Organizational theory design and change chapter 8

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.

A Focus on Managers The managerial implications of organizational design and change are clearly articulated for the needs of students. Each chapter has one or more managerial summaries, in which the practical implications of organizational theories and concepts are clearly outlined. In addition, each chapter has several “Organizational Insight” boxes in which the experi- ences of a real company are tied to the chapter content to highlight the implications of the material. Each chapter also features two closing cases that allow a hands-on analysis by students.

Learning Features and Support Material Each chapter ends with a section entitled “Organizational Theory in Action,” which in- cludes the following hands-on learning exercises/assignments:

! “Practicing Organizational Theory,” which is an experiential exercise designed to give students hands-on experience doing organizational theory. Each exercise takes about 20 minutes of class time. The exercises have been class tested and work very well. Further details on how to use them can be found in the instructor’s manual.

! An “Ethical Dimension” feature, where students individually or in groups can debate the ethical dilemmas that confront managers during the process of organiza- tional design and change.

! A “Making the Connection” feature, where students collect examples of companies to illustrate organizational design and change issues.

! An ongoing “Analyzing the Organization” feature, where students select an organi- zation to study and then complete chapter assignments that lead to an organiza- tional theory analysis and a written case study of their organization. This case study is then presented to the class at the end of the semester. Complete details concern- ing the use of this and the other learning features are in the instructor’s manual.

! A closing “Case for Analysis” with questions, which provides an opportunity for a short class discussion of a chapter-related theme.

In addition to these hands-on learning exercises, I have refined or added to the other learning features developed for previous editions of the book:

! Cases. At the end of the book are numerous cases to be used in conjunction with the book’s chapters to enrich students’ understanding of organizational theory concepts. Most cases are classical, in the sense that the issues they raise are always pertinent and provide a good learning experience for students. To preserve the teaching value of these cases, they should not be used for student write-ups; their value lies in the in-class discussion they generate.

! “Organizational Insight” boxes relate directly to core chapter concepts. ! Chapter objectives and key terms are clearly defined and listed to aid learning.

PREFACE xix

! “Managerial Implications” sections provide students with lessons from organiza- tional theory.

! Detailed end-of-chapter summaries facilitate learning.

Instructor Supplements Instructors can access downloadable supplemental resources by signing in to the Instructor Resource Center at http://www.pearsonhighered.com/educator.

It gets better. Once you register, you will not have additional forms to fill out or mul- tiple user names and passwords to remember to access new titles and/or editions. As a registered faculty member, you can log in directly to download resource files and receive immediate access and instructions for installing Course Management content to your campus server.

Need help? Our dedicated Technical Support team is ready to assist instructors with questions about the media supplements that accompany this text. Visit http://247pearsoned.custhelp.com/ for answers to frequently asked questions and toll- free user support phone numbers. The following supplements are available to adopting instructors.

PowerPoints: This presentation includes basic outlines and key points from each chapter. It includes figures from the text but no forms of rich media, which makes the file size manageable and easier to share online or via email.This set was also designed for the professor who prefers to customize PowerPoints and who wants to be spared from having to strip out animation, embedded files, and other media-rich features.

Instructor’s Manual: Includes Teaching Objectives, Chapter Summaries, Outlines, Discussion Questions and Answers, Organizational Theory in Action, Cases for Analysis, Analyzing the Organization and Teaching Suggestions, and Ethical Dimensions.

Test Bank: Contains a detailed and comprehensive set of at least 60 multiple- choice questions and 15 true/false questions together with three short-answer and essay questions for each chapter.

Students Supplements CourseSmart eTextbooks Developed for students who want to save on required or recommended textbooks, CourseSmart eTextbooks online save students money off the suggested list prices of the print text. Students simply select their eText by title or author and purchase immediate access to the content for the duration of the course using any major credit card. With a CourseSmart eText, students can search for specific keywords or page numbers, make notes online, print out reading assignments that incorporate lecture notes, and bookmark important passages for later review. For more information or to purchase a CourseSmart eTextbook, visit www.coursesmart.com.

Acknowledgments Finding a way to coordinate and integrate the rich and diverse organizational theory lit- erature is challenging. Nor is it easy to present the material in a way that students can readily understand. Across the last editions of Organizational Theory, I have been fortu- nate to have the assistance of several people who contributed greatly to the book’s final form. My developmental editor, Jane Tufts, helped me decide how to present the material in the chapters on structure and culture, which was my most difficult task. Her efforts can be seen in the integrated flow of material both within and between the book’s chapters. Brian Mickelson, my Pearson editor, provided me with timely feedback and information from professors and reviewers, which has allowed me to shape the book to meet the needs of its intended market. Ilene Kahn ably coordinated the book’s progress through

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http://www.pearsonhighered.com/educator
http://247pearsoned.custhelp.com/
www.coursesmart.com
PREFACE xxi

production. Their efforts can be seen in the comprehensiveness of the package of materi- als that constitutes Organizational Theory. I am also grateful to the following reviewers and colleagues who provided me with detailed feedback on the chapters in this and previ- ous editions of the book:

Reviewers Sonny Ariss, Janet Barnard, Nate Bennett, Ken Bettenhausen, Alan Bluedorn, Karen Dill Bowerman,Tony Buono, John Butler, Marian Clark, Paul Collins, Ed Conlon,Tina Dacin, Parthiban David, Gordon Dehler, Richard Deluca, Leonidas Doty, Allen Engle, Steven Farner, Pat Feltes, Robert Figler, Steven Floyd, Linda Fried, Lawrence Gales, Deborah Gibbons, Richard Goodman, Charles Hill, Renata Jaworski, Bruce H. Johnson, Sara Keck, Leslie A. Korb, Robert M. Krug, Nancy Kucinski,Arie Lewin, Ronald Locke, David Loree, Karl Magnusen, Judi McLean-Parus, Frances Milliken, Dennis Mott, Pracheta Mukherjee, Ann Marie Nagye, Janet Near, Jeffrey R. Nystrom, Kaviraj Parboteeah, Dane Partridge, Dave Partridge, Richard Paulson, Janita Rawls, Greg Saltzman, Mary Jane Saxton, John Schaubroeck, John A. Seeger, James Segouis, Jim Sena, Dayle Smith, George Strauss, Dan Svyantek, Paul W. Swierez, Filiz Tabak, Louise Tourigny, and Carolyn Youssef.

Gareth R. Jones College Station, Texas

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What Is an Organization? Few things in today’s world are as important or as taken for granted as organizations. Although we routinely enjoy the goods and services that organizations provide, we rarely bother to wonder about how these goods and services are produced.We see online videos of manufacturing production lines churning out automobiles, PCs, or smartphones, and we watch on a local TV channel how our schools or hospitals are striving to use advances in new kinds of computer hardware and software, such as online learning programs, to help students improve their performance. Yet we rarely question how or why these or- ganizations go about their business. Most often, we think about organizations only when they fail us in some way—for example, when we are forced to wait two hours in the emer- gency room to see a doctor, when our new smartphone crashes, or when we are at the end of a long line in a bank on a Friday afternoon. When such events happen, we wonder why the bank did not anticipate the rush of people and put on more tellers, why the hospital made us spend 30 minutes filling out paperwork in order to obtain service and then kept us waiting for an hour and a half, or why wireless phone companies don’t insist on higher- quality hardware and bug-free software from their smartphone suppliers.

People have a casual attitude toward organizations because organizations are intangible. Even though most people in the world today are born, work, and die in organ- izations, nobody has ever seen or touched an organization. We see the products or services that an organization provides, and sometimes we see the people the organization employs, for example, as we go into a FedEx Kinko’s store or doctor’s office. But the

Organizations and Organizational Effectiveness Learning Objectives Organizations exist in uncertain, changing environments and continually confront new challenges and problems. Managers must find solutions to these challenges and problems if organizations are to survive, prosper, and perform effectively.

After studying this chapter you should be able to:

1. Explain why organizations exist and the purposes they serve. 2. Describe the relationship between organizational theory and organizational design and

change and differentiate between organizational structure and culture. 3. Understand how managers can utilize the principles of organizational theory to design

and change their organizations to increase organizational effectiveness. 4. Identify the three principal ways in which managers assess and measure organizational

effectiveness. 5. Appreciate the way in which several contingency factors influence the design of

organizations.

1C H A P T E RPart 1The Organization and Its Environment

Entrepreneurship The process by which people recognize opportunities to satisfy needs and then gather and use resources to meet those needs.

Organization A tool people use to coordinate their actions to obtain something they desire or value.

2 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT

reason an organization, such as FedEx Kinko’s, is motivated to provide goods and serv- ices, and the way it controls and influences its members so that it can provide them, are not apparent to most people outside the organization. Nevertheless, grouping people and other resources to produce goods and services is the essence of organizing and of what an organization does.1

An organization is a tool people use to coordinate their actions to obtain something they desire or value—that is, to achieve their goals. People who value security create an organization called a police force, an army, or a bank. People who value entertainment create organizations such as the Walt Disney Company, CBS, or a local club. People who desire spiritual or emotional support create churches, social service organizations, or charities. An organization is a response to and a means of satisfying some human need. New organizations are spawned when new technologies become available and new needs are discovered—such as social networking sites like Facebook—and organizations die or are transformed when the needs they satisfied are no longer important—such as video rental stores like Blockbuster. The need to invent improved drugs, for example, led to the creation of Amgen, Genentech, and other biotech companies.The need to handle increas- ing amounts of information and emerging new computer technologies led to the rise of IBM, Apple, Microsoft, Google, and other high-tech companies and the decline and fail- ure of companies whose technology had become outdated, such as the typewriter company Smith Corona. Retail stores such as Walmart, Target, the Gap, and Sears are continually being transformed—not always successfully—as they seek to respond to the changing tastes and needs of consumers.

Who creates the organizations that arise to satisfy people’s needs? Sometimes an indi- vidual or a few people believe they possess the necessary skills and knowledge and set up an organization to produce goods and services. In this way organizations like sandwich shops, Google, and software design studios are created. Sometimes several people form a group to respond to a perceived need by creating an organization. People with a lot of money may invest jointly to build a vacation resort. A group of people with similar beliefs may form a new church, or a nation’s citizens may move to establish a new political party. In general, entrepreneurship is the term used to describe the process by which people recog- nize opportunities to satisfy needs and then gather and use resources to meet those needs.2

Today, many organizations being founded, and particularly those experiencing the fastest growth, are producing goods and services related in some way to new information

Most of us don’t think about the organizations that produce the products we use until we have a problem with those products. if

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Organizational environment The set of forces and conditions that operate beyond an organization’s boundaries but affect its ability to acquire and use resources to create value.

CHAPTER 1 • ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS 3

Organization’s Inputs

Organization obtains inputs from its environment

Raw materials

Money and capital

Human resources

Information and knowledge

Customers of service organizations

Organization’s Conversion Process

Organization transforms inputs and adds value to them

Machinery

Computers

Human skills and abilities

Organization’s Environment

Sales of outputs allow organization to obtain new supplies of inputs

Customers

Shareholders

Suppliers

Distributors

Government

Competitors

Organization’s Outputs

Organization releases outputs to its environment

Finished goods

Services

Dividends

Salaries

Value for stakeholders

Figure 1.1 How an Organization Creates Value

technology (IT). The increasing use of mobile computing devices such as laptops, smart- phones, and tablet computers linked to the World Wide Web (WWW) through wireless broadband connections are revolutionizing the way all organizations operate. This book examines this crucial issue by focusing on one company, Amazon.com, that has achieved explosive growth because of its development of IT products and services such as its Kindle book reader. In nine chapters of this book the story of this company is used to il- lustrate the many ways in which the IT revolution is improving the way organizations op- erate and create value today. We begin this analysis here by examining why and how Amazon.com was founded, which is discussed in the Focus on New Information Technology box.3

How Does an Organization Create Value? The way in which an organization creates value is depicted in Figure 1.1. Value creation takes place at three stages: input, conversion, and output. Each stage is affected by the en- vironment in which the organization operates. The organizational environment is the set of forces and conditions that operate beyond an organization’s boundaries but affect its ability to acquire and use resources to create value.

Inputs include resources such as raw materials, machinery, information and knowl- edge, human resources, and money and capital. The way an organization chooses and ob- tains from its environment the inputs it needs to produce goods and services determines how much value the organization creates at the input stage. For example, Jeff Bezos chose to design software to make Amazon.com’s website as simple and user friendly as he possibly could, and he only recruited people who could provide high-quality,

4 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT

customer-friendly service that would most appeal to his Internet customers. If he had made poor choices and customers had not liked Amazon.com’s website or customer serv- ice, his company would not have been successful.

The way the organization uses human resources and technology to transform inputs into outputs determines how much value is created at the conversion stage. The amount of value the organization creates is a function of the quality of its skills, including its abil- ity to learn from and respond to the environment. For example, Jeff Bezos had to decide how best to sell and market his products to attract customers. His answer was to offer wide choice and low prices and to ship books quickly to customers. His skill at these activities created the value that customers saw in his concept.

The result of the conversion process is an output of finished goods and services that the organization releases to its environment, where they are purchased and used by customers to satisfy their needs—such as delivered books. The organization uses the money earned from the sale of its output to obtain new supplies of inputs, and the cycle begins again. An organization that continues to satisfy people’s needs will be able to obtain increasing amounts of resources over time and will be able to create more and more value as it adds to its stock of skills and capabilities.5 Amazon.com has grown from strength to strength because satisfied customers return to its online storefront and continue to provide the revenues it needs to continually improve its skills and expand its operations.

A value-creation model can be used to describe the activities of most kinds of organizations. Manufacturing companies, such as GE, GM, and IBM, take from the envi- ronment component parts, skilled or semiskilled labor, and technical knowledge and at the conversion stage create value by using their manufacturing skills to organize and assemble those inputs into outputs, such as cars and computers. Service organizations, such as McDonald’s, Amazon.com, the Salvation Army, and your family doctor, interact directly with customers or clients, who are the “inputs” to their operations. Hungry people who go to McDonald’s for a meal, needy families who go to the Salvation Army for assistance, and sick people who go to a doctor for a cure are all “inputs.” In the conversion stage, service organizations create value by applying their skills to yield an output: satisfied hunger, a cared-for family, a cured patient. Figure 1.2 is a simplified model of how McDonald’s creates value.

Focus on New Information Technology

Amazon.com, Part 1

In 1994, Jeffrey Bezos, a computer science and electrical engineering graduate from Princeton University, was growing weary of working for a Wall Street investment bank. With his computer science back- ground prompting him, he saw an entrepreneurial opportunity in the fact that use of the Internet was growing at over 2,300% a year as more and more people were becoming aware of its information advantages.

Searching for an opportunity to take advantage of his skills in the new electronic virtual marketplace, he concluded that the book- selling market would be a good place to invest his personal resources. Deciding to make a break, he packed up his belongings and drove to the West Coast, deciding en route that Seattle, Washington, a new mecca for high-tech software developers and the hometown of Starbucks coffee shops, would be an ideal place to begin his venture.

What was his vision for his new venture? To build an online book- store that would be customer friendly, easy to navigate, and would offer the broadest possible selection of books. Bezos’s mission? “To use the Internet to offer products that would educate, inform and inspire.”4 Bezos realized that compared to a real bricks-and-mortar bookstore, an online bookstore would be able to offer a much larger and more diverse selection of books. Moreover, online customers would be able to search easily for any book in print on a computerized online catalog, browse different subject areas, read reviews of books, and even ask other shoppers for online recommendations—something most people would hesitate to do in a regular bookstore.

With a handful of employees and operating from his garage in Seattle, Bezos launched his venture online in July 1995 with $7 million in borrowed capital. Word of his venture spread like wildfire across the Internet and book sales quickly picked up as satisfied customers spread the good word. Within weeks Bezos was forced to relocate to new larger premises and to hire new employees as book sales soared. Bezos’s new venture seemed to be poised for success.

CHAPTER 1 • ORGANIZATIONS AND ORGANIZATIONAL EFFECTIVENESS 5

McDonald’s inputs: Obtained from its environment

Raw materials (ground beef, sandwich buns, potatoes, milk-shake mix, etc.)

Human resources (cooks, clean-up crew, order takers, managers)

Information and knowledge (training, knowledge of fast-food industry)

Money and capital (shareholders’ investments)

Customers

McDonald’s conversion process: Tranforms inputs and adds value to them

Machinery (grills, toasters, frying machines, milk-shake machines)

Computers (computerized cash registers, ordering systems, inventory tracking)

Human skills and abilities (personnel trained in sandwich preparation, ordering, potato frying, overseeing the whole operation)

McDonald’s environment: Sale of outputs to customers

Satisfied customers

Potential customers

Suppliers of meat, potatoes, milk-shake mix

Population from which to choose employees

Government health regulations

Competitors (KFC, Burger King, Taco Bell)

McDonald’s outputs: Released to its environment

Fast and cheap food

Satisfied customers

Satisfied shareholders

Figure 1.2 How McDonald’s Creates Value

Why Do Organizations Exist? The production of goods and services most often takes place in an organizational setting because people working together to produce goods and services usually can create more value than people working separately. Figure 1.3 summarizes five reasons for the exis- tence of organizations.

To Increase Specialization and the Division of Labor People who work in organizations may become more productive and efficient at what they do than people who work alone. For many kinds of productive work the use of an organization allows the development of specialization and a division of labor. The col- lective nature of organizations allows individuals to focus on a narrow area of expertise, which allows them to become more skilled or specialized at what they do. For example, engineers working in the engineering design department of a large car manufacturer like GM or Toyota might specialize in improving the design of fuel injection systems or other engine components. An engineer working for a small car manufacturer might be responsible for designing the whole engine. Because the engineer in the small company must perform many more tasks than the engineer in the large company, the degree of specialization in the small company is lower; there is less chance of discovering what makes for a great carburetor and thus creating more value for someone who desires high speed.

Economies of scope Cost savings that result when an organization is able to use underutilized resources more effectively because they can be shared across different products or tasks.

Economies of scale Cost savings that result when goods and services are produced in large volume on automated production lines.

6 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT

Increase specialization and the division of labor

The use of an organization allows people jointly to:

Which increases the value that an organization can create

Use large-scale technology

Manage the external environment

Economize on transaction costs

Exert power and control

Figure 1.3 Why Organizations Exist

To Use Large-Scale Technology Organizations are able to take advantage of the economies of scale and scope that result from the use of modern automated and computerized technology. Economies of scale are cost savings that result when goods and services are produced in large volume on auto- mated production lines.

Economies of scope are cost savings that result when an organization is able to use underutilized resources more effectively because they can be shared across several differ- ent products or tasks. Economies of scope (as well as of scale) can be achieved, for example, when it is possible to design an automated production line to produce several different types of products simultaneously. Toyota and Honda were the first carmakers to design assembly lines capable of producing three models of a car instead of just one. GM and Ford have followed suit and have achieved impressive gains in efficiency. Multimodel assembly lines give car companies lower manufacturing costs and greater flexibility to change quickly from making one model to another to meet varying customer needs.