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Chapter 9

Executing Strategy through Organizational Design

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are the basic building blocks of organizational structure?

2. What types of structures exist, and what are advantages and disadvantages of each?

3. What is control and why is it important?

4. What are the different forms of control and when should they be used?

5. What are the key legal forms of business, and what implications does the choice of a business form have

for organizational structure?

Can Oil Well Services Fuel Success for GE?

Chapter 9 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the

sixth largest in the United States.

Image courtesy of The General Electric Company,

http://en.wikipedia.org/wiki/File:Early_General_Electric_logo_1899.png.

In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of

John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides

services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities

of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was

acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it

clear that they had big plans within the oil well services business.

While many executives would struggle to integrate three new companies into their firms, experts expected

GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group PLC,

for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE.”[1] In other words, this

analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The

way that GE was organized fueled this belief.

GE’s organizational structure includes six divisions, each devoted to specific product categories: (1)

Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions,

(4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three

subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire

organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser

into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions

within the Energy division.

In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations.

This division was responsible for all sales of GE products and services outside the United States. The

Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt

expected that countries other than the United States will account for 60 percent of GE’s sales in the

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future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth

& Operations was further divided into twelve geographic regions: China, India, Southeast Asia,

Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan. [2]

Finally, like many large companies, GE also provided some centralized services to support all its units.

These support areas included public relations, business development, legal, global research, human

resources, and finance. By having entire units of the organization devoted to these functional areas, GE

hoped not only to minimize expenses but also to create consistency across divisions.

Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well

services operations would need the help of GE’s public relations and legal departments in the future.

Other important questions about GE’s acquisitions remained open as well. In particular, would the

organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the

culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect,

and the incompatibility of organizational cultures is one reason why.

GE fits a dizzying array of businesses into a relatively simple organizational chart.

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Adapted from company document posted at

http://www.ge.com/pdf/company/ge_organization_chart.pdf

The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly

intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless

professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay

was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in

favor of it.”

In the context of business, execution refers to how well a firm such as GE implements the strategies that

executives create for it. This involves the creation and operation of both an appropriate organizational

structure and an appropriate organizational control processes. Executives who skillfully orchestrate

structure and control are likely to lead their firms to greater levels of success. In contrast, those executives

who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same

way Coach McKay viewed his offense: as worthy of execution.

[1] Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg

Businessweek. Retrieved fromhttp://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-

service-unit-shares-surge.html

[2] GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release]. 2010, November 8.

GE website. Retrieved from http://www.genewscenter.com/ Press-Releases/GE-Names-Vice-Chairman-John-Rice-

to-Lead-GE-Global-Growth-Operations-2c8a.aspx

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9.1 The Basic Building Blocks of Organizational Structure

L E A R N I N G O B J E C T I V E S

1. Understand what division of labor is and why it is beneficial.

2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an

organizational structure.

Division of Labor

General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines,

and loans. One way that GE could produce its lightbulbs would be to have individual employees work on

one lightbulb at a time from start to finish. This would be very inefficient, however, so GE and most other

organizations avoid this approach. Instead, organizations rely ondivision of labor when creating their

products. Division of labor is a process of splitting up a task (such as the creation of lightbulbs)

into a series of smaller tasks, each of which is performed by a specialist.

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The leaders at the top of organizations have long known that division of labor can improve efficiency.

Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating

responsibility to other judges offered perhaps the earliest known example.

In the eighteenth century, Adam Smith’s book The Wealth of Nations quantified the

tremendous advantages that division of labor offered for a pin factory. If a worker performed all the

various steps involved in making pins himself, he could make about twenty pins per day. By breaking the

process into multiple steps, however, ten workers could make forty-eight thousand pins a day. In other

words, the pin factory was a staggering 240 times more productive than it would have been without

relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford

and other industrial pioneers who sought to create efficient organizations.

Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.

While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate

different tasks and the people who perform them. The solution is organizational structure, which is

defined as how tasks are assigned and grouped together with formal reporting relationships. Creating a

structure that effectively coordinates a firm’s activities increases the firm’s likelihood of success.

Meanwhile, a structure that does not match well with a firm’s needs undermines the firm’s chances of

prosperity.

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Division of labor was central to Henry Ford’s development of assembly lines in his automobile

factory. Ford noted, “Nothing is particularly hard if you divide it into small jobs.”

Image courtesy of the Ford Company, http://en.wikipedia.org/wiki/File:A-line1913.jpg.

Vertical and Horizontal Linkages

Most organizations use a diagram called an organizational chart to depict their structure. These

organizational charts show how firms’ structures are built using two basic building blocks: vertical

linkages and horizontal linkages.Vertical linkages tie supervisors and subordinates together. These

linkages show the lines of responsibility through which a supervisor delegates authority to subordinates,

oversees their activities, evaluates their performance, and guides them toward improvement when

necessary. Every supervisor except for the person at the very top of the organization chart also serves as a

subordinate to someone else. In the typical business school, for example, a department chair supervises a

set of professors. The department chair in turn is a subordinate of the dean.

Most executives rely on the unity of command principle when mapping out the vertical linkages in an

organizational structure. This principle states that each person should only report directly to one

supervisor. If employees have multiple bosses, they may receive conflicting guidance about how to do

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their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of

General Electric, for example, the head of the Energy division reports only to the chief executive officer. If

problems were to arise with executing the strategic move discussed in this chapter’s opening vignette—

joining the John Wood Group PLC with GE’s Energy division—the head of the Energy division reports

would look to the chief executive officer for guidance.

Horizontal linkages are relationships between equals in an organization. Often these linkages are called

committees, task forces, or teams. Horizontal linkages are important when close coordination is needed

across different segments of an organization. For example, most business schools revise their

undergraduate curriculum every five or so years to ensure that students are receiving an education that

matches the needs of current business conditions. Typically, a committee consisting of at least one

professor from every academic area (such as management, marketing, accounting, and finance) will be

appointed to perform this task. This approach helps ensure that all aspects of business are represented

appropriately in the new curriculum.

Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages.

As noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal

groupings to maximize familiarity and trust. We organize our stores and company into a variety of

interlocking teams. Most teams have between 6 and 100 Team Members and the larger teams are divided

further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership

Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking team

structure continues all the way upwards to the Executive Team at the highest level of the

company.” [1] This emphasis on teams is intended to develop trust throughout the organization, as well as

to make full use of the talents and creativity possessed by every employee.

Informal Linkages

Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In

the long-running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—

employee at a nuclear power plant. In one episode, Homer gains power and influence with the plant’s

owner, Montgomery Burns, which far exceeds Homer’s meager position in the organization chart, because

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Mr. Burns desperately wants to be a member of the bowling team that Homer captains. Homer tries to use

his newfound influence for his own personal gain and naturally the organization as a whole suffers.

Informal linkages such as this one do not appear in organizational charts, but they nevertheless can have

(and often do have) a significant influence on how firms operate.

K E Y T A K E A W A Y

The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of

the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps

managers to organize better the different individuals and job functions within a firm.

E X E R C I S E S

1. How is division of labor used when training college or university football teams? Do you think you could

use a different division of labor and achieve more efficiency?

2. What are some formal and informal linkages that you have encountered at your college or university?

What informal linkages have you observed in the workplace?

[1] John Mackey’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/

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9.2 Creating an Organizational Structure

L E A R N I N G O B J E C T I V E S

1. Know and be able to differentiate among the four types of organizational structure.

2. Understand why a change in structure may be needed.

Within most firms, executives rely on vertical and horizontal linkages to create a structure that they

hope will match the needs of their firm’s strategy. Four types of structures are available to executives:

(1) simple, (2) functional, (3) multidivisional, and (4) matrix. Like snowflakes, however, no two

organizational structures are exactly alike. When creating a structure for their firm, executives will

take one of these types and adapt it to fit the firm’s unique circumstances. As they do this,

executives must realize that the choice of structure will influence their firm’s strategy in the future.

Once a structure is created, it constrains future strategic moves. If a firm’s structure is designed to

maximize efficiency, for example, the firm may lack the flexibility needed to react quickly

to exploit new opportunities.

Simple Structure

Many organizations start out with a simple structure. In this type of structure, an organizational chart is

usually not needed. Simple structures do not rely on formal systems of division of labor.

If the firm is a sole proprietorship, one person performs all the tasks the organization

needs to accomplish. For example, on the TV series The Simpsons, both bar owner Moe Szyslak and the

Comic Book Guy are shown handling all aspects of their respective businesses.

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There is a good reason most sole proprietors do not bother creating formal organizational charts.

If the firm consists of more than one person, tasks tend to be distributed among them in an informal

manner rather than each person developing a narrow area of specialization. In a family-run restaurant or

bed and breakfast, for example, each person must contribute as needed to tasks, such as cleaning

restrooms, food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic

decision making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm

makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure,

organizations that use this type of structure tend to have very few rules and regulations. The process of

evaluating and rewarding employees’ performance also tends to be informal.

The informality of simple structures creates both advantages and disadvantages. On the plus side, the

flexibility offered by simple structures encourages employees’ creativity and individualism. Informality

has potential negative aspects, too. Important tasks may be ignored if no one person is specifically

assigned accountability for them. A lack of clear guidance from the top of the organization can create

confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus

when relying on a simple structure, the owner of a firm must be sure to communicate often and openly

with employees.

Functional Structure

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As a small organization grows, the person in charge of it often finds that a simple structure is no longer

adequate to meet the organization’s needs. Organizations become more complex as they grow, and this

can require more formal division of labor and a strong emphasis on hierarchy and vertical links. In many

cases, these firms evolve from using a simple structure to relying on a functional structure.

Within a functional structure, employees are divided into departments that each handle activities related

to a functional area of the business, such as marketing, production, human resources, information

technology, and customer service. Each of these five areas would be headed up by a manager

who coordinates all activities related to her functional area. Everyone in a company that works on marketing

the company’s products, for example, would report to the manager of the marketing department. The marketing

managers and the managers in charge of the other four areas in turn would report to the chief executive officer.

An example of a functional structure

Reproduced with permission

Using a functional structure creates advantages and disadvantages. An important benefit of adopting a

functional structure is that each person tends to learn a great deal about his or her particular function. By

being placed in a department that consists entirely of marketing professionals, an individual has a great

opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled

specialists. Second, grouping everyone that serves a particular function into one department tends to keep

costs low and to create efficiency. Also, because all the people in a particular department share the same

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background training, they tend to get along with one another. In other words, conflicts within

departments are relatively rare.

Using a functional structure also has a significant downside: executing strategic changes can be very slow

when compared with other structures. Suppose, for example, that a textbook publisher decides to

introduce a new form of textbook that includes “scratch and sniff” photos that let students smell various

products in addition to reading about them. If the publisher relies on a simple structure, the leader of the

firm can simply assign someone to shepherd this unique new product through all aspects of the

publication process.

If the publisher is organized using a functional structure, however, every department in the organization

will have to be intimately involved in the creation of the new textbooks. Because the new product lies

outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately for

the books’ authors, the publication process will be halted whenever a functional area does not live up to its

responsibilities in a timely manner. More generally, because functional structures are slow to execute

change, they tend to work best for organizations that offer narrow and stable product lines.

The specific functional departments that appear in an organizational chart vary across organizations that

use functional structures. In the example offered earlier in this section, a firm was divided into five

functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology, and (5)

customer service. In the TV show The Office, a different approach to a functional structure is used at the

Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided into six functional

areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5) human resources, and (6)

accounting. A functional structure was a good fit for the branch at the time because its product line was

limited to just selling office paper.

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Multidivisional Structure

Many organizations offer a wide variety of products and services. Some of these organizations sell their

offerings across an array of geographic regions. These approaches require firms to be very responsive to

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customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many

firms abandon the use of a functional structure as their offerings expand. Often the new choice is

a multidivisional structure. In this type of structure, employees are divided into departments based on

product areas and/or geographic regions.

General Electric (GE) is an example of a company organized this way. As shown in the organization chart

that accompanies this chapter’s opening vignette, most of the company’s employees belong to one of six

product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and

Transportation) or to a division that is devoted to all GE’s operations outside the United States (Global

Growth & Operations).

A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE makes a

strategic move such as acquiring the well-support division of John Wood Group PLC, only the relevant

division (in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy. In

contrast, if GE was organized using a functional structure, the transition would be much slower because

all the divisions in the company would need to be involved. A multidivisional structure also helps an

organization to better serve customers’ needs. In the summer of 2011, for example, GE’s Capital division

started to make real-estate loans after exiting that market during the financial crisis of the late

2000s. [1] Because one division of GE handles all the firm’s loans, the wisdom and skill needed to decide

when to reenter real-estate lending was easily accessible.

Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that

do not fit with the company’s overall strategy. McDonald’s experienced this kind of situation in 2002. In

particular, the French division of McDonald’s ran a surprising advertisement in a magazine called Femme

Actuelle. The ad included a quote from a nutritionist that asserted children should not eat at a McDonald’s

more than once per week. Executives at McDonald’s headquarters in suburban Chicago were concerned

about the message sent to their customers, of course, and they made it clear that they strongly disagreed

with the nutritionist.

Another downside of multidivisional structures is that they tend to be more costly to operate than

functional structures. While a functional structure offers the opportunity to gain efficiency by having just

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one department handle all activities in an area, such as marketing, a firm using a multidivisional structure

needs to have marketing units within each of its divisions. In GE’s case, for example, each of its seven

divisions must develop marketing skills. Absorbing the extra expenses that are created reduces a firm’s

profit margin.

GE’s organizational chart highlights a way that firms can reduce some of these expenses: the

centralization of some functional services. As shown in the organizational chart, departments devoted to

important aspects of public relations, business development, legal, global research, human resources, and

finance are maintained centrally to provide services to the six product divisions and the geographic

division. By consolidating some human resource activities in one location, for example, GE creates

efficiency and saves money.

An additional benefit of such moves is that consistency is created across divisions. In 2011, for example,

the Coca-Cola Company created an Office of Sustainability to coordinate sustainability initiatives across

the entire company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of

the Office of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-

Cola had “made significant progress with our sustainability initiatives, but our current approach needs

focus and better integration.” [2] In other words, a department devoted to creating consistency across

Coca-Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.

Matrix Structure

Within functional and multidivisional structures, vertical linkages between bosses and subordinates are

the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships. [3] In particular,

these structures create cross-functional teams that each work on a different project. This offers several

benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and

creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers.

In particular, a person without managerial experience can be put in charge of a relatively small project as

a test to see whether the person has a talent for leading others.

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Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates

the unity of command principle because each employee is assigned multiple bosses. Specifically, any given

individual reports to a functional area supervisor as well as one or more project supervisors. This creates

confusion for employees because they are left unsure about who should be giving them direction.

Violating the unity of command principle also creates opportunities for unsavory employees to avoid

responsibility by claiming to each supervisor that a different supervisor is currently depending on their

efforts.

The potential for conflicts arising between project managers within a matrix structure is another concern.

Chances are that you have had some classes with professors who are excellent speakers while you have

been forced to suffer through a semester of incomprehensible lectures in other classes. This mix of

experiences reflects a fundamental reality of management: in any organization, some workers are more

talented and motivated than others. Within a matrix structure, each project manager naturally will want

the best people in the company assigned to her project because their boss evaluates these managers based

on how well their projects perform. Because the best people are a scarce resource, infighting and politics

can easily flare up around which people are assigned to each project.

Given these problems, not every organization is a good candidate to use a matrix structure. Organizations

such as engineering and consulting firms that need to maximize their flexibility to service projects of

limited duration can benefit from the use of a matrix. Matrix structures are also used to organize research

and development departments within many large corporations. In each of these settings, the benefits of

organizing around teams are so great that they often outweigh the risks of doing so.

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Strategy at the Movies

Office Space

How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an

employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero.

Initech’s use of a matrix structure meant that each employee had multiple bosses, each representing a

different aspect of Initech’s business. High-tech firms often use matrix to gain the flexibility needed to

manage multiple projects simultaneously. Successfully using a matrix structure requires excellent

communication among various managers—however, excellence that Initech could not reach. When

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Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses—and a

parade of his coworkers—admonished him. This fiasco and others led to Gibbons to become cynical about

his job.

Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant

Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s

manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to

enliven their uniforms. A series of mixed messages about the restaurant’s policy on flair led Joanna to

emphatically proclaim—both verbally and nonverbally—her disdain for the manager. She then quit her job

and stormed out of the restaurant.

Office Space illustrates the importance of organizational design decisions to an organization’s culture and

to employees’ motivation levels. A matrix structure can facilitate resource sharing and collaboration but

may also create complicated working relationships and impose excessive stress on employees. Chotchkie’s

organizational structure involved simpler working relationships, but these relationships were strained

beyond the breaking point by a manager’s eccentricities. In a more general sense, Office Spaceshows that

all organizational structures involve a series of trade-offs that must be carefully managed.

Boundaryless Organizations

Most organizational charts show clear divisions and boundaries between different units. The value of a

much different approach was highlighted by former GE CEO Jack Welch when he created the term

boundaryless organization. A boundaryless organization is one that removes the usual barriers between

parts of the organization as well as barriers between the organization and others. [4] Eliminating all

internal and external barriers is not possible, of course, but making progress toward being boundaryless

can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of

fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids

organizational charts, management layers, and supervisors despite having approximately nine thousand

employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L.

Gore emerge based on performance and they attract followers to their ideas over time. As one employee

noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.” [5]

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The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative

thinking that led to their most famous product, GORE-TEX.

Image courtesy of adifansnet, http://www.flickr.com/photos/adifans/3706215019.

An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During

2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders

from the National Guard (who are controlled by state governments) and from active-duty military units

(who are controlled by federal authorities). According to one National Guard officer, “It was just like a

solid wall was between the two entities.” [6]Efforts were needlessly duplicated in some geographic areas

while attention to other areas was delayed or inadequate. For example, poor coordination caused the

evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The

results were immense human suffering and numerous fatalities.

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In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.

Image courtesy of Kyle Niemi,

http://upload.wikimedia.org/wikipedia/commons/3/3d/KatrinaNewOrleansFlooded_edit2.jpg.

To avoid similar problems from arising in the future, barriers between the National Guard and active-duty

military units are being bridged by special military officers called dual-status commanders. These

individuals will be empowered to lead both types of units during a disaster recovery effort, helping to

ensure that all areas receive the attention they need in a timely manner.

Reasons for Changing an Organization’s Structure

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Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s

structure over time and make changes to it if certain danger signs arise. For example, a structure might

need to be adjusted if decisions with the organization are being made too slowly or if the organization is

performing poorly. Both these problems plagued Sears Holdings in 2008, leading executives to reorganize

the company.

Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by

Ben Franklin also illustrates a fundamental truth about structure: If the parts that make up a firm do not work

together, the firm is likely to fail.

Image courtesy of Wikipedia, http://upload.wikimedia.org/wikipedia/commons/9/9c/Benjamin_Franklin_-

_Join_or_Die.jpg.

Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as

clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and

finance), (3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer,

Craftsman, and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S.

Lampert noted that “by creating smaller focused teams that are clearly responsible for their units, we

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[will] increase autonomy and accountability, create greater ownership and enable faster, better

decisions.” [7] Unfortunately, structural changes cannot cure all a company’s ills. As of July 2011, Sears’s

stock was worth just over half what it had been worth five years earlier.

Sometimes structures become too complex and need to be simplified. Many observers believe that this

description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical

emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For

any given project, a small team of people reported to one of forty-seven boards. The boards averaged

fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council

also averaged fourteen members. The councils reported to an operating committee consisting of

Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and

reported directly to the operating committee. These arrangements are so complex and time consuming

that some top executives spend 30 percent of their work hours serving on more than ten of the boards,

councils, and the operating committee.

Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive

moves quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-

Packard (HP) started promoting a warranty service that provides free support and upgrades within the

computer network switches market. Because Cisco’s response to this initiative had to work its way

through multiple committees, the firm did not take action until April 2009. During the delay, Cisco’s

share of the market dropped as customers embraced HP’s warranty. This problem and others created by

Cisco’s overly complex structure were so severe that one columnist wondered aloud “has Cisco’s John

Chambers lost his mind?” [8] In the summer of 2011, Chambers reversed course and decided to return

Cisco to a more traditional structure while reducing the firm’s workforce by 9 percent. Time will tell

whether these structural changes will boost Cisco’s stock price, which remained flat between 2006 and

mid-2011.

K E Y T A K E A W A Y

Executives must select among the four types of structure (simple, functional, multidivisional, and matrix)

available to organize operations. Each structure has unique advantages, and the selection of structures

involves a series of trade-offs.

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E X E R C I S E S

1. What type of structure best describes the organization of your college or university? What led you to

reach your conclusion?

2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from

movies that provide examples or insights relevant to understanding organizational structure?

[1] Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments.

Retrieved fromhttp://www.pionline.com/article/20110725/PRINTSUB/110729949

[2] McWilliams, J. 2011, May 19. Coca-Cola names Bea Perez chief sustainability officer.Atlantic-Journal

Constitution. Retrieved from http://www.ajc.com/business/coca-cola-names-bea-951741.html

[3] This discussion of matrix structures is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from

facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.

[4] Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of

organizational structure. San Francisco, CA: Jossey-Bass.

[5] Hamel, G. 2007, September 27. What Google, Whole Foods do best. CNNMoney. Retrieved from

http://money.cnn.com/2007/09/26/news/companies/management_hamel. fortune/index.htm

[6] Elliott, D. 2011, July 3. New type of commander may avoid Katrina-like chaos. Yahoo! News. Retrieved from

http://news.yahoo.com/type-commander-may-avoid-katrina-chaos-153 143508.html

[7] Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com /story.cfm?ID=41613.

[8] Blodget, H. 2009, August 6. Has Cisco’s John Chambers lost his mind? Business Insider. Retrieved

from http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8

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9.3 Creating Organizational Control Systems

L E A R N I N G O B J E C T I V E S

1. Understand the three types of control systems.

2. Know the strengths and weaknesses of common management fads.

In addition to creating an appropriate organizational structure, effectively executing strategy

depends on the skillful use of organizational control systems. Executives create strategies to try to

achieve their organization’s vision, mission, and goals. Organizational control systems allow

executives to track how well the organization is performing, identify areas of concern, and then take

action to address the concerns. Three basic types of control systems are available to executives: (1)

output control, (2) behavioral control, and (3) clan control. Different organizations emphasize

different types of control, but most organizations use a mix of all three types.

Output Control

Output control focuses on measurable results within an organization. Examples from the business world

include the number of hits a website receives per day, the number of microwave ovens an assembly line

produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 "Output

Controls"). In each of these cases, executives must decide what level of performance is acceptable,

communicate expectations to the relevant employees, track whether performance meets expectations, and

then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida,

were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The

corrective action was simple: they started receiving their pay via direct deposit rather than through the

mail.

Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as

part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent

of Delta’s flights had arrived on time during 2010. This performance led Delta to rank dead last among the

major US airlines and fifteenth out of eighteen total carriers. [1] In response, Delta took important

corrective steps. In particular, the airline added to its ability to service airplanes and provided more

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customer service training for its employees. Because some delays are inevitable, Delta also announced

plans to staff a Twitter account called Delta Assist around the clock to help passengers whose flights are

delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a $198 million

profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices. [2]

Output control also plays a big part in the college experience. For example, test scores and grade point

averages are good examples of output measures. If you perform badly on a test, you might take corrective

action by studying harder or by studying in a group for the next test. At most colleges and universities, a

student is put on academic probation when his grade point average drops below a certain level. If the

student’s performance does not improve, he may be removed from his major and even dismissed. On the

positive side, output measures can trigger rewards too. A very high grade point average can lead to

placement on the dean’s list and graduating with honors.

While most scholarships require a high GPA, comedian David Letterman created a scholarship for

a “C” student at Ball State University. Ball State later named a new communications and media

building after its very famous alumnus.

Image courtesy of Kyle

Flood,http://upload.wikimedia.org/wikipedia/commons/e/eb/David_Letterman_building.jpg.

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Behavioral Control

While output control focuses on results, behavioral control focuses on controlling the actions that

ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate

behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees

that they must wash their hands before returning to work. The dress codes that are enforced within

many organizations are another example of behavioral control. To try to prevent employee theft, many firms

have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile

factories dictate to workers how many minutes they can spend in restrooms during their work shift.

Behavioral control also plays a significant role in the college experience. An illustrative (although perhaps

unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate

students’ behavior; specifically, to force students to attend class. Meanwhile, if you were to suggest that a

rule should be created to force professors to update their lectures at least once every five years, we would

not disagree with you.

Outside the classroom, behavioral control is a major factor within college athletic programs. The National

Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules, policies, and

procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate its rules at

one time or another. Critics suggest that the behavioral controls instituted by the NCAA have reached an

absurd level. Nevertheless, some degree of behavioral control is needed within virtually all organizations.

Creating an effective reward structure is key to effectively managing behavior because people tend to focus

their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that

seem positive on the surface but that can actually undermine organizational goals under some

circumstances. For example, restaurant servers are highly motivated to serve their tables quickly because

doing so can increase their tips. But if a server devotes all his or her attention to providing fast service,

other tasks that are vital to running a restaurant, such as communicating effectively with managers, host

staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and strive to align

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rewards with behaviors. For example, waitstaff who consistently behave as team players could be assigned

to the most desirable and lucrative shifts, such as nights and weekends.

Although some behavioral controls are intended for employees and not customers, following them

is beneficial to everyone.

Image courtesy of Sterilgutassistentin,

http://en.wikipedia.org/wiki/File:Manhattan_New_York_City_2009_PD_20091130_209.JPG.

Clan Control

Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral

control), clan control is an informal type of control. Specifically, clan control relies on shared traditions,

expectations, values, and norms to lead people to work toward the good of their organization.

Clan control is often used heavily in settings where creativity is vital, such as many high-

tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The

creativity of a research scientist would be likely to be stifled, for example, if she were given a quota of

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patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral

control).

Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent

of their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’ for

employees to submit new ideas and to comment on others’ ideas. Google executives routinely make

themselves available two to three times per week for employees to visit with them to present their ideas.

These informal meetings have generated a number of innovations, including personalized home pages

and Google News, which might otherwise have never been adopted.

As part of the team-building effort at Google, new employees are known as Noogles and are given

a propeller hat to wear.

Image courtesy of Tduk Alex Lozupone,http://en.wikipedia.org/wiki/File:Noogler.png.

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Some executives look to clan control to improve the performance of struggling organizations. In 2005,

Florida officials became fed up with complaints about surly clerks within the state’s driver’s license

offices. The solution was to look for help with training employees from two companies that are well-

known for friendly, engaged employees and excellent customer service. The first was The Walt Disney

Company, which offers world-famous hospitality at its Orlando theme parks. The second was regional

supermarket chain Publix, a firm whose motto stressed that “shopping is a pleasure” in its stores. The goal

of the training was to build the sort of positive team spirit Disney and Publix enjoy. The state’s highway

safety director summarized the need for clan control when noting that “we’ve just got to change a little

culture out there.” [3]

Clan control is also important on many college campuses. Philanthropic and social organizations such as

clubs, fraternities, and sororities often revolve around shared values and team spirit. More broadly, many

campuses have treasured traditions that bind alumni together across generations. Purdue University, for

example, proudly owns the world’s largest drum. The drum is beaten loudly before home football games

to fire up the crowd. After athletic victories, Auburn University students throw rolls of toilet paper into

campus oak trees. At Clark University, Rollins College, and Emory University, time-honored traditions

that involve spontaneously canceling classes surprise and delight students. These examples and

thousands of others spread across the country’s colleges and universities help students feel like they

belong to something special.

Management Fads: Out of Control?

Don’t chase the latest management fads. The situation dictates which approach best accomplishes the

team’s mission.

– Colin Powell

The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad

arises when some element of popular culture becomes enthusiastically embraced by a group of people.

Over the past few decades, for example, fashion fads have included leisure suits (1970s), “Members Only”

jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also

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usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle

creates “buzz” and publicity but also ensures that its appeal is only temporary. [4]

Fads also seem to be a predictable aspect of the business world. As with cultural fads, many

provocative business ideas go through a life cycle of creating buzz, captivating a group of

enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly

endless supply of popular management books whose premises range from the intriguing to

the absurd. Within the topic of leadership, for example, various books promise to reveal the “leadership

secrets” of an eclectic array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun,

and Santa Claus.

Beyond the striking similarities between cultural and business fads, there are also important differences.

Most cultural fads are harmless, and they rarely create any long-term problems for those that embrace

them. In contrast, embracing business fads could lead executives to make bad decisions. As our quote

from Colin Powell suggests, relying on sound business practices is much more likely to help executives to

execute their organization’s strategy than are generic words of wisdom from Old St. Nick.

Many management fads have been closely tied to organizational control systems. For example, one of the

best-known fads was an attempt to use output control to improve

performance. Management by objectives (MBO) is a process wherein managers and employees work

together to create goals. These goals guide employees’ behaviors and serve as the benchmarks for

assessing their performance. Following the presentation of MBO in Peter Drucker’s 1954 book The

Practice of Management, many executives embraced the process as a cure-all for organizational problems

and challenges.

Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an

objective for every aspect of employees’ activities eventually discovered that this was unrealistic. The

creation of explicit goals can conflict with activities involving tacit knowledge about the organization.

Intangible notions such as “providing excellent customer service,” “treating people right,” and “going the

extra mile” are central to many organizations’ success, but these notions are difficult if not impossible to

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quantify. Thus, in some cases, getting employees to embrace certain values and other aspects of clan

control is more effective than MBO.

Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in

Japan in the 1960s and were first introduced in the United States in 1972. A quality circle is a formal

group of employees that meets regularly to brainstorm solutions to organizational problems. As the name

“quality circle” suggests, identifying behaviors that would improve the quality of products and the

operations management processes that create the products was the formal charge of many quality circles.

While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent

that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the

production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions

often results in a product that simply cannot satisfy customers’ needs. Many products with perfect quality,

for example, would be created too slowly and at too great a cost to compete in the market effectively. Thus

trade-offs among quality, speed, cost, and flexibility are inevitable.

Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many

organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly

discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the

rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These

discussions were thought to lead individuals to greater understanding of themselves and others. The

anticipated results were more enlightened workers and a greater spirit of teamwork.

Research on social psychology has found that groups are often far crueler than individuals. Unfortunately,

this meant that the candid nature of T-group discussions could easily degenerate into accusations and

humiliation. Eventually, the T-group fad gave way to recognition that creating potentially hurtful

situations has no place within an organization. Hints of the softer side of T-groups can still be observed in

modern team-building fads, however. Perhaps the best known is the “trust game,” which claims to build

trust between employees by having individuals fall backward and depend on their coworkers to catch

them.

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Improving clan control was the basis for the fascination with organizational culture that was all the rage

in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from

America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they

viewed as stellar performers and distilled eight similarities that were shared across the companies. Most

of the similarities, including staying “close to the customer” and “productivity through people,” arose from

powerful corporate cultures. The book quickly became an international sensation; more than three million

copies were sold in the first four years after its publication.

Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both

the popular press and academic research revealed that many of Peters and Waterman’s “excellent”

companies quickly had fallen on hard times. Basic themes such as customer service and valuing one’s

company are quite useful, but these clan control elements often cannot take the place of holding

employees accountable for their performance.

The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment,

“good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are

likely to enjoy performance improvements. Empowerment, for example, builds on important research

findings regarding employees—many workers have important insights to offer to their firms, and these

workers become more engaged in their jobs when executives take their insights seriously. Relying too

heavily on a fad, however, seldom turns out well.

Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s

executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some

Companies Make the Leap…and Others Don’t as a detailed blueprint for running their companies.

Overall, executives should understand that management fads usually contain a core truth that can help

organizations improve but that a balance of output, behavioral, and clan control is needed within most

organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who

yield to trends and fads and popular opinion.”

K E Y T A K E A W A Y

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Organizational control systems are a vital aspect of executing strategy because they track performance

and identify adjustments that need to be made. Output controls involve measurable results. Behavioral

controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values,

expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control

processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually

realize that an array of sound business practices is needed to create effective organizational controls.

E X E R C I S E S

1. What type of control do you think works most effectively with you and why?

2. What are some common business practices that you predict will be considered fads in the future?

3. How could you integrate each type of control intro a college classroom to maximize student learning?

[1] Yamanouchi, K. 2011, February 10. Delta ranks near bottom in on-time performance.Atlanta-Journal

Constitution. Retrieved from http://www.ajc.com/business/delta-ranks-near-bottom-834380.html

[2] Yamanouchi, K. 2011, July 27. Delta has $198 million profit, says 2,000 took buyouts.Atlanta-Journal

Constitution. Retrieved from http://www.ajc.com/business/delta-has-198-million-1050461.html

[3] Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved

fromhttp://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml

[4] This discussion of management fads is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from

facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.

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9.4 Legal Forms of Business

L E A R N I N G O B J E C T I V E S

1. Know the three basic legal forms of business.

2. Know the two specialized types of corporations.

Choosing a Form of Business

The legal form a firm chooses to operate under is an important decision with implications for how a firm

structures its resources and assets. Several legal forms of business are available to executives. Each

involves a different approach to dealing with profits and losses (Figure 9.10 "Business Forms").

There are three basic forms of business. A sole proprietorship is a firm that is owned by one person. From

a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means

that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however,

the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a

sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal

assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for

example, there are a number of self-employed repair people, plumbers, and electricians who work alone

on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses

associated with operating an office.

In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole

proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also

responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise

complements the others. For example, an accountant who specializes in preparing individual tax returns

and another who has mastered business taxes might choose to join forces to offer customers a more

complete set of tax services than either could offer alone.

From a practical standpoint, a partnership allows a person to take time off without closing down the

business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida.

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When Lawrence suffered a serious injury a few years ago, Sander was able to take over supervising his

projects and see them through to completion. Had Lawrence been a sole proprietor, his customers would

have suffered greatly. However, a person who chooses to be part of a partnership rather than operating

alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up

costing you a lot of money. Thus developing trust and confidence in one’s partner is very important.

Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between

a corporation on the one hand and a sole proprietorship and a partnership on the other is that

corporations involve the separation of ownership and management. Corporations sell shares of ownership

that are publicly traded in stock markets, and they are managed by professional executives. These

executives may own a significant portion of the corporation’s stock, but this is not a legal requirement.

Another unique feature of corporations is how they deal with profits and losses. Unlike in sole

proprietorships and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive

profits or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits

and losses tend to be reflected in whether the firm’s stock price rises or falls. When a shareholder sells her

stock, the firm’s performance while she has owned the stock will influence whether she makes a profit

relative to her stock purchase. Shareholders can also benefit from profits if a firm’s executives decide to

pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends

that these profits support are both taxed. This double taxation is a big disadvantage of corporations.

A specialized type of corporation called an S corporation avoids double taxation. Much like in a

partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with

each owner’s share of the firm. Although this is an attractive feature, an S corporation would be

impractical for most large firms because the number of shareholders in an S corporation is capped,

usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For

smaller firms, such as many real-estate agencies, the S corporation is an attractive form of business.

A final form of business is very popular, yet it is not actually recognized by the federal government as a

form of business. Instead, the ability to create a limited liability company (LLC) is granted in state laws.

LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not personally

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responsible for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible

manner (like in a partnership). When paying federal taxes, however, an LLC must choose to be treated as

a corporation, a partnership, or a sole proprietorship. Many home builders (including Sander &

Lawrence), architectural businesses, and consulting firms are LLCs.

K E Y T A K E A W A Y

The three major forms of business in the United States are sole proprietorships, partnerships, and

corporations. Each form has implications for how individuals are taxed and resources are managed and

deployed. E X E R C I S E S

1. Why are so many small firms sole proprietorships?

2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this

form of business over others?

3. Why might different forms of business be more likely to rely on a different organizational structure?

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9.5 Conclusion

This chapter explains elements of organizational design that are vital for executing strategy. Leaders

of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make

decisions about the delegation of authority and responsibility when organizing activities within their

firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting

point for more complex decisions that lead to the creation of formal organizational charts. While

small businesses rarely create organization charts, firms that embrace functional, multidivisional,

and matrix structures often have reporting relationships with considerable complexity. To execute

strategy effectively, managers also depend on the skillful use of organizational control systems that

involve output, behavioral, and clan controls. Although introducing more efficient business practices

to improve organizational functioning is desirable, executives need to avoid letting their firms

become “out of control” by being skeptical of management fads. Finally, the legal form a business

takes is an important decision with implications for a firm’s organizational structure.

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E X E R C I S E S

1. The following chart is an organizational chart for the US federal government. What type of the four

structures mentioned in this chapter best fits what you see in this chart?

2. How does this structure explain why the government seems to move at an incredibly slow pace?

3. What changes could be made to speed up the government? Would they be beneficial?