Week 6 Discussion – Division of Labor

Week 6 Discussion – Division of Labor
Chapter 9 in the eBook states ” 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.” Understanding these linkages helps managers better organize the different functions within an organization. Select an organization or firm that you are familiar or associated with and describe two formal linkages and one informal linkage that can be encountered.
· Were these formal linkages horizontal or vertical? Do you feel these observed divisions of labor were efficient? Explain why or why not?
· Did the informal linkage have an influence on the operation? Explain why or why not?
The original post is due by Tuesday, June 14, 2022, by midnight. Responses to two classmates are also required and due by June 16, 2022, by midnight. Users must post in order to see classmates’ replies to this discussion.
Week 6 Discussion – Division of Labor
Chapter 9 in the eBook states ” 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.” Understanding these linkages helps managers better organize the different functions within an organization. Select an organization or firm that you are familiar or associated with and describe two formal linkages and one informal linkage that can be encountered.
· Were these formal linkages horizontal or vertical? Do you feel these observed divisions of labor were efficient? Explain why or why not?
· Did the informal linkage have an influence on the operation? Explain why or why not?
The original post is due by Tuesday, June 14, 2022, by midnight. Responses to two classmates are also required and due by June 16, 2022, by midnight. Users must post in order to see classmates’ replies to this discussion.
Week 6 Discussion-Division of Labor-Raymond L. Bellamy Jr.
Informal linkagesare unofficial relationships such as friendships that do not appear in organizational charts. Formal linkages are linkages that are specifiedand agreed to by organizations.
The term ‘formal and informal linkage’ is used to define the network of organizations and individuals who collaborate with each other while pursuing an activity.
Formal linkages refer to those connections that are specified and agreed upon by the organization. It means that the connections between different organizations or between their departments have been formalized and each department knows its responsibilities.
Informal linkages refer to the direct contact between individuals on the basis of the need for collaboration.
Informal linkages are formed when employees of different organizations or departments come in contact with each other.
Agritex is an agricultural company that uses new technology and innovative methods to produce agricultural products of excellent quality. Agritex collaborates with many companies and NGOs for research. It has a formal linkage with the Department of Veterinary Services and the Livestock Development Trust.
The informal linkages exist between Agritex personnel and the members of other rural development programs as many such programs are headed by the former personnel of Agritex.
1. These formal linkages were horizontal in nature as Agritex and Department of Veterinary services work on the same level. The observed divisions of labor were efficient as both organizations gather data that is related to their field of work. For example, in on-farm trials, Agritex identifies collaborating farmers, mobilizes local communities, and monitors experiments, while the department conducts the trials.
2. Informal linkage has an influence on the operation as the personnel of Agritex are known by the members of rural district councils who help them in conducting their trials smoothly.
Chapter 9: Executing Strategy through Organizational
Chapter 9: Executing Strategy through Organizational Design
9.1 Executing Strategy through Organizational Design
9.2 The Basic Building Blocks of Organizational Structure
9.3 Creating an Organizational Structure
9.4 Creating Organizational Control Systems
9.5 Legal Forms of Business
9.6 Conclusion
9.1 Executing Strategy through Organizational Design
Learning Objectives
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?
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
Wikimedia Commons – public domain.
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 (Layne, 2011).” 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
9.1 Executing Strategy through Organizational Design 276
United States will account for 60 percent of GE’s sales in the 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 (GE News Center, 2010).
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.
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.
GE News Center, 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-
Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg
277 Mastering Strategic Management
Businessweek. Retrieved from http://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-
9.1 Executing Strategy through Organizational Design 278
9.2 The Basic Building Blocks of Organizational Structure
Table 9.1 The Building Blocks of Organizational Structure
Legendary football coach Vince Lombardi once noted, “The achievements of an organization are the results of
the combined effort of each individual.” Understanding how people can be most efficiently organized is the basis
for modern management thought, and we illustrate the building blocks of organizational structure below.
Division of labor is a process of splitting up a task into a series of smaller tasks, each of which is performed by a
specialist. In ancient Greece, historian Xenophon wrote about the division of labor in shoe making: one person cut out the
shoes, another sewed the uppers together, and a third person assembled the parts.
An organizational chart is a diagram that depicts a firm’s structure.
Do you know what happens each year on the Wednesday of the last full week of April? It’s Administrative Professionals’
Day. Savvy workers mark this day with generosity. The reason involves informal linkages, which are unofficial
relationships such as friendships that do not appear in organizational charts. Administrative professionals such as
secretaries tend to be well informed about both policies and office politics. So keep them on your side!
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.
Horizontal linkages are formal relationships between equals in an organization. They often take the form of committees
and task forces.
Employees may receive conflicting guidance about how to do their jobs if they work in a situation where multiple bosses
are present. This problem can be avoided by following the unity of command principle, which states that each person
should only report directly to one supervisor.
Learning Objectives
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 on division of labor when creating their products (Table 9.1 “The Building
Blocks of Organizational Structure”). 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.
Table 9.2 Hierarchy of Authority
We illustrate one of the oldest recorded stories that is relevant to the design of modern organizations below.
After fleeing Egypt, Moses found himself as the sole
judge of the entire Hebrew population. This was a
daunting task because estimates suggest the population
may’ve exceeded on million people.
Moses’s father-in-law Jethro warned Moses that he would wear
himself out if he tried to handle such a heavy load alone.
Jethro offered Moses some practical advice. He told
Moses that he should teach the people decrees and laws
in an effort to minimize trouble and act as an example
to demonstrate how the people live and the duties they
were to perform.
Rather than handling all judging himself, Moses should appoint
capable and trustworthy officials over groups of thousands,
hundreds, fifties, and tens. These men would serve as judges for
the people at all times, and only the most difficult cases would
be brought to Moses.
Key Takeaway
This is perhaps the first recorded example of a clear hierarchy of authority—an arrangement of individuals based
on rank. A similar idea is used today in the U.S. justice system where there are lower courts for easy-to-resolve
cases and the Supreme Court only handles the most difficult cases.
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 (Table 9.2 “Hierarchy of Authority”). 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
9.2 The Basic Building Blocks of Organizational Structure 280
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.
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.”
Wikimedia Commons – public domain.
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 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
281 Mastering Strategic Management
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.
Committee meetings can be boring, but they are often vital for coordinating efforts across departments.
Yohann Legrand – Meeting – CC BY-SA 2.0.
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 (Mackey, 2010).” 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 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
9.2 The Basic Building Blocks of Organizational Structure 282
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
Key Takeaway
• 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.
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?
Mackey, John’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved from
283 Mastering Strategic Management
9.3 Creating an Organizational Structure
Learning Objectives
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 (Table 9.3 “Common Organizational Structures”). 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 influences 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.
Table 9.3 Common Organizational Structures
Executives rely on vertical and horizontal linkages to create a structure that they hope will match the firm’s
needs. While no two organizational structures are exactly alike, four general types of structures are available to
executives: simple functional, multidivisional, and matrix.
Simple structures do not rely on formal systems of division of labor, and organizational charts are not
generally needed. If the firm is a sole proprietorship, one person performs all of the tasks that the
organization needs to accomplish. Consequently, this structure is common for many small businesses.
Within a functional structure, employees are divided into departments that each handles activities
related to a functional area of the business, such as marketing, production, human resources,
information technology, and customer service.
In this type of structure, employees are divided into departments based on product areas and/or
geographic regions. General Electric, for example, has six product divisions: Energy, Capital, Home &
Business Solutions, Healthcare, Aviation, and Transportation.
Firms that engage in projects of limited duration often use a matrix structure where employees can be
put on different teams to maximize creativity and idea flow. As parodied in the move Office Space, this
structure is common in high tech and engineering firms.
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 (Table 9.4 “Simple Structure”).
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.
Table 9.4 Simple Structure
Most small businesses begin with a simple structure where one person or a small set of people share the tasks
needed to accomplish the firm’s goals with relatively little formalized division of labor. We illustrate a number of
businesses that commonly rely upon a simple structure below.
Need a few dollars to tide you over? You may want to pawn your rare
coin collection. The pawn shop’s simple structure will mean that the
same person values your coins, decides how much money you can
borrow, and writes up your paperwork.
The reality show Miami Ink illustrates how a
tattoo parlor’s simple structure governs a
colorful set of tattoo artists who create body art
for their patrons.
Architects often also act as marketers and accountants when drafting
their small business plans.
Bait shop owners generally do not dive deep
into their pockets to pay for additional
personnel as many are owner operated.
When a dry cleaner is family owned as many are, all members of the
family pitch in as needed to clean clothing and wait on customers.
There is flexibility in the management of many
yoga studios given the laid back management
style often embraced.
Instrument dealers may create beautiful music, but they rarely create
complex organizational structures.
“Bridezillas” are an occupational hazard for
bridal shops, but these shops are generally able
to avoid the complexity associated with other
organizational structures.
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.
285 Mastering Strategic Management
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
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.
Table 9.5 Functional Structure
Functional structures rely on a division of labor whereby groups of people handle activities related to a specific
function of the overall business. We illustrate functional structures in action within two types of organizations that
commonly use them.
Grocery Store Functions Spa Functions
Grocery stockers often work at night to make sure
shelves stay full during the day.
Some spa employees manicure fingernails, a practice that is over
four thousand years old. Many also provide pedicures, a service
whose popularity has nearly doubled in the past decade.
Pharmacists’ specialized training allows them to
command pay that can exceed $50 an hour.
Compared to other spa functions, little training is required of a
tanning bed operator–although the ability to tell time may help.
Bakers wake up early to give shoppers their daily
Almost anyone can buy a shotgun or parent a child without any
training, but every state requires a license in order to cut hair.
Bagging groceries requires a friendly personality as
well as knowing that eggs should not go on the
Cucumber masks are usually applied by a skin care specialist who
has taken a professional training program.
Folks that work checkout aisles should be trusted
to handle cash.
The license required of massage therapists in many states ensures
that spa visits end happily.
The creation of produce, deli, and butcher
departments provides an efficient way to divide a
grocery store physically as well as functionally.
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 (Table 9.5 “Functional Structure”). 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.
9.3 Creating an Organizational Structure 286
An example of a functional structure
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 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.
287 Mastering Strategic Management
The Scranton branch of Dunder Mifflin may be a dysfunctional organization, but it relies on a functional structure.
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 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
9.3 Creating an Organizational Structure 288
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 (Jacobius, 2011). 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
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.
Problems can be created when delegating lots of authority to local divisions. McDonald’s top executives were angered when an ad by
their French division suggested that children should only eat at their restaurants once a week.
Alfonsina Blyde – Everything to see you smile – CC BY-NC-ND 2.0.
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 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.
289 Mastering Strategic Management
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 (McWilliams, 2011).” 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 (Ketchen & Short, 2011). 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.
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.
9.3 Creating an Organizational Structure 290
You won’t need to choose between a red pill and a blue pill within a matrix structure, but you will have multiple bosses.
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 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 Space shows that all organizational structures involve a series of trade-offs
that must be carefully managed.
291 Mastering Strategic Management
Within a poorly organized firm like Initech, simply keeping possession of a treasured stapler is a challenge.
Wikimedia Commons – public domain.
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 (Askenas, et. al., 1995). 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 (Hamel, 2007).”
9.3 Creating an Organizational Structure 292
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.
Adifansnet – adidas_Men’s_WINTER STORY – CC BY-SA 2.0.
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 (Elliott, 2011).” 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.
293 Mastering Strategic Management
In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.
Wikimedia Commons – public domain.
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.
9.3 Creating an Organizational Structure 294
Reasons for Changing an Organization’s Structure
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.
Wikimedia Commons – public domain.
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 [will] increase autonomy and accountability,
create greater ownership and enable faster, better decisions (Retail Net).” 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
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
295 Mastering Strategic Management
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 (Blodget, 2009)?” 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.
Key Takeaway
• 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.
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?
Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of
organizational structure. San Francisco, CA: Jossey-Bass.
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.
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.
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.
Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments.
Retrieved from http://www.pionline.com/article/20110725/PRINTSUB/110729949.
9.3 Creating an Organizational Structure 296
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.
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.
Retail Net, Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com
297 Mastering Strategic Management
9.4 Creating Organizational Control Systems
Learning Objectives
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 (Table 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 (Yamanouchi, 2011). In response, Delta took important corrective steps.
In particular, the airline added to its ability to service airplanes and provided more 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 (Yamanouchi, 2011).
Table 9.6 Output Controls
Outcome controls assess measurable production and other tangible results. Often output controls emphasize
“bottom-line” performance. We illustrate some outcome controls found in organizations below.
Because real estate agents are paid a percentage of the selling price when a house sells, the number of dollars generated in
houses sold is an important metric. Many realty offices have designations like “five million dollar club” to recognize very
productive realtors.
Grade point averages provide a tangible means to compare students for employers and graduate schools.
In the movie Elf, the main character Buddy leaves Santa’s workshop when the number of Etch-A-Sketch toys he produces
is nearly nine hundred units lower than the standard pace.
To ear tenure in a research-focused business schools, a professor’s output generally must include publishing numerous
high-quality articles at reputable scholarly journals.
Within restaurants, servers can increase a key output–amount of tips received–by providing customers with fast, friendly,
and high-quality service.
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
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.
Wikimedia Commons – public domain.
299 Mastering Strategic Management
Behavioral Control
Table 9.7 Behavioral Controls
Behavioral controls dictate the actions of individuals. Such controls often emphasize rules and procedures. We
illustrate some behavioral controls found in organizations below.
No shoes, no shirt, no paycheck. Many food service companies have strict attire requirements to make sure
employees are in compliance with the rules of the Food and Drug Administration and those of local health
departments. Casual Fridays provide a welcome break in offices that enforce strict dress codes. Many businesses
require that checks are signed by two people. This prevents a dishonest employee from embezzling money.
Grading attendance is a behavioral control designed to force students to show up for class. This can be very
helpful because research shows that attendance is positively related to grades. Unfortunately, however, there are
no behavioral controls that force professors’ lectures to be interesting.
Gotta go? Be careful to not take too much time at certain auto factories, where bathroom breaks are monitored
in an effort to cut costs. Some employees of U.S. firms are limited to forty six minutes of bathroom time per shift,
while Japanese automakers allow their American employees only 30 minutes per shift.
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 (Table
9.7 “Behavioral Controls”). 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 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.
9.4 Creating Organizational Control Systems 300
Although some behavioral controls are intended for employees and not customers, following them is beneficial to everyone.
Wikimedia Commons – CC BY-SA 3.0.
Clan Control
Table 9.8 Clan Controls
Rather than measuring result (as in outcome control) or dictating behavior (as in behavioral control), clan
control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their
301 Mastering Strategic Management
organization. Some of the most interesting and unusual examples of clan control are found on college campuses.
Below we illustrate a few striking examples that help build school spirit and loyalty.
Roughly one-quarter of Brandeis University’s student body gets adorned in pain–and nothing else–at the annual Liquid
Latex event.
No matter how you slice it, the Toast Toss seems strange to outsiders. University of Pennsylvania students fling the
breakfast staple into the air after the third quarter of home football games.
Students at Texas Tech University honor the school’s southwest heritage by throwing torillas at sporting events.
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 (Table 9.8 “Clan Controls”). 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 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.
9.4 Creating Organizational Control Systems 302
As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear.
Wikimedia Commons – CC BY-SA 3.0.
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
303 Mastering Strategic Management
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 (Bousquet, 2005).”
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?
Table 9.9 Managing Management Fads
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises
when some element of culture–such as fashion, a toy, or a hairstyle–becomes enthusiastically embraced by a
group of people. Fads also seem to be a predictable aspect of the business world. Below we illustrate several fads
that executives have latched onto in an effort to improve their organizations’ control systems.
by objectives
A supervisor and an employee create a series of goals that provide structure and motivation for the
employee. A huge set of studies shows that setting challenging but attainable goals leads to good
performance, but not every aspect of work can be captured by a goal.
Free-flowing group discussions are used to lead individuals toward greater understanding of themselves
and others. Because a “mob mentality” can take over a group, sensitivity training too often degenerates
into hostility and humiliation.
Volunteer employee groups developed to brainstorm new methods or processes to improve quality.
Quality is important, but managers face trade-offs among quality, cost, flexibility, and speed. A singular
obsession with quality sacrifices too much along other dimensions.
Fueled by 1982’s In Search of Excellence and fascination with Japanese management systems, having a
strong culture became viewed as crucial to organizational success. Within a few years, many of the
“excellent” companies highlighted in the book had fallen on hard times. However, firms such as Disney
continue to gain competitive advantage through their strong cultures.
Don’t chase the latest management fads. The situation dictates which approach best accomplishes the team’s
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 usually the cause of its
9.4 Creating Organizational Control Systems 304
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 (Ketchen & Short, 2011).
Fads also seem to be a predictable aspect of the business world (Table 9.9 “Managing Management Fads”).
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 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.
305 Mastering Strategic Management
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.
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.
9.4 Creating Organizational Control Systems 306
Spirited games of kickball can help build an organization’s culture, but such events should not substitute for
holding employees accountable for delivering results.
Matthew Peoples – Kickball – CC BY-NC 2.0.
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
307 Mastering Strategic Management
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.”
Key Takeaway
• 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.
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?
Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved from
http://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml.
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.
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.
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.
9.4 Creating Organizational Control Systems 308
9.5 Legal Forms of Business
Learning Objectives
1. Know the three basic legal forms of business.
2. Know the two specialized types of corporations.
Table 9.10 Business Forms
Making a profit is a key goal for the overwhelming majority of firms. How a firm’s owners benefit from profits
and suffer from losses varies across different legal forms of business. Below we illustrate how profits and losses
are treated within different business forms.
A sole proprietorship is owned by one person. The firm and its owner are treated interchangeably–the owner is the only
beneficiary of any profits and its personally responsible for any losses and debts. Most sole proprietorships are small, but
entrepreneur James Cash Penney operated JCPenney as one for many years after buying out his two partners.
In a partnership, two or more partners jointly own the firm. A successful partnership requires trust because profits and
losses are shared and because each partner is accountable for the actions of others. Partnerships are a common business
form for dental practices and law offices.
A corporation such as Southwest Airlines separates ownership and management by issuing ownership shares that are
publicly traded in stock markets. Shareholders do not directly receive profits or absorb losses, but profits and losses tend to
be reflected in whether the firm’s stock price rises or falls. Shareholders can also benefit from profits in the form of
dividends. A disadvantage of this business form is double taxation: taxes are paid on corporate profits and on any
dividends that corporate income fuels.
A limited liability company (LLC) can be thought of as a hybrid of a corporation and partnership. Like in a corporation,
owners are not accountable for the firm’s debts. A winner of a legal judgement against an LLC, for example, cannot claim
the personal assets of the LLC’s owners. LLC’s also enjoy the management flexibility of partnerships. For federal tax
purposes, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship. Many architectural
and consulting firms are organized as LLCs.
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 (Table 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. 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 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.
9.5 Legal Forms of Business 310
Key Takeaway
• 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
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?
311 Mastering Strategic Management
9.6 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.
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?
Mastering Strategic Management
Mastering Strategic Management
Publisher Information
About the Authors
Chapter 1: Mastering Strategy: Art and Science
1.1 Mastering Strategy: Art and Science
1.2 Defining Strategic Management and Strategy
1.3 Intended, Emergent, and Realized Strategies
1.4 The History of Strategic Management
1.5 Understanding the Strategic Management Process
1.6 Conclusion
Chapter 2: Leading Strategically
2.1 Leading Strategically
2.2 Vision, Mission, and Goals
2.3 Assessing Organizational Performance
2.4 The CEO as Celebrity
2.5 Entrepreneurial Orientation
2.6 Conclusion
Chapter 3: Evaluating the External Environment
3.1 Evaluating the External Environment
3.2 The Relationship between an Organization and Its Environment
3.3 Evaluating the General Environment
3.4 Evaluating the Industry
3.5 Mapping Strategic Groups
3.6 Conclusion
Chapter 4: Managing Firm Resources
4.1 Managing Firm Resources
4.2 Resource-Based Theory
4.3 Intellectual Property
4.4 Value Chain
4.5 Beyond Resource-Based Theory: Other Views on Firm Performance
4.6 SWOT Analysis
4.7 Conclusion
Chapter 5: Selecting Business-Level Strategies
5.1 Selecting Business-Level Strategies
5.2 Understanding Business-Level Strategy through “Generic Strategies”
5.3 Cost Leadership
5.4 Differentiation
5.5 Focused Cost Leadership and Focused Differentiation
5.6 Best-Cost Strategy
5.7 Stuck in the Middle
5.8 Conclusion
Chapter 6: Supporting the Business-Level Strategy: Competitive and Cooperative Moves
6.1 Supporting the Business-Level Strategy: Competitive and Cooperative Moves
6.2 Making Competitive Moves
6.3 Responding to Competitors’ Moves
6.4 Making Cooperative Moves
6.5 Conclusion
Chapter 7: Competing in International Markets
7.1 Competing in International Markets
7.2 Advantages and Disadvantages of Competing in International Markets
7.3 Drivers of Success and Failure When Competing in International Markets
7.4 Types of International Strategies
7.5 Options for Competing in International Markets
7.6 Conclusion
Chapter 8: Selecting Corporate-Level Strategies
8.1 Selecting Corporate-Level Strategies
8.2 Concentration Strategies
8.3 Vertical Integration Strategies
8.4 Diversification Strategies
8.5 Strategies for Getting Smaller
8.6 Portfolio Planning and Corporate-Level Strategy
8.7 Conclusion
Chapter 9: Executing Strategy through Organizational Design
9.1 Executing Strategy through Organizational Design
9.2 The Basic Building Blocks of Organizational Structure
9.3 Creating an Organizational Structure
9.4 Creating Organizational Control Systems
9.5 Legal Forms of Business
9.6 Conclusion
Chapter 10: Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility
10.1 Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility
10.2 Boards of Directors
10.3 Corporate Ethics and Social Responsibility
10.4 Understanding Thought Patterns: A Key to Corporate Leadership?
10.5 Conclusion
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