CHAPTER 10 Managing New Venture Formation and Entrepreneurship CHAPTER SUMMARY This chapter deals with entrepreneurship and new venture formation. Planning and decision making are essential ingredients in the success of any new and/or growing venture. Moreover, entrepreneurial ideas and processes can also contribute directly to effective planning and decision making. In this chapter, we explore the role of entrepreneurship in the business world and discuss entrepreneurial strategies. We also describe the structure and performance of entrepreneurial companies. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Discuss the nature of entrepreneurship. 2. Describe the role of entrepreneurship in society. 3. Understand the major issues involved in choosing strategies for small firms and the role of international management in entrepreneurship. 4. Discuss the structural challenges unique to entrepreneurial firms. 5. Understand the determinants of the performance of small firms. Michael Gleissner, a German entrepreneur who profited from the Internet, used the money that he made by selling his early ventures to found Bigfoot Entertainment, a company that supports and finances independent film makers. Bigfoot’s production facilities are in Philippines and the company has gone into film distribution and training in an effort to be a major player in the entertainment industry. Company Update: Bigfoot’s website is www.bigfoot.com and the site details the movies that the company is working on as also its other projects. LECTURE OUTLINE I. THE NATURE OF ENTREPRENEURSHIP A. Entrepreneurship is the process of planning, organizing, and assuming the risk of a business venture. B. An entrepreneur is someone who engages in entrepreneurship. C. A small business is one that is privately owned by an individual or a small group of individuals; its sales and assets are not large enough to influence its environment. Teaching Tip: Point out to students that the definition of “small” depends on the industry. A small retail store may employ only two or three workers, while a small nuclear power plant employs hundreds. Teaching Tip: Point out to your students a sample of small businesses around campus—convenience stores, dry cleaners, local restaurants, clothing shops, bookstores, and so forth. Cross-Reference: In Chapter 3 we discussed how regulators are a key part of a firm’s task environment. Though the purpose of the Small Business Administration is to assist small business, it also has regulatory implications as well. II. THE ROLE OF ENTREPRENEURSHIP IN SOCIETY A. Job Creation 1. About 24.5 percent of all U.S. workers work in firms with fewer than 20 employees, and more than one-half work in firms with fewer than 100. 2. Small businesses create many new jobs in the United States. Discussion Starter: Ask if any of your students ever took a job with a new firm just as it was starting out. Ask them to recount their experiences. B. Innovation Small businesses create many new innovative products and services. Examples include the personal computer, air conditioning, and the instant photograph. C. Importance to Big Business Big businesses buy more of their inputs from small businesses than from other big businesses. Cross-Reference: Given that small businesses are frequent suppliers for bigger businesses, they constitute an important ingredient in the task environment, as discussed in Chapter 3. III. STRATEGY FOR ENTREPRENEURIAL ORGANIZATIONS A. Choosing an Industry Cross-Reference: As noted in the text here, Porter’s five forces framework provides an effective model for assessing industry attractiveness. We discussed that framework in Chapter 3. Small businesses can be successful in any industry segment. Small businesses tend to be more prevalent in industries in which resources requirements and economies of scale are low. 1. Service organizations are organizations that offer a service such as video rental stores and hair salons. They are the fastest-growing segment of small business. 2. Retailing businesses can cater to a select group of customers like golfers or college students, or they can be part of a larger chain of retail stores that is operating as a franchise. Teaching Tip: Point out the large number of small service and retail businesses that likely exist around your campus. 3. Construction firms are often founded by skilled craftspeople and can focus on small, local projects. 4. Finance and insurance businesses are likely to be affiliates of larger national firms. 5. Wholesale businesses buy products from large manufacturers and resell the products to retailers. 6. Transportation companies often provide services in a local area or work as subcontractors for larger firms. 7. Manufacturing can be a very difficult industry for small businesses due to high economies of scale. High economies of scale exist when production costs fall as the number of units produced increases. High economies of scale mean that a large firm, with a higher volume of production, can produce the same goods less expensively than a smaller firm. Teaching Tip: With the growing role of computers and other technology in the creation of new products and product ideas, the disadvantages of manufacturing for small businesses may become less significant. Use of technology can shift an industry’s economies of scale, making it less expensive to produce products in small quantities. B. Emphasizing Distinctive Competencies New businesses also increase their chances of success if they can identify and emphasize their distinctive competencies. 1. One way to succeed with a new business is to identify a niche in an established market. A niche is a segment of a market that is not being adequately served. An established market is one in which several large firms compete according to relatively well-defined criteria. Extra Example: Although there are many sellers of women’s attire, Eddie Bauer was the first retailer to offer all of its products in sizes for tall women. This niche had been underserved for years. 2. Another way to succeed with a new business is to identify a new market that is just emerging. a) This may involve transferring a successful product to another market. b) This may also occur when an entirely new market or industry is created. Extra Example: Ann Taylor achieved success when she identified a new market for women’s business attire that is professional and feminine at the same time. 3. A new business may also be successful when it has first-mover advantages, that is, when it exploits an opportunity before any other firm does. Extra Example: Dell Computer has thrived as a result of its first-mover advantage in direct marketing—selling online and shipping directly to consumers. Dell has maintained its dominance in this segment of the industry because of its head start. C. Writing a Business Plan Another key ingredient to entrepreneurial success is the preparation of a strong business plan. Teaching Tip: The website www.bplans.com offers a number of sample business plans. It is interesting to look at the variety of businesses that are the subject matter of these plans. Interesting Quote: “Whether the plan calls for fast growth or slow doesn’t matter much. When you do a business plan, you’re forced to make your assumptions explicit and to challenge them.” (Raymond Boggs, economist; quoted in Fortune, May 2, 1994, p. 84.) Group Exercise: Have small groups of students sketch the basic issues they would need to consider if they were going to start a specific type of new business. 1. The business plan should include a discussion of goals, strategies, and implementation. 2. The business plan should also include forecasts and a budget. D. Entrepreneurship and International Management International markets are becoming increasingly important to successful small businesses. IV. STRUCTURE OF ENTREPRENEURIAL ORGANIZATIONS A. Starting the New Business 1. Buying an existing business allows the entrepreneur to examine the business’s past history and thus to better understand what he or she is getting into. 2. Starting from scratch allows the entrepreneur to avoid inheriting the mistakes of the past owner. Also, the excitement level in a new business is usually high. Teaching Tip: If possible, point out for your students examples of local firms that have been started from scratch and examples in which a business has been sold to a new owner. B. Financing the New Business Personal resources are used for over half of the expenses of a new business, but other popular methods of financing include strategic alliances, lenders, venture capitalists, small-business investment companies, and SBA financial programs. 1. Personal resources—from the entrepreneurs, or their family or friends. 2. Strategic alliances—especially popular with dot.com companies who may subcontract many of their functions to traditional wholesalers or shippers 3. Lenders—includes banks, independent investors, and government loans 4. Venture capital companies—small groups of investors who supply money to new firms with high growth potential, in exchange for partial ownership and control 5. Small-business investment companies—companies that borrow money from the Small Business Administration and invest it in high-growth firms 6. Small Business Administration (SBA) financial programs—federal loans for those who cannot get private financing on reasonable terms C. Sources of Management Advice In addition to financing, entrepreneurs typically need management advice as well as support from legal, accounting, financial, and tax advisors. 1. Advisory boards provide experience and assistance. 2. The quality varies and the price may be high, but consultants may be the best source of specialized advice. 3. The Small Business Administration provides advice from retired business people under its SCORE program. The SBA uses volunteer consultants, college students, and university faculty to provide assistance. It also has training programs and workshops. Teaching Tip: It is often interesting to have a local speaker from the SBA, SCORE, or other program visit class for a few minutes and discuss various new business assistance programs. 4. Networking, or meeting regularly with other business people to share ideas and advice, is also popular. One example is The National Association of Women Business Owners. D. Franchising A franchising agreement is a contract between an entrepreneur (the franchisee) and a parent company (called the franchiser). The franchisee pays the franchiser a fee for the use its name, trademarks, formulas, design, and so forth. The franchiser provides management and marketing expertise, a national image, and so forth. Franchising potentially reduces the entrepreneur’s risks, but it also provides less control and profit potential. Interesting Quote: “Hamburgers are a wonderful means to an end, a great way to be on the front line of society, a great way to earn a good living.” (McDonald’s franchisee, quoted in The Wall Street Journal, June 3, 1998, p. A1). This quote can be used to set up an interesting argument as to whether hamburgers are a good investment in today’s health conscious world! Teaching Tip: Point out some local businesses, especially near campus, that are franchised. Discussion Starter: The fastest-growing franchises in the U.S. are fast food companies, motels, convenience stores, and janitorial services. Why are these types of firms popular choices for franchising? V. THE PERFORMANCE OF ENTREPRENEURIAL ORGANIZATIONS A. Trends in New Business Start-Ups 1. Emergence of e-commerce and the Internet explosion has led to an increased ability for small firms to grow a national clientele. 2. Many individuals are opting out of the corporate rat race, and recent corporate layoffs have also added to the number of people considering entrepreneurship. 3. Woman- and minority-owned small businesses are growing faster than the overall rate of growth. 4. The failure rate is not as high in the last 10 years as it was in the previous decades. B. Reasons for Failure 1. Managerial incompetence or inexperience results when entrepreneurs have little or no management experience or training. 2. Neglect is a threat, and some entrepreneurs don’t realize how much time is involved in owning your own business. 3. Weak control systems can allow a firm to flounder without a clear sense of what needs improvement. 4. Insufficient capital means that there isn’t enough reserve to sustain the firm through the expensive start-up period or subsequent lean times. C. Reasons for Success 1. Hard work, drive, and dedication on the part of the entrepreneur are all key to success. Long hours and independent work are also required. Teaching Tip: Stress for students that not everyone is cut out to be an entrepreneur. Indeed, many people who try it end up going back to work for someone else. Discussion Starter: Ask students if they have an interest in being an entrepreneur or if they intend to go to work for someone else. 2. Market demand for its products or services provided is imperative for a business to succeed. 3. Managerial competence on the part of the entrepreneur is important. 4. Luck plays at least a small part in every successful business. CHAPTER 11 Basic Elements of Organizing The second basic management function, as introduced in Chapter 1, is the organizing process. This part is devoted to in-depth coverage of the various issues and concepts most relevant to organizing. As listed below, this Part has four chapters. Chapter 11 introduces the basic elements of organizing. Chapter 12 discusses organization design. Organization change and innovation are covered in Chapter 13. Finally, Chapter 14 deals with human resource management. CHAPTER SUMMARY This chapter introduces the basic elements of organizing. Key topics covered in the chapter are designing jobs, grouping jobs via departmentalization, establishing reporting relationships, distributing authority, coordinating activities, and differentiating between positions. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Identify the basic elements of organizations. 2. Describe the basic alternative approaches to designing jobs. 3. Discuss the rationale and the most common bases for grouping jobs into departments. 4. Describe the basic elements involved in establishing reporting relationships. 5. Discuss how authority is distributed in organizations. 6. Discuss the basic coordinating activities undertaken by organizations. 7. Describe basic ways in which positions within an organization can be differentiated. The opening case looks reorganization in Anglo American PLC, the world’s fourth-largest mining company. Because of poor performance caused by the global economic downturn, the company “delayered” by creating new business units and laying off people. Management Update: Anglo American reported revenues of $32.929 billion and profits of $11.983 billion in fiscal 2010. Both numbers were substantially up from 2009. Cynthia Caroll continues to the CEO of the company. LECTURE OUTLINE I. THE ELEMENTS OF ORGANIZING Organizing is deciding how best to group organizational activities and resources. Organization structure is the set of building blocks that can be used to configure an organization. Teaching Tip: The building block analogy used here is a good way to introduce this material. Building blocks come in all manner of shapes and can be combined in innumerable ways to create things. Likewise, the elements of organizing can be configured in many different ways as well. Group Exercise: You might ask student groups to sketch real or hypothetical organization charts. You can then use the boxes (jobs) and reporting relationships (lines) they generate to illustrate some of the elements of organizing to be introduced in this chapter. II. DESIGNING JOBS The first basic element of organization structure is job design. Job design is the determination of an individual’s work-related responsibilities. A. Job Specialization Job specialization is the degree to which the overall task of the organization is broken down and divided into smaller component parts. It evolved from the concept of division of labor. B. Benefits and Limitations of Specialization 1. There are four benefits of specialization. a) Workers will become proficient at their task because it is small and simple. b) Transfer time between tasks may decrease. c) The more narrowly defined the job, the easier it is to develop specialized equipment to assist with the job. d) Training costs should be relatively low. 2. The main problem with specialization is that the worker can become bored and dissatisfied. This can lead to higher absenteeism and lower quality of work. It also is possible to overspecialize. Extra Example: Another good example to illustrate how job specialization evolves is Sam Walton. When Walton opened the first Wal-Mart store, he planned the store himself, ordered all the merchandise, developed the newspaper ads, and even operated one of the cash registers. Of course, as his business grew these jobs were later assigned to others. Discussion Starter: Ask students to recount their own experiences involving highly specialized jobs. Discussion Starter: Ask students to speculate on how managers and organizations should identify the optimal degree of job specialization in order to balance efficiency and worker satisfaction. C. Alternatives to Specialization Because of the drawbacks noted, many firms have sought alternative approaches to designing jobs. 1. Job rotation involves systematically moving employees from one job to another. Management Update: Many companies are using job rotation today for training. For example, Southwest Airlines uses job rotation quite effectively, shifting employees across jobs in different departments and different functions. Global Connection: At General Electric’s plant in Puerto Rico, workers rotate to new jobs every six months. They also get pay raises for each new job they master. 2. Job enlargement increases the total number of tasks workers perform. 3. Job enrichment attempts to increase both the number of tasks a worker does and the control the worker has over the job. Cross-Reference: Job enrichment is based on the two-factor theory of motivation developed by Frederick Herzberg. We discuss the two-factor theory in Chapter 16. 4. The job characteristics approach suggests that jobs should be diagnosed and improved along five core dimensions. If these factors are high, workers are more likely to be motivated. a) Skill variety—the number of things a person does in a job. b) Task identity—the extent to which the worker does an identifiable portion of the total job. c) Task significance—the perceived importance of the task. d) Autonomy—the degree of control the worker has over how the work is performed. e) Feedback—the extent to which the worker knows how well the job is being performed. Extra Example: A useful way to illustrate variations on the core job dimensions is by contrasting the jobs of airline pilot and airline ticket agent. The agent does one basic thing (process tickets), while the pilot does several (preflight checks, taking off, flying, landing, etc.). Similar distinctions can be drawn for each of the other dimensions. Group Exercise: Have small groups of students select a job they observe regularly (i.e., retail clerk, fast-food worker). Ask them to describe how much each of the five core job dimensions is likely to exist now and how the job might be changed to improve the core dimensions. 5. Work teams are another alternative to specialization that occur when a group is given responsibility for designing the work system to be used in performing an interrelated set of jobs. Cross-Reference: Work teams are discussed more fully in Chapter 19. III. GROUPING JOBS: DEPARTMENTALIZATION Departmentalization is the grouping of jobs according to some logical arrangement. A. Rationale for Departmentalization The rationale for departmentalization is linked to size. As the organization grows, it is no longer possible for one manager to oversee all of the workers, so workers are assigned to new managers based on some overall plan. B. Common Bases for Departmentalization Teaching Tip: Stress for your students that most organizations use multiple bases of departmentalization in different areas and/or at different levels. Figure 11.2 illustrates this point. 1. Functional departmentalization groups together those jobs involving the same or similar activities. Interesting Quote: “One of the beauties of the vertical, functional organization is that who you report to and who’s the boss is very, very clear.” (Douglas Lennick, American Express executive, Fortune, April 3, 1995, 92.). 2. Product departmentalization involves grouping and arranging activities around products or product groups. Teaching Tip: Identify local organizations that use product departmentalization. (Many retail outlets use this approach and are good examples.) Global Connection: Few Japanese companies have ever used functional departmentalization. Instead, most Japanese companies have always used product- or customer-based departmentalization. 3. Customer departmentalization structures the organization’s activities so as to respond to and interact with specific customers and customer groups. 4. Location departmentalization groups jobs on the basis of defined geographic sites or areas. Teaching Tip: If possible, identify for your students examples of local organizations that use customer and location bases of departmentalization. 5. Other forms of departmentalization, such as time, can be used to organize an organization. Airlines use this type of structuring. Sequence also can be used to structure an organization. For example, insurance claim divisions frequently are organized by policy number sequence. Group Exercise: Have groups of students search for examples of different forms of departmentalization in your college or university. 6. Departments can be called various things such as divisions, units, sections, or bureaus. IV. ESTABLISHING REPORTING RELATIONSHIPS A. Chain of Command 1. The chain of command is a clear and distinct line of authority among positions in the organization. Teaching Tip: Trace for your students the chain of command that exists within your college or university. Discussion Starter: Ask students to discuss the advantages and disadvantages of a clear chain of command. 2. Unity of command suggests that each person within an organization should have a clear reporting relationship to one and only one boss. 3. The scalar principle suggests that there should be a clear and unbroken line of authority that extends from the lowest to the highest position in the organization. B. Narrow Versus Wide Spans Span of management or span of control determines how many people will report to each manager. Group Exercise: Have students research the different spans of management for different administrators in your college or university. Teaching Tip: Have students use the formula shown in the text to calculate the effects of different spans of management, say for spans of four, eight, and ten subordinates. C. Tall Versus Flat Organizations Tall organizations have more layers of management than do flat organizations. Many businesses today have adopted a flatter organization by widening spans of management. Extra Example: An example of a firm that has always used a flat structure is Toyota. Ask students to compare the number of layers in Toyota and its automotive rival, General Motors. Interesting Quote: “In a big organization each layer slows down the process. By delayering you are giving people the power to change.” (Serge Huot, GE Executive, Fortune, April 3, 1995, 96.) D. Determining the Appropriate Span There are at least eight factors that influence the determination of the appropriate span. Teaching Tip: Table 11.1 in the text summarizes the eight factors influencing span of management. 1. Competence of supervisor and subordinates (greater equals wider) 2. Physical dispersion of subordinates (greater equals narrower) 3. Extent of nonsupervisory work in manager’s job (more equals narrower) 4. Degree of required interaction (more equals narrower) 5. Extent of standardized procedures (more equals wider) 6. Similarity of tasks being supervised (more similar equals wider) 7. Frequency of new problems (higher equals narrower) 8. Preferences of supervisor and subordinate Interesting Quote: “Remember the theory that a manager should have no more than six or seven direct reports? I say the right number is closer to ten or fifteen. …With ten or fifteen reports, a leader can focus only on the big important issues, not on minutiae.” (Jack Welch, CEO of General Electric, Harvard Business Review, September–October 1989, 114.) Global Connection: Many Chinese managers today are still concerned with trying to identify the “ideal” span of management. U.S. consultants report that when they visit Chinese businesses, this is one of the most frequently asked questions. V. DISTRIBUTING AUTHORITY Authority is power that has been legitimized by the organization. A. The Delegation Process Delegation is the process by which a manager assigns a portion of his or her total workload to others. 1. The primary reason for delegation is to allow the manager to get more work done. Also, the employee may have more expertise than the manager, or the manager may want to challenge and develop the employee’s skills. 2. The delegation process involves three steps: (1) assign responsibility or task, (2) give the authority needed to do the job, and (3) establish accountability. 3. Delegation may be problematic if managers are unwilling to delegate, are too unorganized to delegate or do not trust their employees enough to delegate. Also, subordinates may be reluctant to accept delegation. Teaching Tip: Relate delegation back to job specialization. As managers find it useful to create new specialized jobs to perform various functions, they similarly may find it useful and necessary to delegate authority to people performing those jobs. B. Decentralization and Centralization 1. Decentralization is the process of systematically delegating power and authority throughout the organization to middle and lower-level managers. 2. Centralization is the process of systematically retaining power and authority in the hands of higher-level managers. Discussion Starter: Ask students if they have ever worked for a boss who did not delegate properly. Explore whether the problem was too little or too much delegation. Teaching Tip: Point out the relationship between decentralization and flat organizations. Specifically, as organizations become flatter, they must also become more decentralized. VI. COORDINATING ACTIVITIES Coordination is the process of linking the activities of the various departments in the organization. Global Connection: Brazilian firms are traditionally managed in a highly centralized manner. Guards often patrol factory floors, employee trips to the bathrooms are timed, and employees are frequently searched when they leave work. A. The Need for Coordination The primary reason for coordination is that departments and work groups need information and resources from each other to do their jobs. 1. Pooled interdependence is the lowest level of interdependence. Only the output of the units is pooled at the organizational level. 2. In sequential interdependence, the output of one unit becomes the input for another in a sequential fashion. 3. Reciprocal interdependence exists when activities flow both ways between units. Extra Example: Note that different courses have different levels of interdependence. A biology course and a philosophy course may be unrelated other than contributing to overall student education (pooled interdependence), whereas Statistics I may feed directly into Statistics II (sequential interdependence). B. Structural Coordination Techniques 1. Organizations that use the managerial hierarchy to achieve coordination place one manager in charge of interdependent departments or units. Teaching Tip: Note that the hierarchy is most effective as a coordination technique when the organization is relatively tall and centralized. 2. Rules and procedures can be used to coordinate routine activities. 3. Managers in liaison roles coordinate interdependent units by acting as a common point of contact in order to facilitate the flow of information between units. 4. Task forces may be created when the need for coordination is acute. Individuals from several units who have special information form a task force to solve a specific problem and then go back to their original units. 5. Integrating departments are a more permanent version of a task force. There are permanent members as well as temporary members. Teaching Tip: Liaison roles, task forces, and integrating departments are more likely to be used for coordination in organizations that are relatively flat and decentralized. C. Electronic Coordination Technology, especially the Internet, email, handheld devices, and networked computers make coordination easier. Discussion Starter: Ask students who have jobs how their organization coordinates the work of different employees. VII. DIFFERENTIATING BETWEEN POSITIONS A. Line positions are positions in the direct chain of command that are responsible for the achievement of an organization’s goals. B. Staff positions are intended to provide expertise, advice, and support for line positions. C. Differences between Line and Staff 1. Purpose differs. Line managers work toward organizational goals whereas staff managers advise and assist. 2. Authority differs. Line authority is formal whereas staff authority is less concrete. Staff authority might be the power to advise, to give compulsory advice, or it might be functional authority. Teaching Tip: Provide students with some local examples of line and staff organizational positions. D. Administrative Intensity Administrative intensity is the degree to which managerial positions are concentrated in staff positions. Discussion Starter: The text notes that many organizations have reduced the number of staff members they employ. Ask students if they believe that this trend can go too far. Specifically, is it imaginable that an organization can function with no staff employees? CHAPTER 12 Managing Organization Design CHAPTER SUMMARY This chapter deals with organization design. After introducing students to the nature of organization design, it covers first universal perspectives and then situational perspectives on organization design. The linkages between strategy and organization design are then explored. Basic forms of organization design are next introduced and discussed. Finally, the chapter concludes with a discussion of emerging issues in organization design. LEARNING OBJECTIVES After covering this chapter, students should be able to: 1. Describe the basic nature of organization design. 2. Identify and explain two basic universal perspectives on organization design. 3. Identify and explain key situational influences on organization design. 4. Discuss how an organization’s strategy and its design are interrelated. 5. Describe the basic forms of organization design. 6. Describe emerging issues in organization design. The opening case deals with Abercrombie & Fitch the retailing phenomenon that has caught the fancy 18 to 22 age group. While the company owns several brands (Hollister, Ruehl 25, etc.), it has structured itself along functional line – the U-form structure, in contrast to the more traditional M-form structure. This means that decisions in the area of purchasing and distribution, for example, are made by a single group of people for all the brands. Discussion Starter: Abercrombie & Fitch is very popular with college students. Find out from students why this brand appeals to them. What about the other brands owned by the company that are mentioned in the case? LECTURE OUTLINE I. THE NATURE OF ORGANIZATION DESIGN Organization design is the overall pattern of structural components and arrangements used to manage the total organization. Cross-Reference: Note for your students that Chapter 11 was concerned with identifying and discussing the various elements of organizing. This chapter focuses on how to put the various elements together to create an overall organization. II. UNIVERSAL PERSPECTIVES ON ORGANIZATION DESIGN A. Bureaucratic Model Bureaucracy is an organization based on a legitimate and formal system of authority. Weber felt bureaucracy was “the one best way” to do things and delineated five basic characteristics of a bureaucracy. 1. Division of labor 2. Rules and procedures Discussion Starter: Ask your students to identify examples of bureaucratic rule and red tape they have recently encountered. Teaching Tip: Point out to your students that rules and regulations are sometimes necessary to ensure equitable treatment. For example, explain to them that there needs to be some logical system to determine who can register for classes at your school, who can file degree plans, who can buy athletic tickets, who can park, and so forth. This system, in turn, must then be codified into rules and regulations. 3. Organizational hierarchy 4. Impersonal relationships among workers 5. Expertise-determined promotions Group Exercise: Have small groups of your students develop a plan for making an organization less bureaucratic. Global Connection: The bureaucratic model is still very prevalent in China. Many managers there still believe in the importance of hierarchy, rules, regulations, and standard operating procedures. B. Behavioral Model The behavioral model is a second universal model. It was developed by Rensis Likert. The behavioral model is based on eight key processes: leadership, motivation, communication, interactions, decision making, goal setting, control, and performance goals. Any organization can be placed on a set of dimensions describing each of these eight elements. The placement of an organization along these dimensions can also be labeled by a system number. Likert suggested that there were four systems. System 1 was similar to bureaucracy, whereas System 4 was the opposite of bureaucracy. Teaching Tip: Note the distinctions between System 1 and System 4 as detailed in Table 12.1. Point out the similarities between the System 1 design and the bureaucratic model discussed earlier. Cross-Reference: Note that the emergence of the behavioral model of organization design paralleled the emergence of the human relations school of management thought. Extra Example: In many ways, the transformations many organizations are currently undergoing toward a flatter, more horizontal form of organization design mirror the transition from System 1 to System 4. Ford Motor’s Customer Service Division, for example, recently made this transition. III. SITUATIONAL INFLUENCES ON ORGANIZATION DESIGN The situational view of organization design is based on the assumption that the optimal design for any given organization depends on a set of relevant situational factors including core technology, environment, organizational size, and organizational life cycle. A. Core Technology 1. Technology is the conversion processes used to transform inputs into outputs. 2. While any organization often uses multiple technologies, its most important one is called its core technology. 3. Woodward identified three basic forms of technology. The first is the least complex, while the third is the most complex. a) Unit or small batch—custom-made products or small quantities are made. Extra Example: Other examples of unit or small-batch technology are: a medical laboratory that performs blood tests on request, a cabinetmaker who makes special cabinets for customers, and a software design firm that writes special programs to meet unique customer requirements. b) Large-batch or mass-production—assembly line production. Extra Example: Other examples of large-batch or mass-production technology are computer manufacturers like IBM and Hewlett-Packard, pen manufacturers like Cross, and bicycle makers like Schwinn. c) Continuous-process—transformation of raw materials to finished goods is done by a series of transformations. Extra Example: Other examples of continuous-process technology include fertilizer makers like Scott’s and paint manufacturers like Sherwin-Williams. 4. Woodward found that firms using unit and continuous-process technologies were likely to use System 4, while firms using mass production were likely to be more bureaucratic. Teaching Tip: Note that Woodward’s conceptualization of technology is actually relatively simple in terms of today’s understanding of technology. Group Exercise: Have small groups of students try to develop their own frameworks or taxonomies of technology. Discussion Starter: Ask students whether service technology is likely to have a different influence on organization design from manufacturing technology. B. Environment Cross-Reference: Remind students that the environment was covered from a variety of perspectives in Chapter 3. 1. A mechanistic organization structures its activities in predictable ways by means of rules, specialized jobs, and centralized authority. It is similar to a System 1 or a bureaucracy. This structure is usually found in stable environments. 2. An organic organization uses a higher level of fluidity and flexibility to match its constantly changing environments. It is similar to a System 4. This structure is usually found in unstable environments. 3. Differentiation is the extent to which the organization is broken down into subunits. Extra Example: The Limited operates each of its businesses independently (highly differentiated). 4. Integration is the degree to which the various units must work together in a coordinated fashion. 5. The degree of differentiation and integration needed by an organization will depend on the stability of the environments it faces. C. Organizational Size Organizational size is the total number of full-time or full-time-equivalent employees. High levels of decentralization, integration, and job specialization are all associated with large size, as are other variables. Discussion Starter: Ask students to speculate about the kinds of differences in organization design that are likely to exist among larger versus smaller organizations. D. Organizational Life Cycle Organizational life cycle is a four-phase process through which organizations evolve. The stages include birth, youth, midlife, and maturity. The organization’s structure must evolve to cope with challenges in each stage of the process. Extra Example: Note that different units within the same organization can be at different stages of their life cycles. For example, The Limited stores have been around since 1963 and are in their maturity stage. On the other hand, the Bath & Body Works chain is only a few years old and is in the youth (rapid growth) stage. IV. STRATEGY AND ORGANIZATION DESIGN A. Corporate-Level Strategy It is important for an organization to match its corporate-level strategy to its design. Teaching Tip: Note that The Limited’s corporate strategy is one of related diversification (clothing, lingerie, personal care products). This allows the firm’s organization design to facilitate synergy. In contrast, a firm like General Electric that uses unrelated diversification will have an organization design that does not necessarily try to promote synergy. B. Business-Level Strategy The type of business-level strategy an organization selects directly influences the design of the organization. Teaching Tip: Note the interrelationships among environment and business strategy and how each is also related to organization design. C. Organizational Functions Normally, a firm’s functional strategy and design link will be covered in the corporate- and business-level links. Teaching Tip: Note that many organizational subunits, such as marketing, operations, or human resource management, have their own unique organization designs. Teaching Tip: Note that the appropriate organization design for a particular firm is dependent on, or contingent on, the situational factors already discussed: technology, environment, size, and life cycle, as well as strategy. Cross-Reference: Note that we discussed the contingency perspective in Chapter 2. This perspective, which argues that appropriate managerial action is contingent on the situation, is the basis for this discussion of the situational nature of organization design. V. BASIC FORMS OF ORGANIZATION DESIGN A. Functional (U-Form) Design The functional design is an arrangement based on the functional approach to departmentalization as detailed in Chapter 10. This design also is referred to as the U-form (for unitary) that is attributed to Williamson. Extra Example: Most local automobile dealerships use a U-form design. The Outback Steakhouse restaurant chain also uses this form of organization design. B. Conglomerate (H-Form) Design The conglomerate is an organization made up of a set of unrelated businesses. The nickname H-form refers to the holding company that results from unrelated diversification. Extra Example: Tyco is another example of an H-form organization. Tyco has several unrelated divisions such security systems (ADT) and automotive products. Group Exercise: Have students research and identify other examples of H-form organizations. C. Divisional (M-Form) Design The divisional design is based on multiple businesses in related areas operating within a larger organizational framework. Hence, the term M-form emphasizes the multiple businesses. Extra Example: Other firms that use an M-form organization design include Bristol-Myers Squibb (prescription drugs, medical equipment, consumer health products, and toiletries and beauty aids) and Cooper Industries (automotive products, industrial equipment, electrical products, tools and hardware, and electrical power equipment). D. Matrix Design The matrix design is based on two overlapping bases of departmentalization. There is a base of functional departments with a set of product groups superimposed across them. A multiple-command structure results when any given individual may report both to a functional superior and to one or more project managers. Teaching Tip: Note that the idea of a multiple-command structure essentially contradicts the idea of unity of command, as discussed in Chapter 11. Extra Example: Business schools often use a matrix form of organization design. Academic departments (management, marketing, and so forth) serve as functional departments, while various academic programs (undergraduate program, MBA program, honors program, and so forth) serve as product groups. Discussion Starter: Ask students how they think they would function in a multiple-command structure (i.e., having two bosses). Cross-Reference: The foundation of matrix forms of organization design is work teams. Teams are discussed more fully in Chapter 19. E. Hybrid Designs A hybrid design occurs when two or more of the common forms of organization design are combined. VI. EMERGING ISSUES IN ORGANIZATION DESIGN A. The Team Organization A team organization is a form of organization design that relies almost exclusively on teams. Extra Example: Many high-tech and engineering firms like Hewlett-Packard and Microsoft are moving more and more in the direction of a team organization. B. The Virtual Organization A virtual organization is one with little or no formal structure. Extra Example: In many ways a football team is a virtual organization. The coach puts players in and takes others out on almost every play, depending upon the situation and tactics. C. The Learning Organization A learning organization is one that works to facilitate the lifelong learning and personal development of all of its employees while continually transforming itself to respond to changing demands and needs D. Issues in International Organization Design Because of the increased emphasis on globalization, it is important that a firm’s organization design allows it to deal effectively in global markets. Global Connection: Note the similarities and differences among domestic forms of organization design and global forms of organization design. Global Connection: Many international firms in the same industries have designs that are very similar to one another. For example, Ford and Nissan have similar organization designs. Instructor Manual for Management Ricky W. Griffin,9781111969714
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