Multidomestic corporations reflect the ________

Richard L. Daft VANDERBILT UNIVERSITY

Organization Theory and Design

TENTH EDITION

Organization Theory and Design, Tenth Edition

Richard L. Daft

With the Assistance of Patricia G. Lane

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Richard L. Daft, Ph.D., is the Brownlee O. Currey, Jr., Professor of Management in the Owen Graduate School of Management at Vanderbilt University. Professor Daft specializes in the study of organization theory and leadership. Professor Daft is a Fellow of the Academy of Management and has served on the editorial boards of Academy of Management Journal, Administrative Science Quarterly, and Journal of Management Education. He was the Associate Editor-in-Chief of Organization Science and served for three years as associate editor of Administrative Science Quarterly.

Professor Daft has authored or co-authored twelve books, including Management (Cengage/South-Western, 2010), The Leadership Experience (Cengage/South- Western, 2008), and What to Study: Generating and Developing Research Questions (Sage, 1982). He also published Fusion Leadership: Unlocking the Subtle Forces That Change People and Organizations (Berrett-Koehler, 2000, with Robert Lengel). He has authored dozens of scholarly articles, papers, and chapters. His work has been published in Administrative Science Quarterly, Academy of Management Journal, Academy of Management Review, Organizational Dynamics, Strategic Management Journal, Journal of Management, Accounting Organizations and Society, Management Science, MIS Quarterly, California Management Review, and Organizational Behavior Teaching Review. Professor Daft has been awarded several government research grants to pursue studies of organization design, orga- nizational innovation and change, strategy implementation, and organizational information processing.

Professor Daft is also an active teacher and consultant. He has taught man- agement, leadership, organizational change, organizational theory, and organiza- tional behavior. He has been involved in management development and consulting for many companies and government organizations, including Allstate Insurance, American Banking Association, Bell Canada, Bridgestone, National Transportation Research Board, NL Baroid, Nortel, TVA, Pratt & Whitney, State Farm Insurance, Tenneco, Tennessee Emergency Pediatric Services, the United States Air Force, the United States Army, J. C. Bradford & Co., Central Parking System, USAA, United Methodist Church, Entergy Sales and Service, Bristol-Myers Squibb, First American National Bank, and the Vanderbilt University Medical Center.

About the Author

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Part 1: Introduction to Organizations 1 1. Organizations and Organization Theory 2

Part 2: Organizational Purpose and Structural Design 55 2. Strategy, Organization Design, and Effectiveness 56 3. Fundamentals of Organization Structure 88

Part 3: Open System Design Elements 137 4. The External Environment 138 5. Interorganizational Relationships 174 6. Designing Organizations for the International Environment 208

Part 4: Internal Design Elements 251 7. Manufacturing and Service Technologies 252 8. Using IT for Coordination and Control 294 9. Organization Size, Life Cycle, and Decline 332

Part 5: Managing Dynamic Processes 371 10. Organizational Culture and Ethical Values 372 11. Innovation and Change 410 12. Decision-Making Processes 450 13. Conflict, Power, and Politics 371

Integrative Cases 529 1.0 Rondell Data Corporation 531 2.0 It Isn’t So Simple: Infrastructure Change at Royce Consulting 539 3.0 Custom Chip, Inc. 544 4.0 “Ramrod” Stockwell 551 5.0 W. L. Gore & Associates, Inc. Entering 1998 554 6.0 Dick Spencer 569 7.0 The Plaza Inn 574 8.0 Dowling Flexible Metals 578 9.0 The Donor Services Department 582 10.0 Empire Plastics 586

Brief Contents

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vi Brief Contents

11.1 Littleton Manufacturing (A) 589 11.2 Littleton Manufacturing (B) 601 12.0 Hartland Memorial Hospital (A): An Inbox Exercise 603

Glossary 613 Name Index 623 Corporate Name Index 634 Subject Index 639

vii

Contents

Chapter 1: Organizations and Organization Theory 2 Organization Theory in Action 6

Topics, 6 • Current Challenges, 7 • Purpose of This Chapter, 10

What is an Organization? 10

Definition, 11 • From Multinationals to Nonprofits, 11 • Importance of Organizations, 12

BookMark 1.0: The Company: A Short History of a Revolutionary Idea 13

Dimensions of Organization Design 14

Structural Dimensions, 15 • Contextual Dimensions, 17

In Practice: Ternary Software Inc. 18

Performance and Effectiveness Outcomes, 20

In Practice: Federal Bureau of Investigation 22

The Evolution of Organization Theory and Design 22

Historical Perspectives, 23

How Do You Fit the Design? Evolution of Style 24

Don’t Forget the Environment, 26

Organizational Configuration 26

Mintzberg’s Organizational Types, 26 • Contemporary Design Ideas, 30

Efficient Performance versus the Learning Organization 30

From Vertical to Horizontal Structure, 31 • From Routine Tasks to Empowered Roles, 31 • From Formal Control Systems to Shared Information, 33 • From Competitive to Collaborative Strategy, 33 • From Rigid to Adaptive Culture, 33

In Practice: Cementos Mexicanos 34

Framework for the Book 35

Levels of Analysis, 35 • Plan of the Book, 37 • Plan of Each Chapter, 37

Design Essentials 39

Chapter 1 Workbook: Measuring Dimensions of Organizations 40

Case for Analysis: Perdue Farms Inc.: Responding to 21st Century Challenges 41

Part 1: Introduction to Organizations 1

Part 2: Organizational Purpose and Structural Design 55

Chapter 2: Strategy, Organization Design, and Effectiveness 56

Purpose of This Chapter, 57

The Role of Strategic Direction in Organization Design 58

Organizational Purpose 60

Strategic Intent, 60

In Practice: Walgreens 61

Operative Goals, 62 • The Importance of Goals, 64B

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viii Contents

A Framework for Selecting Strategy and Design 65

Porter’s Competitive Forces and Strategies, 65

How Do You Fit the Design? Your Strategy/ Performance Strength 66

In Practice: Apple 68

Miles and Snow’s Strategy Typology, 70

BookMark 2.0: The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It) 71

How Strategies Affect Organization Design, 72 • Other Factors Affecting Organization Design, 73

Assessing Organizational Effectiveness 74

Traditional Effectiveness Approaches 75

Goal Indicators, 75 • Resource-based Indicators, 76 • Internal Process Indicators, 77

The Balanced Scorecard Approach to Effectiveness 77

Design Essentials 79

Chapter 2 Workbook: Identifying Company Strategies and Effectiveness Criteria 81

Case for Analysis: The University Art Museum 81 Case for Analysis: Airstar Inc. 84 Chapter 2 Workshop: The Balanced Scorecard

and Organizational Effectiveness 85

Chapter 3: Fundamentals of Organization Structure 88

Purpose of This Chapter, 90

Organization Structure 90

BookMark 3.0: The Future of Management 92

Information-Sharing Perspective on Structure 92

In Practice: Textron Inc. 94

Vertical Information Sharing, 94 • Horizontal Information Sharing, 95

How Do You Fit the Design? The Pleasure/Pain of Working on a Team 100

Organization Design Alternatives 101

Required Work Activities, 101 • Reporting Relationships, 102 • Departmental Grouping Options, 102

Functional, Divisional, and Geographic Designs 104

Functional Structure, 104

In Practice: Blue Bell Creameries, Inc. 105

Functional Structure with Horizontal Linkages, 105 • Divisional Structure, 106 • Geographic Structure, 109

Matrix Structure 110

Conditions for the Matrix, 110 • Strengths and Weaknesses, 112

In Practice: Englander Steel 113

Horizontal Structure 115

Characteristics, 116

In Practice: GE Salisbury 117

Strengths and Weaknesses, 118

Virtual Networks and Outsourcing 119

How the Structure Works, 120

In Practice: TiVo Inc. 120

Strengths and Weaknesses, 121

Hybrid Structure 122

Applications of Structural Design 123

Structural Alignment, 125 • Symptoms of Structural Deficiency, 125

Design Essentials 127

Chapter 3 Workbook: You and Organization Structure 128

Case for Analysis: C & C Grocery Stores Inc. 129 Case for Analysis: Aquarius Advertising Agency 132

Part 3: Open System Design Elements 137

Chapter 4: The External Environment 138

Purpose of This Chapter, 140

The Organization’s Environment 140

Task Environment, 140 • General Environment, 142 • International Environment, 143

In Practice: Univision 144

The Changing Environment 144

Simple–Complex Dimension, 145 • Stable–Unstable Dimension, 146

BookMark 4.0: Confronting Reality: Doing What Matters to Get Things Right 146

Framework, 147

Contents ix

Adapting to a Changing Environment 149

Adding Positions and Departments, 149

In Practice: Wal-Mart 149

Building Relationships, 150 • Differentiation and Integration, 152 • Organic versus Mechanistic Management Processes, 153 • Planning, Forecasting, and Responsiveness, 155

How Do You Fit the Design? Mind and Environment 155

Framework for Responses to Environmental Change 156

Dependence on External Resources 158

Influencing External Resources 158

Establishing Formal Relationships, 159

In Practice: AT&T 160

Influencing Key Sectors, 162

In Practice: eBay 163

Organization–Environment Integrative Framework, 164

Design Essentials 165

Chapter 4 Workbook: Organizations You Rely On 167 Case for Analysis: The Paradoxical Twins: Acme

and Omega Electronics 168

Chapter 5: Interorganizational Relationships 174

Purpose of This Chapter, 176

Organizational Ecosystems 176

Is Competition Dead?, 177

In Practice: Sony Corporation and Samsung Electronics Company 177

The Changing Role of Management, 179 • Interorganizational Framework, 180

Resource Dependence 181

Supply Chain Relationships, 181 • Power Implications, 182

In Practice: Amazon.com 183

Collaborative Networks 183

Why Collaboration?, 183

How Do You Fit the Design? Personal Networking 184

From Adversaries to Partners, 185

BookMark 5.0: Managing Strategic Relationships: The Key to Business Success 187

Population Ecology 188

Organizational Form and Niche, 189 • Process of Ecological Change, 189

In Practice: Axiom Global Inc. 190

Strategies for Survival, 191

Institutionalism 192

The Institutional View and Organization Design, 193 • Institutional Similarity, 194

Design Essentials 197

Chapter 5 Workbook: Management Fads 199 Case for Analysis: Oxford Plastics Company 199 Case for Analysis: Hugh Russel, Inc. 200 Chapter 5 Workshop: Ugli Orange Case 203

Chapter 6: Designing Organizations for the International Environment 208

Purpose of This Chapter, 210

Entering the Global Arena 210

Motivations for Global Expansion, 211

BookMark 6.0: The World Is Flat: A Brief History of the Twenty-First Century 211

Stages of International Development, 214 • Global Expansion through International Strategic Alliances, 215

Designing Structure to Fit Global Strategy 216

Model for Global versus Local Opportunities, 216 • International Division, 219 • Global Product Division Structure, 220 • Global Geographic Division Structure, 221

In Practice: Colgate-Palmolive Company 222

Global Matrix Structure, 223

In Practice: Asea Brown Boveri Ltd. (ABB) 224

Building Global Capabilities 225

The Global Organizational Challenge, 226

In Practice: IBM 228

Global Coordination Mechanisms, 230

Cultural Differences in Coordination and Control 233

National Value Systems, 233

How Do You Fit the Design? Are You Ready to Fill an International Role? 234

Three National Approaches to Coordination and Control, 235

The Transnational Model of Organization 237

Design Essentials 240

Chapter 6 Workbook: Made in the U.S.A.? 242 Case for Analysis: TopDog Software 242 Case for Analysis: Rhodes Industries 243 Chapter 6 Workshop: Comparing Cultures 246

x Contents

Part 4: Internal Design Elements 251

Chapter 7: Manufacturing and Service Technologies 252

Purpose of This Chapter, 255

Core Organization Manufacturing Technology 256

Manufacturing Firms, 256 • Strategy, Technology, and Performance, 258

In Practice: Printronix 259

BookMark 7.0: Inviting Disaster: Lessons from the Edge of Technology 260

Contemporary Applications 261

Flexible Manufacturing Systems, 261 • Lean Manufacturing, 263

In Practice: Matsushita Electric Industrial Company 263

Performance and Structural Implications, 264

Core Organization Service Technology 266

Service Firms, 267

How Do You Fit the Design? Manufacturing vs. Service 269

Designing the Service Organization, 270

In Practice: Home Depot Inc. 271

Non-Core Departmental Technology 272

Variety, 272 • Analyzability, 272 • Framework, 273

Department Design 275

Workflow Interdependence Among Departments 277

Types, 277

In Practice: Great Ormond Street Hospital for Children 279

Structural Priority, 280 • Structural Implications, 280

In Practice: Athletic Teams 281

Impact of Technology on Job Design 282

Job Design, 282 • Sociotechnical Systems, 283

Design Essentials 285

Chapter 7 Workbook: Bistro Technology 287 Case for Analysis: Acetate Department 288

Chapter 8: Using IT for Coordination and Control 294

Purpose of This Chapter, 296

Information Technology Evolution 296

Information for Decision Making and Control 298

Organizational Decision-Making Systems, 298 • Feedback Control Model, 299 • Management Control Systems, 300

How Do You Fit the Design? Is Goal-Setting Your Style? 301

In Practice: eBay 302

The Level and Focus of Control Systems 305

Organization Level: The Balanced Scorecard, 305

BookMark 8.0: Five Key Principles of Corporate Performance Management 306

Department Level: Behavior versus Outcome Control, 308

In Practice: Best Buy 310

Adding Strategic Value: Strengthening Internal Coordination 311

Intranets, 311 • Web 2.0 Tools, 312 • Knowledge Management, 312

In Practice: ExactTarget Inc. 314

Enterprise Resource Planning, 314

Adding Strategic Value: Strengthening External Coordination 315

The Integrated Enterprise, 315

In Practice: Corrugated Supplies 316

Customer Relationships, 318

E-Business Organization Design 319

In-House Division, 319 • Spin-Off, 319 • Strategic Partnership, 320

It Impact on Organization Design 321

Design Essentials 323

Chapter 8 Workbook: Balanced Scorecard Exercise 325

Case for Analysis: Century Medical 327 Case for Analysis: Product X 328

Chapter 9: Organization Size, Life Cycle, and Decline 332

Purpose of This Chapter, 334

Organization Size: Is Bigger Better? 334

Pressures for Growth, 334

BookMark 9.0: Small Giants: Companies That Choose to Be Great Instead of Big 335

Dilemmas of Large Size, 336

How Do You Fit the Design? What Size Organization for You? 338

Contents xi

Organizational Life Cycle 340

Stages of Life Cycle Development, 340

In Practice: Amazon 343

Organizational Characteristics during the Life Cycle, 344

Organizational Size, Bureaucracy, and Control 345

What Is Bureaucracy?, 346

In Practice: United Parcel Service (UPS) 347

Size and Structural Control, 348

Bureaucracy in a Changing World 349

Organizing Temporary Systems, 350

In Practice: The Salvation Army 351

Other Approaches to Busting Bureaucracy, 351

Bureaucracy versus other Forms of Control 352

Bureaucratic Control, 353 • Market Control, 354 • Clan Control, 354

In Practice: Southwest Airlines 355

Organizational Decline and Downsizing 356

Definition and Causes, 357 • A Model of Decline Stages, 358

In Practice: Herman Miller 359

Downsizing Implementation, 360

Design Essentials 362

Chapter 9 Workbook: Control Mechanisms 363 Case for Analysis: Sunflower Incorporated 364 Chapter 9 Workshop: Windsock Inc. 365

Part 5: Managing Dynamic Processes 371

Chapter 10: Organizational Culture and Ethical Values 372

Purpose of This Chapter, 374

Organizational Culture 374

What Is Culture?, 374 • Emergence and Purpose of Culture, 376

BookMark 10.0: Good to Great: Why Some Companies Make the Leap . . . And Others Don’t 376

Interpreting Culture, 377

Organization Design and Culture 381

The Adaptability Culture, 382

In Practice: Google 382

The Mission Culture, 383 • The Clan Culture, 384 • The Bureaucratic Culture, 384

How Do You Fit the Design? Corporate Culture Preference 385

Culture Strength and Organizational Subcultures, 385

In Practice: Pitney Bowes Credit Corporation 386

Organizational Culture, Learning, and Performance 387

In Practice: Genentech 388

Ethical Values and Social Responsibility 389

Sources of Individual Ethical Principles, 389 • Managerial Ethics, 390 • Corporate Social Responsibility, 392 • Does It Pay to Be Good?, 392

How Leaders Shape Culture and Ethics 393

Values-Based Leadership, 394 • Formal Structure and Systems, 395

Corporate Culture and Ethics in a Global Environment 398

Design Essentials 399

Chapter 10 Workbook: Shop ’til You Drop: Corporate Culture in the Retail World 401

Case for Analysis: Implementing Change at National Industrial Products 402

Case for Analysis: Does This Milkshake Taste Funny? 404 Chapter 10 Workshop: The Power of Ethics 406

Chapter 11: Innovation and Change 410 Purpose of This Chapter, 411

The Strategic Role of Change 412

Innovate or Perish, 412 • Strategic Types of Change, 413

Elements for Successful Change 415

Technology Change 417

How Do You Fit the Design? Are You Innovative? 418

The Ambidextrous Approach, 418 • Techniques for Encouraging Technology Change, 419

BookMark 11.0: Innovation: The Five Disciplines for Creating What Customers Want 422

New Products and Services 423

New Product Success Rate, 423 • Reasons for New Product Success, 424 • Horizontal Coordination Model, 424

In Practice: Threadless 426

Achieving Competitive Advantage: The Need for Speed, 427

xii Contents

Strategy and Structure Change 428

The Dual-Core Approach, 428 • Organization Design for Implementing Management Change, 429

In Practice: Hewlett-Packard 430

Culture Change 431

Forces for Culture Change, 431 • Organization Development Culture Change Interventions, 432

Strategies for Implementing Change 433

Leadership for Change, 434

In Practice: Memorial Hospital 434

Barriers to Change, 435 • Techniques for Implementation, 436

Design Essentials 438

Chapter 11 Workbook: Innovation Climate 440 Case for Analysis: Shoe Corporation of Illinois 441 Case for Analysis: Southern Discomfort 445

Chapter 12: Decision-Making Processes 450

Purpose of This Chapter, 452

Definitions 452

Individual Decision Making 454

Rational Approach, 454

In Practice: Saskatchewan Consulting 456

Bounded Rationality Perspective, 457

How Do You Fit the Design? Making Important Decisions 459

BookMark 12.0: Blink: The Power of Thinking without Thinking 461

Organizational Decision Making 461

Management Science Approach, 462

In Practice: United Airlines 463

Carnegie Model, 464 • Incremental Decision Model, 466

In Practice: Gillette Company 469

Organizational Decisions and Change 470

Combining the Incremental Process and Carnegie Models, 470 • Garbage Can Model, 470

In Practice: I ♥ Huckabees 474

Contingency Decision-Making Framework 475

Problem Consensus, 475 • Technical Knowledge about Solutions, 476 • Contingency Framework, 476

Special Decision Circumstances 478

High-Velocity Environments, 479 • Decision Mistakes and Learning, 480 • Cognitive Biases, 481 • Overcoming Personal Biases, 482

Design Essentials 483

Chapter 12 Workbook: Decision Styles 485 Case for Analysis: Cracking the Whip 485 Case for Analysis: The Dilemma of Aliesha State

College: Competence versus Need 486

Chapter 13: Conflict, Power, and Politics 490

Purpose of This Chapter, 492

Intergroup Conflict in Organizations 492

Sources of Conflict, 493

In Practice: The Purpose-Driven Church 495

Rational versus Political Model, 496

Power And Organizations 497

Individual versus Organizational Power, 498 • Power versus Authority, 498 • Vertical Sources of Power, 499 • The Power of Empowerment, 503

In Practice: Semco 504

Horizontal Sources of Power, 504

In Practice: University of Illinois 507

In Practice: Carilion Health System 509

Political Processes in Organizations 509

Definition, 510 • When Is Political Activity Used?, 511

Using Power, Politics, and Collaboration 512

How Do You Fit the Design? Political Skills 512

Tactics for Increasing Power, 513

BookMark 13.0: Influence: Science and Practice 514

Political Tactics for Using Power, 515

In Practice: World Bank 517

Tactics for Enhancing Collaboration, 517

Design Essentials 520

Chapter 13 Workbook: How Do You Handle Conflict? 522 Case for Analysis: The Daily Tribune 523 Case for Analysis: Pierre Dux 524

Contents xiii

Integrative Cases 529

1.0 Rondell Data Corporation 531

2.0 It Isn’t So Simple: Infrastructure Change at Royce Consulting 539

3.0 Custom Chip, Inc. 544

4.0 “Ramrod” Stockwell 551

5.0 W. L. Gore & Associates, Inc. Entering 1998 554

6.0 Dick Spencer 569

7.0 The Plaza Inn 574

8.0 Dowling Flexible Metals 578

9.0 The Donor Services Department 582

10.0 Empire Plastics 586

11.1 Littleton Manufacturing (A) 589

11.2 Littleton Manufacturing (B) 601

12.0 Hartland Memorial Hospital (A): An Inbox Exercise 603

Glossary 613

Name Index 623

Corporate Name Index 634

Subject Index 639

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xv

My vision for the Tenth Edition of Organization Theory and Design is to integrate contemporary problems about organization design with classic ideas and theories in a way that is engaging and enjoyable for students. Significant changes in this edition include two new features—“Managing by Design Questions” and “How Do You Fit the Design?”—along with updates to every chapter that incorporate the most recent ideas, new case examples, new book reviews, and new end-of-book integra- tive cases. The research and theories in the field of organization studies are rich and insightful and will help students and managers understand their organizational world and solve real-life problems. My mission is to combine the concepts and mod- els from organizational theory with changing events in the real world to provide the most up-to-date view of organization design available.

DISTINGUISHING FEATURES OF THE TENTH EDITION

Many students in a typical organization theory course do not have extensive work experience, especially at the middle and upper levels, where organization theory is most applicable. Moreover, word from the field is that many students today often do not read the chapter opening examples or boxed examples, preferring instead to focus on chapter content. To engage students in the world of organizations, the Tenth Edition adds two significant features. First, “Managing by Design Questions” start each chapter to engage students in thinking and expressing their beliefs and opinions about organization design concepts. Second, a new in-chapter feature, “How Do You Fit the Design?” engages students in how their personal style and approach will fit into an organization. Other student experiential activities that engage students in applying chapter concepts are new “Book Marks,” new “In Practice” examples, and new integrative cases for student analysis. The total set of features substantially expands and improves the book’s content and accessibility. These multiple pedagogi- cal devices are used to enhance student involvement in text materials.

How Do You Fit the Design? The “How Do You Fit the Design?” feature presents a short questionnaire in each chapter about the student’s own style and prefer- ences to quickly provide feedback about how they fit particular organizations or situations. For example, questionnaire topics include: “What Size Organization for You?” “Are You Ready to Fill an International Role?” “The Pleasure/Pain of Working on a Team,” “How Innovative Are You?” and “How Do You Make

Preface

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xvi Preface

Important Decisions?” These short feedback questionnaires connect the student’s personal preferences to chapter material to heighten interest and show relevance of the concepts.

Managing by Design Questions Each chapter now opens with three short opinion questions that engage students in clarifying their thoughts about upcoming material and concepts. These questions are based on the idea that when students express their opinions first, they are more open to and interested in receiving material rel- evant to the questions. Example questions, which ask students to agree or disagree, include:

The primary role of managers in business organizations is to achieve maximum efficiency.

Managers should use the most objective, rational process possible when making a decision.

If management practices and coordination techniques work well for a company in its home country, they probably will be successful in the company’s international divisions as well.

A certain amount of conflict is good for an organization.

As a follow-up to the three “Managing by Design” questions, each chapter contains three “Assess Your Answer” inserts that allow students to compare their original opinions with the “correct” or most appropriate answers based on chapter concepts. Students learn whether their mental models and beliefs about organiza- tions align with the world of organizations.

Book Marks “Book Marks,” a unique feature of this text, are book reviews that reflect current issues of concern for managers working in real-life organizations. These reviews describe the varied ways companies are dealing with the challenges of today’s changing environment. New “Book Marks” in the Tenth Edition include Five Key Principles of Corporate Performance Management; The World Is Flat: A Brief History of the Twenty-First Century; The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It); The Future of Management; Small Giants: Companies That Choose to Be Great Instead of Big; and Innovation: The Five Disciplines for Creating What Customers Want.

In Practice This edition contains many new “In Practice” examples that illus- trate theoretical concepts in organizational settings. Many examples are interna- tional, and all are based on real organizations. New “In Practice” cases used within chapters include Samsung Electronics, eBay, the Salvation Army, Axiom Global, Univision, Google, Semco, AT&T, the World Bank, Threadless, Carilion Health System, Apple, Matsushita Electric, Herman Miller, and Great Ormand Street Hospital for Children.

Manager’s Briefcase Located in the chapter margins, this feature tells students how to use concepts to analyze cases and manage organizations.

Text Exhibits Frequent exhibits are used to help students visualize organizational relationships, and the artwork has been redone to communicate concepts more clearly.

Preface xvii

Design Essentials This summary and interpretation section tells students how the essential chapter points are important in the broader context of organization theory.

Case for Analysis These cases are tailored to chapter concepts and provide a vehicle for student analysis and discussion.

Integrative Cases The integrative cases at the end of the text have been expanded and positioned to encourage student discussion and involvement. The new cases include Rondell Data Corporation; The Plaza Inn; and Hartland Memorial Hospital (A): An Inbox Exercise. Previous cases that have been retained include Royce Consulting; Custom Chip Inc.; W. L. Gore & Associates; Empire Plastics; and Littleton Manufacturing.

NEW CONCEPTS

Many concepts have been added or expanded in this edition. New material has been added on organizational configuration and Mintzberg’s organization forms; strategic intent, core competence and competitive advantage; Porter’s competitive forces and strategies; using the balanced scorecard to measure effectiveness; using strategy maps; the trend toward outsourcing; supply chain management; intelligence teams; collaborative versus operations management roles; applying Web 2.0 tools for internal and external coordination; behavior versus outcome control; execu- tive dashboards; interpreting and shaping culture through organization structures, control systems, and power systems; corporate social responsibility; values-based leadership; collaborative teams for innovation; prospect theory; groupthink; over- coming cognitive biases in decision making; and the power of empowerment. Many ideas are aimed at helping students learn to design organizations for an environment characterized by uncertainty; a renewed emphasis on innovation; public demands for stronger ethics and social responsibility; and the need for a speedy response to change, crises, or shifting customer expectations. In addition, coping with the com- plexity of today’s global environment is explored thoroughly in Chapter 6.

CHAPTER ORGANIZATION

Each chapter is highly focused and is organized into a logical framework. Many organization theory textbooks treat material in sequential fashion, such as “Here’s View A, Here’s View B, Here’s View C,” and so on. Organization Theory and Design shows how they apply in organizations. Moreover, each chapter sticks to the essential point. Students are not introduced to extraneous material or confusing methodological squabbles that occur among organizational researchers. The body of research in most areas points to a major trend, which is reported here. Several chapters develop a framework that organizes major ideas into an overall scheme.

This book has been extensively tested on students. Feedback from students and faculty members has been used in the revision. The combination of organization theory concepts, book reviews, examples of leading organizations, self-insight ques- tionnaires, case illustrations, experiential exercises, and other teaching devices is designed to meet student learning needs, and students have responded favorably.

xviii Preface

SUPPLEMENTS

Instructor’s Resource Guide (ISBN: 0-324-59912-9) The Instructor’s Resource Guide includes an Instructor’s Manual and Test Bank. The Instructor’s Manual contains chap- ter overviews, chapter outlines, lecture enhancements, discussion questions, discussion of workbook activities, discussion of chapter cases, and case notes for integrative cases. The Test Bank consists of multiple choice, true/false, and essay questions.

PowerPoint Lecture Presentation Available on the Instructor’s Resource CD-ROM and the Web site, the PowerPoint Lecture Presentation enables instructors to custom- ize their own multimedia classroom presentations. Prepared in conjunction with the text and instructor’s resource guide, the package contains approximately 150 slides. It includes figures and tables from the text, as well as outside materials to supplement chapter concepts. Material is organized by chapter and can be modified or expanded for individual classroom use. PowerPoint presentations are also easily printed to create customized transparency masters.

ExamView A computerized version of the Test Bank is available on the Instructor’s Resource CD-ROM. ExamView contains all of the questions in the printed test bank. This program is easy-to-use test creation software. Instructors can add or edit questions, instructions, and answers and can select questions (randomly or numeri- cally) by previewing them on the screen. Instructors can also create and administer quizzes online, whether over the Internet, a local area network (LAN), or a wide area network (WAN).

Instructor’s Resource CD-ROM (ISBN: 0-324-59905-6) Key instructor ancillaries (Instructor’s Manual, Test Bank, ExamView, and PowerPoint slides) are provided on CD-ROM, giving instructors the ultimate tool for customizing lectures and presentations.

WebTutor™ Toolbox WebTutor is an interactive, Web-based student supplement on WebCT and/or BlackBoard that harnesses the power of the Internet to deliver innovative learning aids that actively engage students. The instructor can incorporate WebTutor as an integral part of the course, or the students can use it on their own as a study guide.

Web Site (www.cengage.com/management/daft) The Daft Web site is a comprehensive, resource-rich location for both instructors and students to find pertinent information. The Instructor Resources section contains an Instructor’s Manual download, Test Bank download, and PowerPoint download.

Premium Web Site (www.cengage.com/login) This new optional Premium Web site features text-specific resources that enhance student learning by bringing con- cepts to life. Dynamic interactive learning tools include online quizzes, flashcards, PowerPoint slides, learning games, and more.

Video/DVD (ISBN: 0-324-59906-4) This DVD includes video segments related to organization design concepts. They’re designed to visually reinforce key concepts.

Experiential Exercises in Organization Theory and Design, Second Edition By H. Eugene Baker III and Steven K. Paulson of the University of North Florida.

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Preface xix

Tailored to the table of contents in Daft’s Organization Theory and Design, Tenth Edition, the core purpose of Experiential Exercises in Organization Theory and Design is to provide courses in organizational theory with a set of classroom exercises that will help students better understand and internalize the basic princi- ples of the course. The chapters of the book cover the most basic and widely covered concepts in the field. Each chapter focuses on a central topic, such as organizational power, production technology, or organizational culture, and provides all necessary materials to fully participate in three different exercises. Some exercises are intended to be completed by individuals, others in groups, and still others can be used either way. The exercises range from instrumentation-based and assessment question- naires to actual creative production activities.

ACKNOWLEDGMENTS

Textbook writing is a team enterprise. The Tenth Edition has integrated ideas and hard work from many people to whom I am grateful. Reviewers and focus group participants made an especially important contribution. They praised many features, were critical of things that didn’t work well, and offered valuable suggestions.

David Ackerman University of Alaska, Southeast

Michael Bourke Houston Baptist University

Suzanne Clinton Cameron University

Jo Anne Duffy Sam Houston State University

Cheryl Duvall Mercer University

Patricia Feltes Missouri State University

Robert Girling Sonoma State University

John A. Gould University of Maryland

Ralph Hanke Pennsylvania State University

Bruce J. Hanson Pepperdine University

Guiseppe Labianca Tulane University

Jane Lemaster University of Texas–Pan American

Steven Maranville University of Saint Thomas

Rick Martinez Baylor University

Janet Near Indiana University

Julie Newcomer Texas Woman’s University

Asbjorn Osland George Fox University

Laynie Pizzolatto Nicholls State University

Samantha Rice Abilene Christian University

Richard Saaverda University of Michigan

W. Robert Sampson University of Wisconsin, Eau Claire

Amy Sevier University of Southern Mississippi

W. Scott Sherman Pepperdine University

Thomas Terrell Coppin State College

Jack Tucci Southeastern Louisiana University

Judith White Santa Clara University

Jan Zahrly University of North Dakota

xx Preface

Among my professional colleagues, I am grateful to my friends and colleagues at Vanderbilt’s Owen School—Bruce Barry, Ray Friedman, Neta Moye, Rich Oliver, David Owens, Ranga Ramanujam, and Bart Victor—for their intellectual stimula- tion and feedback. I also owe a special debt to Dean Jim Bradford and Associate Deans Bill Christie and Dawn Iocabucci for providing the time and resources for me to stay current on the organization design literature and develop the revisions for the text.

I want to extend special thanks to my editorial associate, Pat Lane. She skill- fully wrote materials on a variety of topics and special features, found resources, and did an outstanding job with the copyedited manuscript and page proofs. Pat’s personal enthusiasm and care for the content of this text enabled the Tenth Edition to continue its high level of excellence.

The team at South-Western also deserves special mention. Joe Sabatino did a great job of designing the project and offering ideas for improvement. Erin Guendelsberger and Emma Guttler were superb to work with during their respective turns as Developmental Editor, keeping the people and project on schedule while solving problems creatively and quickly. Colleen Farmer, Senior Content Project Manager, provided superb project coordination and used her creativity and man- agement skills to facilitate the book’s on-time completion. Clint Kernen, Marketing Manager, provided additional support, creativity, and valuable market expertise.

Finally, I want to acknowledge the love and contributions of my wife, Dorothy Marcic. Dorothy has been very supportive of my textbook projects and has created an environment in which we can grow together. She helped the book take a giant step forward with her creation of the Workbook and Workshop student exercises. I also want to acknowledge the love and support of my daughters, Danielle, Amy, Roxanne, Solange, and Elizabeth, who make my life special during our precious time together.

Richard L. Daft

Nashville, Tennessee

March 2009

Introduction to Organizations

Chapter 1

Organizations and

Organization Theory

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Organizations and Organization

Theory

Organization Theory in Action Topics • Current Challenges • Purpose of This Chapter

What Is an Organization? Definition • From Multinationals to Nonprofits • Importance of Organizations

Dimensions of Organization Design Structural Dimensions • Contextual Dimensions • Performance and Effectiveness Outcomes

The Evolution of Organization Theory and Design Historical Perspectives • Don’t Forget the Environment

Organizational Configuration Mintzberg’s Organizational Types • Contemporary Design Ideas

Efficient Performance versus the Learning Organization From Vertical to Horizontal Structure • From Routine Tasks to Empowered Roles • From Formal Control Systems to Shared Information • From Competitive to Collaborative Strategy • From Rigid to Adaptive Culture

Framework for the Book Levels of Analysis • Plan of the Book • Plan of Each Chapter

Design Essentials

Chapter 1

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Managing by Design Questions

Before reading this chapter, please circle your opinion below for each of the following statements:

Managing by Design Questions

1 An organization can be understood primarily by understanding the people who make it up. 1 2 3 4 5

STRONGLY AGREE STRONGLY DISAGREE

2 The primary role of managers in business organizations is to achieve maximum effi ciency. 1 2 3 4 5

STRONGLY AGREE STRONGLY DISAGREE

3 A CEO’s top priority is to make sure the organization is designed correctly. 1 2 3 4 5

STRONGLY AGREE STRONGLY DISAGREE

A LOOK INSIDE

XEROX CORPORATION On the eve of the twenty-first century, Xerox Corporation seemed on top of the world, with fast-rising earnings, a soaring stock price, and a new line of computerized copier-printers that were technologically superior to rival products. Less than two years later, many considered Xerox a has-been, destined to fade into history. Consider the following events:

• Sales and earnings plummeted as rivals caught up with Xerox’s high-end digital machines, offering comparable products at lower prices.

• Xerox’s losses for the opening year of the twenty-first century totaled $384 million, and the company continued to bleed red ink. Debt mounted to $18 billion.

• The stock fell from a high of $64 to less than $4, amid fears that the company would file for federal bankruptcy protection. Over an 18-month period, Xerox lost $38 billion in shareholder wealth.

• Twenty-two thousand Xerox workers lost their jobs, further weakening the morale and loyalty of remaining employees. Major customers were alienated, too, by a restructuring that threw salespeople into unfamiliar territories and tied billing up in knots, leading to mass confusion and billing errors.

• The company was fined a whopping $10 million by the Securities and Exchange Commission (SEC) for accounting irregularities and alleged accounting fraud.

What went wrong at Xerox? The company’s deterioration is a classic story of organizational decline. Although Xerox appeared to fall almost overnight, the organization’s problems were connected to a series of organizational blunders over a period of many years.

BACKGROUND Xerox was founded in 1906 as the Haloid Company, a photographic supply house that developed the world’s first xero- graphic copier, introduced in 1959. Without a doubt, the 914 copier was a money-making machine. By the time it was retired in the early 1970s, the 914 was the best-selling industrial product of all time, and the new name of the company, Xerox, was listed in the dictionary as a synonym for photocopying.

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A LOOK INSIDE (continued)

Joseph C. Wilson, Haloid’s longtime chairman and president, created a positive, people-oriented culture continued by his successor, David Kearns, who steered Xerox until 1990. The Xerox culture and its dedicated employees (sometimes called “Xeroids”) were the envy of the corporate world. In addition to values of fairness and respect, Xerox’s culture emphasized risk taking and employee involvement. Wilson wrote the following for early recruiting materials: “We seek people who are willing to accept risk, willing to try new ideas and have ideas of their own . . . who are not afraid to change what they are doing from one day to the next, and from one year to the next . . .” Xerox continued to use these words in its recruiting efforts, but the culture the words epitomize had eroded.

“BUROX” TAKES HOLD Like many profitable organizations, Xerox became a victim of its own success. Leaders no doubt knew that the company needed to move beyond copiers to sustain its growth, but they found it difficult to look beyond the 70 percent gross profit margins of the 914 copier.

Xerox’s Palo Alto Research Center (PARC), established in 1970, became known around the world for innovation— many of the most revolutionary technologies in the computer industry, including the personal computer, graphical user interface, Ethernet, and laser printer, were invented at PARC. But the copier bureaucracy, or Burox as it came to be known, blinded Xerox leaders to the enormous potential of these innovations. While Xerox was plodding along selling copy machines, younger, smaller, and hungrier companies were developing PARC technologies into tremendous money- making products and services.

The dangers of Burox became dramatically clear when the company’s xerography patents began expiring. Suddenly, Japanese rivals such as Canon and Ricoh were selling copiers at the cost it took Xerox to make them. Market share declined from 95 percent to 13 percent by 1982. And with no new products to make up the difference, the company had to fight hard to cut costs and reclaim market share by committing to Japanese-style techniques and total quality manage- ment. Through the strength of his leadership, CEO Kearns was able to rally the troops and rejuvenate the company by 1990. However, he also set Xerox on a path to future disaster. Seeing a need to diversify, Kearns moved the company into insurance and financial services on a large scale. When he turned leadership over to Paul Allaire in 1990, Xerox’s balance sheet was crippled by billions of dollars in insurance liabilities.

ENTERING THE DIGITAL AGE Allaire wisely began a methodical, step-by-step plan for extricating Xerox from the insurance and financial services busi- ness. At the same time, he initiated a mixed strategy of cost cutting and new-product introductions to get the stodgy company moving again. Xerox had success with a line of digital presses and new high-speed digital copiers, but it fumbled again by underestimating the threat of the inkjet printer. By the time Xerox introduced its own line of desktop printers, the game was already over.

Desktop printers, combined with increasing use of the Internet and e-mail, cut heavily into Xerox’s sales of copiers. People didn’t need to make as many photocopies, but there was a huge increase in the number of documents being created and shared. Rebranding Xerox as “The Document Company,” Allaire pushed into the digital era, hoping to remake Xerox in the image of the rejuvenated IBM, offering not just “boxes (machines)” but complete document management solutions.

As part of that strategy, Allaire picked Richard Thoman, who was then serving as Louis Gerstner’s right-hand man at IBM, as his successor. Thoman came to Xerox as president, chief operating officer, and eventually CEO, amid high hopes that the company could regain the stature of its glory years. Only 13 months later, as revenues and the stock price continued to slide, he was fired by Allaire, who had remained as Xerox chairman.

PLAYING POLITICS Allaire and Thoman blamed each other for the failure to successfully implement the digital strategy. Outsiders, however, believe the failure had much more to do with Xerox’s dysfunctional culture. The culture was already slow to adapt, and some say that under Allaire it became almost totally paralyzed by politics. Thoman was brought in to shake things up, but when he tried, the old guard rebelled. A management struggle developed, with the outsider Thoman and a few allies on one side lined up against Allaire and his group of insiders who were accustomed to doing things the Xeroid way. Recognized for his knowledge, business experience, and intensity, Thoman was also considered to be somewhat haughty

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and unapproachable. He was never able to exert substantial influence with key managers and employees, nor to gain the support of board members, who continued to rally behind Allaire.

The failed CEO succession illustrates the massive challenge of reinventing a century-old company. By the time Thoman arrived, Xerox had been going through various rounds of restructuring, cost cutting, rejuvenating, and reinventing for nearly two decades, but little had really changed. Many believe Thoman tried to do too much too soon. He saw the urgency for change but was unable to convey that urgency to others within the company and inspire them to take the difficult journey real transformation requires.

Others doubted that anyone could fix Xerox, because the culture had become too dysfunctional and politicized. “There was always an in-crowd and an out-crowd,” says one former executive. “They change the branches, but when you look closely, the same old monkeys are sitting in the trees.”

THE INSIDER’S INSIDER Enter Anne Mulcahy, the consummate insider. In August 2001, Allaire turned over the CEO reins to the popular twenty- four-year veteran, who had started at Xerox as a copier saleswoman and worked her way up the hierarchy. Despite her insider status, Mulcahy proved that she was more than willing to challenge the status quo at Xerox. Since she took over, Mulcahy has surprised skeptical analysts, stockholders, and employees by engineering one of the most extraordinary business turnarounds in recent history.

How did she do it? One key success factor was giving people vision and hope. Mulcahy wrote a fictitious Wall Street Journal article describing Xerox five years in the future, outlining the things Xerox wanted to accomplish as if they had already been achieved and presenting the company as a thriving, forward-thinking organization. And although few people thought Mulcahy would take the tough actions Xerox needed to survive, she turned out to be a strong decision maker. She quickly launched a turnaround plan that included massive cost cutting and closing of several money-losing opera- tions, including the division she had previously headed. She was brutally honest about “the good, the bad, and the ugly” of the company’s situation, as one employee put it, but she also showed that she cared about what happened to employees. After major layoffs, she walked the halls to tell people she was sorry and let them vent their anger. She personally negotiated the settlement of a long investigation into fraudulent accounting practices, insisting that her personal involvement was necessary to signal a new commitment to ethical business practices and corporate social responsibility. She appealed directly to creditors begging them not to pull the plug until a new management team could make needed changes.

Mulcahy transferred much of production to outside contractors and refocused Xerox on innovation and service. Two areas she refused to cut were research and development and customer contact. Since 2005, Xerox has introduced more than 100 new products and moved into high-growth areas such as document management services, IT consulting, and digital press technology. A series of acquisitions enabled the company to enter new markets and expand its base of small- and medium-sized business customers. Sales in 2007 rose to more than $17 billion, and in November of that year, Xerox announced its first quarterly cash dividend in six years. Mulcahy has also responded to global stakeholders with a firm commitment to human rights and sustainable business practices. “By doing the right thing for our stakehold- ers and the global community, we’re also doing what is right for our business,” she said.

Mulcahy was belittled in the press when she took over as CEO, but she has proved the pundits wrong and regu- larly shows up on various “best manager” lists. In 2008, she became the first woman CEO selected by her peers to receive Chief Executive magazines’s “CEO of the Year” award, which she promptly declared to “represent the impressive accomplishments of Xerox people around the world.” But Mulcahy knows Xerox can’t afford to rest on its laurels. The technology industry is tough, and she has to keep her management team focused on growth while also maintaining the cost controls that stabilized the company.

Eight years after this American icon almost fell, Xerox is once again admired in the corporate world. Has the “perfect storm” of troubles been replaced with a “perfect dawn”? Mulcahy and her top management team believe Xerox is posi- tioned to be resilient in the face of the current economic slowdown, but in the rapidly changing world of organizations, nothing is ever certain.1

Welcome to the real world of organization theory. The shifting fortunes of Xerox illustrate organization theory in action. Xerox managers were deeply involved in organization theory each day of their working lives—but many never realized it. Company managers didn’t fully understand how the organization related to the environment or how it should function internally. Organization theory concepts have helped Anne Mulcahy and her management team analyze and diagnose what is happening and the changes needed to keep the company competitive. Organization theory gives us the tools to explain the decline of Xerox and understand Mulcahy’s turnaround.

Similar problems have challenged numerous organizations. Consider the dramatic organizational missteps illustrated by the 2008 crises in the mortgage industry and finance sector in the United States. Lehman Brothers Holdings, a pillar in the invest- ment banking industry for more than 150 years, filed for Chapter 11 bankruptcy, unable to weather the storm sweeping through the industry. American International Group (AIG) sought a bailout from the U.S. government. And another icon, Merrill Lynch, was saved by becoming part of Bank of America, which had already snapped up struggling mortgage lender Countrywide Financial Corporation. The Merrill Lynch acquisition gave Bank of America a vast reach into nearly every part of the finance industry, from credit cards and auto loans to stock underwriting, wealth manage- ment, and merger advice. Power in the industry took a decided shift away from huge investment firms back toward the basic business of commercial banking, making companies such as Bank of America and Wells Fargo & Company in the United States, Germany’s Deutsche Bank AG, and Banco Santander SA of Spain key players in a new financial landscape.2 The 2008 crisis in the U.S. financial sector represented change and uncertainty on an unprecedented scale, and it would, to some extent, affect man- agers in all types of organizations and industries around the world.

ORGANIZATION THEORY IN ACTION

Organization theory gives us the tools to analyze and understand how a huge, pow- erful firm like Lehman Brothers can die and a company like Bank of America can emerge almost overnight as a giant in the industry. It enables us to comprehend how a band like the Rolling Stones, which operates like a highly sophisticated global busi- ness organization, can enjoy phenomenal success for nearly half a century, while some musical groups with equal or superior talent don’t survive past a couple of hit songs. Organization theory helps us explain what happened in the past, as well as what may happen in the future, so that we can manage organizations more effectively.

Topics

Each of the topics to be covered in this book is illustrated in the Xerox case. Indeed, managers at companies such as Xerox, Lehman Brothers, Bank of America, and even the Rolling Stones are continually faced with a number of challenges. For example:

• How can the organization adapt to or control such external elements as com- petitors, customers, government, and creditors in a fast-paced environment?

• What strategic and structural changes are needed to help the organization attain effectiveness?

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• How can the organization avoid management ethical lapses that could threaten its viability?

• How can managers cope with the problems of large size and bureaucracy? • What is the appropriate use of power and politics among managers? • How should internal conflict be managed? • What kind of corporate culture is needed to enhance rather than stifle innova-

tion and change, and how can that culture be shaped by managers?

These are the topics with which organization theory is concerned. Organization theory concepts apply to all types of organizations in all industries. Managers at Burger King revitalized the once-floundering fast-food chain by revising its menu and marketing approach based on customer analysis. Nokia underwent a major reorganization to improve the organization’s flexibility and adaptability. Hewlett- Packard acquired Electronic Data Systems Corporation to move H-P more aggres- sively into the technology services industry.3 All of these companies are using concepts based in organization theory. Organization theory also applies to nonprofit organizations such as the United Way, the American Humane Association, local arts organizations, colleges and universities, and the Make-A-Wish Foundation, which grants wishes to terminally ill children.

Organization theory draws lessons from organizations such as Xerox, Bank of America, and United Way and makes those lessons available to students and manag- ers. As our opening example of Xerox shows, even large, successful organizations are vulnerable, lessons are not learned automatically, and organizations are only as strong as their decision makers. Organizations are not static; they continuously adapt to shifts in the external environment. Today, many companies are facing the need to transform themselves into dramatically different organizations because of new challenges in the environment.

Current Challenges

Research into hundreds of organizations provides the knowledge base to make Xerox and other organizations more effective. For example, challenges facing orga- nizations today are different from those of the past, and thus the concept of orga- nizations and organization theory is evolving. The world is changing more rapidly than ever before, and managers are responsible for positioning their organizations to adapt to new needs. Some specific challenges today’s managers and organizations face are globalization, intense competition, rigorous ethical scrutiny, the need for rapid response, the digital workplace, and increasing diversity.

Globalization. The cliché that the world is getting smaller is dramatically true for today’s organizations. With rapid advances in technology and communications, the time it takes to exert influence around the world from even the most remote locations has been reduced from years to only seconds. Markets, technologies, and organizations are becoming increasingly interconnected.4 Today’s successful organi- zations feel “at home” anywhere in the world. Companies can locate different parts of the organization wherever it makes the most business sense: top leadership in one country, technical brainpower and production in other locales.

Related trends are global outsourcing, or contracting out some functions to organizations in other countries, and strategic partnering with foreign firms to gain a global advantage. In Bain & Company’s 2007 survey of managers, nearly

Briefcase As an organization manager, keep these guidelines in mind:

Do not ignore the external environ- ment or protect the organization from it. Because the environ- ment is unpredict- able, do not expect to achieve complete order and rationality within the organiza- tion. Strive for a bal- ance between order and flexibility.

50 percent said they saw cross-border acquisitions as crucial to their future com- petitiveness. Moreover, U.S. managers believe developing relationships in India and China will be vital to business success.5 Already, numerous companies from all over the world, including Home Depot, CNA Life, and Sony, use India’s Wipro Ltd. to develop sophisticated software applications, design semiconductors, and manage back-office solutions.6 Other companies turn to China, which is the world’s largest maker of consumer electronics and is rapidly and expertly moving into biotechnol- ogy, computer manufacturing, and semiconductors.7

Intense Competition. This growing global interdependence creates new advantages, but it also means that the environment for companies is becoming extremely competi- tive. Customers want low prices for goods and services. Outsourcing firms in low-wage countries can often do work for 50 to 60 percent less than companies based in the United States, for instance, so U.S. firms that provide similar services have to search for new ways to compete or go into new lines of business.8 In recent years, though, rising fuel costs cut into the cost advantage many manufacturers enjoyed from what has been called the “China price.”9 The higher cost of shipping goods from China or other low- wage countries counteracted the lower cost of production, leaving U.S. manufacturers searching for ways to make up the difference without exorbitant price increases.

Companies in all industries are feeling pressure to drive down costs and keep prices low, yet at the same time they are compelled to invest in research and devel- opment or get left behind in the global drive for innovation. In the United States, high oil prices, the housing slump, mortgage meltdown, crisis in the financial sec- tor, and the soaring costs of materials and supplies created a tough environment for companies in all industries. Consider McDonald’s. Even as managers were seeking ways to expand the menu and draw in new customers, McDonald’s labs were test- ing how to cut the cost of making basic items on the Dollar Menu. With the price of ingredients such as cheese, beef, and buns going up, McDonald’s had to cut internal costs or lose money on its dollar-menu items.10 Auto insurers searched for new ways to compete as drivers faced with steep gas prices looked for ways to cut their trans- portation costs.11 Casual restaurant chains battled to draw in customers as people cut back on eating out. Grocers, too, felt the sting. Managers at Supervalu, the second largest supermarket company in the United States, quickly learned that they couldn’t just pass on their higher costs to shoppers. Sales and profits plunged in early 2008 before managers adjusted their strategy to promote cheaper store brands, work with manufacturers to design innovative promotions and coupons, and intro- duce new lines of products at lower prices.12

Ethics and Social Responsibility. Today’s managers face tremendous pressure from the government and the public to hold their organizations and employees to high ethical and professional standards. Following widespread moral lapses and corporate financial scandals, organizations are under scrutiny as never before. The pervasiveness of ethical lapses in the early 2000s was astounding. Once-respected firms such as Enron, Arthur Andersen, Tyco, and HealthSouth became synonymous with greed, deceit, and financial chicanery. No wonder a public poll found that 79 percent of respondents in the United States believe questionable business prac- tices are widespread. Fewer than one-third said they think most CEOs are honest.13

The sentiment is echoed in other countries. Recent investigations of dozens of top executives in Germany for tax evasion, bribery, and other forms of corruption have destroyed the high level of public trust business leaders there once enjoyed, with just

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15 percent of respondents in Germany now saying they consider business leaders trustworthy.14

The climate of suspicion has spread to nonprofit organizations and colleges and universities as well. For example, the student loan industry has come under close scru- tiny after an investigation found that Student Loan Xpress paid financial aid directors at three universities a total of $160,000 in consulting fees, personal tuition reimburse- ment, and other payments as a gateway to being placed on the universities’ preferred lenders lists. Investigators are seeking to determine whether lenders are being recom- mended to students because of the hidden payments university officials are receiving rather than the fact that they offer the best lending terms to students.15