Intentional change theory at the organizational level a case study

Organizational Theory, Design, and Change

seventh edition

Gareth R. Jones Texas A&M University

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Library of Congress Cataloging-in-Publication Data Jones, Gareth R.

Organizational theory, design, and change / Gareth R. Jones.—7th ed. p. cm.

ISBN-13: 978-0-13-272994-9 ISBN-10: 0-13-272994-6 1. Organizational behavior. 2. Organizational behavior—Case studies. I. Title.

HD58.7.J62 2013 302.3’5—dc23

2011036274

ISBN 10: 0-13-272994-6 ISBN 13: 978-0-13-272994-9

10 9 8 7 6 5 4

For Nicholas and Julia

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Brief Contents

Preface xvii

Part 1 The Organization and Its Environment 1 Chapter 1 Organizations and Organizational Effectiveness 1 Chapter 2 Stakeholders, Managers, and Ethics 28 Chapter 3 Organizing in a Changing Global Environment 59

Part 2 Organizational Design 92 Chapter 4 Basic Challenges of Organizational Design 92 Chapter 5 Designing Organizational Structure: Authority

and Control 121 Chapter 6 Designing Organizational Structure: Specialization

and Coordination 148 Chapter 7 Creating and Managing Organizational Culture 179 Chapter 8 Organizational Design and Strategy in a Changing Global

Environment 207 Chapter 9 Organizational Design, Competences, and Technology 240

Part 3 Organizational Change 273 Chapter 10 Types and Forms of Organizational Change 273 Chapter 11 Organizational Transformations: Birth, Growth, Decline,

and Death 305 Chapter 12 Decision Making, Learning, Knowledge Management,

and Information Technology 334 Chapter 13 Innovation, Intrapreneurship, and Creativity 366 Chapter 14 Managing Conflict, Power, and Politics 391

Case Studies 417 Company Index 480 Name Index 483 Subject Index 485

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Contents

Preface xvii

Part 1 The Organization and Its Environment 1

Chapter 1 Organizations and Organizational Effectiveness 1 What Is an Organization? 1

How Does an Organization Create Value? 3

Why Do Organizations Exist? 5 To Increase Specialization and the Division of Labor 5 To Use Large-Scale Technology 6 To Manage the Organizational Environment 6 To Economize on Transaction Costs 6 To Exert Power and Control 7

Organizational Theory, Design, and Change 8 Organizational Structure 8 Organizational Culture 9 Organizational Design and Change 9 The Importance of Organizational Design and Change 11 Dealing with Contingencies 11 Gaining Competitive Advantage 12 Managing Diversity 14 The Consequences of Poor Organizational Design 14

How Do Managers Measure Organizational Effectiveness? 16 The External Resource Approach: Control 17 The Internal Systems Approach: Innovation 17 The Technical Approach: Efficiency 18 Measuring Effectiveness: Organizational Goals 19

The Plan of This Book 20 Organizational Design 22 Organizational Change 22

Summary 23 • Discussion Questions 23 Organizational Theory in Action: Practicing Organizational Theory 24

Open Systems Dynamics 24 The Ethical Dimension #1 24 Making the Connection #1 24 Analyzing the Organization: Design Module #1 24 Assignment 25

Chapter 2 Stakeholders, Managers, and Ethics 28 Organizational Stakeholders 28

Inside Stakeholders 28 Outside Stakeholders 30

Organizational Effectiveness: Satisfying Stakeholders’ Goals and Interests 34

Competing Goals 35 Allocating Rewards 36

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Top Managers and Organizational Authority 37 The Chief Executive Officer 39 The Top-Management Team 40 Other Managers 41

An Agency Theory Perspective 41 The Moral Hazard Problem 41 Solving the Agency Problem 42

Top Managers and Organizational Ethics 43 Ethics and the Law 44 Ethics and Organizational Stakeholders 45 Sources of Organizational Ethics 47 Why Do Ethical Rules Develop? 49 Why Does Unethical Behavior Occur? 51

Creating an Ethical Organization 52 Designing an Ethical Structure and Control System 53 Creating an Ethical Culture 53 Supporting the Interests of Stakeholder Groups 53

Summary 54 • Discussion Questions 55 • Organizational Theory in Action: Practicing Organizational Theory 55

Creating a Code of Ethics 55 The Ethical Dimension #2 55 Making the Connection #2 55 Analyzing the Organization: Design Module #2 55 Assignment 55

Chapter 3 Organizing in a Changing Global Environment 59 What Is the Organizational Environment? 59

The Specific Environment 61 The General Environment 63 Sources of Uncertainty in the Organizational Environment 65

Resource Dependence Theory 69 Interorganizational Strategies for Managing Resource Dependencies 70 Strategies for Managing Symbiotic Resource Interdependencies 71

Developing a Good Reputation 71 Cooptation 72 Strategic Alliances 72 Joint Venture 75 Merger and Takeover 76

Strategies for Managing Competitive Resource Interdependencies 76 Collusion and Cartels 77 Third-Party Linkage Mechanisms 78 Strategic Alliances 78 Merger and Takeover 78

Transaction Cost Theory 79 Sources of Transaction Costs 80 Transaction Costs and Linkage Mechanisms 81 Bureaucratic Costs 82 Using Transaction Cost Theory to Choose an Interorganizational Strategy 82

Summary 86 • Discussion Questions 87 • Organizational Theory in Action: Practicing Organizational Theory 87

Protecting Your Domain 87 The Ethical Dimension #3 87 Making the Connection #3 88 Analyzing the Organization: Design Module #3 88 Assignment 88

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Part 2 Organizational Design 92

Chapter 4 Basic Challenges of Organizational Design 92 Differentiation 92

Organizational Roles 94 Subunits: Functions and Divisions 95 Differentiation at the B.A.R. and Grille 96 Vertical and Horizontal Differentiation 97 Organizational Design Challenges 97

Balancing Differentiation and Integration 99 Integration and Integrating Mechanisms 99 Differentiation versus Integration 102

Balancing Centralization and Decentralization 103 Centralization versus Decentralization of Authority 103

Balancing Standardization and Mutual Adjustment 106 Formalization: Written Rules 106 Socialization: Understood Norms 107 Standardization versus Mutual Adjustment 108

Mechanistic and Organic Organizational Structures 109 Mechanistic Structures 110 Organic Structures 110 The Contingency Approach to Organizational Design 112 Lawrence and Lorsch on Differentiation, Integration, and the Environment 112 Burns and Stalker on Organic versus Mechanistic Structures and the Environment 115

Summary 116 • Discussion Questions 117 • Organizational Theory in Action: Practicing Organizational Theory 117

Growing Pains 117 Making the Connection #4 117 The Ethical Dimension #4 117 Analyzing the Organization: Design Module #4 117 Assignment 118

Chapter 5 Designing Organizational Structure: Authority and Control 121 Authority: How and Why Vertical Differentiation Occurs 121

The Emergence of the Hierarchy 121 Size and Height Limitations 122 Problems with Tall Hierarchies 124 The Parkinson’s Law Problem 127 The Ideal Number of Hierarchical Levels: The Minimum Chain of Command 127 Span of Control 128

Control: Factors Affecting the Shape of the Hierarchy 130 Horizontal Differentiation 130 Centralization 132 Standardization 133

The Principles of Bureaucracy 134 The Advantages of Bureaucracy 137 Management by Objectives 139

The Influence of the Informal Organization 140 IT, Empowerment, and Self-Managed Teams 141 Summary 143 • Discussion Questions 143 • Organizational Theory in Action: Practicing Organizational Theory 144

How to Design a Hierarchy 144 The Ethical Dimension #5 144

CONTENTS ix

Making the Connection #5 144 Analyzing the Organization: Design Module #5 144 Assignment 144

Chapter 6 Designing Organizational Structure: Specialization and Coordination 148 Functional Structure 148

Advantages of a Functional Structure 150 Control Problems in a Functional Structure 150 Solving Control Problems in a Functional Structure 151

From Functional Structure to Divisional Structure 152 Moving to a Divisional Structure 154

Divisional Structure I: Three Kinds of Product Structure 154 Product Division Structure 154 Multidivisional Structure 156 Product Team Structure 161

Divisional Structure II: Geographic Structure 163 Divisional Structure III: Market Structure 164 Matrix Structure 166

Advantages of a Matrix Structure 167 Disadvantages of a Matrix Structure 167 The Multidivisional Matrix Structure 168 Hybrid Structure 170

Network Structure and the Boundaryless Organization 171 Advantages of Network Structures 171 Disadvantages of Network Structures 172 The Boundaryless Organization 172 E-Commerce 173

Summary 174 • Discussion Questions 175 • Organizational Theory in Action: Practicing Organizational Theory 175

Which New Organizational Structure? 175 The Ethical Dimension #6 175 Making the Connection #6 175 Analyzing the Organization: Design Module #6 175 Assignment 175

Chapter 7 Creating and Managing Organizational Culture 179 What Is Organizational Culture? 179

Differences in Global Values and Norms 182

How Is an Organization’s Culture Transmitted to Its Members? 184 Socialization and Socialization Tactics 184 Stories, Ceremonies, and Organizational Language 187

Where Does Organizational Culture Come From? 189 Characteristics of People within the Organization 189 Organizational Ethics 191 Property Rights 193 Organizational Structure 196

Can Organizational Culture Be Managed? 197 Social Responsibility 199

Approaches to Social Responsibility 199 Why Be Socially Responsible? 200

Summary 202 • Discussion Questions 203 • Organizational Theory in Action: Practicing Organizational Theory 203

Developing a Service Culture 203 The Ethical Dimension #7 203

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Making the Connection #7 204 Analyzing the Organization: Design Module #7 204 Assignment 204

Chapter 8 Organizational Design and Strategy in a Changing Global Environment 207 Strategy and the Environment 207

Sources of Core Competences 208 Global Expansion and Core Competences 210 Four Levels of Strategy 211

Functional-Level Strategy 213 Strategies to Lower Costs or Differentiate Products 213 Functional-Level Strategy and Structure 215 Functional-Level Strategy and Culture 216

Business-Level Strategy 217 Strategies to Lower Costs or Differentiate Products 218 Focus Strategy 219 Business-Level Strategy and Structure 219 Business-Level Strategy and Culture 222

Corporate-Level Strategy 224 Vertical Integration 225 Related Diversification 226 Unrelated Diversification 226 Corporate-Level Strategy and Structure 227 Corporate-Level Strategy and Culture 229

Implementing Strategy across Countries 230 Implementing a Multidomestic Strategy 232 Implementing International Strategy 232 Implementing Global Strategy 233 Implementing Transnational Strategy 234

Summary 235 • Discussion Questions 236 • Organizational Theory in Action: Practicing Organizational Theory 236

What Kind of Supermarket? 236 The Ethical Dimension #8 236 Making the Connection #8 236 Analyzing the Organization: Design Module #8 237 Assignment 237

Chapter 9 Organizational Design, Competences, and Technology 240 What Is Technology? 240 Technology and Organizational Effectiveness 242 Technical Complexity: The Theory of Joan Woodward 244

Small-Batch and Unit Technology 244 Large-Batch and Mass Production Technology 247 Continuous-Process Technology 248 Technical Complexity and Organizational Structure 248 The Technological Imperative 250

Routine Tasks and Complex Tasks: The Theory of Charles Perrow 250 Task Variability and Task Analyzability 251 Four Types of Technology 252 Routine Technology and Organizational Structure 253 Nonroutine Technology and Organizational Structure 255

Task Interdependence: The Theory of James D. Thompson 255 Mediating Technology and Pooled Interdependence 256 Long-Linked Technology and Sequential Interdependence 258 Intensive Technology and Reciprocal Interdependence 259

CONTENTS xi

From Mass Production to Advanced Manufacturing Technology 261 Advanced Manufacturing Technology: Innovations in Materials Technology 263

Computer-Aided Design 264 Computer-Aided Materials Management 264 Just-in-Time Inventory Systems 265 Flexible Manufacturing Technology and Computer-Integrated Manufacturing 266

Summary 267 • Discussion Questions 268 • Organizational Theory in Action: Practicing Organizational Theory 268

Choosing a Technology 268 The Ethical Dimension #9 269 Making the Connection #9 269 Analyzing the Organization: Design Module #9 269 Assignment 269

Part 3 Organizational Change 273

Chapter 10 Types and Forms of Organizational Change 273 What Is Organizational Change? 273

Targets of Change 274

Forces for and Resistance to Organizational Change 275 Forces for Change 275 Resistances to Change 278 Organization-Level Resistance to Change 278 Group-Level Resistance to Change 279 Individual-Level Resistance to Change 280 Lewin’s Force-Field Theory of Change 280

Evolutionary and Revolutionary Change in Organizations 281 Developments in Evolutionary Change: Sociotechnical Systems Theory 281 Total Quality Management 282 Flexible Workers and Flexible Work Teams 285 Developments in Revolutionary Change: Reengineering 285 E-Engineering 290 Restructuring 290 Innovation 291

Managing Change: Action Research 291 Diagnosing the Organization 292 Determining the Desired Future State 292 Implementing Action 293 Evaluating the Action 294 Institutionalizing Action Research 294

Organizational Development 295 OD Techniques to Deal with Resistance to Change 295 OD Techniques to Promote Change 297

Summary 299 • Discussion Questions 300 • Organizational Theory in Action: Practicing Organizational Theory 300

Managing Change 300 Making the Connection #10 301 The Ethical Dimension #10 301 Analyzing the Organization: Design Module #10 301

Chapter 11 Organizational Transformations: Birth, Growth, Decline, and Death 305 The Organizational Life Cycle 305 Organizational Birth 306

Developing a Plan for a New Business 307

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A Population Ecology Model of Organizational Birth 309 Number of Births 310 Survival Strategies 311 The Process of Natural Selection 312

The Institutional Theory of Organizational Growth 314 Organizational Isomorphism 315 Disadvantages of Isomorphism 316

Greiner’s Model of Organizational Growth 316 Stage 1: Growth through Creativity 317 Stage 2: Growth through Direction 318 Stage 3: Growth through Delegation 318 Stage 4: Growth through Coordination 319 Stage 5: Growth through Collaboration 320

Organizational Decline and Death 321 Effectiveness and Profitability 321 Organizational Inertia 323 Changes in the Environment 324 Weitzel and Jonsson’s Model of Organizational Decline 325

Summary 328 • Discussion Questions 329 • Organizational Theory in Action: Practicing Organizational Theory 329

Growing Pains 329 Making the Connection #11 329 The Ethical Dimension #11 329 Analyzing the Organization: Design Module #11 330 Assignment 330

Chapter 12 Decision Making, Learning, Knowledge Management, and Information Technology 334 Organizational Decision Making 334 Models of Organizational Decision Making 335

The Rational Model 335 The Carnegie Model 337 The Incrementalist Model 339 The Unstructured Model 339 The Garbage-Can Model 340 The Nature of Organizational Learning 342 Types of Organizational Learning 342 Levels of Organizational Learning 343

Knowledge Management and Information Technology 347 Factors Affecting Organizational Learning 349

Organizational Learning and Cognitive Structures 350 Types of Cognitive Biases 350 Cognitive Dissonance 350 Illusion of Control 351 Frequency and Representativeness 351 Projection and Ego-Defensiveness 352 Escalation of Commitment 352

Improving Decision Making and Learning 353 Strategies for Organizational Learning 353 Using Game Theory 354 Nature of the Top-Management Team 356 Devil’s Advocacy and Dialectical Inquiry 357 Collateral Organizational Structure 358

Summary 359 • Discussion Questions 360 • Organizational Theory in Action: Practicing Organizational Theory 360

CONTENTS xiii

Store Learning 360 Making the Connection #12 360 The Ethical Dimension #12 360 Analyzing the Organization: Design Module #12 360 Assignment 361

Chapter 13 Innovation, Intrapreneurship, and Creativity 366 Innovation and Technological Change 366

Two Types of Innovation 366 Protecting Innovation through Property Rights 368

Innovation, Intrapreneurship, and Creativity 370 Entrepreneurship as “Creative Destruction” 371 Innovation and the Product Life Cycle 372

Managing the Innovation Process 374 Project Management 374 Stage-Gate Development Funnel 376 Using Cross-Functional Teams and a Product Team Structure 377 Team Leadership 379 Skunk Works and New Venture Divisions 380 Joint Ventures 381 Creating a Culture for Innovation 381

Innovation and Information Technology 383 Innovation and Information Synergies 384

IT and Organizational Structure and Culture 385 Summary 386 • Discussion Questions 387 • Organizational Theory in Action: Practicing Organizational Theory 387

Managing Innovation 387 The Ethical Dimension #13 387 Making the Connection #13 388 Analyzing the Organization: Design Module #13 388

Chapter 14 Managing Conflict, Power, and Politics 391 What Is Organizational Conflict? 391 Pondy’s Model of Organizational Conflict 394

Stage 1: Latent Conflict 394 Stage 2: Perceived Conflict 396 Stage 3: Felt Conflict 397 Stage 4: Manifest Conflict 397 Stage 5: Conflict Aftermath 398

Managing Conflict: Conflict Resolution Strategies 399 Acting at the Level of Structure 399 Acting at the Level of Attitudes and Individuals 400

What Is Organizational Power? 401 Sources of Organizational Power 402

Authority 402 Control over Resources 403 Control over Information 404 Nonsubstitutability 404 Centrality 405 Control over Uncertainty 406 Unobtrusive Power: Controlling the Premises of Decision Making 406

Using Power: Organizational Politics 407 Tactics for Playing Politics 407 The Costs and Benefits of Organizational Politics 409

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Summary 412 • Discussion Questions 412 • Organizational Theory in Action: Practicing Organizational Theory 413

Managing Conflict 413 The Ethical Dimension #14 413 Making the Connection #14 413 Analyzing the Organization: Design Module #14 413 Assignment 413

Case Studies 417 Supplemental Case Map 417 Case 1 United Products, Inc. 419

Jeffrey C. Shuman

Case 2 The Paradoxical Twins: Acme and Omega Electronics 428 John F. Veiga

Case 3 How SAP’s Business Model and Strategies Made It the Global Business Software Leader 431 Gareth R. Jones

Case 4 The Scaffold Plank Incident 439 Stewart C. Malone and Brad Brown

Case 5 Beer and Wine Industries: Bartles & Jaymes 441 Per V. Jenster

Case 6 Bennett’s Machine Shop, Inc. 447 Arthur Sharplin

Case 7 Southwest Airlines 459 Case 8 The Rise and Fall of Eastman Kodak: How Long Will It Survive Beyond

2011? 463 Gareth R. Jones

Case 9 Philips NV 474 Charles W. L. Hill

Case 10 “Ramrod” Stockwell 476 Charles Perrow

Company Index 480 Name Index 483 Subject Index 485

CONTENTS xv

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Preface

In the seventh edition of Organizational Theory, Design, and Change, I have kept to my theme of providing students with the most contemporary and up-to-date account of how the changing environment affects the way managers design and change organizational structure to increase organizational effectiveness. In revising my book, I have continued to focus on making the text relevant and interesting to students so it engages and encour- ages them to make the effort necessary to assimilate the text material—material being used every day by managers and consultants who are working to improve organizational performance. I have continued to mirror the changes taking place in the way organiza- tions deal with their environments, such as the increasing use of outsourcing and the use of information technology, by incorporating recent developments in organizational the- ory and research into the text. Also, I have worked to provide vivid, current examples of the way managers of companies large and small have responded to such changes.

New to This Edition ! Over 65% of the in-chapter boxes and 90% of the closing cases are new and the rest

have been updated. ! New material on the changing nature of problems involved in managing functional,

product, and divisional structures and ways IT can be used to improve their performance.

! New material on the strategy–structure relationship, and new coverage about the reasons companies need to continuously examine and change their global strategies and structures.

! New material on online software development and craftswork technology and its importance in the growing services area.

! Expanded discussion of how to manage technology to create successful virtual orga- nizational structures, such as those used by Accenture and PeopleSoft.

! A major focus is the recent ongoing changes in the mobile computing, smartphone, and software applications and the consequent effects on the changes in the competi- tive environment and the way companies have been changing their structures and control systems to manage these issues.

! Increased coverage of ethical issues involved in the stakeholder approach to organi- zations and their implications for organizational effectiveness, such as new “green” environmental coverage, and new coverage of disasters such as the BP oil spill, ethics in health care, and fraud in disguising the quality and price of goods and services.

! Explanations of the most recent developments in organizational structure, such as the product team structure, outsourcing, and network organizations because of advancements in IT.

The number and complexity of the strategic and organizational challenges confronting managers because of the changing global environment has continued to increase in the 2000s. In most companies, managers at all levels are playing catch-up as they work toward meeting these challenges by implementing new forms of organizational structure and by changing their existing structures, using the techniques and practices described in this book. Today, relatively small differences in performance between companies—the speed at which they can bring new products to market, for example, or in the way they choose to motivate their employees to find ways to increase effectiveness—can give one organiza- tion a significant competitive advantage over another. Managers and companies that use

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established organizational theory and design principles to change the way they operate can increase their effectiveness over time.

This is clearly evident by the way companies are continuously changing and reorgan- izing how they operate—at the functional, divisional, organizational, and global levels— to better compete and manage the ever-changing environment in the 2010s. Of course, the recession that began in the later 2000s, as well as continuously changing technological and economic conditions, offer new opportunities for agile companies that can adapt to meet these challenges while threatening the survival of those that cannot. Nowhere is this clearer than in the developing markets for mobile computing devices such as smart- phones and tablet computers, where the performance of some companies like Apple and Samsung have soared, while those of others such as Motorola, Blackberry, and Dell have plunged.

Across all functions and levels, managers and employees must continuously search out ways to change organizational design to “work smarter” and increase performance. The challenges facing managers continue to mount as changing global forces such as in- creasing global outsourcing, rising commodity prices, and the emergence of new low-cost overseas competitors impact organizations large and small. Moreover, the revolution in information technology (IT) has transformed the way managers make decisions across all levels of an organization’s hierarchy and across all of its functions and global divisions— and the rate of change in IT is accelerating.

The accelerated change in IT is changing the way organizations operate from top to bottom, a theme that has been extended and updated in the seventh edition. In today’s world of video downloading, streaming media, text messaging, and tweeting without the use of any one type of mobile computing device, there is a need to understand how this affects organizational structure. The new edition offers up-to-date coverage of these issues throughout, peppered with examples that highlight the significant ways that ad- vances in IT affect organizational decision making, change, and structure. For example, one issue covered in more depth is the pros and cons of global outsourcing and the new organizational problems that emerge when thousands of functional jobs in IT, customer service, and manufacturing are now being performed in countries overseas.

Encouraged by the increasing number of instructors and students who are using Organizational Theory with each new edition, and based on the reactions and sugges- tions of both users and reviewers, I have revised and updated the text in the following ways. First, just as pertinent new research concepts have been added to each chapter, outdated ideas and concepts have been omitted. As usual, my goal is to streamline the text content so students can avoid having to assimilate excessive material. Second, I am happy that the current content and arrangement of the chapters continues to be favor- ably received by its users. The organization of the book offers instructors many more hands-on ways in which they can help students to appreciate the power that people have over organizations to increase their effectiveness. As one student from New York City informed me in an email, “The book has given me a new vocabulary to understand the organization I work for and provided the conceptual tools needed to analyze and change it.”

By bringing a discussion of organizational change and renewal to the center stage of organizational theory and design, this book stands alone. The organizational theory con- cepts the text describes are the same ones that firms of management consultants, chief operating officers, and the increasing number of managers responsible for organizational design and change use as they perform their roles and jobs.

Seventh Edition Content The organization of the chapters in this edition is unchanged. Many textbooks lack a tight, integrated flow of topics from chapter to chapter. In this book, students will see be- ginning in Chapter 1 how the book’s topics are related to one another. Integration has been achieved by organizing the material so that each chapter builds on the material of the previous chapters in a logical fashion. I also accomplish integration by focusing on one company, Amazon.com, and in several of the book’s chapters I use boxed examples

xviii PREFACE

of this company, all of which have been updated, to illustrate organizational design and change issues.

Chapter 2, “Stakeholders, Managers, and Ethics,” has proved to be popular, high- lighting as it does the ethical issues that confront managers who seek to serve the inter- ests of multiple stakeholders. I have expanded coverage of ethical issues in this edition in many chapters, offering more discussion and examples of all kinds of organizations— for-profit and nonprofit—that have benefited by the increased use of control systems to monitor their managers and their decision making. “The Ethical Dimension” exercise added to the “Organizational Theory in Action” section at the end of each chapter has also proved to be popular. Today, as corporate scandals proliferate, particularly insider trading and organizations created to defraud customers in the 2010s, it is important to ask students to think about and debate the ethical issues involved in organizational de- sign and change.