The Basic Building Blocks of Organizational Structure

Introduction

Learning Objectives

After reading this chapter, you should be able to understand and answer the following questions:

1. What are the basic building blocks of organizational structure?
2. What types of structures exist, and what are advantages and disadvantages of each?
3. What is control and why is it important?
4. What are the different forms of control and when should they be used?
5. What are the key legal forms of business, and what implications does the choice of a business form have for organizational structure?

Which Divisions Will Drive Success for Jim Pattison Group?

Jim Pattison Group is the second-largest private company in Canada, with holdings in numerous auto dealerships, food companies, media suppliers, and entertainment groups. Pattison opened a GM dealership in 1961 and branched out to auto leasing. At over 80 years of age, he is the president, chairman, CEO, and sole owner of the Jim Pattison Group. Succession and continuance planning will be an important part of future planning for the organization.

In 2013, Jim Pattison Group had annual sales of $8.1 billion, more than 36,000 employees, and investments in Canada, the United States, Mexico, Europe, Asia and Australia. The organizational structure includes nine divisions, each devoted to specific product categories: (1) Food and Beverage, (2) Media, (3) Entertainment, (4) Automotive and Agriculture, (5) Periodical Distribution and Marketing, (6) Signs, (7) Packaging, (8) Forest Products and Port Services, and (9) Investments and Partnerships.

Jim Pattison Group, like many large companies, formed a Group Opportunities program (GO program) to provide sales, marketing, and procurement resources to help drive the growth and success of all companies within Jim Pattison Group. It also supports the achievement of cross-company objectives by building synergies and collaboration between the operating divisions. The Jim Pattison Group works with its divisions to eliminate waste, increase efficiency, protect resources, and run operations with the long term in mind. The Group has been recognized over the years for its efforts to bring positive environmental change.

The company's recent acquisitions are as diverse as Guinness World Records, Just Energy, Ocean Brands, AMC Billboards, and several radio stations in Alberta and Saskatchewan. Important questions in evaluating new acquisitions include how the organizational cultures of Ocean Brands or Guinness World Records would mesh with the culture of Jim Pattison Group. Many acquisitions in the business world fail to deliver the results that executives expect, and the incompatibility of organizational cultures is one of the reasons why. In view of continuing expansion and acquisition, the sprawling company of nine diverse categories may become unwieldy. As time elapses, some sectors may be identified as underperforming or become outdated, and be subject to sell-off.

The management team has a challenging job in assessing each division, maximizing profit, and looking to the future to strategize for the continuance of the organization.

Figure 9.1: The Jim Pattison Outpatient Care and Surgery Centre named after Jim Pattison

The word executing used in this chapter's title has two distinct meanings. These meanings were cleverly intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless professional football team. In one game, McKay's offensive unit played particularly poorly. When McKay was asked after the game what he thought of his offensive unit's execution, he wryly responded, "I am in favor of it".

In the context of business, execution refers to how well a firm such as Jim Pattison Group implements the strategies that executives create for it. This involves the creation and operation of both an appropriate organizational structure and appropriate organizational control processes. Executives who skillfully orchestrate structure and control are likely to lead their firms to greater levels of success. In contrast, those executives who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same way Coach McKay viewed his offense: as worthy of execution.

Source: Janice Edwards, https://opentextbc.ca/strategicmanagement/part/chapter-9/
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 License.

The Basic Building Blocks of Organizational Structure

Learning Objectives

1. Understand what division of labor is and why it is beneficial.
2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an organizational structure.

Division of Labor

Figure 9.2: The Building Blocks of Organizational Structure

The leaders at the top of organizations have long known that division of labor can improve efficiency. Thousands of years ago, for example, Moses's creation of a hierarchy of authority by delegating responsibility to other judges offered perhaps the earliest known example. In the 18th century, Adam Smith's book The Wealth of Nations quantified the tremendous advantages that division of labor offered, using an example of a pin (nail) factory. If a worker performed all the various steps involved in making pins himself, he could make perhaps twenty pins per day. By breaking the process into eighteen separate steps, however, ten workers could make upwards of 48,000 pins a day. In other words, the pin factory was a staggering 2,400 times more productive than it would have been without relying on division of labor. In the early 20th century, Smith's ideas strongly influenced Henry Ford and other industrial pioneers who sought to create efficient organizations.

Figure 9.3: Division of labour allowed eighteenth-century pin factories to dramatically increase their efficiency.

While division of labour fuels efficiency, it also creates a challenge - figuring out how to coordinate different tasks and the people who perform them. The solution is an organizational structure, which defines how tasks are assigned and grouped together with formal reporting relationships. Creating a structure that effectively coordinates a firm's activities increases the firm's likelihood of success. Meanwhile, a structure that does not match well with a firm's needs undermines the firm's chances of prosperity.

Figure 9.4: Division of labour was central to Henry Ford's development of assembly lines in his automobile factory. Ford noted, "Nothing is particularly hard if you divide it into small jobs".

Vertical and Horizontal Linkages

Most organizations use a diagram called an organizational chart to visually depict their structure. These organizational charts show how firms' structures are built using two basic building blocks: vertical linkages and horizontal linkages. Vertical linkages tie supervisors and subordinates together. These linkages show the lines of responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates their performance, and guides them toward improvement when necessary. Every supervisor except for the person at the very top of the organization chart also serves as a subordinate to someone else. In the typical business school, for example, a department chair supervises a set of professors. The department chair in turn is a subordinate of the dean.

Most executives rely on the unity of command principle when mapping out the vertical linkages in an organizational structure. This principle states that each person should only report directly to one supervisor. If employees have multiple bosses, they may receive conflicting guidance about priorities and how to do their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of Jim Pattison Group, for example, the head of the Media division reports only to the president. If problems were to arise with executing the strategic move - such as joining the AMC Billboard group with the Media division - the president would look to the chief executive officer for guidance and accountability.

Horizontal linkages are relationships between equals in an organization. Operationally, such linkages take the form of committees, task forces, and teams, and in fact are where the majority of  organizational decisions are first considered for their cross-departmental or overall impact. Horizontal linkages are also important when close coordination is needed across different segments of an organization. For example, most business schools revise their undergraduate curriculum every five or so years to ensure that students are receiving an education that matches the needs of current business conditions. Typically, a committee consisting of at least one professor from every academic area (such as management, marketing, accounting, and finance) is appointed to perform this task. This approach helps ensure that all aspects of business are represented appropriately in the new curriculum.

Figure 9.5: Committee meetings can be boring, but they are often vital for coordinating efforts across departments.

Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages. As noted on their website, "At Whole Foods Market we recognize the importance of smaller tribal groupings to maximize familiarity and trust. We organize our stores and company into a variety of interlocking teams. Most teams have between 6 and 100 Team Members and the larger teams are divided further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking team structure continues all the way upwards to the Executive Team at the highest level of the company". This emphasis on teams is intended to develop trust throughout the organization, as well as to make full use of the talents and creativity possessed by every employee.

Informal Linkages

Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In the long-running comedy series The Simpsons, Homer Simpson is a low-level - and very low-performing - employee at a nuclear power plant. In one episode, Homer gains power and influence with the plant's owner, Montgomery Burns, which far exceeds Homer's meager position in the organization chart, because Mr. Burns desperately wants to be a member of the bowling team that Homer captains. Homer tries to use his newfound influence for his own personal gain and naturally the organization as a whole suffers. Informal linkages such as this one do not appear in organizational charts, but they nevertheless can have (and often do have) a significant influence on how firms operate.

Key Takeaways

• The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps managers to organize better the different individuals and job functions within a firm.
  

Creating an Organizational Structure

Learning Objectives

1. Know and be able to differentiate among the four types of organizational structure.
2. Understand why a change in structure may be needed.
   

Within most firms, executives rely on vertical and horizontal linkages to create a structure that they hope will match the needs of their firm's strategy. Four types of structures are available to executives: (1) simple, (2) functional, (3) multidivisional, and (4) matrix (Figure 9.6 "Common Organizational Structures"). Like snowflakes, however, no two organizational structures are exactly alike. When creating a structure for their firm, executives will take one of these types and adapt it to fit the firm's unique circumstances. As they do this, executives must realize that the choice of structure will influence their firm's strategy and strategic options in the future. Once a structure is created, it constrains certain future strategic moves, and supports others. If a firm's structure is designed to maximize efficiency, for example, the firm may lack the flexibility needed to react quickly to exploit new opportunities.

Figure 9.6: Common Organizational Structures

Executives rely on vertical and horizontal linkages to create a structure that they hope will match the firm's needs. While no two organizational structures are exactly alike, four general types of structures are available to executives: simple, functional, multidivisional, and matrix.

Simple Structure

Many organizations start out with a simple structure. In this type of structure, an organizational chart is usually not needed. Simple structures do not rely on formal systems of division of labor (Figure 9.7 "Simple Structure"). If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. Many professions, such as doctors, lawyers, and architects, find that a simple structure meets the needs of their business. The same is true for small business owners; for example, on the TV series The Simpsons, both bar owner Moe Szyslak and Comic Book Guy are shown handling all aspects of their respective businesses.

Figure 9.7: Simple Structure

If the firm consists of more than one person, tasks tend to be distributed among them in an informal manner rather than each person developing a narrow area of specialization. In a family-run restaurant or bed and breakfast, for example, each person will contribute as needed to tasks, such as cleaning restrooms, food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic decision making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure, organizations that use this type of structure tend to have very few rules and regulations. The process of evaluating and rewarding employees' performance also tends to be informal.

Figure 9.8: There is a good reason most sole proprietors do not bother creating formal organizational charts.

The informality of simple structures creates both advantages and disadvantages. On the plus side, the flexibility offered by simple structures encourages employees' creativity and individualism. Informality has potential negative aspects, too. Important tasks may be ignored if no one person is specifically assigned accountability for them. A lack of clear guidance from the top of the organization can create confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus when relying on a simple structure, the owner of a firm must be sure to communicate often and openly with employees.

Functional Structure

As a small organization grows, the person in charge of it often finds that a simple structure is no longer adequate to meet the organization's needs. Organizations become more complex as they grow, and this can require more formal division of labour and a strong emphasis on hierarchy and vertical links. In many cases, these firms evolve from using a simple structure to relying on a functional structure.

Figure 9.9: Functional Structure

Within a functional structure, employees are divided into departments that each handle activities related to a functional area of the business, such as marketing, production, human resources, information technology, and customer service (Figure 9.9 "Functional Structure"). Each of these five areas would be headed up by a manager who coordinates all activities related to her functional area. Everyone in a company that works on marketing the company's products, for example, would report to the manager of the marketing department. The marketing managers and the managers in charge of the other four areas in turn would report to the chief executive officer.

Figure 9.10: An example of a functional structure.

Using a functional structure creates advantages and disadvantages. An important benefit of adopting a functional structure is that each person tends to learn a great deal about his or her particular function. By being placed in a department that consists entirely of marketing professionals, an individual has a great opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled specialists. Second, grouping everyone that serves a particular function into one department tends to keep costs low and create efficiencies. Also, because all the people in a particular department share the same background training, they tend to get along with one another. In other words, conflicts within departments are relatively rare.

Using a functional structure also has a significant downside: executing strategic changes can be very slow when compared with other structures. Suppose, for example, that a textbook publisher decides to introduce a new form of textbook that includes "scratch and sniff" photos that let students smell various products in addition to reading about them. If the publisher relies on a simple structure, the leader of the firm can simply assign someone to shepherd this unique new product through all aspects of the publication process.

If the publisher is organized using a functional structure, however, every department in the organization will have to be intimately involved in the creation of the new textbooks. Because the new product lies outside each department's routines, it may become lost in the proverbial shuffle. And unfortunately for the books' authors, the publication process will be halted whenever a functional area does not live up to its responsibilities in a timely manner. More generally, because functional structures are slow to execute change, they tend to work best for organizations that offer narrow and stable product lines.

The specific functional departments that appear in an organizational chart vary across organizations that use functional structures. In the example offered earlier in this section, a firm was divided into five functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology, and (5) customer service. In the TV show The Office, a different approach to a functional structure is used at the Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided into six functional areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5) human resources, and (6) accounting. A functional structure was a good fit for the branch at the time because its product line was limited to just selling office paper.

Multidivisional Structure

Many organizations offer a wide variety of products and services. Some of these organizations sell their offerings across an array of geographic regions. These approaches require firms to be responsive to local customers' needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, when they expand, many firms abandon the use of a functional structure as no longer optimal for their larger size. Often the new choice is a multidivisional structure. In this type of structure, employees are divided into departments based on products, services, and/or geographic regions.

In the multidivisional form, the firm is divided into semi-autonomous divisions that have their own support (corporate) structures with each division being responsible for its own production and maximizing its own profit. The firm still has a central office that oversees the other divisions but the central office's main responsibility is to develop overall strategies for the business, not to be responsible for each division's operations.

Jim Pattison Group is an example of a company organized this way. As noted in this chapter's opening vignette, most of the company's employees belong to one of nine product divisions: Food and Beverage, Media, Entertainment, Automotive and Agriculture, Periodical Distribution and Marketing, Signs, Packaging, Forest Products and Port Services, and Investments and Partnerships.

A big advantage of a multidivisional structure is that it allows a firm to act quickly. When Jim Pattison Group made a strategic move such as acquiring Ocean Foods, only the relevant division (in this case, Food and Beverage) needed to be involved in integrating the new unit into the company's hierarchy. In contrast, if the Group was organized using a functional structure, the transition would be much slower because all the divisions in the company would need to be involved. A multidivisional structure also helps an organization better serve customers' needs. In the summer of 2006, for example, Jim Pattison Group's Investments and Partnerships division created Great Pacific Bank Limited in Barbados. Because one division of Jim Pattison Group handles all the firm's investment business, the wisdom and skill needed to decide when to enter the banking business in Barbados was more easily accessible.

Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that do not fit with the company's overall strategy. McDonald's experienced this kind of situation in 2002. The France division of McDonald's ran a surprising advertisement in a magazine called Femme Actuelle. The ad included a quote from a nutritionist that asserted children should not eat at a McDonald's more than once per week. Executives at McDonald's headquarters in suburban Chicago were concerned about the message sent to their customers, of course, and they made it clear that they strongly disagreed with the nutritionist.

Figure 9.11: Problems can be created when delegating lots of authority to local divisions. McDonald's top executives were angered when an ad by their France division suggested that children should only eat at their restaurants once a week.

Another downside of multidivisional structures is that they tend to be more costly to operate than functional structures. While a functional structure offers the opportunity to gain efficiency by having just one department handle all activities in an area, such as marketing, a firm using a multidivisional structure needs to have marketing units within each of its divisions. In the Jim Pattison Group's case, for example, each of its nine divisions must develop its own marketing skills, which may reduce a firm's overall profit margin. The organization does have a Group Opportunities (GO) program that offers assistance such as group purchasing and shared services that can create efficiencies and save money.

An additional benefit of such moves is that consistency is created across divisions. Many Canadian universities and colleges have created an Office of Sustainability to coordinate sustainability initiatives across the entire organization. McMaster University has beekeeping on campus (McMaster, 2014). The University of Saskatchewan celebrated International Polar Bear Day by pledging to reduce building energy use by adjusting the cooling and heating temperatures in its buildings, and encouraging students and staff to take personal action to save energy now and in the future.

Matrix Structure

Within functional and multidivisional structures, vertical linkages between bosses and subordinates are central for decision making, communications, and accountability. Matrix Structure, in contrast, rely heavily on horizontal relationships. In particular, these structures create cross-functional teams that each work on a different project. This offers several benefits: maximizing the organization's flexibility, enhancing communication by emphasizing both vertical (top-down) and horizontal communications across functional lines, and supporting a stronger spirit of teamwork and collaboration. A matrix structure can also help develop new managers. In particular, a person with limited managerial experience can become a team leader for a relatively small project in developing their talents for leading others.

Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates the unity of command principle because each employee is assigned multiple bosses. Specifically, any given individual reports to a functional area supervisor as well as one or more project supervisors. This has the potential to create confusion for employees because they are left unsure about who should be giving them direction, especially in setting priorities for their work. Violating the unity of command principle also creates opportunities for unsavory employees to avoid responsibility by claiming to be busy on the other supervisor's projects.

The potential for conflicts arising between project managers within a matrix structure is another concern. Chances are that you have had some classes with professors who are excellent speakers, while in other classes, you have been forced to suffer through a semester of semi-incomprehensible lectures. This mix of experiences reflects a fundamental reality of management: in any organization, some workers are more talented and motivated than others. Within a matrix structure, each project manager naturally will want the best people in the company assigned to his or her project because the boss evaluates these managers based on how well their projects perform. Because the best people are a scarce resource, infighting and politics can easily flare up around which people are assigned to each project.

One area where some degree of matrix management appears to be successful is in health. Most larger Canadian provinces use a regional health model, with regions covering up to half of the province. Local employees, often physically quite remote from headquarters, receive professional direction and orders from HQ health specialists such as the regional head nurse or the regional dental director, while receiving day-to-day directions from a local operations manager.

Organizations such as engineering and consulting firms that are functionally project oriented and require maximum flexibility for projects of limited duration are candidates for matrix management. Matrix structures are also used to organize research and development departments within many large corporations. In each of these settings, the benefits of organizing around semi-autonomous teams are sufficient to outweigh the risks of doing so. However, overall, given the risks and issues in matrix management, few organizations are good candidates for a matrix structure.

Figure 9.12: Within a matrix structure, you will have multiple bosses, which contradicts the rule of direct chain of command.

Strategy at the Movies

Office Space
How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero. Initech's use of a matrix structure meant that each employee had multiple bosses, each representing a different aspect of Initech's business. High-tech firms often use matrix to gain the flexibility needed to manage multiple projects simultaneously. Successfully using a matrix structure requires excellent communication among various managers - however, excellence that Initech could not reach. When Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses - and a parade of his coworkers - admonished him. This fiasco and others led to Gibbons to become cynical about his job.

Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant Chotchkie's, had only one manager - a stark contrast to Gibbons's eight bosses. Unfortunately, Joanna's manager had an unhealthy obsession with the "flair" (colorful buttons and pins) used by employees to enliven their uniforms. A series of mixed messages about the restaurant's policy on flair led Joanna to emphatically proclaim - both verbally and nonverbally - her disdain for the manager. She then quit her job and stormed out of the restaurant.

Office Space illustrates the importance of organizational design decisions to an organization's culture and to employees' motivation levels. A matrix structure can facilitate resource sharing and collaboration but may also create complicated working relationships and impose excessive stress on employees. Chotchkie's organizational structure involved simpler working relationships, but these relationships were strained beyond the breaking point by a manager's eccentricities. In a more general sense, Office Space shows that all organizational structures involve a series of trade-offs that must be carefully managed.

Figure 9.13: Within a poorly organized firm like Initech, simply keeping possession of a treasured stapler is a challenge.

Boundaryless Organizations

Most organizational charts show clear divisions and boundaries between different units. The value of a much different approach was highlighted by former GE CEO Jack Welch when he created the term boundaryless organizations. A boundaryless organization is one that removes the usual barriers between parts of the organization as well as barriers between the organization and others. Eliminating all internal and external barriers is not possible, of course, but making progress toward being boundaryless can help an organization become more flexible and responsive.

One example is W. L. Gore, a maker of fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids organizational charts, management layers, and supervisors despite having approximately 9,000 employees across thirty countries. Rather than granting formal titles to certain people, leaders with W. L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, "We vote with our feet. If you call a meeting, and people show up, you're a leader".

Figure 9.14: The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative thinking that led to their most famous product, GORE-TEX.

An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During 2005's Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders from the National Guard (who are controlled by state governments) and those from active-duty military units (who are controlled by federal authorities). According to one National Guard officer, "It was just like a solid wall was between the two entities". Efforts were needlessly duplicated in some geographic areas while attention to other areas was delayed or inadequate. For example, poor coordination caused the evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The results were immense human suffering and numerous fatalities.

Figure 9.15: In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.

As Hurricane Sandy moved toward the U.S. East Coast near the end of 2012, the Secretary of Defense and affected governors agreed to appoint dual status commanders who could direct federal and National Guard forces. These commanders are typically National Guard officers who have been trained to preserve the two separate chains of command of federal and state forces, helping to coordinate troops and reduce redundancies. Under the direction of these commanders, Guard personnel conducted damage assessments and search-and-rescue missions, removed debris, delivered supplies and equipment, and supported evacuation shelters. The Defense Department also named active duty deputies to help supply dual status commanders with active duty troops if needed to deal with the effects of the hurricane. The coordinated effort worked much more efficiently in assisting those in need during and after the storm.

Reasons for Changing an Organization's Structure

Creating an organizational structure is not a one-time activity. Executives must revisit an organization's structure over time and make changes to it if certain danger signs arise. For example, a structure might need to be adjusted if decisions with the organization are being made too slowly or if the organization is performing poorly.

In 2014, Walmart Canada confirmed that it laid off 750 employees across Canada to re-work its management structure.  According to the company, after testing a new management structure in select stores, 1,300 associates were promoted to more senior roles and about 200 senior managers were added.

Procter and Gamble, the world's largest consumer products manufacturer, announced in 2014 that it may sell off its iconic Ivory soap brand. A range of reports pegged Ivory's 2013 global revenues at $112 million, and its share of the U.S. bar soap market at 3.4 percent. Even though Ivory maintains a high profile, it has retreated significantly from its highs of past decades, and it may be considered an expendable laggard among the high-performance product mix that P&G's CEO wants to create. P&G is being trimmed to concentrate on the seventy to eighty brands that generate more than $100 million in gross annual revenues. Ivory is just above that cutline, and projections do not call for growth.

Sometimes structures become too complex and need to be simplified. Many observers believe that this description fit Cisco Systems Inc., which designs, manufactures, and sells networking equipment. The company's CEO, John Chambers, has moved Cisco away from a hierarchical emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For any given project, a small team of people reported to one of forty-seven boards. The boards averaged fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council also averaged fourteen members. The councils reported to an operating committee consisting of Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and reported directly to the operating committee. These arrangements are so complex and time consuming that some top executives spend 30 percent of their work hours serving on more than ten of the boards, councils, and the operating committee.

Because it competes in fast-changing high-tech markets, Cisco needed to be able to make competitive moves quickly. The firm's complex structural arrangements are preventing this. In late 2007, a competitor, Hewlett-Packard (HP), started promoting a warranty service that provides free support and upgrades within the computer network switches market. Because Cisco's response to this initiative had to work its way through multiple committees, the firm did not take action until April 2009. During the delay, Cisco's share of the market dropped as customers embraced HP's warranty. This problem and others created by Cisco's overly complex structure were so severe that one columnist wondered aloud, "Has Cisco's John Chambers lost his mind?" (Blodget, 2009). In the summer of 2011, Chambers reversed course and decided to return Cisco to a more traditional structure, while reducing the firm's workforce by 9 percent. Time will tell whether these structural changes will boost Cisco's stock price, which dipped to $18 in mid-2011, but had rallied to the $24 range by 2014.

Key Takeaways

• Executives must select among the four types of structure (simple, functional, multidivisional, and matrix) available to organize operations. Each structure has unique advantages, and the selection of structures involves a series of trade-offs.
  

Creating Organizational Control Systems

Learning Objectives

1. Understand the three types of control systems.
2. Know the strengths and weaknesses of common management fads.

In addition to creating an appropriate organizational structure, effectively executing strategy depends on the skillful use of organizational control systems. Executives create strategies to try to achieve their organization's vision, mission, and goals. Organizational control systems allow executives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns. Three basic types of control systems are available to executives: (1) output control, (2) behavioural control, and (3) clan control. Different organizations emphasize different types of control, but most organizations use a mix of all three types.

Output Control

Output control focuses on measurable results within an organization. Examples from the business world include the number of hits a website receives per day, the number of microwave ovens an assembly line produces per week, and the number of vehicles a car salesperson sells per month (Figure 9.16 "Output Controls"). In each of these cases, executives must decide what level of performance is acceptable, communicate expectations to the relevant employees, track whether performance meets expectations, and then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their paychecks had been lost - by the U.S. Postal Service! The corrective action was simple: they started receiving their pay via direct deposit rather than through the mail.

Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent of Delta's flights had arrived on time during 2010. This performance led Delta to rank dead last among the major U.S. airlines and fifteenth out of eighteen total carriers. In response, Delta took important corrective steps. In particular, the airline added to its ability to service airplanes and provided more customer service training for its employees. Because some delays are inevitable, Delta also announced plans to staff a Twitter account called Delta Assist around the clock to help passengers whose flights are delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a $198 million profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices.

Figure 9.16: Output Controls

Output control also plays a big part in the university experience. For example, test scores and grade point averages are good examples of output measures. If you perform badly on a test, you might take corrective action by studying harder or by studying in a group for the next test. At colleges and universities, students may be put on academic probation when their grades or grade point average drops below a certain level. If their performance does not improve, they may be removed from their major and even suspended from further studies. On the positive side, output measures can trigger rewards too. A very high grade point average can lead to placement on the dean's list and graduating with honors.

Figure 9.17: UBC's Museum of Anthropology

Arthur Erickson, noted Canadian architect, graduated from University of British Columbia and was commissioned to design the Museum of Anthropology there, which opened in 1976. It was inspired by the post-and-beam architecture of northern Northwest Coast First Nations people.

Behavioural Control

While output control focuses on results, behavioural control focuses on controlling the actions that ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate behaviour (Figure 9.18 "Behavioural Controls"). In most states, for example, signs are posted in restaurant bathrooms reminding employees that they must wash their hands before returning to work. The dress codes that are enforced within many organizations are another example of behavioural control. To try to prevent employee theft, many firms have a rule that requires checks to be signed by two people. Some employers may prefer non-smoking employees, as cigarette breaks can take as much as 40 minutes out of a workday, plus higher absenteeism and associated health costs for smokers.

Figure 9.18: Behavioural Controls

Output control also plays a significant role in the university experience. An illustrative (although perhaps unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate students' behaviour; specifically, to force students to attend class. Meanwhile, if you were to suggest that a rule should be created to force professors to update their lectures at least once every five years, we would not disagree with you.

Outside the classroom, behavioural control is a major factor within university and college athletic programs. The Canadian Collegiate Athletic Association (CCAA) governs college athletics using a set of rules, policies, and procedures. CCAA members, all players, and coaches are expected to follow the standard guidelines and principles of the CCAA Code of Ethics, and failure to comply will result in disciplinary action. Some degree of behavioural control is needed within virtually all organizations.

Creating an effective reward structure is key to effectively managing behaviour because people tend to focus their efforts on the rewarded behaviours. Problems can arise when people are rewarded for behaviours that seem positive on the surface but that can actually undermine organizational goals under some circumstances. For example, restaurant servers are highly motivated to serve their tables quickly because doing so can increase their tips. But if a server devotes all his or her attention to providing fast service, other tasks that are vital to running a restaurant, such as communicating effectively with managers, host staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and strive to align rewards with behaviours. For example, wait staff who consistently behave as team players could be assigned to the most desirable and lucrative shifts, such as nights and weekends.

Figure 9.19: Although some behavioural controls are intended for employees and not customers, following them is beneficial to everyone.

Clan Control

Instead of measuring results (as in outcome control) or dictating behaviour (as in behavioural control), clan control is an informal type of control. Specifically, clan control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization (Figure 9.20 "Clan Controls"). Clan control is often used heavily in settings where creativity is vital, such as many high-tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The creativity of a research scientist would be likely to be stifled, for example, if he or she were given a quota of patents that must be met each year (output control) or if a strict dress code were enforced (behavioural control).

Figure 9.20: Clan Controls

Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent of their work week on their own innovative projects. The company offers an ‘‘ideas mailing list'' for employees to submit new ideas and to comment on others' ideas. Google executives routinely make themselves available two to three times per week for employees to visit with them to present their ideas. These informal meetings have generated a number of innovations, including personalized home pages and Google News, which might otherwise have never been adopted.

Figure 9.21: As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear.

Some executives look to clan control to improve the performance of struggling organizations. In 2014, Rogers Communications CEO Guy Laurence formally unveiled his plan to revitalize growth at the country's largest communications firm. The strategy, dubbed "Rogers 3.0," aimed to improve the customer experience and use the company's assets - which include everything from magazines to the Toronto Blue Jays - together in a more effective way. Laurence explained the issues he believed the company struggles with, and how his plan will address them. The reorganization is aimed at focusing on better customer service by bringing together all of the elements of customer experience - 10,400 staff - into a single unit reporting to him. In plans to improve customer service to business and enterprise customers, Rogers has split out consumers from enterprise users, believing there's a growth story in enterprise. Finally, Laurence said that Rogers' stable of sports, broadcast, and publishing properties would differentiate the company from its telecom peers and commented, "I believe content is the most important part of our mix".

Clan control is also important in many Canadian cities. Vancouver has the steam clock and Wreck Beach; Toronto has the CN Tower and the Blue Jays; Edmonton has the Oilers and West Edmonton Mall. These attractions are sources of pride to residents and desired places to visit for tourists; they help people feel like they belong to something special.

It is worth noting that control systems, once embedded in an organization, become very difficult to change. Control systems emerged within an organization, not by accident, but in response to the firm's need to monitor employees' work to encourage high performance. Changing results metrics is an invitation for gaming the data with employees finding innovative ways to ensure that the data shows they are performing at the expected level, while behaviour and clan culture are notoriously difficult to change, often taking a decade or more to truly change. New senior executives often tweak control systems in an effort to improve performance. However, the time required to actually implement such changes often exceeds the executive's tenure with the firm - thus the phrase, latest (management) fad.

Management Fads: Out of Control?

The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises when some element of popular culture becomes enthusiastically embraced by a group of people. Over the past few decades, for example, fashion fads have included leisure suits (1970s), "Members Only" jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle creates "buzz" and publicity but also ensures that its appeal is only temporary.

Figure 9.22: Managing Management Fads

Fads also seem to be a predictable aspect of the business world (Figure 9.22 "Managing Management Fads"). As with cultural fads, many provocative business ideas go through a life cycle of creating buzz, captivating a group of enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly endless supply of popular management books whose premises range from the intriguing to the absurd. Within the topic of leadership, for example, various books promise to reveal the "leadership secrets" of an eclectic array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun, and Santa Claus.

Beyond the striking similarities between cultural and business fads, there are also important differences. Most cultural fads are harmless, and they rarely create any long-term problems for those that embrace them. In contrast, embracing business fads could lead executives to make bad decisions. As the quote from Colin Powell suggests, relying on sound business practices is much more likely to help executives to execute their organization's strategy than are generic words of wisdom from Old St. Nick.

Many management fads have been closely tied to organizational control systems. For example, one of the best-known fads was an attempt to use output control to improve performance. Management by objectives (MBO)  is a process wherein managers and employees work together to create goals. These goals guide employees' behaviours and serve as the benchmarks for assessing their performance. Following the presentation of MBO in Peter Drucker's 1954 book The Practice of Management, many executives embraced the process as a cure-all for organizational problems and challenges as if previous management had not been concerned with their objectives!

Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an objective for every aspect of employees' activities eventually discovered that this was unrealistic. The creation of explicit goals can conflict with activities involving tacit knowledge about the organization. Intangible notions such as "providing excellent customer service," "treating people right," and "going the extra mile" are central to many organizations' success, but these notions are difficult if not impossible to quantify. Thus, in some cases, getting employees to embrace certain values and other aspects of clan control is more effective than MBO.

Quality circles were a second fad that built on the notion of behavioural control. Quality circles began in Japan in the 1960s and were first introduced in the United States in 1972. A quality circle is a formal group of employees that meets regularly to brainstorm solutions to organizational problems. As the name "quality circle" suggests, identifying behaviours that would improve the quality of products and the operations management processes that create the products was the formal charge of many quality circles.

While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions often results in a product that simply cannot satisfy customers' needs. Many products with perfect quality, for example, would be created too slowly and at too great a cost to compete in the market effectively. Thus trade-offs among quality, speed, cost, and flexibility are inevitable.

Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These discussions were thought to lead individuals to greater understanding of themselves and others. The anticipated results were more enlightened workers and a greater spirit of teamwork.

Research on social psychology has found that groups are often far crueler than individuals. Unfortunately, this meant that the candid nature of T-group discussions could easily degenerate into accusations and humiliation. Eventually, the T-group fad gave way to recognition that creating potentially hurtful situations has no place within an organization. Hints of the softer side of T-groups can still be observed in modern team-building fads, however. Perhaps the best known is the "trust game," which claims to build trust between employees by having individuals fall backward and depend on their coworkers to catch them.

Improving clan control was the basis for the fascination with organizational culture that was all the rage in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from America's Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they viewed as stellar performers and distilled eight similarities that were shared across the companies. Most of the similarities, including staying "close to the customer" and "productivity through people," arose from powerful corporate cultures. The book quickly became an international sensation; more than three million copies were sold in the first four years after its publication.

Soon it became clear that organizational culture's importance was being exaggerated. Before long, both the popular press and academic research revealed that many of Peters and Waterman's "excellent" companies quickly had fallen on hard times. Basic themes such as customer service and valuing one's company are quite useful, but these clan control elements often cannot take the place of holding employees accountable for their performance.

Figure 9.23: Spirited games of kickball can help build an organization's culture, but such events should not substitute for holding employees accountable for delivering results.

The history of fads allows us to make certain predictions about today's hot ideas, such as empowerment, "good to great," and viral marketing. Executives who distill and act on basic lessons from these fads are likely to enjoy performance improvements. Empowerment, for example, builds on important research findings regarding employees - many workers have important insights to offer to their firms, and these workers become more engaged in their jobs when executives take their insights seriously. Relying too heavily on a fad, however, seldom turns out well.

Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today's executives should avoid treating James Collins's 2001 best-selling book Good to Great: Why Some Companies Make the Leap…and Others Don't as a detailed blueprint for running their companies. Overall, executives should understand that management fads usually contain a core truth that can help organizations improve but that a balance of output, behavioural , and clan control is needed within most organizations. As legendary author Jack Kerouac noted, "Great things are not accomplished by those who yield to trends and fads and popular opinion".

Key Takeaways

Organizational control systems are a vital aspect of executing strategy because they track performance and identify adjustments that need to be made. Output controls involve measurable results. Behavioural controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values, expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually realize that an array of sound business practices is needed to create effective organizational controls.

Legal Forms of Business

Learning Objectives

1. Know the three basic legal forms of business.
2. Know the two specialized types of corporations.

Choosing a Form of Business

The legal form a firm chooses to operate under is an important decision with implications for how a firm structures its resources and assets. Several legal forms of business are available to entrepreneurial business owners. Each involves a different approach to dealing with profits and losses (Figure 9.24 "Business Forms").

Figure 9.24: Business Forms

There are three basic forms of business. A sole proprietorship is a firm that is owned by one person. From a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however, the owner is personally responsible for the firm's losses and debts. This presents a tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for example, there are a number of self-employed repair people, plumbers, and electricians who work alone on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses associated with operating an office.

In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole proprietorship in that the partners are the only beneficiaries of the firm's profits, but they are also responsible for any losses and debts. Partnerships can be especially attractive if each person's expertise complements the others. For example, an accountant who specializes in preparing individual tax returns and another who has mastered business taxes might choose to join forces to offer customers a more complete set of tax services than either could offer alone.

From a practical standpoint, a partnership allows a person to take time off without closing down the business temporarily. In a partnership of two home builders, if one were to suffer a serious injury, the other partner could take over supervising his or her partner's projects and see them through to completion. Had the builder been a sole proprietor, the customers and the business would have suffered greatly. However, a person who chooses to be part of a partnership rather than operating alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up costing you a lot of money. Thus developing trust and confidence in one's partner is very important.

Most large firms, such as Canadian Tire, are organized as corporations. A key difference between a corporation on the one hand and a sole proprietorship and a partnership on the other is that corporations involve the separation of ownership and management. Corporations sell shares of ownership that are publicly traded in stock markets, and they are managed by professional executives. These executives may own a significant portion of the corporation's stock, but this is not a legal requirement.

In Canada, there are several types of corporations:  a Canadian-controlled private corporation (CCPC);  a public corporation; a corporation controlled by a public corporation; and another corporation (you guessed it: the type of corporation that doesn't fit into any of the other categories). Legally, the shareholders or owners of corporations cannot be held legally liable for the corporations actions, their financial risk is limited to the value of the stocks they own.

A unique feature of corporations is how they deal with profits and losses. Unlike in sole proprietorships and partnerships, a corporation's owners (i.e., shareholders) do not directly receive profits or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits and losses tend to be reflected in whether the firm's stock price rises or falls. When a shareholder sells his or her stock, the firm's performance while that person has owned the stock will influence whether he or she makes a profit relative to the stock purchase. Shareholders can also benefit from profits if a firm's executives decide to pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends that these profits support are both taxed. This double taxation is a big disadvantage of share ownership in corporations.

A final form of business is a limited liability company (LLC). The Canada Revenue Agency (CRA) continues to treat the LLC as a corporation rather than a partnership, which results in classic double taxation to Canadian investors. Canadians should be aware that U.S. limited liability companies may be hazardous to their (tax) health.

Key Takeaways

• The three major forms of business in Canada are sole proprietorships, partnerships, and corporations. Each form has implications for how individuals are taxed and resources are managed and deployed.
  

Conclusion

This chapter has explained elements of organizational design that are vital for executing strategy. Leaders of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about the delegation of authority and responsibility when organizing activities within their firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions that lead to the creation of formal organizational charts. While small businesses rarely create organization charts, firms that embrace functional, multidivisional, and matrix structures often have reporting relationships with considerable complexity. To execute strategy effectively, managers also depend on the skillful use of organizational control systems that involve output, behavioural, and clan controls. Although introducing more efficient business practices to improve organizational functioning is desirable, executives should avoid letting their firms become "out of control" by being skeptical of management fads. Finally, the legal form a business takes is an important decision with implications for a firm's organizational structure.