.

2. It is probably safe to say no evidence supports a relationship between span of control and employee satisfaction or performance. a. Although it is intuitively attractive to argue that large spans might lead to

higher employee performance because they provide more distant supervision and more opportunity for personal initiative, the research fails to support this notion.

b. Some people like to be left alone; others prefer the security of a boss who is quickly available at all times.

c. Consistent with several of the contingency theories of leadership discussed in Chapter 12, we would expect factors such as employees’ experiences and abilities and the degree of structure in their tasks to explain when wide or narrow spans of control are likely to contribute to their performance and job satisfaction.

d. However, some evidence indicates that a manager’s job satisfaction increases as the number of employees supervised increases.

3. We find fairly strong evidence linking centralization and job satisfaction. a. In general, less centralized organizations have a greater amount of

autonomy. b. And autonomy appears positively related to job satisfaction. But, again,

while one employee may value freedom, another may find autonomous environments frustratingly ambiguous.

C. Our conclusion: to maximize employee performance and satisfaction, managers must take individual differences, such as experience, personality, and the work task, into account.


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1. We can draw one obvious insight: other things equal, people don’t select employers randomly.

2. They are attracted to, are selected by, and stay with organizations that suit their personal characteristics.

3. Job candidates who prefer predictability are likely to seek out and take employment in mechanistic structures, and those who want autonomy are more likely to end up in an organic structure.

4. Thus, the effect of structure on employee behavior is undoubtedly reduced when the selection process facilitates proper matching of individual characteristics with organizational characteristics.

D. Although research is slim, it does suggest national culture influences the preference for structure. 1. Organizations that operate with people from high power-distance cultures,

such as Greece, France, and most of Latin America, find their employees are much more accepting of mechanistic structures than are employees from low power-distance countries.

2. So consider cultural differences along with individual differences when predicting how structure will affect employee performance and satisfaction.

VI. Summary and Implications for Managers A. The theme of this chapter is that an organization’s internal structure contributes to

explaining and predicting behavior. 1. That is, in addition to individual and group factors, the structural relationships

in which people work has a bearing on employee attitudes and behavior. 2. What’s the basis for this argument?

a. To the degree that an organization’s structure reduces ambiguity for employees and clarifies concerns such as “What am I supposed to do?” “How am I supposed to do it?” “To whom do I report?” and “To whom do I go if I have a problem?” it shapes their attitudes and facilitates and motivates them to higher levels of performance.

3. Exhibit 15-10 summarizes what we’ve discussed. There are a few other take-home messages worth considering:a. Although specialization can bring efficiency, excessive specialization also

can breed dissatisfaction and reduced motivation.b. Formal hierarchies offer advantages like unification of mission and goal

while employees in excessively rigid hierarchies can feel they have no power or autonomy. As with specialization, the key is striking the right balance.

c. Virtual and boundaryless forms are changing the face of many organizations. Contemporary managers should thoroughly understand their implications and recognize advantages and potential pitfalls.

d. Organizational downsizing can lead to major cost savings and focus organizations around their core competencies, but it can leave workers dissatisfied and worried about the future of their jobs.

e. When determining an appropriate organizational form, managers will need to consider scarcity, dynamism, and complexity of the environment and


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balance the organic and mechanistic elements appropriate to their organization’s environment.

GlOBalization The Global Organization

This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Dynamics of the global economy; Multicultural and diversity understanding; Reflective thinking skills.

One of the most significant trends in organizational structure is the emergence of truly global organizations with leadership and development functions located all around the world.

In organizations that offshore many functions, a central office located in one country sends business processes to facilities in another country, like a U.S. computer company (think of Dell or Apple) that designs computers in California, manufactures all the parts in China, and assembles them in Texas. Such companies are global in the sense that their operations span multiple nations, but the central culture of the organization is based in a home country.

In a “stateless” corporation, in contrast, all divisions share a common management culture, and operations are standardized for all locations. Managers are drawn from a variety of national backgrounds and placed wherever their functional expertise will be most valuable. Reckitt Benckiser (maker of Clearasil, Lysol, and Woolite) assigns managers to a variety of global offices to ensure they get a picture of border spanning trends that might produce innovations in other countries. As a result, an Italian is running the UK business, an American the German business, an Indian the Chinese operation, and a Dutch executive the U.S. business.

Although these international strategies may produce advantages like cost savings and centralization of decision-making, some observers feel the future is more likely to belong to truly cosmopolitan organizations that produce and market products and services particular to each country in which they operate. This strategy gives local offices maximal control over their own particular areas and takes the greatest advantage of specialized, local knowledge of markets.

It’s not yet clear whether it’s better to pursue a strategy based on offshoring, stateless corporations, or cosmopolitan organizations, but it’s likely there is no universal best


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configuration. The best structure is likely to depend heavily on the type of products and market the company is targeting.

Sources: Based on J. Lampel and A. Bhalla, “Living with Offshoring: The Impact of Offshoring on the Evolution of Organizational Configurations,” Journal of World Business 46, (2011), pp. 346–358; P. Gehmawat, “The Cosmopolitan Corporation,” Harvard Business Review (May 2011), pp. 92–99; and B. Becht, “Building a Company Without Borders,” Harvard Business Review (April 2010), pp. 103–106.

Class Exercise

1. Divide the class into teams of three to five students each.2. Ask the students to read the essay at

http://www.telstrainternational.com/uploads/files/CIO%20Magazine%20Successful%20Partnering%20in%20Asia.pdf

3. Each team should prepare a presentation to discuss the potential difficulties in the “stateless” global business as pointed out in the essay.

4. The presentation should include students’ recommendations for overcoming the difficulties.

Teaching Notes:

This exercise is applicable to face-2-face classes or synchronous online classes such as BlackBoard 9.1, Breeze, WIMBA, and Second Life Virtual Classrooms. See http://www.baclass.panam.edu/imob/SecondLife for more information.

An Ethical Choice Downsizing with a Conscience

This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Ethical understanding and reasoning abilities; Reflective thinking skills.

Especially during economic down times, organizations may have to reduce headcount. The negative effects on those who remain are well documented and include increased sickness absence, withdrawal from work tasks, intentions to sue the organization, stress, dissatisfaction, and loss of commitment.

Do employers have a responsibility to help cushion the blow of downsizing? While ethicists debate how much organizations should help laid-off employees, they generally agree that firms that can afford to do something probably should. Indeed, this assistance can work in the organization’s self-interest, by increasing commitment among those who remain and reducing stress and strain for all. Managing layoffs with an eye to the


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http://www.baclass.panam.edu/imob/SecondLife




organization’s reputation may also be important for hiring new employees when economic prospects improve.

Here are some suggestions to minimize the negative impact of downsizing on employees:1. Managers are often reticent to give out information about future company plans,

but research clearly suggests that ample advance warning about downsizing can reduce employee distress. Open communication makes it much easier for employees to plan how they will respond.

2. Deliver the news about layoffs in a compassionate, personal manner. Let employees know face-to-face they are being let go. This can be hard for managers who would rather avoid conflict or angry encounters, but most research suggests employees prefer to find out about a job loss in this manner (as opposed to e-mail).

3. Explore ways to help, such as by providing job search assistance or severance pay. This might not always be financially feasible, but it’s ethically responsible to do everything you can to help departing employees land on their feet.

Sources: B. Weinstein, “Downsizing 101” Bloomberg Businessweek (September 12, 2008), www.businessweek.com ; S. Randall, “Attracting Layoff-Wary Millennials,” Workforce Management Online (Feburary 2010), www.workforce.com ; and D. K. Datta, J. P. Guthrie, D. Basuil, and A. Pandey, “Causes and Effects of Employee Downsizing: A Review and Synthesis,” Journal of Management 36, no. 1 (2010), pp. 281–348.

Class Exercise

1. Pair the students for a role-playing exercise.2. Ask one of the students in the pair to play the part of a company executive and to

read http://www.businessweek.com/managing/content/sep2008/ca20080912_135498.htm

3. He or she should prepare a plan to deliver the news to the other student about downsizing. The other student is playing Marketing Support Administrator for the firm.

4. The firm has suffered reduce income from sales during the recession. To reduce expenses in comparison with the reduced revenue, some downsizing must be initiated. And, the Marketing Support Administrator is one of 15 employees across the company that must be released.

Teaching Notes:



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http://www.businessweek.com/managing/content/sep2008/ca20080912_135498.htm

http://www.businessweek.com/managing/content/sep2008/ca20080912_135498.htm


Myth or Science? Employees Resent Outsourcing

This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.

Surprisingly, this statement appears to be false.

Two relatively new ways organizations restructure themselves are outsourcing (moving work to another domestic company) and offshoring (moving work to another country). For example, a Denver-based company that contracts with a call center vendor in Cleveland is outsourcing those operations. If the same company decides to contact with a call center in Bangalore, India, it is offshoring.

Like downsizing, outsourcing and offshoring are restructuring efforts primarily pursued for cost-saving reasons; some companies might undertake all three. All result in job loss for the organization. Yet, a recent study of 13,683 U.S. employees (all of whom retained their jobs) suggests that employees react differently to these three restructuring efforts. Predictably, where downsizing and offshoring occurred, employees reacted negatively, reporting significantly lower job satisfaction and organizational commitment than in matched organizations where they did not occur. Surprisingly, however, this study found no negative effects of outsourcing on these attitudes.

The authors speculate that employees may view outsourcing less negatively because they see it as less of a threat to their jobs. Future research is needed to test this explanation.

Sources: C. P. Maertz, J. W. Wiley, C. LeRouge, and M. A. Campion, “Downsizing Effects on Survivors: Layoffs, Offshoring, and Outsourcing,” Industrial Relations 49, no. 2 (2010), pp. 275–285; and L. H. Nishii, D. P. Lepak, and B. Schneider, “Employee Attributions of the ‘Why’ of HR Practices: Their Effects on Employee Attitudes and Behaviors, and Customer Satisfaction,” Personnel Psychology 61,no. 3 (2008), pp. 503–545.

Class Exercise

1. Divide the class into groups of three to five students each.2. Have the teams prepare a presentation on what information contributes to

decisions to outsource, offshore, or downsize. For example see the essay at http://www.flatworldsolutions.com/articles/top-ten-reasons-to-outsource.php

3. Ask the teams to present their findings and ask the remainder of the class to discuss the reasons that a firm might consider the strongest to motivate a decision.


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Teaching Notes:


Point/CounterPoint The End of Management


Point

Management—at least as we know it—is dying. Formal organizational structures are giving way to flatter, less bureaucratic, less formal structures. And that’s a good thing.

Today, leaders are celebrated for triumphing over structure rather than for working well within it. Innovative companies like Apple, Google, Facebook, Twitter, and Groupon were born and thrive thanks not to a multilayered bureaucracy but to an innovative idea that was creatively executed by a flexible group of people freely collaborating. Management in those companies exists to facilitate, rather than control.

Only 100 of today’s Fortune 500 companies existed in 1957. Yet management theory and practice continue to hew to a 1957 mode of thinking. As one future-minded expert noted, “The single biggest reason companies fail is that they overinvest in what is, as opposed to what might be.” How does a traditional, formal, bureaucratic structure foster “what might be” thinking? It doesn’t.

Inertia can cause even innovative companies to become bureaucratized. Google co-founder Larry Page replaced ex-CEO Eric Schmidt when Page’s “desire to move quickly on ambitious ideas was stifled by company bureaucracy.” Page and cofounder Sergey Brin know traditional, bureaucratic structures are Google’s greatest threats.

Some enlightened leaders have learned from their mistakes. Early in his career, says Cristóbal Conde, president and CEO of IT company SunGard, “I was very command-and-control, very top-down. I felt I was smart, and that my decisions would be better.” After some of his best people left because they felt constrained, Conde decided to flatten and loosen the structure. He says: “A C.E.O. needs to focus more on the platform that enables collaboration . . . By having technologies that allow people to see what others are doing, share information, collaborate, brag about their successes—that is what flattens the organization.”


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CounterPoint

There is no “right size fits all” approach to organizational structure. How flat, informal, and collaborative an organization should be depends on many factors. Let’s consider two cases.

People lauded how loosely and informally Warren Buffett structured his investment firm, Berkshire Hathaway. Buffett spends most of his day reading and talking informally “with highly gifted people whom he trusts and who trust him.” This all sounded wonderful until it was discovered Buffett’s CFO and heir apparent David Sokol was on the take. Sokol made $3 million when he successfully lobbied for Berkshire Hathaway to acquire a firm in which he had secretly acquired a significant stake. His insider maneuvers discovered, Sokol was forced to resign. Wouldn’t Buffett have known Sokol was compromised if he supervised more closely or had structures in place to check such “freedom”? It’s hard to argue with Berkshire Hathaway’s past successes, but they don’t prove the company is ideally structured.

Berkshire Hathaway is a cautionary example of the perils of a structure that’s too flat and informal. For the benefits of a formal, complex structure, look no further than Boeing. Boeing’s 787 “Dreamliner”—built of composite materials and 20 percent more fuel efficient than comparable passenger planes—is one of the most innovative products in the history of aviation and the fastest-selling ever. How was the Dreamliner invented and produced? Through an enormously complex planning, design, engineering, production, and testing process. To build the Dreamliner, Boeing has contracted with 40 different suppliers at 135 sites around the world—a feat it could not accomplish without an organizational structure to support it. Boeing’s organizational structure is quite formal, complex, and even bureaucratic. The Dreamliner proves innovation does not need to come from radical organizational structures.

Sources: A. Bryant, “Structure? The Flatter the Better,” New York Times (January 17, 2010), p. BU2; A. R. Sorkin, “Delegator in Chief,” New York Times (April 24, 2011), p. B4; A. Murray, “The End of Management,” Wall Street Journal (August 21, 2010), p. W3; and A. Efrati and S. Morrison, “Chief Seeks More Agile Google,” Wall Street Journal (January 22, 2011), pp. B1, B4.

Class Exercise

1. Create debate teams of three to five students each with half the teams in your class assigned the Point position and the other half the CounterPoint position.

2. Ask the students to prepare to defend the position represented in the exercise, with the advice they should seek additional ideas and resources to support their positions.

3. On a defined day, select a team from each position to debate the conflict.4. After the debate ask the remaining students to comment for or against the concept

regardless of the position prepared.


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Teaching NotesThis exercise is applicable to face-2-face classes or synchronous online classes such as BlackBoard 9.1, Breeze, WIMBA, and Second Life Virtual Classrooms. See http://www.baclass.panam.edu/imob/SecondLife for more information.

Questions for Review

1. What are the six key elements that define an organization’s structure? Answer: The structure is how job tasks are formally divided, grouped, and coordinated The 6 Key Elements that define an organization’s structure are:

Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization (This exercise covers Learning Objectives: Identify the six elements of an organization’s structure; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

2. What is a bureaucracy, and how does it differ from a simple structure? Answer: Bureaucracy is a complex structure that is comprised of highly operating routine tasks achieved through specialization, very formalized rules and regulations, tasks that are grouped into functional departments, centralized authority, narrow spans of control, and decision making that follows the chain of command A simple structure is characterized by a low degree of departmentalization, wide spans of control, authority centralized in a single person and little formalization. (This exercise covers Learning Objectives: Identify the characteristics of bureaucracy; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

3. What is a matrix organization? Answer: The matrix structure is used in advertising agencies, aerospace firms, research and development laboratories, construction companies, hospitals, government agencies, universities, management consulting firms, and entertainment companies. It combines two forms of departmentalization: functional and product.


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The matrix attempts to gain the strengths of both functional and product departmentalization, while avoiding their weaknesses. The most obvious structural characteristic of the matrix is that it breaks the unity-of-command concept. Employees in the matrix have two bosses—their functional department managers and their product managers. Therefore, the matrix has a dual chain of command.

The strength of the matrix lies in its ability to facilitate coordination when the organization has a multiplicity of complex and interdependent activities. It facilitates the efficient allocation of specialists. The matrix achieves the advantages of economies of scale by providing the organization with both the best resources and an effective way of ensuring their efficient deployment. The major disadvantages of the matrix lie in the confusion it creates, its propensity to foster power struggles, and the stress it places on individuals. (This exercise covers Learning Objectives: Describe a matrix structure; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

4. What are the characteristics of a virtual organization?Answer: The Virtual Organization: The essence of the virtual organization is typically a small, core organization that outsources major business functions. It is highly centralized, with little or no departmentalization. Virtual organizations create networks of relationships that allow them to contract out manufacturing, distribution, marketing, or any other business function where management feels that others can do it better or more cheaply. The virtual organization stands in sharp contrast to the typical bureaucracy in that it outsources many generic functions and concentrates on what it does best. The major advantage to the virtual organization is its flexibility. The primary drawback is that it reduces management’s control over key parts of its business. (This exercise covers Learning Objectives: Identify the characteristics of a virtual organization; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

5. How can managers create a boundaryless organization? Answer: The Boundaryless Organization: The boundaryless organization seeks to eliminate the chain of command, have limitless spans of control, and replace departments with empowered teams. Because it relies so heavily on information technology, some call this structure the T-form (or technology-based) organization. By removing vertical boundaries, management flattens the hierarchy and:

Minimizes status and rank. Uses cross-hierarchical teams. Uses participative decision-making practices. Uses 360-degree performance appraisals.


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Functional departments create horizontal boundaries. The way to reduce these barriers is to replace functional departments with cross-functional teams and to organize activities around processes. When fully operational, the boundaryless organization also breaks down barriers to external constituencies (suppliers, customers, regulators, etc.) and barriers created by geography. The one common technological thread that makes the boundaryless organization possible is networked computers. (This exercise covers Learning Objectives: Show why managers want to create boundaryless organizations; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

6. Why do organizational structures differ, and what is the difference between a mechanistic structure and an organic structure? Answer: There are four reasons why structures differ.

1. Strategy - a. Innovation Strategy - A strategy that emphasizes the introduction

of major new products and services. An organic structure may be best.

b. Cost-minimization Strategy - A strategy that emphasizes tight cost controls, avoidance of unnecessary innovation or marketing expenses, and price cutting

c. Imitation Strategy - A strategy that seeks to move into new products or new markets only after their viability has already been proven

2. Organizational Size - As organizations grow, they become more mechanistic, more specialized, with more rules and regulations

3. Technology - How an organization transfers its inputs into outputs The more routine the activities, the more mechanistic the structure with greater formalization Custom activities need an organic structure

4. Environment - Institutions or forces outside the organization that potentially affect the organization’s performance Three key dimensions:

a. capacity, b. volatility, andc. complexity.

(This exercise covers Learning Objectives: Demonstrate how organizational structures differ and contrast mechanistic and organic structural models; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

7. What are the behavioral implications of different organizational designs? Answer: It is impossible to generalize behavioral implications due to individual differences in the employees People seek and stay at organizations that match their needs. Some of the research helps to understand some of the behavior such as:

1. Work specialization contributes to higher employee productivity, but it reduces job satisfaction.

2. The benefits of specialization have decreased rapidly as employees seek more intrinsically rewarding jobs.


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3. The effect of span of control on employee performance is contingent upon individual differences and abilities, task structures, and other organizational factors.

4. Participative decision making in decentralized organizations is positively related to job satisfaction.

(This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.)

8. How does globalization affect organizational structure? Answer: In terms of culture and organizational structure, many countries follow the U.S. model. U.S. management may be too individualistic. Culture may affect employee structure preferences. Cultures with high-power distance may prefer mechanistic structures. The boundaryless organization may be a solution to regional differences in global firms. It breaks down cultural barriers, especially in strategic alliances. Telecommuting also blurs organizational boundaries. (This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills)

Experiential Exercise Dismantling a Bureaucracy

This exercise covers Learning Objectives: Demonstrate how organizational structures differ and contrast mechanistic and organic structural models; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.

Pre-work

In order to understand how to improve an organizational structure, it is important to start with a clear understanding of how an organization is currently structured. For this exercise, you will perform research on the college or university you are attending or another organization that your professor identifies. Using the organization’s Web site, find out about different administrative units, paying special attention to different noncore functions like finance, information technology, and human resources.While doing this research, assemble a list of five features that resemble a bureaucracy and five features that you think might be successfully managed by an external partner.

Create Groups

Your instructor will form you into groups of at least four individuals at the start of class.


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Assess Bureaucracy

Your initial task will be to share your assessments of the features of the organization that seem bureaucratic in nature. What are the common functions that tend to be run in a bureaucratic manner? Try to identify standardized work practices that enhance coordination and control. In particular, think of systems of rules, regulations, departments, and offices that have highly specific and specialized roles. Collectively, your team will take about 15 minutes to accomplish this task.

Dismantle Bureaucracy

To dismantle a bureaucracy, it is important to consider both the advantages and disadvantages of the current system. Thus, the goal of the second part of the exercise is to employ techniques related to boundaryless and virtual organizations to reduce bureaucracy in a debate format, with one person arguing for why changes can be good, while the other person argues for why changes might be disruptive.

The team will start by dividing into two subgroups and will work in these groups independently for about 10 minutes. One member will have the responsibility to identify alternative mechanisms that might be able to replace the current bureaucratic structure while still keeping all the same functions “in-house” by creating a boundaryless organization. How can the organizations get the same results but with a different set of control systems? Another member will identify reasons it might be difficult to transition from a bureaucracy to the system you advocated in point #2. What are the potential sources of resistance to change? These two members should work together to arrive at a consensus for how bureaucracy might be minimized without damaging organizational productivity and efficiency.

At the same time, the second group of two individuals will work on a different task. One member will consider how each organization can take on elements of a virtual organization as a way to become less bureaucratic. Identify elements of the organization that might be downsized or outsourced. Another member will identify why “going virtual” might be a bad idea, looking to potential loss of control and poor information exchange as possible obstacles. These two members will arrive at a consensus for how the organization can be made as lean as possible without damaging organizational productivity and efficiency.

Finally, all four members of the team will come together to arrive at a consensus for how to limit bureaucracy by either (1) using new systems that are consistent with a boundaryless organization or (2) using elements of a lean, virtual organization to strip off unnecessary bureaucratic layers. This final combination process should take about 10 minutes.


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Debriefing

After each group has come to a consensus for how to limit bureaucracy, the instructor will lead an all-class discussion in which each group will describe its eventual approach to minimizing bureaucracy in its organization.

Your instructor will provide additional insight into why it may be difficult to change a bureaucracy, as well as suggesting areas where bureaucracy can be effectively limited through either boundarylessness or virtuality.

Ethical Dilemma Directing the Directors

This exercise covers Learning Objectives: Analyze the behavioral implications of different organizational designs; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Ethical understanding and reasoning abilities; Reflective thinking skills.

One critical structural element of most corporations is the board of directors. In principle, chief executives report to the directors. In practice, however, boards do not always function as you might expect. Boards were implicated in many corporate scandals of the past decade—either because they actively condoned unethical behavior or because they turned a blind eye to it. Many also blamed lax board oversight for the financial meltdown and ensuing recession. Business media have called boards “absolutely useless” and “a sham.”

One of the keys to reforming board behavior is ensuring that boards function independently of the CEO. The Securities and Exchange Commission (SEC) and the NewYork Stock Exchange (NYSE) have set guidelines for the independence of directors—who should not be otherwise affiliated with, employed by, or connected to the organization they direct. The more independent the structure and composition of the board, the better the corporation will be governed, and the more effective it will be.

One example of nonindependence came to light in 2010. In addition to $225,000 in cash and deferred stock he was paid to function as a member of Citibank’s board,Robert Joss earned $350,000 in consulting fees for advising the bank on projects “from time to time.” When asked to comment, Joss replied, “I’m comfortable that I can handle that.”

Such examples seem egregious violations of independence in board structures. Yet, evidence on the link between board independence and firm performance is surprisingly


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weak. One recent review concluded, “There is no evidence of systematic relationships between board composition and corporate financial performance.”

Another structural issue is how the roles of the CEO and chairperson are filled—for instance, whether these positions are held by different people. Most argue that for the board to function independently, the roles must be separate, and Bloomberg Businessweek estimates that 37 percent of the 500 largest U.S. corporations do split them. Yet here, too, the evidence is weak: it doesn’t appear that corporations with separate CEOs and chairs perform any better than those where the CEO and chairperson are one and the same.

Questions1. Do you think Citibank’s consulting arrangement with Robert Joss was unethical?

Or is it possible to justify the arrangement?Answer: The student’s answer to this question will depend on his or her ethic. Those who believe that the “end justifies the means” will see the outcome of Robert Joss as legitimate (not against he law) and, therefore, OK. Other students will believe that Joss is taking an unfair advantage of the firm because he realizes contract work that could be obtained by people outside the firm’s relationship. This type of detachment, they will reason, offers the firm a more objective view of the situation and is less likely to be inappropriate expense for the firm.

2. Why do you think board structure doesn’t appear to matter to corporate performance?Answer: The answer will depend on a student’s appreciation for the job a board of directors performs. Realizing the most of the board members are from companies or industries different from the firm. It is logical that people whose competencies are not directly related to the firm will have difficulty making decisions in the best interest of the firm.

3. Do you think the roles of CEO and chairperson of the board of directors should always be separate? Why or why not?Answer: The answer to this question will vary since it is an opinion question. Some students will favor the two positions in the same person because they perceive that there are many examples of successful companies that have used the method. Other students will suggest that the two positions should be separate to provide a system of checks and balances to ensure that decisions are not adversely affected by limited consideration.

Sources: D. R. Dalton and C. M. Dalton, “Integration of Micro and Macro Studies in Governance Research:CEO Duality, Board Composition, and Financial Performance,” Journal of Management 37, no. 2 (2011),pp. 404–411; T. J. Neff and R. Charan, “Separating the CEO and Chairman Roles,” Bloomberg Businessweek (January 15, 2010), downloaded July 5, 2011, from www.businessweek.com/ ; B. Keoun, “Citigroup to Pay Director $350,000 for Weeks of Consulting,” Bloomberg News (May 10, 2010), downloaded July 5, 2011, from www.bloomberg.com/news/ .


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Case Incident 1Creative Deviance: Bucking the Hierarchy?

This exercise covers Learning Objectives: Demonstrate how organizational structures differ and contrast mechanistic and organic structural models; Learning Outcomes: Discuss the factors that influence decisions about organizational structure; and AACSB Learning Goals: Reflective thinking skills.

One of the major functions of an organizational hierarchy is to increase standardization and control for top managers. Using the chain of command, managers can direct the activities of subordinates toward a common purpose. If the right person with a creative vision is in charge of a hierarchy, the results can be phenomenal. Until Steve Job’s regrettable passing in October of 2011, Apple had used a strongly top-down creative process in which most major decisions and innovations flow directly through Jobs and then are delegated to sub-teams as specific assignments to complete.

Then there is creative deviance, in which individuals create extremely successful products despite being told by senior management to stop working on them. The electrostatic displays used in more than half of Hewlett-Packard’s instruments, the tape slitter that was one of the most important process innovations in 3M’s history, and Nichia’s development of multi-billion-dollar LED bright lighting technology were all officially rejected by the management hierarchy. In all these cases, an approach like Apple’s would have shut down some of the most successful products these companies ever produced. Doing “business as usual” can become such an imperative in a hierarchical organization that new ideas are seen as threats rather than opportunities for development.

It’s not immediately apparent why top-down decision making works so well for one highly creative company like Apple, while hierarchy nearly ruined innovations at several other organizations. It may be that Apple’s structure is actually quite simple, with relatively few layers and a great deal of responsibility placed on each individual for his or her own outcomes. Or it may be that Apple simply had a very unique leader who was able to rise above the conventional strictures of a CEO to create a culture of constant innovation.

Questions1. Do you think it’s possible for an organization to deliberately create an “anti-

hierarchy” to encourage employees to engage in more acts of creative deviance? What steps might a company take to encourage creative deviance?Answer: This answer will depend on the student’s opinion. If they answer that it is possible, then they are likely basing the answer on the concept of


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“decentralization,” which delegates decision-making downward in the organization. If properly designed, this type of “Grassroots Leadership” allows firms to respond to environmental changes more quickly and efficiently.

2. What are the dangers of an approach that encourages creative deviance?Answer: If the structure for a “decentralization” culture is not effective, it can lead to wasted resources, inappropriate activity, and non-mission activities in the organization.

3. Why do you think a company like Apple is able to be creative with a strongly hierarchical structure, whereas other companies find hierarchy limiting?Answer: A company like Apple has a strong leadership that is creative and futuristic. Although Steve Jobs is the front for the hierarchical personality, the truth is that Jobs has a cadre of leaders with similar creativity and innovation capabilities. Generally, the reason some companies trying the hierarchical, centralized structure find it doesn’t work is because of the incapability of the central figure to have the personality and skill to fill the central position. For example, see Apple Computer company under John Sculley.

4. Do you think Apple’s success has been entirely dependent upon Steve Jobs’ role as head of the hierarchy? What are the potential liabilities of a company that is so strongly connected to the decision making of a single individual?Answer: NO, as we see following Jobs retirement and death, the people who were in the centralized management hierarchy are no longer under the mask of Jobs as the center. The new officers and managers have been revealed as the driving force behind their departmental responsibilities. With Jobs, a unifying presence with a vision was the glue that held it together. Now there are new glue spots coming together to guide Apple.

Sources: C. Mainemelis, “Stealing Fire: Creative Deviance in the Evolution of New Ideas,” Academy ofManagement Review 35, no. 4 (2010), pp. 558–578; and A. Lashinsky, “Inside Apple,” Fortune (May 23,2011), pp. 125–134.

Case Incident 2Siemen’s Simple Structure–Not



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There is perhaps no tougher task for an executive than to restructure a European organization. Ask former Siemens CEO Klaus Kleinfeld.

Siemens, with 77 billion Euros in revenue in 2008, some 427,000 employees, and branches in 190 countries, is one of the largest electronics companies in the world. Although the company has long been respected for its engineering prowess, it’s also derided for its sluggishness and mechanistic structure. So when Kleinfeld took over as CEO, he sought to restructure the company along the lines of what Jack Welch did at General Electric. He has tried to make the structure less bureaucratic so decisions are made more quickly He spun off underperforming businesses. And he simplified the company’s structure.

Kleinfeld’s efforts drew angry protests from employee groups, with constant picket lines outside his corporate offices. One of the challenges of transforming European organizations is the customary active participation of employees in executive decisions. Half the seats on the Siemens board of directors are allocated to labor representatives. Not surprisingly, the labor groups did not react positively to Kleinfeld’s GE-like restructuring efforts. In his efforts to speed those efforts, labor groups alleged, Kleinfeld secretly bankrolled a business-friendly workers’ group to try to undermine Germany’s main industrial union.

Due to this and other allegations, Kleinfeld was forced out in June 2007 and replaced by Peter Löscher. Löscher has found the same tensions between inertia and the need for restructuring. Only a month after becoming CEO, Löscher was faced with a decision whether to spin off the firm’s underperforming 10 billion-Euro auto parts unit, VDO. He had to weigh the forces for stability, which want to protect worker interests, against U.S.-style pressures for financial performance. One of VDO’s possible buyers is a U.S. company, TRW, the controlling interest of which is held by Blackstone, a U.S. private equity firm. German labor representatives have derided such private equity firms as “locusts.” When Löscher decided to sell VDO to German tire giant Continental Corporation, Continental promptly began to downsize and restructure the unit’s operations.

Löscher has continued to restructure Siemens. In mid- 2008, he announced elimination of nearly 17,000 jobs worldwide. He also announced plans to consolidate more business units and reorganize the company’s operations geographically. “The speed at which business is changing worldwide has increased considerably, and we’re orienting Siemens accordingly,” Löscher said.

Since the switch from Kleinfeld to Löscher, Siemens has experienced its ups and downs. Since 2008, its stock price has fallen 26 percent on the European stock exchange and is down 31 percent on the New York Stock Exchange. That is better than some competitors, such as France’s Alcatel- Lucent (down 83 percent) and General Electric (down 69 percent), and worse than others, such as IBM (up 8 percent) and the Swiss/Swedish conglomerate ABB (down 15 percent).


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Though Löscher’s restructuring efforts have generated far less controversy than Kleinfeld’s, that doesn’t mean they went over well with all constituents. Of the 2008 job cuts, Werner Neugebauer, regional director for a union representing many Siemens employees, said, “The planned job cuts are incomprehensible nor acceptable for these reasons, and in this extent, completely exaggerated.”

When asked by a reporter whether the cuts would be controversial, Löscher retorted, “I couldn’t care less how it’s portrayed.” He paused a moment, then added, ““Maybe that’s the wrong term. I do care.”

Questions

1. What do Kleinfeld’s efforts at Siemens tell you about the difficulties of restructuring organizations? Answer: Global restructuring is difficult. The guide to global structures at http://74.125.47.132/search?q=cache:_E0UAS88Wd0J:macy.ba.ttu.edu/Fall%252006/5371/overview%2520of%2520eight%2520types%2520of%2520structure%2520for%2520110106.ppt+global+organizational+structures&cd=16&hl=en&ct=clnk&gl=us&client=safari suggests criteria that includes organizational and local cultures into labor relations. These vary widely and must be addressed uniquely to restructure.

2. Why do you think Löscher’s restructuring decisions have generated less controversy than did Kleinfeld’s? Answer: Löscher’s efforts focused on attempts to keep local organizational culture in place. Kleinfwld’s efforts seemed more formula in implementation and less sensitive to individuals. Although the results were similar, Löscher’s effort was probably seen as more appreciative of the worker’s plight.

3. Assume a colleague read this case and concluded “This case proves restructuring efforts do not improve a company’s financial performance.” How would you respond to this statement? Answer: The colleague’s position does recognize long-term outcome of performance. Any restructuring carries a period of productivity drop because of the changes implemented. These changes include personnel, job definitions, job processes, and departmental relationships. All of these can cause drops in productivity in initial implementation that will improve after the “learning curve” is completed and new processes and relationships become the norm.

4. Do you think a CEO who decides to restructure or downsize a company takes the well-being of employees into account? Should he or she do so? Why or why not? Answer: The answer will depend on student beliefs and opinions. In general most students will say that consideration of employees is more important. However, students should see that the CEO’s responsibility is to chare holders. A balance must be made between employee consideration and shareholder equity. Over


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http://74.125.47.132/search?q=cache:_E0UAS88Wd0J:macy.ba.ttu.edu/Fall%252006/5371/overview%2520of%2520eight%2520types%2520of%2520structure%2520for%2520110106.ppt+global+organizational+structures&cd=16&hl=en&ct=clnk&gl=us&client=safari




consideration in either direction can create an unmanageable situation for the CEO.

Sources: Based on A. Davidson, “Peter Löscher Makes Siemens Less German,” The Sunday Times (June 29, 2008), business.timesonline .co.uk; G. Frey, “Siemens Cutting 17K Jobs Worldwide to Cut Costs,” Fox News (July 8, 2008), www.foxnews.com; M. Esterl and D. Crawford, “Siemens CEO Put to Early Test,” Wall Street Journal (July 23, 2007), p. A8; and J. Ewing, “Siemens’ Culture Clash,” BusinessWeek (January 29, 2007), pp. 42–46.

Instructor’s ChoiceApplying the Concepts


If one were to chart the growth spurts of Volkswagen over the past three decades, the chart would look like a roller coaster. Plans were for former BMW boss Bernd Pischetsrieder to fix ailing VW when he came aboard in 2002. However, best-laid plans often go astray. VW’s share price is down almost 50% and profits fell by 36%. What is wrong at VW? First, VW has always been able to charge more for its cars because of quality, innovation, styling, and an implied lifetime guarantee. In recent years, however, consumers have decided that the company is going to have to come up with more value for the dollar if loyalty is to be retained. Second, sales in China’s booming market (VW was one of the first car makers on the scene in this giant economy) have plummeted and GM has driven VW from its number one ranking. Third, cost-cutting moves have not worked. Fourth, VW uncharacteristically has labor pains. The CEO has had little luck in reversing these problems because his consensus management techniques are having little impact on VW’s change-resistant bureaucracy. Over half of the company’s 100 managers are not used to making their own decisions. This spells even more trouble for the company in the year ahead.

a. Using a search engine of your own choosing, investigate Volkswagen’s performance over the past two years. Write a brief summary of their fortunes and misfortunes.

b. Visit the Volkswagen Web site at www.vw.com. From information supplied, characterize the company’s existing structure.

c. Based on what you have observed in “a” and “b” above, suggest a new organizational structure for the company. Cite any assumptions that you made when you developed your structure.


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Instructor Discussion

Students will be able to find a wealth of information on VW (particularly negative information because of their recent performance). A nice summary article appears in BusinessWeek (see August 9, 2004 “Volkswagen Slips into Reverse” p. 40). Students are free to pick any organizational form that they believe is best given the existing situation. However, they should be aware that the current CEO is not having much success with modern structures as the company seems to be very tradition-bound at present. Students might also interview a local VW dealer for opinions.

EXPLORING OB TOPICS ON THE WORLD WIDE WEB


Search Engines are our navigational tool to explore the WWW. Some commonly used search engines are:

www.goto.com www.google.com www.excite.comwww.lycos.com www.hotbot.com www.bing.com

1. The chapter discusses span of control and the various advantages and disadvantages of wide vs. narrow. Let us see how that looks in actual numbers. First, determine how many hierarchical levels there are in at least three organizations of varying sizes that you are currently involved with. One could be the college or university you attend, another where you work, and finally a club or religious institution you belong to. Or, for one of the choices, select a non-profit organization you have some interest in. (For example, Red Cross, MDS, American Cancer Society, etc.). Obtain their hierarchical structure either by searching the WWW (most annual reports have information on this), calling or visiting them, or drawing the structure yourself if you are involved in the organization. Use www.google.com to help you search.

2. What factors influence virtual teams? For a short analysis point to: http://www.seanet.com/~daveg/articles.htm. Write a short paragraph or two outlining why you would or would not like working in a virtual environment. Do you see a time later in your career when you would prefer working in a virtual team? Why or why not?


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http://www.seanet.com/~daveg/articles.htm

http://www.google.com/

http://www.bing.com/

http://www.hotbot.com/

http://www.lycos.com/

http://www.excite.com/

http://www.google.com/

http://www.goto.com/

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