Organization Theory and Design

Organization Theory and Design

NINTH EDITION

Richard L. Daft

VANDERBILT UNIVERSITY

Organization Theory and Design, Ninth Edition
Richard L. Daft

With the Assistance of Patricia G. Lane

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About the Author

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

Professor Daft has authored or co-authored 12 books, including Management
(Thomson Learning/South-Western, 2005), The Leadership Experience (Thomson
Learning/South-Western, 2005), and What to Study: Generating and Developing
Research Questions (Sage, 1982). He recently published Fusion Leadership: Un-
locking the Subtle Forces That Change People and Organizations (Berrett-Koehler,
2000, with Robert Lengel). He has also authored dozens of scholarly articles,
papers, and chapters. His work has been published in Administrative Science Quar-
terly, Academy of Management Journal, Academy of Management Review, Strategic
Management Journal, Journal of Management, Accounting Organizations and
Society, Management Science, MIS Quarterly, California Management Review, and
Organizational Behavior Teaching Review. Professor Daft has been awarded several
government research grants to pursue studies of organization design, organizational
innovation and change, strategy implementation, and organizational information
processing.

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

iii

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Brief Contents

Preface xv

Part 1: Introduction to Organizations 1
53
1. Organizations and Organization Theory 2 135
243
Part 2: Organizational Purpose and Structural Design 357

2. Strategy, Organization Design, and Effectiveness 54 517
3. Fundamentals of Organization Structure 88

Part 3: Open System Design Elements 204

4. The External Environment 136
5. Interorganizational Relationships 170
6. Designing Organizations for the International Environment

Part 4: Internal Design Elements

7. Manufacturing and Service Technologies 244
8. Information Technology and Control 286
9. Organization Size, Life Cycle, and Decline 319

Part 5: Managing Dynamic Processes

10. Organizational Culture and Ethical Values 358
11. Innovation and Change 398
12. Decision-Making Processes 441
13. Conflict, Power, and Politics 481

Integrative Cases

1.0 It Isn’t So Simple: Infrastructure Change at Royce Consulting 518
2.0 Custom Chip, Inc. 522
3.0 W. L. Gore & Associates, Inc. Entering 1998 528
4.0 XEL Communications, Inc. (C): Forming a Strategic Partnership 543
5.0 Empire Plastics 549
6.0 The Audubon Zoo, 1993 552
7.0 Moss Adams, LLP 566
8.1 Littleton Manufacturing (A) 577
8.2 Littleton Manufacturing (B) 589

Glossary 591 610
Name Index 601
Corporate Name Index
Subject Index 614

v

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Contents

Preface xv

Part 1: Introduction to Organizations 1

Chapter 1: Organizations 2 In Practice: W. L. Gore & Associates 21
and Organization Theory 24
3 Performance and Effectiveness Outcomes, 22 25
A Look Inside: Xerox Corporation 6 In Practice: Federal Bureau of Investigation
7 32
Organization Theory in Action 10 The Evolution of Organization Theory and Design 33
Topics, 6 • Current Challenges, 6 Historical Perspectives, 25 • Contemporary
12 Organization Design, 27 • Efficient 36
Leading by Design: The Rolling Stones 14 Performance versus the Learning 38
Organization, 28 39
Purpose of This Chapter, 10 17
In Practice: Cementos Mexicanos
What Is an Organization?
Definition, 10 • Types of Organizations, 11 Framework for the Book
• Importance of Organizations, 12 Levels of Analysis, 33 • Plan of the Book,
34 • Plan of Each Chapter, 36
Book Mark 1.0: The Company: A Short History of a
Revolutionary Idea Summary and Interpretation

Perspectives on Organizations Chapter 1 Workbook: Measuring Dimensions
Open Systems, 14 • Organizational of Organizations
Configuration, 16 Case for Analysis: Perdue Farms Inc.:
Responding to 21st Century Challenges
Dimensions of Organization Design
Structural Dimensions, 17 • Contextual
Dimensions, 20

Part 2: Organizational Purpose and Structural Design 53

Chapter 2: Strategy, Organization Leading by Design: Wegmans 61
Design, and Effectiveness 62
54 The Importance of Goals, 62 64

A Look Inside: Starbucks Corporation 55 A Framework for Selecting Strategy and Design vii

Purpose of This Chapter, 56 Porter’s Competitive Strategies, 63

The Role of Strategic Direction in Organization In Practice: Ryanair

Design 56 Miles and Snow’s Strategy Typology, 65

Organizational Purpose 58

Mission, 58 • Operative Goals, 59

viii Contents

Book Mark 2.0: What Really Works: 66 Required Work Activities, 99 • Reporting 102
The 4 ϩ 2 Formula for Sustained Business Success Relationships, 100 • Departmental 103
70 Grouping Options, 100
How Strategies Affect Organization 70 Functional, Divisional, and Geographical Designs 106
Design, 67 • Other Factors Affecting Functional Structure, 102 108
Organization Design, 69 72
Assessing Organizational Effectiveness In Practice: Blue Bell Creameries, Inc. 111
Contingency Effectiveness Approaches 75 Functional Structure with Horizontal 113
Goal Approach, 71 78 Linkages, 104 • Divisional Structure, 104 115
In Practice: Chevrolet 79 117
Resource-based Approach, 73 • Internal In Practice: Microsoft 118
Process Approach, 74 80 Geographical Structure, 107 120
An Integrated Effectiveness Model 81 122
In Practice: The Thomson Corporation 84 Matrix Structure
Summary and Interpretation 85 Conditions for the Matrix, 109 • Strengths 124
and Weaknesses, 110 126
Chapter 2 Workbook: Identifying Company Goals 88 126
and Strategies In Practice: Englander Steel 129
89 Horizontal Structure
Case for Analysis: The University Art Museum 90
Case for Analysis: Airstar, Inc. 91 Characteristics, 114
In Practice: GE Salisbury
Chapter 2 Workshop: Competing Values 92
and Organizational Effectiveness Strengths and Weaknesses, 116
94 Virtual Network Structure
Chapter 3: Fundamentals 99
of Organization Structure How the Structure Works, 117
In Practice: TiVo Inc.
A Look Inside: Ford Motor Company
Purpose of This Chapter, 90 Strengths and Weaknesses, 118
Hybrid Structure
Organization Structure Applications of Structural Design
Information-Processing Perspective on Structure
Book Mark 3.0: The Future of Work: How the New Structural Alignment, 122 • Symptoms of
Order of Business Will Shape Your Organization, Your Structural Deficiency, 123
Management Style, and Your Life Summary and Interpretation

Vertical Information Linkages, 93 Chapter 3 Workbook: You and Organization
In Practice: Oracle Corporation Structure

Horizontal Information Linkages, 95 Case for Analysis: C & C Grocery Stores, Inc.
Organization Design Alternatives Case for Analysis: Aquarius Advertising Agency

Part 3: Open System Design Elements 135

Chapter 4: The External Environment 136 Environmental Uncertainty 142

A Look Inside: Nokia 137 Simple–Complex Dimension, 143 •
138 Stable–Unstable Dimension, 144
Purpose of This Chapter, 138
142 Book Mark 4.0: Confronting Reality: Doing What Matters
The Environmental Domain
Task Environment, 138 • General to Get Things Right 144
Environment, 140 • International
Context, 141 Framework, 145

In Practice: Ogilvy & Mather Adapting to Environmental Uncertainty 147

Positions and Departments, 147 • Buffering
and Boundary Spanning, 147

viii

Contents ix

In Practice: Genesco 149 In Practice: Genentech 188
Institutionalism 188
Differentiation and Integration, 149 • 153 In Practice: Wal-Mart 189
Organic versus Mechanistic Management 154
Processes, 151 • Planning, Forecasting, and 154 The Institutional View and Organization 193
Responsiveness, 152 156 Design, 190 • Institutional Similarity, 190 195
Summary and Interpretation 195
Leading by Design: Rowe Furniture Company 157 196
Chapter 5 Workbook: Management Fads 199
Framework for Organizational Responses 160
to Uncertainty Case for Analysis: Oxford Plastics Company
161 Case for Analysis: Hugh Russel, Inc.
Resource Dependence 164
165 Chapter 5 Workshop: Ugli Orange Case
Controlling Environmental Resources
Chapter 6: Designing Organizations
Establishing Interorganizational Linkages, for the International Environment 204
156
A Look Inside: Gruner ϩ Jahr 205
In Practice: Verizon and SBC Communications Inc.
Purpose of This Chapter, 206
Controlling the Environmental Domain,
159 Entering the Global Arena 206

In Practice: Wal-Mart Motivations for Global Expansion, 206 •
Stages of International Development, 209 •
Organization–Environment Integrative Global Expansion through International
Framework, 161 Strategic Alliances, 210

Summary and Interpretation Designing Structure to Fit Global Strategy 211

Chapter 4 Workbook: Organizations You Rely On Model for Global versus Local
Opportunities, 211 • International
Case for Analysis: The Paradoxical Twins: Division, 214 • Global Product Division
Structure, 215 • Global Geographical
Acme and Omega Electronics Division Structure, 215

Chapter 5: Interorganizational 170 In Practice: Colgate-Palmolive Company 217
Relationships
171 Global Matrix Structure, 218
A Look Inside: International Truck 172
and Engine Corporation 173 In Practice: Asea Brown Boveri Ltd. (ABB) 219

Purpose of This Chapter, 172 177 Building Global Capabilities 220
Organizational Ecosystems
178 The Global Organizational Challenge, 220
Is Competition Dead? 173
181 In Practice: Sony 223
In Practice: Amazon.com Inc. 182
The Changing Role of Management, 174 • 183 Global Coordination Mechanisms, 224
Interorganizational Framework, 176
186 Cultural Differences in Coordination and Control 227
Resource Dependence
Resource Strategies, 177 • Power Strategies, National Value Systems, 227 • Three
178 National Approaches to Coordination
and Control, 227
Collaborative Networks
Why Collaboration? 179 • From Book Mark 6.0: Cross-Cultural Business Behavior: 228
Adversaries to Partners, 180 Marketing, Negotiating and Managing
Across Cultures
Book Mark 5.0: Managing Strategic Relationships:
The Key to Business Success The Transnational Model of Organization 230

In Practice: Bombardier Summary and Interpretation 233

Population Ecology Chapter 6 Workbook: Made in the U.S.A.? 235
Organizational Form and Niche, 184 • 235
Process of Ecological Change, 185 Case for Analysis: TopDog Software 236
Case for Analysis: Rhodes Industries 239
Leading by Design: Shazam—It’s Magic!
Chapter 6 Workshop: Comparing Cultures
Strategies for Survival, 187

x Contents

Part 4: Internal Design Elements 243

Chapter 7: Manufacturing 244 Information for Decision Making and Control 291
and Service Technologies
245 Organizational Decision-Making Systems, 291 295
A Look Inside: American Axle & Manufacturing 248 • Feedback Control Model, 293 •
(AAM) Management Control Systems, 293 298
251
Purpose of This Chapter, 247 252 In Practice: eBay 302
Core Organization Manufacturing Technology 253 303
The Balanced Scorecard, 296 304
Manufacturing Firms, 248 • Strategy, 255 304
Technology, and Performance, 250 256 Adding Strategic Value: Strengthening Internal
In Practice: Printronix 259 Coordination 308
Intranets, 298 • Enterprise Resource 309
Book Mark 7.0: Inviting Disaster: 263 Planning, 299 • Knowledge Management, 311
Lessons from the Edge of Technology 264 300 313
Contemporary Applications 315
Flexible Manufacturing Systems, 253 • Lean 266 Book Mark 8.0: The Myth of the Paperless Office 316
Manufacturing, 254 268
In Practice: Autoliv 269 In Practice: Montgomery-Watson Harza

Leading by Design: Dell Computer 273 Adding Strategic Value: Strengthening External
Performance and Structural Implications, 257 274 Relationships
Core Organization Service Technology
276 Leading by Design: Corrugated Supplies
Service Firms, 259 • Designing the Service 278
Organization, 262 280 The Integrated Enterprise, 305 • Customer
In Practice: Pret A Manger Relationship Management, 307 •
Non-Core Departmental Technology 286 E-Business Organization Design, 307
Variety, 264 • Analyzability, 264 •
Framework, 264 287 In Practice: Tesco.com
Department Design 289
In Practice: Parkland Memorial Hospital 290 IT Impact on Organization Design
Workflow Interdependence among Departments
Types, 269 • Structural Priority, 271 • Summary and Interpretation
Structural Implications, 272
In Practice: Athletic Teams Chapter 8 Workbook: Are You Fast Enough
Impact of Technology on Job Design to Succeed in Internet Time?
Job Design, 274 • Sociotechnical Systems,
275 Case for Analysis: Century Medical
Summary and Interpretation Case for Analysis: Product X

Chapter 7 Workbook: Bistro Technology Chapter 9: Organization Size, 319
Life Cycle, and Decline
Case for Analysis: Acetate Department
A Look Inside: Interpol 320
Chapter 8: Information Technology
and Control Purpose of This Chapter, 321

A Look Inside: The Progressive Group of Insurance Organization Size: Is Bigger Better? 321
Companies
Pressures for Growth, 321 • Dilemmas of
Purpose of This Chapter, 289 Large Size, 322
Information Technology Evolution
In Practice: Anheuser-Busch Book Mark 9.0: Execution: The Discipline of Getting

Things Done 325

Organizational Life Cycle 326

Stages of Life Cycle Development, 326

In Practice: Nike 329

Organizational Characteristics during the
Life Cycle, 330

Organizational Bureaucracy and Control 331

What Is Bureaucracy? 332

In Practice: United Parcel Service 333

Size and Structural Control, 334

Contents 335 Organizational Decline and Downsizing xi
Definition and Causes, 343 • A Model of
Bureaucracy in a Changing World Decline Stages, 344 343
Organizing Temporary Systems for
Flexibility and Innovation, 336 • Other In Practice: Brobeck, Phleger & Harrison LLP 346
Approaches to Reducing Bureaucracy, 337 338 Downsizing Implementation, 346
339 In Practice: Charles Schwab & Company 348
Leading by Design: The Salvation Army 348
Organizational Control Strategies Summary and Interpretation 350
351
Bureaucratic Control, 339 • Market 341 Chapter 9 Workbook: Control Mechanisms 352
Control, 340
In Practice: Imperial Oil Limited Case for Analysis: Sunflower Incorporated
Clan Control, 341
In Practice: Southwest Airlines 342 Chapter 9 Workshop: Windsock, Inc.

Part 5: Managing Dynamic Processes 357

Chapter 10: Organizational Culture 358 Formal Structure and Systems, 382 385
and Ethical Values 386
In Practice: General Electric 387
A Look Inside: Boots Company PLC 359 389
Corporate Culture and Ethics in a Global 390
Purpose of This Chapter, 360 Environment 392
394
Organizational Culture 361 Summary and Interpretation
398
What Is Culture? 361 • Emergence and Chapter 10 Workbook: Shop ‘til You Drop:
Purpose of Culture, 361 • Interpreting Corporate Culture in the Retail World 399
Culture, 363
Case for Analysis: Implementing Change at 400
Book Mark 10.0: Good to Great: Why Some 364
Companies Make the Leap . . . And Others Don’t National Industrial Products 403
405
Organization Design and Culture 367 Case for Analysis: Does This Milkshake Taste 407

The Adaptability Culture, 368 • The Funny? 411
Mission Culture, 368 412
Chapter 10 Workshop: The Power of Ethics
In Practice: J.C. Penney 369 415
Chapter 11: Innovation and Change
The Clan Culture, 369 • The Bureaucratic
Culture, 369 • Culture Strength and A Look Inside: Toyota Motor Corporation
Organizational Subcultures, 370
Purpose of This Chapter, 400
In Practice: Pitney Bowes Credit Corporation 371 Innovate or Perish: The Strategic Role

Organizational Culture, Learning, and Performance 371 of Change
Incremental versus Radical Change, 400 •
Leading by Design: JetBlue Airways 372 Strategic Types of Change, 402

Ethical Values and Social Responsibility 374 Leading by Design: Google

Sources of Individual Ethical Principles, Elements for Successful Change
374 • Managerial Ethics and Social Technology Change
Responsibility, 375 • Does It Pay to Be
Good? 377 The Ambidextrous Approach, 407 •
Techniques for Encouraging Technology
Sources of Ethical Values in Organizations 378 Change, 408

Personal Ethics, 378 • Organizational In Practice: W. L. Gore
Culture, 379 • Organizational Systems, 379
• External Stakeholders, 380 New Products and Services
New Product Success Rate, 412 • Reasons
How Leaders Shape Culture and Ethics 381 for New Product Success, 412 •
Horizontal Coordination Model, 413
Values-based Leadership, 381
In Practice: Procter & Gamble
In Practice: Kingston Technology Co. 382

xii Contents

Achieving Competitive Advantage: The 417 The Learning Organization 462
Need for Speed, 416
Strategy and Structure Change 419 Combining the Incremental Process and 466
The Dual-Core Approach, 417 • 420 Carnegie Models, 462 • Garbage Can 467
Organization Design for Implementing 421 Model, 463
Administrative Change, 418 471
In Practice: Tyco International 424 In Practice: I ♥ Huckabees
Culture Change 473
Forces for Culture Change, 420 424 Contingency Decision-Making Framework 475
In Practice: X-Rite Inc. 476
Organization Development Culture Change 429 Problem Consensus, 467 • Technical 477
Interventions, 422 430 Knowledge about Solutions, 468 •
Strategies for Implementing Change 432 Contingency Framework, 468
Book Mark 11.0: The Change Monster: 436
The Human Forces That Fuel or Foil Corporate Special Decision Circumstances
Transformation and Change 441
Leadership for Change, 425 • Barriers to High-Velocity Environments, 471 •
Change, 426 • Techniques for 442 Decision Mistakes and Learning, 472 •
Implementation, 426 443 Escalating Commitment, 473
Summary and Interpretation 445
448 Summary and Interpretation
Chapter 11 Workbook: Innovation Climate 450
452 Chapter 12 Workbook: Decision Styles
Case for Analysis: Shoe Corporation of Illinois 453
Case for Analysis: Southern Discomfort 453 Case for Analysis: Cracking the Whip
454 Case for Analysis: The Dilemma of Aliesha State
Chapter 12: Decision-Making 457
Processes 461 College: Competence versus Need

A Look Inside: Maytag Chapter 13: Conflict, Power, 481
Purpose of This Chapter, 443 and Politics
482
Definitions A Look Inside: Morgan Stanley 483
Individual Decision Making
Purpose of This Chapter, 483 486
Rational Approach, 445 Intergroup Conflict in Organizations 488
In Practice: Alberta Consulting
Sources of Conflict, 484 496
Bounded Rationality Perspective, 448 498
Leading by Design: Motek Leading by Design: Advanced Cardiovascular 498
Systems
Book Mark 12.0: Blink: The Power of Thinking 500
without Thinking Rational versus Political Model, 487
Power and Organizations 504
In Practice: Paramount Pictures 505
Organizational Decision Making Individual versus Organizational Power,
489 • Power versus Authority, 489 •
Management Science Approach, 453 Vertical Sources of Power, 490 • Horizontal
In Practice: Continental Airlines Sources of Power, 494

Carnegie Model, 456 In Practice: University of Illinois
In Practice: Encyclopaedia Britannica
In Practice: HCA and Aetna Inc.
Incremental Decision Process Model, 458
In Practice: Gillette Company Political Processes in Organizations
Definition, 499 • When Is Political Activity
Used? 500

Using Power, Politics, and Collaboration
Tactics for Increasing Power, 501 • Political
Tactics for Using Power, 502

Book Mark 13.0: Influence: Science and Practice

In Practice: Yahoo!

Tactics for Enhancing Collaboration, 505

Contents xiii

In Practice: Aluminum Company of America/ 506 4.0 XEL Communications, Inc. (C): Forming 543
International Association of Machinists 508 a Strategic Partnership 549
Summary and Interpretation 552
510 5.0 Empire Plastics 566
Chapter 13 Workbook: How Do You Handle 511 6.0 The Audubon Zoo, 1993 577
Conflict? 512 7.0 Moss Adams, LLP 589
8.1 Littleton Manufacturing (A)
Case for Analysis: The Daily Tribune 8.2 Littleton Manufacturing (B) 591
Case for Analysis: Pierre Dux 601
Glossary 610
Integrative Cases 517 614
Name Index
1.0 It Isn’t So Simple: Infrastructure Change 518
at Royce Consulting 522 Corporate Name Index
528
2.0 Custom Chip, Inc. Subject Index
3.0 W. L. Gore & Associates, Inc. Entering 1998

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Preface

My vision for the Ninth Edition of Organization Theory and Design is to integrate
contemporary problems about organization design with classic ideas and theories in
a way that is interesting and enjoyable for students. Significant changes in this edi-
tion include updates to every chapter that incorporate the most recent ideas, new
case examples, new book reviews, new end-of-chapter cases, and new end-of-book
integrative cases. The research and theories in the field of organization studies are
rich and insightful and will help students and managers understand their organiza-
tional world and solve real-life problems. My mission is to combine the concepts
and models from organizational theory with changing events in the real world to
provide the most up-to-date view of organization design available.

Distinguishing Features of the Ninth Edition

Many students in a typical organization theory course do not have extensive work
experience, especially at the middle and upper levels, where organization theory is
most applicable. To engage students in the world of organizations, the Ninth Edi-
tion adds and expands significant features: Leading by Design boxes with current
examples of companies that are successfully using organization design concepts to
compete in today’s complex and uncertain business world, student experiential ac-
tivities that engage students in applying chapter concepts, new Book Marks, new In
Practice examples, and new end-of-chapter and integrative cases for student analy-
sis. The total set of features substantially expands and improves the book’s content
and accessibility. These multiple pedagogical devices are used to enhance student in-
volvement in text materials.

Leading by Design The Leading by Design features describe companies that have
undergone a major shift in organization design, strategic direction, values, or cul-
ture as they strive to be more competitive in today’s turbulent global environment.
Many of these companies are applying new design ideas such as network organiz-
ing, e-business, or temporary systems for flexibility and innovation. The Leading by
Design examples illustrate company transformations toward knowledge sharing,
empowerment of employees, new structures, new cultures, the breaking down of
barriers between departments and organizations, and the joining together of em-
ployees in a common mission. Examples of Leading by Design organizations include
Wegmans Supermarkets, Google, The Salvation Army, JetBlue, Corrugated Supplies,
Shazam, the Rolling Stones, and Dell Computer.

xv

xvi Preface

Book Marks Book Marks, a unique feature of this text, are book reviews that re-
flect current issues of concern for managers working in real-life organizations. These
reviews describe the varied ways companies are dealing with the challenges of to-
day’s changing environment. New Book Marks in the Ninth Edition include The Fu-
ture of Work: How the New Order of Business Will Shape Your Organization, Your
Management Style, and Your Life; Execution: The Discipline of Getting Things
Done; What Really Works: The 4 ϩ 2 Formula for Sustained Business Success;
Blink: The Power of Thinking without Thinking; The Company: A Short History of
a Revolutionary Idea; and Confronting Reality: Doing What Matters to Get Things
Right.

New Case Examples This edition contains many new examples to illustrate theo-
retical concepts. Many examples are international, and all are based on real organ-
izations. New chapter opening cases for the Ninth Edition include Gruner ϩ Jahr,
International Truck and Engine Company, Morgan Stanley, Ford Motor Company,
Boots Company PLC, Maytag, Toyota, and American Axle & Manufacturing. New
In Practice cases used within chapters to illustrate specific concepts include TiVo
Inc., General Electric, J.C. Penney, Genentech, Ryanair, Charles Schwab and Com-
pany, Nike, Verizon Communications, eBay, Tyco International, Sony, and the Fed-
eral Bureau of Investigation.

A Look Inside This feature introduces each chapter with a relevant and interesting
organizational example. Many examples are international, and all are based on real
organizations. New cases include Boots Company PLC, International Truck and
Engine Company, Gruner ϩ Jahr, Morgan Stanley, Toyota, and American Axle &
Manufacturing.

In Practice These cases also illustrate theoretical concepts in organizational settings.
New In Practice cases used within chapters to illustrate specific concepts include
J.C. Penney, Charles Schwab and Company, eBay, the Federal Bureau of Investiga-
tion, Ryanair, Chevrolet, Genentech, Tyco International, and Sony.

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

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

Summary and Interpretation The summary and interpretation section tells stu-
dents how the chapter points are important in the broader context of organizational
theory.

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

Integrative Cases The integrative cases at the end of the text are positioned to
encourage student discussion and involvement. These cases include Royce Consulting;
Custom Chip, Inc.; W. L. Gore & Associates, Inc.; XEL Communications, Inc.;
Empire Plastics; The Audubon Zoo; Moss Adams, LLP; and Littleton Manufacturing.

Preface xvii

New Concepts

Many concepts have been added or expanded in this edition. New material has been
added on culture, learning, and performance; virtual network organization struc-
tures; applying ethics to create socially responsible organizations; outsourcing; lean
manufacturing; customer relationship management; political tactics for increasing
and using manager power; applying business intelligence; and the use of global co-
ordination mechanisms for transferring knowledge and innovation. Many ideas are
aimed at helping students learn to design organizations for an environment charac-
terized by uncertainty; a renewed emphasis on ethics and social responsibility; and
the need for a speedy response to change, crises, or shifting customer expectations.
In addition, coping with the complexity of today’s global environment is explored
thoroughly in Chapter 6.

Chapter Organization

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

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

Supplements

Instructor’s Manual with Test Bank (ISBN: 0-324-40543-X) The Instructor’s Man-
ual contains chapter overviews, chapter outlines, lecture enhancements, discussion
questions, discussion of workbook activities, discussion of chapter cases, Internet
activities, case notes for integrative cases, and a guide to the videos available for use
with the text. The Test Bank consists of multiple choice, true/false, and short answer
questions.

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

xviii Preface

ExamView A computerized version of the Test Bank is available upon request.
ExamView contains all of the questions in the printed test bank. This program is
easy-to-use test creation software compatible with Microsoft Windows. Instructors
can add or edit questions, instructions, and answers and can select questions (ran-
domly or numerically) by previewing them on the screen. Instructors can also cre-
ate and administer quizzes online, whether over the Internet, a local area network
(LAN), or a wide area network (WAN).

Instructor’s Resource CD-ROM (ISBN: 0-324-40579-0) Key instructor ancillaries
(Instructor’s Manual, Test Bank, ExamView, and PowerPoint slides) are provided
on CD-ROM, giving instructors the ultimate tool for customizing lectures and
presentations.

WebTutor™ Toolbox (0-324-43106-6 on WebCT or 0-324-43109-0 on Black-
Board) WebTutor is an interactive, Web-based student supplement on WebCT and/or
BlackBoard that harnesses the power of the Internet to deliver innovative learning aids
that actively engage students. The instructor can incorporate WebTutor as an integral
part of the course, or the students can use it on their own as a study guide.

Web Site (http://daft.swlearning.com) The Daft Web site is a comprehensive,
resource-rich location for both instructors and students to find pertinent informa-
tion. The Instructor Resources section contains an Instructor’s Manual download,
Test Bank download, PowerPoint download, and case material.

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

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

Acknowledgments

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

David Ackerman Suzanne Clinton
University of Alaska, Southeast Cameron University

Michael Bourke Jo Anne Duffy
Houston Baptist University Sam Houston State University

Preface xix

Cheryl Duvall Asbjorn Osland
Mercer University George Fox University

Patricia Feltes Laynie Pizzolatto
Missouri State University Nicholls State University

Robert Girling Samantha Rice
Sonoma State University Abilene Christian University

John A. Gould Richard Saaverda
University of Maryland University of Michigan

Ralph Hanke W. Robert Sampson
Pennsylvania State University University of Wisconsin, Eau Claire

Bruce J. Hanson Amy Sevier
Pepperdine University University of Southern Mississippi

Guiseppe Labianca W. Scott Sherman
Tulane University Pepperdine University

Jane Lemaster Thomas Terrell
University of Texas–Pan American Coppin State College

Steven Maranville Jack Tucci
University of Saint Thomas Southeastern Louisiana University

Rick Martinez Judith White
Baylor University Santa Clara University

Janet Near Jan Zahrly
Indiana University University of North Dakota

Julie Newcomer
Texas Woman’s University

Among my professional colleagues, I am grateful to my friends and colleagues
at Vanderbilt’s Owen School—Bruce Barry, Ray Friedman, Neta Moye, Rich Oliver,
David Owens, and Bart Victor—for their intellectual stimulation and feedback. I
also owe a special debt to Dean Jim Bradford and Senior Associate Dean Joe Black-
burn for providing the time and resources for me to stay current on the organiza-
tion design literature and develop the revisions for the text.

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

The team at South-Western also deserves special mention. Joe Sabatino did a
great job of designing the project and offering ideas for improvement. Emma Gut-
tler was superb as Developmental Editor, keeping the people and project on sched-
ule while solving problems creatively and quickly. Cliff Kallemeyn, Production
Editor, provided superb project coordination and used his creativity and manage-
ment skills to facilitate the book’s on-time completion.

Finally, I want to acknowledge the love and contributions of my wife, Dorothy
Marcic. Dorothy has been very supportive of my textbook projects and has created

xx Preface

an environment in which we can grow together. She helped the book take a giant
step forward with her creation of the Workbook and Workshop student exercises.
Perhaps best of all, Dorothy lets me practice applying organization design ideas as
co-producer of her theatrical productions. I also want to acknowledge the love and
support of my daughters, Danielle, Amy, Roxanne, Solange, and Elizabeth, who
make my life special during our precious time together.

PART 1

Introduction to
Organizations

1. Organizations and
Organization Theory

Organizations

1 and Organization Theory

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

What Is an Organization?
Definition • Types of Organizations • Importance of Organizations

Perspectives on Organizations
Open Systems • Organizational Configuration

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

The Evolution of Organization Theory and Design
Historical Perspectives • Contemporary Organization Design • Efficient Performance
versus the Learning Organization

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

Summary and Interpretation

A Look Inside

Xerox Corporation

Xerox was once an icon of innovation and corporate success in the
business of copying and digital imaging. On the eve of the twenty-
first century, the company seemed on top of the world, with fast-
rising earnings, a soaring stock price, and a new line of computerized
copier-printers that were technologically superior to rival products.
Less than 2 years later, many considered Xerox a has-been, destined to fade
into history. Consider the following events:

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

• Xerox’s losses for the opening year of the twenty-first century totaled $384 million,
and the company continued to bleed red ink. Debt mounted to $17 billion.

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

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

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

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

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

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

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

4 Part 1: Introduction to Organizations

Xerox’s Palo Alto Research Center (PARC), established in 1970, became known around the
world for innovation—many of the most revolutionary technologies in the computer industry,
including the personal computer, graphical user interface, Ethernet, and laser printer, were in-
vented at PARC. But the copier bureaucracy, or Burox as it came to be known, blinded Xerox
leaders to the enormous potential of these innovations. While Xerox was plodding along sell-
ing copy machines, younger, smaller, and hungrier companies were developing PARC tech-
nologies into tremendous money-making products and services. “At Xerox, unless there’s a cri-
sis in the organization, as long as the stock prices are acceptable, it doesn’t move very fast,”
says a former Xerox manager.

The dangers of Burox became dramatically clear in the early 1970s, when the company’s
xerography patents began expiring. Suddenly, Japanese rivals such as Canon and Ricoh were
selling copiers at the cost it took Xerox to make them. Market share declined from 95 percent
to 13 percent by 1982. And with no new products to make up the difference, the company
had to fight hard to cut costs and reclaim market share by committing to Japanese-style tech-
niques and total quality management. Through the strength of his leadership, CEO Kearns was
able to rally the troops and rejuvenate the company by 1990. However, he also set Xerox on
a path to future disaster. Seeing a need to diversify, Kearns moved the company into insurance
and financial services on a large scale. By the time he turned leadership over to Paul Allaire in
1990, Xerox’s balance sheet was crippled by billions of dollars in insurance liabilities.

Entering the Digital Age
Allaire wisely began a methodical, step-by-step plan for extricating Xerox from the insurance
and financial services business. At the same time, he initiated a mixed strategy of cost-cutting
and new-product introductions to get the stodgy company moving again. Xerox had success
with a line of digital presses and new high-speed digital copiers, but it fumbled again by un-
derestimating the threat of the inkjet printer. By the time Xerox introduced its own line of desk-
top printers, the game was already over.

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

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

Playing Politics
Allaire and Thoman blamed each other for the failure to successfully implement the digital
strategy. Outsiders, however, believe the failure had much more to do with Xerox’s dysfunc-
tional culture. The culture was already slow to adapt, and some say that under Allaire it be-
came almost totally paralyzed by politics. Thoman was brought in to shake things up, but
when he tried, the old guard rebelled. A management struggle developed, with the outsider
Thoman and a few allies on one side lined up against Allaire and his group of insiders who
were accustomed to doing things the Xeroid way. Recognized for his knowledge, business ex-
perience, and intensity, Thoman was also considered to be somewhat haughty and unap-
proachable. He was never able to exert substantial influence with key managers and employ-
ees, nor to gain the support of board members, who continued to rally behind Allaire.

Chapter 1: Organizations and Organization Theory 5

The failed CEO succession illustrates the massive challenge of reinventing a nearly 100-
year-old company. By the time Thoman arrived, Xerox had been going through various rounds
of restructuring, cost-cutting, rejuvenating, and reinventing for nearly two decades, but little
had really changed. Many believe Thoman tried to do too much too soon. He saw the urgency
for change but was unable to convey that urgency to others within the company and inspire
them to take the difficult journey real transformation requires.

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

The Insider’s Insider
Enter Anne Mulcahy, the consummate insider. In August 2001, Allaire turned over the CEO
reins to the popular twenty-four-year veteran, who had started at Xerox as a copier sales-
woman and worked her way up the hierarchy. Despite her insider status, Mulcahy says she’s
more than willing to challenge the status quo at Xerox.

Mulcahy is a strong decision maker. She launched a multi-billion dollar turnaround plan
that included massive cost-cutting and closing of several money-losing operations, including
the belatedly launched line of inkjet printers. She personally negotiated the settlement of a
long investigation into fraudulent accounting practices, insisting that her personal involve-
ment was necessary to signal a new commitment to ethical business practices. She has in-
troduced numerous new products and services in high-growth areas such as digital technol-
ogy, document services, color products, and consulting. The company launched forty new
products in 2004 alone, and sales and profits are growing as debt continues to shrink. More-
over, a renewed focus on innovation signals that Mulcahy and her management team are
concentrating on areas that provide a solid foundation for future growth. Although the
stock price is nowhere near the highs of the late 1990s, it is on a strong upturn.

By getting Xerox off the critical list, Mulcahy has gained respect and admiration
from employees, labor leaders, customers, creditors, and the press. She was recognized by
Business Week magazine as one of the best managers of the year in 2004. However,
Mulcahy can’t afford to rest on her laurels. Xerox faces stiff competition from Hewlett-
Packard, Canon, and other technology companies. Mulcahy has to keep her management
team focused on growth while also maintaining the cost controls that stabilized the
company. As Xerox struggles to regain the prestige it once held, the corporate world is
watching with guarded optimism. In the rapidly changing world of organizations, nothing is
ever certain.1

Welcome to the real world of organization theory. The shifting fortunes of
Xerox illustrate organization theory in action. Xerox managers were
deeply involved in organization theory each day of their working lives—
but they never realized it. Company managers didn’t fully understand how the or-
ganization related to the environment or how it should function internally. Famil-
iarity with organization theory can help Anne Mulcahy and her management team
analyze and diagnose what is happening and the changes needed to keep the com-
pany competitive. Organization theory gives us the tools to explain the decline of
Xerox and understand Mulcahy’s turnaround. It helps us explain what happened in
the past, as well as what may happen in the future, so that we can manage organi-
zations more effectively.

6 Part 1: Introduction to Organizations

Briefcase Organization Theory in Action

As an organization Topics
manager, keep these
guidelines in mind: Each of the topics to be covered in this book is illustrated in the Xerox case. Con-
sider, for example, Xerox’s failure to respond to or control such elements as com-
Do not ignore the exter- petitors, customers, and creditors in the fast-paced external environment; its inabil-
nal environment or pro- ity to implement strategic and structural changes to help the organization attain
tect the organization from effectiveness; ethical lapses within the organization; difficulties coping with the
it. Because the environ- problems of large size and bureaucracy; lack of adequate cost controls; the negative
ment is unpredictable, do use of power and politics among managers that created conflict and allowed the or-
not expect to achieve ganization to drift further into chaos; and an outmoded corporate culture that sti-
complete order and ratio- fled innovation and change. These are the subjects with which organization theory
nality within the organiza- is concerned.
tion. Strive for a balance
between order and Of course, the concepts of organization theory are not limited to Xerox. Man-
flexibility. agers at AirTran Airways applied organization theory concepts to expand their busi-
ness during a difficult time. Even as many carriers were slashing costs and seeking
federal loans to combat huge losses, AirTran maintained a course of steady growth
by developing strong interorganizational partnerships.2 IBM, Hewlett-Packard, and
Ford Motor Company have all undergone major structural transformations using
concepts based in organization theory. Organization theory also applies to nonprofit
organizations such as the Girl Scouts, the American Humane Association, local arts
organizations, colleges and universities, and the Make-a-Wish Foundation, which
grants wishes to terminally ill children. Even rock groups such as the Rolling Stones
benefit from an appreciation of organization theory, as described in this chapter’s
Leading by Design box.

Organization theory draws lessons from organizations such as the Rolling
Stones, IBM, and Xerox and makes those lessons available to students and man-
agers. The story of Xerox’s decline is important because it demonstrates that even
large, successful organizations are vulnerable, that lessons are not learned automat-
ically, and that organizations are only as strong as their decision makers. Organiza-
tions are not static; they continuously adapt to shifts in the external environment.
Today, many companies are facing the need to transform themselves into dramati-
cally different organizations because of new challenges in the environment.

Current Challenges

Research into hundreds of organizations provides the knowledge base to make
Xerox and other organizations more effective. For example, challenges facing orga-
nizations today are quite different from those of the past, and thus the concept of or-
ganizations and organization theory is evolving. For one thing, the world is chang-
ing more rapidly than ever before. Surveys of top executives indicate that coping with
rapid change is the most common problem facing managers and organizations.3
Some specific challenges are dealing with globalization, maintaining high standards
of ethics and social responsibility, responding rapidly to environmental changes and
customer needs, managing the digital workplace, and supporting diversity.

Globalization. The cliché that the world is getting smaller is dramatically true for
today’s organizations. With rapid advances in technology and communications, the
time it takes to exert influence around the world from even the most remote loca-

Chapter 1: Organizations and Organization Theory 7

Leading by Design

The Rolling Stones

They may be old, but they keep on for concert tickets so that the band can keep their prices com-
rocking and rolling after more than petitive. That sometimes means cutting costs and increasing
40 years in the music business. The efficiency to make sure the organization turns a profit.
Rolling Stones have enjoyed phe-
nomenal commercial success in recent The Stones also recognize the importance of interorgani-
decades, generating billions of dollars zational partnerships, cutting sponsorship deals with big com-
in revenue from record sales, song rights, panies such as Sprint, Anheuser-Busch, and Microsoft, which
concert tickets, sponsorships, and merchandising. reportedly paid $4 million for the rights to “Start Me Up” for
The Rolling Stones group was recently cited as one of the the launch of Windows 95. And they hire lawyers, accoun-
world’s ten most enduring organizations, according to a study tants, managers, and consultants to keep in touch with
commissioned by Booz Allen Hamilton. One reason for the changes in the environment and manage relationships with
Stones’ success is that the band operates like an effective customers (fans), partners, employees, record companies,
global business organization. The Stones have set up a solid promoters, and tour sites. Jagger learned from the early days
organizational structure, with different divisions to run differ- that creativity and talent aren’t enough to ensure success—in
ent aspects of the business, such as touring or merchandising. the mid-1960s, the band was selling millions of records
At the top of the organization is a core top management but still living hand to mouth. Today, effective control systems
team made up of the four band members: Mick Jagger, who and widespread information sharing make sure that doesn’t
acts as a sort of CEO, Keith Richards, Charlie Watts, and happen.
Ronnie Wood. This core team manages a group of somewhat
autonomous yet interlocking companies that include Promo- “You don’t start to play your guitar thinking you’re going
tour, Promopub, Promotone, and Musidor, each dedicated to to be running an organization that will maybe generate mil-
a particular part of the overall business. At times, depending lions,” Jagger says. Yet by understanding and applying orga-
on what’s happening in the organization, each company nization theory, the Rolling Stones have become one of the
might employ only a few dozen people. When the band is most successful organizations ever in the music industry—and
touring, on the other hand, head count goes way up and the wealthiest rock ‘n’ roll band on the planet.
the organization resembles a flourishing start-up company.
Jagger himself keeps a close eye on the market-price range Source: Andy Serwer, “Inside the Rolling Stones Inc.,” Fortune (September
30, 2002), 58–72; and William J. Holstein, “Innovation, Leadership,
and Still No Satisfaction,” The New York Times (December 19, 2004),
Section 3, 11.

tions has been reduced from years to only seconds. Markets, technologies, and or-
ganizations are becoming increasingly interconnected.4 Today’s organizations have
to feel “at home” anywhere in the world. Companies can locate different parts of
the organization wherever it makes the most business sense: top leadership in one
country, technical brainpower and production in other locales. A related trend is to
contract out some functions to organizations in other countries or to partner with
foreign organizations to gain global advantage. India’s Wipro Ltd. used to sell cook-
ing oils; today, its 15,000 employees develop sophisticated software applications,
design semiconductors, and manage back-office solutions for giant companies from
all over the world, including CNA Life, Home Depot, and Sony. Korea’s Samsung
Electronics, which has manufacturing plants in fourteen countries, has long supplied
components for U.S. computer firms, and it recently designed a new laptop that it
will manufacture for Texas-based Dell Computer Corp. Many of Intel’s new chip
circuits are designed by companies in India and China. These organizations can do
the job for 50 to 60 percent less than organizations based in the United States, cre-
ating new advantages as well as greater competition for U.S.-based firms.5

8 Part 1: Introduction to Organizations

This growing interdependence means that the environment for companies is be-
coming extremely complex and extremely competitive. Organizations have to learn
to cross lines of time, culture, and geography in order to survive. Companies large
and small are searching for the right structures and processes that can help them
reap the advantages of global interdependence and minimize the disadvantages.

Ethics and Social Responsibility. Ethics and social responsibility have become
some of the hottest topics in corporate America. The list of executives and major
corporations involved in financial and ethical scandals continues to grow. The sor-
did story of high-flying Enron Corporation, where managers admitted they inflated
earnings and hid debt through a series of complex partnerships, was just the begin-
ning. Executives profited handsomely from the fraud at Enron, but when the com-
pany collapsed, employees and average investors lost billions. Arthur Andersen LLP,
the company’s auditor, was found guilty of obstruction of justice for improperly
shredding documents related to the Enron investigation. Martha Stewart, who built
a multimillion-dollar style empire, has served time in jail, convicted of lying about
why she unloaded shares of ImClone Systems stock just before the price plunged.
And Yale University’s School of Management is forcing out the head of its corpo-
rate governance institute over alleged expense-account abuse.6 Pick up any major
newspaper on almost any day, and the front page will contain news about some or-
ganization embroiled in an ethical scandal. This is corporate corruption on a scale
never before seen, and the effects within organizations and society will be felt for
years to come.

Although some executives and officials continue to insist that it is a few bad
apples involved in all the wrongdoing, the “man on the street” is quickly forming
the opinion that all corporate executives are crooks.7 The public is disgusted with
the whole mess, and leaders will face tremendous pressure from the government
and the public to hold their organizations and employees to high ethical and pro-
fessional standards.

Speed of Responsiveness. A third significant challenge for organizations is to re-
spond quickly and decisively to environmental changes, organizational crises, or
shifting customer expectations. For much of the twentieth century, organizations
operated in a relatively stable environment, so managers could focus on designing
structures and systems that kept the organization running smoothly and efficiently.
There was little need to search for new ways to cope with increased competition,
volatile environmental shifts, or changing customer demands. Today, globalization
and advancing technology has accelerated the pace at which organizations in all in-
dustries must roll out new products and services to stay competitive.

Today’s customers also want products and services tailored to their exact needs.
Companies that relied on mass production and distribution techniques must be pre-
pared with new computer-aided systems that can produce one-of-a-kind variations
and streamlined distribution systems that deliver products directly from the manu-
facturer to the consumer. Another shift brought about by technology is that the fi-
nancial basis of today’s economy is information, not machines and factories. For ex-
ample, in the mid-1900s tangible assets represented 73 percent of the assets of
nonfinancial corporations in the United States. By 2002, the percentage had shrunk
to about 53 percent, and it continues to decline.8 One result of concern to organi-
zational leaders is that the primary factor of production becomes knowledge, to
which managers must respond by increasing the power of employees. Employees,

Chapter 1: Organizations and Organization Theory 9

not production machinery, have the power and knowledge needed to keep the com-
pany competitive.

Considering the turmoil and flux inherent in today’s world, the mindset needed
by organizational leaders is to expect the unexpected and be prepared for rapid
change and potential crises. Crisis management has moved to the forefront in light
of terrorist attacks all over the world; a tough economy, rocky stock market, and
weakening consumer confidence; widespread ethical scandals; and, in general, an
environment that may shift dramatically at a moment’s notice.

The Digital Workplace. Many traditional managers feel particularly awkward in
today’s technology-driven workplace. Organizations have been engulfed by infor-
mation technology that affects how they are designed and managed. In today’s
workplace, many employees perform much of their work on computers and may
work in virtual teams, connected electronically to colleagues around the world. In
addition, organizations are becoming enmeshed in electronic networks. The world
of e-business is booming as more and more business takes place by digital processes
over a computer network rather than in physical space. Some companies have taken
e-business to very high levels to achieve amazing performance. Dell Computer Corp.
pioneered the use of end-to-end digital supply-chain networks to keep in touch with
customers, take orders, buy components from suppliers, coordinate with manufac-
turing partners, and ship customized products directly to consumers. This trend to-
ward disintermediation—eliminating the middleman—is affecting every industry,
prompting a group of consultants at a Harvard University conference to conclude
that businesses today must either “Dell or Be Delled.”9 These advances mean that
organizational leaders not only need to be technologically savvy but are also re-
sponsible for managing a web of relationships that reaches far beyond the bound-
aries of the physical organization, building flexible e-links between a company and
its employees, suppliers, contract partners, and customers.10

Diversity. Diversity is a fact of life that no organization can afford to ignore. As or-
ganizations increasingly operate on a global playing field, the workforce—as well as
the customer base—is changing dramatically. Many of today’s leading organizations
have an international face. Look at the makeup of consulting firm McKinsey & Co.
In the 1970s, most consultants were American, but by the turn of the century,
McKinsey’s chief partner was a foreign national (Rajat Gupta from India), only
40 percent of consultants were American, and the firm’s foreign-born consultants
came from forty different countries.11

The demographics of the U.S. population and workforce are also shifting. Today’s
average worker is older, and many more women, people of color, and immigrants are
seeking job and advancement opportunities. During the 1990s, the foreign-born pop-
ulation of the United States nearly doubled, and immigrants now make up more than
12 percent of the U.S. workforce. By 2050, it is estimated that 85 percent of entrants
into the workforce will be women and people of color. Already, white males, the ma-
jority of workers in the past, represent less than half of the workforce.12 This growing
diversity brings a variety of challenges, such as maintaining a strong corporate culture
while supporting diversity, balancing work and family concerns, and coping with the
conflict brought about by varying cultural styles.

People from diverse ethnic and cultural backgrounds offer varying styles, and
managing diversity may be one of the most rewarding challenges for organizations
competing on a global basis. For example, research has indicated that women’s style

10 Part 1: Introduction to Organizations

of doing business may hold important lessons for success in the emerging global
world of the twenty-first century. Yet the glass ceiling persists, keeping women from
reaching positions of top leadership.13

Purpose of This Chapter

The purpose of this chapter is to explore the nature of organizations and organiza-
tion theory today. Organization theory has developed from the systematic study of
organizations by scholars. Concepts are obtained from living, ongoing organizations.
Organization theory can be practical, as illustrated in the Xerox case. It helps people
understand, diagnose, and respond to emerging organizational needs and problems.

The next section begins with a formal definition of organization and then ex-
plores introductory concepts for describing and analyzing organizations. Next, the
scope and nature of organization theory are discussed more fully. Succeeding sec-
tions examine the history of organization theory and design, the development of
new organizational forms in response to changes in the environment, and how or-
ganization theory can help people manage complex organizations in a rapidly
changing world. The chapter closes with a brief overview of the themes to be cov-
ered in this book.

What Is an Organization?

Organizations are hard to see. We see outcroppings, such as a tall building, a com-
puter workstation, or a friendly employee; but the whole organization is vague
and abstract and may be scattered among several locations, even around the
world. We know organizations are there because they touch us every day. Indeed,
they are so common that we take them for granted. We hardly notice that we are
born in a hospital, have our birth records registered in a government agency, are
educated in schools and universities, are raised on food produced on corporate
farms, are treated by doctors engaged in a joint practice, buy a house built by a
construction company and sold by a real estate agency, borrow money from a
bank, turn to police and fire departments when trouble erupts, use moving com-
panies to change residences, receive an array of benefits from government agen-
cies, spend 40 hours a week working in an organization, and are even laid to rest
by a funeral home.14

Definition

Organizations as diverse as a church, a hospital, and Xerox have characteristics in
common. The definition used in this book to describe organizations is as follows:
organizations are (1) social entities that (2) are goal-directed, (3) are designed as de-
liberately structured and coordinated activity systems, and (4) are linked to the ex-
ternal environment.

The key element of an organization is not a building or a set of policies and pro-
cedures; organizations are made up of people and their relationships with one an-
other. An organization exists when people interact with one another to perform es-
sential functions that help attain goals. Recent trends in management recognize the
importance of human resources, with most new approaches designed to empower
employees with greater opportunities to learn and contribute as they work together
toward common goals.

Chapter 1: Organizations and Organization Theory 11

Managers deliberately structure and coordinate organizational resources to
achieve the organization’s purpose. However, even though work may be structured
into separate departments or sets of activities, most organizations today are striving
for greater horizontal coordination of work activities, often using teams of employ-
ees from different functional areas to work together on projects. Boundaries be-
tween departments, as well as those between organizations, are becoming more flex-
ible and diffuse as companies face the need to respond to changes in the external
environment more rapidly. An organization cannot exist without interacting with
customers, suppliers, competitors, and other elements of the external environment.
Today, some companies are even cooperating with their competitors, sharing infor-
mation and technology to their mutual advantage.

Types of Organizations

Some organizations are large, multinational corporations. Others are small, family-
owned shops. Some manufacture products such as automobiles or computers,
whereas others provide services such as legal representation, banking, or medical
services. Later in this text, Chapter 7 will look at the distinctions between manu-
facturing and service technologies. Chapter 9 discusses size and life cycle and de-
scribes some differences between small and large organizations.

Another important distinction is between for-profit businesses and nonprofit or-
ganizations. All of the topics in this text apply to nonprofit organizations such as the
Salvation Army, the World Wildlife Fund, the Save the Children Foundation, and
Chicago’s La Rabida Hospital, which is dedicated to serving the poor, just as they do
to such businesses as Starbucks Coffee, eBay, or Holiday Inns. However, there are
some important dissimilarities to keep in mind. The primary difference is that man-
agers in businesses direct their activities toward earning money for the company,
whereas managers in nonprofits direct their efforts toward generating some kind of
social impact. The unique characteristics and needs of nonprofit organizations cre-
ated by this distinction present unique challenges for organizational leaders.15

Financial resources for nonprofits typically come from government appropria-
tions, grants, and donations rather than from the sale of products or services to cus-
tomers. In businesses, managers focus on improving the organization’s products and
services to increase sales revenues. In nonprofits, however, services are typically pro-
vided to nonpaying clients, and a major problem for many organizations is securing
a steady stream of funds to continue operating. Nonprofit managers, committed to
serving clients with limited funds, must focus on keeping organizational costs as low
as possible and demonstrating a highly efficient use of resources.16 Another problem
is that, since nonprofit organizations do not have a conventional “bottom line,”
managers often struggle with the question of what constitutes organizational effec-
tiveness. It is easy to measure dollars and cents, but nonprofits have to measure in-
tangible goals such as “improve public health” or “make a difference in the lives of
the disenfranchised.”

Managers in nonprofit organizations also deal with many diverse stakeholders
and must market their services to attract not only clients (customers) but also vol-
unteers and donors. This can sometimes create conflict and power struggles among
organizations, as illustrated by the Make-a-Wish Foundation, which is butting
heads with small, local wish-granting groups as it expands to cities across the
United States. The more kids a group can count as helping, the easier it is to raise
money. As charitable donations in general have declined with the economy, the is-
sue has become serious. Small groups are charging that Make-a-Wish is abusing the

12 Part 1: Introduction to Organizations

power of its national presence to overwhelm or absorb the smaller groups. “We
should not have to compete for children and money,” says the director of the Indi-
ana Children’s Wish Fund. “They [Make-a-Wish] use all their muscle and money
to get what they want.”17

Thus, the organization design concepts discussed throughout this book, such as
setting goals and measuring effectiveness, coping with environmental uncertainty,
implementing effective control mechanisms, satisfying multiple stakeholders, and
dealing with issues of power and conflict, apply to nonprofit organizations such as
the Make-a-Wish Foundation just as they do to Microsoft Corp., UPS, or Xerox, as
described in the chapter opening. These concepts and theories are adapted and re-
vised as needed to fit unique needs and problems.

Importance of Organizations

It may seem hard to believe today, but organizations as we know them are relatively
recent in the history of humankind. Even in the late nineteenth century there were
few organizations of any size or importance—no labor unions, no trade associa-

Book Mark 1.0 (HAVE YOU READ THIS BOOK?)

The Company: A Short History of a Revolutionary Idea
By John Micklethwait and Adrian Wooldridge

“The limited liability corporation is the to consumers for almost any product we know today
greatest single discovery of modern would be impossible to afford.
times,” is one conclusion of the concise and readable book, • Historically, the corporation has been a force for civilized
The Company: A Short History of a Revolutionary Idea by John behavior and provided people with worthwhile activities,
Micklethwait and Adrian Wooldridge. Companies are so ubiq- identity, and community, as well as a paycheck.
uitous today that we take them for granted, so it may come • The Virginia Company, a forerunner of the limited liability
as a surprise that the company as we know it is a relatively re- corporation, helped introduce the revolutionary concept
cent innovation. Although people have joined together in of democracy to the American colonies.
groups for commercial purposes since ancient Greek and Ro- • The modern multinational corporation began in Britain in
man times, the modern company has its roots in the late nine- the third quarter of the 1800s with the railroads, which
teenth century. The idea of a limited liability company that built rail networks throughout Europe by shipping into
was legally an “artificial person” began with the Joint Stock each country the managers, materials, equipment, and la-
Companies Act, enacted by the London Board of Trade in bor needed.
1856. Today the company is seen as “the most important or-
ganization in the world.” Here are a few reasons why: During the past few years, it seems that large corpora-
tions have been increasingly in conflict with societies’ inter-
• The corporation was the first autonomous legal and social ests. Yet large companies have been reviled throughout mod-
institution that was within society yet independent of the ern history—consider the robber barons at the beginning of
central government. the twentieth century—and the authors suggest that recent
abuses are relatively mild compared to some incidents from
• The concept of a limited liability company unleashed en- history. Everyone knows that corporations can be scoundrels,
trepreneurs to raise money because investors could lose but overall, Micklethwait and Wooldridge argue, their force
only what they invested. Increasing the pool of entrepre- has been overwhelmingly for the cumulative social and eco-
neurial capital spurred innovation and generally enriched nomic good.
the societies in which companies operated.
The Company: A Short History of a Revolutionary Idea, by John Micklethwait
• The company is the most efficient creator of goods and and Adrian Wooldridge, is published by The Modern Library.
services that the world has ever known. Without a com-
pany to harness resources and organize activities, the cost

Chapter 1: Organizations and Organization Theory 13

tions, and few large businesses, nonprofit organizations, or governmental depart-
ments. What a change has occurred since then! The development of large organiza-
tions transformed all of society, and, indeed, the modern corporation may be the
most significant innovation of the past 100 years.18 This chapter’s Book Mark ex-
amines the rise of the corporation and its significance in our society. Organizations
are central to people’s lives and exert a tremendous influence.

Organizations are all around us and shape our lives in many ways. But what
contributions do organizations make? Why are they important? Exhibit 1.1 lists
seven reasons organizations are important to you and to society. First, organiza-
tions bring together resources to accomplish specific goals. Consider Northrup
Grumman Newport News (formerly Newport News Shipbuilding), which builds
nuclear-powered, Nimitz-class aircraft carriers. Putting together an aircraft carrier
is an incredibly complex job involving 47,000 tons of precision-welded steel, more
than 1 million distinct parts, 900 miles of wire and cable, about 40 million skilled-
worker hours, and more than 7 years of hard work by the organization’s 17,800
employees.19

Organizations also produce goods and services that customers want at compet-
itive prices. Bill Gates, who built Microsoft into a global powerhouse, asserts that
the modern organization “is one of the most effective means to allocate resources
we’ve ever seen. It transforms great ideas into customer benefits on an unimaginably
large scale.”20

Companies look for innovative ways to produce and distribute desirable goods
and services more efficiently. Two ways are through e-business and through the use
of computer-based manufacturing technologies. Redesigning organizational struc-
tures and management practices can also contribute to increased efficiency. Organi-
zations create a drive for innovation rather than a reliance on standard products and
outmoded ways of doing things.

Organizations adapt to and influence a rapidly changing environment. Consider
Google, provider of the Internet’s most popular search engine, which continues to

Organizations exist to do the following: EXHIBIT 1.1
1. Bring together resources to achieve desired goals and outcomes Importance of
2. Produce goods and services efficiently Organizations
3. Facilitate innovation
4. Use modern manufacturing and information technologies
5. Adapt to and influence a changing environment
6. Create value for owners, customers, and employees
7. Accommodate ongoing challenges of diversity, ethics, and the motivation and coordination

of employees

14 Part 1: Introduction to Organizations

adapt and evolve along with the evolving Internet. Rather than being a rigid service,
Google is continually adding technological features that create a better service by
accretion. At any time, Google’s site features several technologies in development so
that engineers can get ideas and feedback from users.21 Some large businesses have
entire departments charged with monitoring the external environment and finding
ways to adapt to or influence that environment. One of the most significant changes
in the external environment today is globalization. Organizations such as Coca-
Cola, AES Corporation, Heineken Breweries, and IBM are involved in strategic al-
liances and partnerships with companies around the world in an effort to influence
the environment and compete on a global scale.

Through all of these activities, organizations create value for their owners, cus-
tomers, and employees. Managers analyze which parts of the operation create value
and which parts do not; a company can be profitable only when the value it creates
is greater than the cost of resources. JetBlue, a rapidly growing low-fare airline, for
example, creates value by keeping labor costs low and offering extras such as leather
seats and 24 channels of satellite TV.22 Finally, organizations have to cope with and
accommodate today’s challenges of workforce diversity and growing concerns over
ethics and social responsibility, as well as find effective ways to motivate employees
to work together to accomplish organizational goals.

Organizations shape our lives, and well-informed managers can shape organi-
zations. An understanding of organization theory enables managers to design orga-
nizations to function more effectively.

Perspectives on Organizations

There are various ways to look at and think about organizations and how they
function. Two important perspectives are the open-systems approach and the
organizational-configuration framework.

Open Systems

One significant development in the study of organizations was the distinction be-
tween closed and open systems.23 A closed system would not depend on its envi-
ronment; it would be autonomous, enclosed, and sealed off from the outside world.
Although a true closed system cannot exist, early organization studies focused on
internal systems. Early management concepts, including scientific management,
leadership style, and industrial engineering, were closed-system approaches because
they took the environment for granted and assumed the organization could be made
more effective through internal design. The management of a closed system would
be quite easy. The environment would be stable and predictable and would not in-
tervene to cause problems. The primary management issue would be to run things
efficiently.

An open system must interact with the environment to survive; it both consumes
resources and exports resources to the environment. It cannot seal itself off. It must
continuously adapt to the environment. Open systems can be enormously complex.
Internal efficiency is just one issue—and sometimes a minor one. The organization
has to find and obtain needed resources, interpret and act on environmental
changes, dispose of outputs, and control and coordinate internal activities in the

Chapter 1: Organizations and Organization Theory 15

face of environmental disturbances and uncertainty. Every system that must interact
with the environment to survive is an open system. The human being is an open sys-
tem. So is the planet Earth, the city of New York, and Xerox Corp. Indeed, one
problem at Xerox was that top managers seemed to forget they were part of an open
system. They isolated themselves within the bureaucratic culture and failed to pay
close attention to what was going on with their customers, suppliers, and competi-
tors. The rapid changes over the past few decades, including globalization and in-
creased competition, the explosion of the Internet and e-business, and the growing
diversity of the population and workforce, have forced many managers to reorient
toward an open-systems mindset and recognize their business as part of a complex,
interconnected whole.

To understand the whole organization, we must view it as a system. A system
is a set of interacting elements that acquires inputs from the environment, trans-
forms them, and discharges outputs to the external environment. The need for
inputs and outputs reflects dependency on the environment. Interacting ele-
ments mean that people and departments depend on one another and must work
together.

Exhibit 1.2 illustrates an open system. Inputs to an organization system in-
clude employees, raw materials and other physical resources, information, and
financial resources. The transformation process changes these inputs into some-
thing of value that can be exported back to the environment. Outputs include spe-
cific products and services for customers and clients. Outputs may also include
employee satisfaction, pollution, and other by-products of the transformation
process.

A system is made up of several subsystems, as illustrated at the bottom of
Exhibit 1.2. These subsystems perform the specific functions required for organiza-
tional survival, such as production, boundary spanning, maintenance, adaptation,
and management. The production subsystem produces the product and service out-
puts of the organization. Boundary subsystems are responsible for exchanges with
the external environment. They include activities such as purchasing supplies or
marketing products. The maintenance subsystem maintains the smooth operation
and upkeep of the organization’s physical and human elements. The adaptive sub-
systems are responsible for organizational change and adaptation. Management is a
distinct subsystem, responsible for coordinating and directing the other subsystems
of the organization.

ENVIRONMENT EXHIBIT 1.2
An Open System and its
Raw Subsystems
materials
People Input Transformation Output Products
Information process and
resources
Financial services
resources
Boundary Production, maintenance, Boundary
SUBSYSTEMS spanning adaptation, management spanning

16 Part 1: Introduction to Organizations

Briefcase Organizational Configuration

As an organization Various parts of the organization are designed to perform the key subsystem func-
manager, keep these tions illustrated in Exhibit 1.2. One framework proposed by Henry Mintzberg sug-
guidelines in mind: gests that every organization has five parts.24 These parts, illustrated in Exhibit 1.3,
include the technical core, top management, middle management, technical support,
Design the organization and administrative support. The five parts of the organization may vary in size and
so that the five basic importance depending on the organization’s environment, technology, and other
parts—technical core, factors.
technical support, admin-
istrative support, top man- Technical Core. The technical core includes people who do the basic work of the
agement, and middle organization. It performs the production subsystem function and actually produces
management—ade- the product and service outputs of the organization. This is where the primary trans-
quately perform the sub- formation from inputs to outputs takes place. The technical core is the production
system functions of pro- department in a manufacturing firm, the teachers and classes in a university, and the
duction, maintenance, medical activities in a hospital. At Xerox, the technical core produces copiers, digi-
adaptation, management, tal presses, and document management services for customers.
and boundary spanning.
Try to maintain a balance Technical Support. The technical support function helps the organization adapt to
among the five parts so the environment. Technical support employees such as engineers and researchers
that they work together scan the environment for problems, opportunities, and technological developments.
for organizational effec- Technical support is responsible for creating innovations in the technical core, help-
tiveness. ing the organization change and adapt. Technical support at Xerox is provided by
departments such as technology, research and development (R&D), and marketing
research. Investment in R&D, for example, enabled Xerox to produce more than
500 patents in 2004, enabling Xerox to enrich existing products, develop next-
generation products, and explore potentially disruptive technologies so the com-
pany can adapt as the environment changes.25

Administrative Support. The administrative support function is responsible for
the smooth operation and upkeep of the organization, including its physical and hu-
man elements. This includes human resource activities such as recruiting and hiring,
establishing compensation and benefits, and employee training and development, as
well as maintenance activities such as cleaning of buildings and service and repair
of machines. Administrative support functions in a corporation such as Xerox might

EXHIBIT 1.3 Technical To p Administrative
Five Basic Parts of Support Management Support
an Organization Staff
Source: Based on Henry Staff Middle
Mintzberg, The Structuring of Management
Organizations (Englewood
Cliffs, N.J.: Prentice-Hall, 1979), Technical Core
215–297; and Henry
Mintzberg, “Organization
Design: Fashion or Fit?”
Harvard Business Review
59 (January-February 1981):
103–116.

Chapter 1: Organizations and Organization Theory 17

include the human resource department, organizational development, the employee
cafeteria, and the maintenance staff.

Management. Management is a distinct subsystem, responsible for directing and
coordinating other parts of the organization. Top management provides direction,
strategy, goals, and policies for the entire organization or major divisions. Middle
management is responsible for implementation and coordination at the departmen-
tal level. In traditional organizations, middle managers are responsible for mediat-
ing between top management and the technical core, such as implementing rules and
passing information up and down the hierarchy.

In real-life organizations, the five parts are interrelated and often serve more
than one subsystem function. For example, managers coordinate and direct other
parts of the system, but they may also be involved in administrative and technical
support. In addition, several of the parts serve the boundary spanning function men-
tioned in the previous section. For example, in the administrative support realm, hu-
man resource departments are responsible for working with the external environ-
ment to find quality employees. Purchasing departments acquire needed materials
and supplies. In the technical support area, R&D departments work directly with
the external environment to learn about new technological developments. Managers
perform boundary-spanning as well, such as when Anne Mulcahy of Xerox negoti-
ated directly with the SEC regarding accounting irregularities. The important
boundary-spanning subsystem is embraced by several areas, rather than being con-
fined to one part of the organization.

Dimensions of Organization Design

The systems view pertains to dynamic, ongoing activities within organizations. The
next step for understanding organizations is to look at dimensions that describe spe-
cific organizational design traits. These dimensions describe organizations in much
the same way that personality and physical traits describe people.

Organizational dimensions fall into two types: structural and contextual, illus-
trated in Exhibit 1.4. Structural dimensions provide labels to describe the internal
characteristics of an organization. They create a basis for measuring and comparing
organizations. Contextual dimensions characterize the whole organization, includ-
ing its size, technology, environment, and goals. They describe the organizational
setting that influences and shapes the structural dimensions. Contextual dimensions
can be confusing because they represent both the organization and the environment.
Contextual dimensions can be envisioned as a set of overlapping elements that un-
derlie an organization’s structure and work processes. To understand and evaluate
organizations, one must examine both structural and contextual dimensions.26
These dimensions of organization design interact with one another and can be ad-
justed to accomplish the purposes listed earlier in Exhibit 1.1.

Structural Dimensions

1. Formalization pertains to the amount of written documentation in the organi-
zation. Documentation includes procedures, job descriptions, regulations, and
policy manuals. These written documents describe behavior and activities.

18 Part 1: Introduction to Organizations

EXHIBIT 1.4 The Organization
Interacting Contextual
and Structural Dimensions
of Organization Design

Environment Goals and Size
Strategy

Culture Structure Technology

1. Formalization
2. Specialization
3. Hierarchy of authority
4. Centralization
5. Professionalism
6. Personnel ratios

Briefcase Formalization is often measured by simply counting the number of pages of
documentation within the organization. Large state universities, for example,
As an organization tend to be high on formalization because they have several volumes of written
manager, keep these rules for such things as registration, dropping and adding classes, student as-
guidelines in mind: sociations, dormitory governance, and financial assistance. A small, family-
owned business, in contrast, may have almost no written rules and would be
Think of the organization considered informal.
as an entity distinct from 2. Specialization is the degree to which organizational tasks are subdivided into
the individuals who work separate jobs. If specialization is extensive, each employee performs only a
in it. Describe the organi- narrow range of tasks. If specialization is low, employees perform a wide range
zation according to its of tasks in their jobs. Specialization is sometimes referred to as the division of
size, formalization, decen- labor.
tralization, specialization, 3. Hierarchy of authority describes who reports to whom and the span of control
professionalism, personnel for each manager. The hierarchy is depicted by the vertical lines on an organi-
ratios, and the like. Use zation chart, as illustrated in Exhibit 1.5. The hierarchy is related to span of con-
these characteristics to trol (the number of employees reporting to a supervisor). When spans of control
analyze the organization are narrow, the hierarchy tends to be tall. When spans of control are wide, the
and to compare it with hierarchy of authority will be shorter.
other organizations. 4. Centralization refers to the hierarchical level that has authority to make a deci-
sion. When decision making is kept at the top level, the organization is central-
ized. When decisions are delegated to lower organizational levels, it is decen-
tralized. Organizational decisions that might be centralized or decentralized
include purchasing equipment, establishing goals, choosing suppliers, setting
prices, hiring employees, and deciding marketing territories.

Advisory Board of Chapter 1: Organizations and Organization Theory
Committees Directors

Level 1 Executive
Level 2 Committee

Executive
Director

Assistant Executive Director Assistant Executive Director
for Community Services for Human Services

Director Director Director Director Director Director Director CETA
Regional Housing Criminal Finance AAA
Level 3 Economic Planning Justice
Assistant
Dev. Director
Finance
Lead Lead
Couns. Couns.

Level 4 Housing Alcoh. Public Accountant Program Program CETA CETA CETA CETA CETA
Coordinator Coordinator Information Spec. Planner Intake & Couns. Couns. Couns. Planner
Coordinator AAA Orient Devs. Devs. Devs.
AAA Youth
Title Title
II ABC IV II D &
VI & VII
Contract
Fiscal Mgr.

Level 5 Secretary Records Secretary Administrative Payroll Secretary IT Staff Administrative
Clerk Assistant Clerk Specialist Clerk Assistant

EXHIBIT 1.5
Organization Chart Illustrating the Hierarchy of Authority for a Community Job Training Program

19

20 Part 1: Introduction to Organizations

5. Professionalism is the level of formal education and training of employees. Pro-
fessionalism is considered high when employees require long periods of training
to hold jobs in the organization. Professionalism is generally measured as the av-
erage number of years of education of employees, which could be as high as
twenty in a medical practice and less than ten in a construction company.

6. Personnel ratios refer to the deployment of people to various functions and de-
partments. Personnel ratios include the administrative ratio, the clerical ratio,
the professional staff ratio, and the ratio of indirect to direct labor employees.
A personnel ratio is measured by dividing the number of employees in a classi-
fication by the total number of organizational employees.

Contextual Dimensions

1. Size is the organization’s magnitude as reflected in the number of people in the
organization. It can be measured for the organization as a whole or for specific
components, such as a plant or division. Because organizations are social sys-
tems, size is typically measured by the number of employees. Other measures
such as total sales or total assets also reflect magnitude, but they do not indicate
the size of the human part of the system.

2. Organizational technology refers to the tools, techniques, and actions used to
transform inputs into outputs. It concerns how the organization actually pro-
duces the products and services it provides for customers and includes such
things as flexible manufacturing, advanced information systems, and the Inter-
net. An automobile assembly line, a college classroom, and an overnight pack-
age delivery system are technologies, although they differ from one another.

3. The environment includes all elements outside the boundary of the organization.
Key elements include the industry, government, customers, suppliers, and the fi-
nancial community. The environmental elements that affect an organization the
most are often other organizations.

4. The organization’s goals and strategy define the purpose and competitive
techniques that set it apart from other organizations. Goals are often written
down as an enduring statement of company intent. A strategy is the plan of
action that describes resource allocation and activities for dealing with the
environment and for reaching the organization’s goals. Goals and strategies
define the scope of operations and the relationship with employees, cus-
tomers, and competitors.

5. An organization’s culture is the underlying set of key values, beliefs, under-
standings, and norms shared by employees. These underlying values may pertain
to ethical behavior, commitment to employees, efficiency, or customer service,
and they provide the glue to hold organization members together. An organiza-
tion’s culture is unwritten but can be observed in its stories, slogans, ceremonies,
dress, and office layout.

The eleven contextual and structural dimensions discussed here are interdepen-
dent. For example, large organization size, a routine technology, and a stable envi-
ronment all tend to create an organization that has greater formalization, special-
ization, and centralization. More detailed relationships among the dimensions are
explored in later chapters of this book.

These dimensions provide a basis for the measurement and analysis of charac-
teristics that cannot be seen by the casual observer, and they reveal significant

Chapter 1: Organizations and Organization Theory 21

information about an organization. Consider, for example, the dimensions of W. L.
Gore & Associates compared with those of Wal-Mart and a governmental agency.

When Jack Dougherty began work at W. L. Gore & Associates, Inc., he reported to Bill In Practice
Gore, the company’s founder, to receive his first assignment. Gore told him, “Why
don’t you find something you’d like to do.” Dougherty was shocked at the informal- W. L. Gore &
ity but quickly recovered and began interrogating various managers about their activ- Associates
ities. He was attracted to a new product called Gore-Tex, a membrane that was wa-
terproof but breathable when bonded to fabric. The next morning, he came to work
dressed in jeans and began helping feed fabric into the maw of a large laminator. Five
years later, Dougherty was responsible for marketing and advertising in the fabrics group.

Bill Gore died in 1986, but the organization he designed still runs without official titles, orders,
or bosses. One of the key tenets of the organization is that employees (called associates) figure out
what they want to do and where they think they can make a contribution. The company has
some 6,000 associates in forty-five locations around the world. The plants are kept small—up to 200
people—to maintain a family atmosphere. “It’s much better to use friendship and love than slavery
and whips,” Bill Gore said. Several professional associates are assigned to act as “sponsors” for new
product development, but the administrative structure is lean. Good human relations is a more im-
portant value than is internal efficiency, and it works. The company has seven times been named
one of Fortune magazine’s “100 Best Companies to Work For in America,” and Gore continues to
grow and prosper.

Contrast that approach to Wal-Mart, where efficiency is the goal. Wal-Mart achieves its com-
petitive edge through employee commitment and internal cost efficiency. A standard formula is used
to build each store, with uniform displays and merchandise. Wal-Mart operates about 1,600 dis-
count stores, as well as 1,100 Supercenters, 500 Sam’s Clubs, and more than 1,000 international
stores. Its administrative expenses are the lowest of any chain. The distribution system is a marvel of
efficiency. Goods can be delivered to any store in less than two days after an order is placed. Stores
are controlled from the top, but store managers have also been given some freedom to adapt to lo-
cal conditions. Performance is high, and employees are satisfied because the pay is fair and more
than half of them share in corporate profits.

An even greater contrast is seen in many government agencies or nonprofit organizations that
rely heavily on public funding. Most state humanities and arts agencies, for example, are staffed by
only a small number of highly trained employees, but workers are overwhelmed with rules and reg-
ulations and swamped by paperwork. Employees who have to implement rule changes often don’t
have time to read the continuous stream of memos and still keep up with their daily work with com-
munity arts organizations. Employees must require extensive reporting from their clients in order to
make regular reports to a variety of state and federal funding sources. Agency workers are frustrated
and so are the community-based organizations they seek to serve. These smaller organizations
sometimes refuse assistance because of the extensive paperwork involved.27

Exhibit 1.6 illustrates several structural and contextual dimensions of Gore &
Associates, Wal-Mart, and the state arts agency. Gore & Associates is a medium-
sized manufacturing organization that ranks very low with respect to formalization,
specialization, and centralization. A number of professional staff are assigned to
nonworkflow activities to do the R&D needed to stay abreast of changes in the fiber
industry. Wal-Mart is much more formalized, specialized, and centralized. Efficiency
is more important than new products, so most activities are guided by standard reg-
ulations. The percentage of nonworkflow personnel is kept to a minimum. The arts

22 Formalization Part 1: Introduction to Organizations
Specialization
EXHIBIT 1.6 Centralization
Characteristics of Three W. L. Gore & Configuration: Percent nonworkflow personnel
Organizations Associates
Manufacturing
100
6,000
Standard Score 50

0 Wal-Mart State arts agency
Company Retailing Government service
250,000
Technology 35
Size

Briefcase agency, in contrast to the other organizations, reflects its status as a small part of a
large government bureaucracy. The agency is overwhelmed with rules and standard
As an organization procedures. Rules are dictated from the top. Most employees are assigned to work-
manager, keep this flow activities, although in normal times a substantial number of people are devoted
guideline in mind: to administration and clerical support.

Consider the needs and Structural and contextual dimensions can thus tell a lot about an organization
interests of all stake- and about differences among organizations. Organization design dimensions are ex-
holders when setting amined in more detail in later chapters to determine the appropriate level of each
goals and designing the dimension needed to perform effectively in each organizational setting.
organization to achieve
effectiveness. Performance and Effectiveness Outcomes

The whole point of understanding varying perspectives and the structural and con-
textual dimensions of organizations is to design the organization in such a way as to
achieve high performance and effectiveness. Managers adjust structural and contex-
tual dimensions and organizational subsystems to most efficiently and effectively
transform inputs into outputs and provide value. Efficiency refers to the amount of re-
sources used to achieve the organization’s goals. It is based on the quantity of raw ma-
terials, money, and employees necessary to produce a given level of output. Effective-
ness is a broader term, meaning the degree to which an organization achieves its goals.

To be effective, organizations need clear, focused goals and appropriate strate-
gies for achieving them. Strategy, goals, and approaches to measuring effectiveness
will be discussed in detail in Chapter 2. Many organizations are using new technol-
ogy to improve efficiency and effectiveness. For example, the State of Illinois is ap-
plying technology to meet customer service and business development goals, such as
providing trucking firms with one-stop access to state and federal permits over the
Internet. Illinois was also one of the first states to go to a paperless system for school
board meetings, allowing the public to view agendas and reports online. In the busi-
ness world, UPS is using technologically sophisticated package-handling equipment

Chapter 1: Organizations and Organization Theory 23

and computerized logistics systems to cut one day from the average delivery time for
ground packages to major metropolitan areas.28

However, achieving effectiveness is not always a simple matter because different
people want different things from the organization. For customers, the primary con-
cern is high-quality products and services at a reasonable price, whereas employees
are mostly concerned with adequate pay, good working conditions, and job satis-
faction. Managers carefully balance the needs and interests of various stakeholders
in setting goals and striving for effectiveness. This is referred to as the stakeholder
approach, which integrates diverse organizational activities by looking at various
organizational stakeholders and what they want from the organization. A stake-
holder is any group within or outside of the organization that has a stake in the or-
ganization’s performance. The satisfaction level of each group can be assessed as an
indication of the organization’s performance and effectiveness.29

Exhibit 1.7 illustrates various stakeholders and what each group wants from the
organization. Organizations often find it difficult to simultaneously satisfy the de-
mands of all groups. A business might have high customer satisfaction, but the or-
ganization might have difficulties with creditors or supplier relationships might be
poor. Consider Wal-Mart. Customers love its efficiency and low prices, but the low-
cost emphasis the company uses with suppliers has caused friction. Some activist
groups argue that Wal-Mart’s tactics are unethical because they force suppliers to
lay off workers, close factories, and outsource to manufacturers from low-wage
countries. One supplier said clothing is being sold at Wal-Mart so cheaply that many
U.S. companies couldn’t compete even if they paid their workers nothing. The chal-
lenges of managing such a huge organization have also led to strains in relationships
with employees and other stakeholder groups, as evidenced by recent gender dis-
crimination suits and complaints about low wages.30

EXHIBIT 1.7
Major Stakeholder Groups and What They Expect

OWNERS AND STOCKHOLDERS EMPLOYEES CUSTOMERS
• Financial return • Satisfaction • High-quality goods, services
• Pay • Service
• Supervision • Value

SUPPLIERS CREDITORS
• Satisfactory transactions • Creditworthiness
• Revenue from purchases • Fiscal responsibility

ORGANIZATION MANAGEMENT
• Efficiency
COMMUNITY • Effectiveness
• Good corporate citizen
• Contribution to community

affairs

UNION GOVERNMENT
• Worker pay • Obedience to laws and
• Benefits
regulations
• Fair competition

24 Part 1: Introduction to Organizations

Stakeholder interests sometimes conflict, such as when unions demand wage in-
creases that might hurt shareholders’ financial returns or require a switch to lower-
cost suppliers. In nonprofit organizations, the needs and interests of clients some-
times conflict with restrictions on use of government funds or contributions from
donors. In reality, it is unreasonable to assume that all stakeholders can be equally
satisfied. However, if an organization fails to meet the needs of several stakeholder
groups, it is probably not meeting its effectiveness goals. Recall from the opening
case Xerox’s problems with satisfying employees, customers, creditors, stock-
holders, and government regulators.

Research has shown that the assessment of multiple stakeholder groups is an
accurate reflection of organizational effectiveness, especially with respect to orga-
nizational adaptability.31 Moreover, both profit and nonprofit organizations care
about their reputations and attempt to shape stakeholders’ perceptions of their
performance.32

Managers strive to at least minimally satisfy the interests of all stakeholders. When
any one group becomes seriously dissatisfied, it may withdraw its support and hurt
future organizational performance. Satisfying multiple stakeholders can be challenging,
particularly as goals and priorities change, as illustrated by the following example.

In Practice Few will deny that homeland security and battling terrorism should be a top priority
for the United States, and since the attacks of September 11, 2001, the Federal Bu-
Federal Bureau reau of Investigation (FBI) has channeled more and more resources into the domestic
of Investigation war on terrorism.

Sounds good so far, right? The only problem is, the new focus means pulling hun-
dreds of agents off their regular beats, where they investigated everything from drug
smuggling to kidnapping to white collar crime. “Just about everyone here is involved in ter-
ror cases, one way or another,” says agent Ron Buckley. “Everything else is on the back burner.”
That’s putting a heavy burden on police departments and other law enforcement agencies
around the country. These organizations don’t have the personnel, investigative resources, or know-
how to fight the kinds of crime FBI agents once handled. For example, even when local departments
have adequate manpower, crimes often go unsolved because of lack of access to the FBI’s high-tech
forensic labs. State and local police aren’t happy about the diversion of federal resources, even
though they understand the need. Many of these departments are already woefully underfunded
and understaffed, and some have resorted to using volunteers to take crime reports for nonviolent
crimes. Local communities are also distressed because they fear more drugs in their neighborhoods
and more violent crime on their streets. Although the U.S. public is worried about terrorism, they
also want their own little piece of the world protected from criminal activity.
Some of the FBI agents aren’t particularly happy about the change either. An agent who has spent
most of his 25-year career poring over financial statements investigating fraud, for example, has to
make a huge mental shift to feel comfortable traveling around town in an unmarked car with sub-
machine guns, stun grenades, body armor—and a toothbrush—prepared for the next long stakeout.33

This example provides a glimpse of how difficult it can be for managers to sat-
isfy multiple stakeholders. In all organizations, managers have to evaluate stake-
holder concerns and establish goals that can achieve at least minimal satisfaction for
major stakeholder groups.

Chapter 1: Organizations and Organization Theory 25

The Evolution of Organization
Theory and Design

Organization theory is not a collection of facts; it is a way of thinking about orga-
nizations. Organization theory is a way to see and analyze organizations more ac-
curately and deeply than one otherwise could. The way to see and think about or-
ganizations is based on patterns and regularities in organizational design and
behavior. Organization scholars search for these regularities, define them, measure
them, and make them available to the rest of us. The facts from the research are not
as important as the general patterns and insights into organizational functioning.

Historical Perspectives

Organization design and management practices have varied over time in response to
changes in the larger society.

You may recall from an earlier management course that the modern era of man-
agement theory began with the classical management perspective in the late nine-
teenth and early twentieth century. The emergence of the factory system during the
Industrial Revolution posed problems that earlier organizations had not en-
countered. As work was performed on a much larger scale by a larger number of
workers, people began thinking about how to design and manage work in order to
increase productivity and help organizations attain maximum efficiency. The classi-
cal perspective, which sought to make organizations run like efficient, well-oiled
machines, is associated with the development of hierarchy and bureaucratic organi-
zations and remains the basis of much of modern management theory and practice.
In this section, we will examine the classical perspective, with its emphasis on effi-
ciency and organization, as well as other perspectives that emerged to address new
concerns, such as employee needs and the role of the environment. Elements of each
perspective are still used in organization design, although they have been adapted
and revised to meet changing needs.

Efficiency is Everything. Pioneered by Frederick Winslow Taylor, scientific man-
agement postulates that decisions about organizations and job design should be
based on precise, scientific study of individual situations.34 To use this approach,
managers develop precise, standard procedures for doing each job, select workers
with appropriate abilities, train workers in the standard procedures, carefully plan
work, and provide wage incentives to increase output. Taylor’s approach is illus-
trated by the unloading of iron from railcars and reloading finished steel for the Beth-
lehem Steel plant in 1898. Taylor calculated that with correct movements, tools, and
sequencing, each man was capable of loading 47.5 tons per day instead of the typi-
cal 12.5 tons. He also worked out an incentive system that paid each man $1.85 per
day for meeting the new standard, an increase from the previous rate of $1.15. Pro-
ductivity at Bethlehem Steel shot up overnight. These insights helped to establish or-
ganizational assumptions that the role of management is to maintain stability and ef-
ficiency, with top managers doing the thinking and workers doing what they are told.

How to Get Organized. Another subfield of the classical perspective took a
broader look at the organization. Whereas scientific management focused primarily
on the technical core—on work performed on the shop floor—administrative

26 Part 1: Introduction to Organizations

Briefcase principles looked at the design and functioning of the organization as a whole. For
example, Henri Fayol proposed fourteen principles of management, such as “each
As an organization subordinate receives orders from only one superior” (unity of command) and “sim-
manager, keep these ilar activities in an organization should be grouped together under one manager”
guidelines in mind: (unity of direction). These principles formed the foundation for modern manage-
Be cautious when apply- ment practice and organization design.
ing something that works
in one situation to an- The scientific management and administrative principles approaches were pow-
other situation. All organi- erful and gave organizations fundamental new ideas for establishing high produc-
zational systems are not tivity and increasing prosperity. Administrative principles in particular contributed
the same. Use organiza- to the development of bureaucratic organizations, which emphasized designing and
tion theory to identify the managing organizations on an impersonal, rational basis through such elements as
correct structure, goals, clearly defined authority and responsibility, formal recordkeeping, and uniform ap-
strategy, and manage- plication of standard rules. Although the term bureaucracy has taken on negative
ment systems for each connotations in today’s organizations, bureaucratic characteristics worked ex-
organization. tremely well for the needs of the Industrial Age. One problem with the classical per-
spective, however, is that it failed to consider the social context and human needs.

What About People? Early work on industrial psychology and human relations
received little attention because of the prominence of scientific management. How-
ever, a major breakthrough occurred with a series of experiments at a Chicago elec-
tric company, which came to be known as the Hawthorne Studies. Interpretations
of these studies concluded that positive treatment of employees improved their mo-
tivation and productivity. The publication of these findings led to a revolution in
worker treatment and laid the groundwork for subsequent work examining treat-
ment of workers, leadership, motivation, and human resource management. These
human relations and behavioral approaches added new and important contribu-
tions to the study of management and organizations.

However, the hierarchical system and bureaucratic approaches that developed
during the Industrial Revolution remained the primary approach to organization
design and functioning well into the 1970s and 1980s. In general, this approach
worked well for most organizations until the past few decades. However, during
the 1980s, it began to lead to problems. Increased competition, especially on a
global scale, changed the playing field.35 North American companies had to find a
better way.

The 1980s produced new corporate cultures that valued lean staff, flexibility,
rapid response to the customer, motivated employees, caring for customers, and
quality products.

Over the past 2 decades, the world of organizations has undergone even more
profound and far-reaching changes. The Internet and other advances in information
technology, globalization, rapid social and economic changes, and other challenges
from the environment call for new management perspectives and more flexible ap-
proaches to organization design.

Don’t Forget the Environment. Many problems occur when all organizations are
treated as similar, which was the case with scientific management and administra-
tive principles approaches that attempted to design all organizations alike. The
structures and systems that work in the retail division of a conglomerate will not be
appropriate for the manufacturing division. The organization charts and financial
procedures that are best for an entrepreneurial Internet firm like eBay or Google will
not work for a large food processing plant.

Chapter 1: Organizations and Organization Theory 27

Contingency means that one thing depends on other things, and for organiza-
tions to be effective, there must be a “goodness of fit” between their structure and
the conditions in their external environment.36 What works in one setting may not
work in another setting. There is not one best way. Contingency theory means “it
depends.” For example, some organizations experience a certain environment, use
a routine technology, and desire efficiency. In this situation, a management approach
that uses bureaucratic control procedures, a hierarchical structure, and formal com-
munication would be appropriate. Likewise, free-flowing management processes
work best in an uncertain environment with a nonroutine technology. The correct
management approach is contingent on the organization’s situation.

Today, almost all organizations operate in highly uncertain environments. Thus,
we are involved in a significant period of transition, in which concepts of organiza-
tion theory and design are changing as dramatically as they did with the dawning of
the Industrial Revolution.

Contemporary Organization Design

To a great extent, managers and organizations are still imprinted with the hierar-
chical, bureaucratic approach that arose more than a century ago. Yet the chal-
lenges presented by today’s environment—globalization, diversity, ethical concerns,
rapid advances in technology, the rise of e-business, a shift to knowledge and in-
formation as organizations’ most important form of capital, and the growing ex-
pectations of workers for meaningful work and opportunities for personal and pro-
fessional growth—call for dramatically different responses from people and
organizations. The perspectives of the past do not provide a road map for steering
today’s organizations. Managers can design and orchestrate new responses for a
dramatically new world.

Today’s organizations and managers may be seen as shifting from a mindset
based on mechanical systems to one based on natural and biological systems. These
changing beliefs and perceptions affect how we think about organizations and the
patterns of behavior within organizations.

For most of the twentieth century, eighteenth-century Newtonian science, which
suggests that the world functions as a well-behaved machine, continued to guide
managers’ thinking about organizations.37 The environment was perceived as or-
derly and predictable and the role of managers was to maintain stability. This mind-
set worked quite well for the Industrial Age.38 Growth was a primary criterion for
organizational success.

Organizations became large and complex, and boundaries between functional de-
partments and between organizations were distinct. Internal structures grew more
complex, vertical, and bureaucratic. Leadership was based on solid management prin-
ciples and tended to be autocratic; communication was primarily through formal
memos, letters, and reports. Managers did all the planning and “thought work,”
while employees did the manual labor in exchange for wages and other compensation.

The environment for today’s companies, however, is anything but stable. With
the turbulence of recent years, managers can no longer maintain an illusion of or-
der and predictability. The science of chaos theory suggests that relationships in
complex, adaptive systems—including organizations—are nonlinear and made up of
numerous interconnections and divergent choices that create unintended effects and
render the universe unpredictable.39 The world is full of uncertainty, characterized
by surprise, rapid change, and confusion. Managers can’t measure, predict, or con-

28 Part 1: Introduction to Organizations

Briefcase trol in traditional ways the unfolding drama inside or outside the organization.
However, chaos theory also recognizes that this randomness and disorder occurs
As an organization within certain larger patterns of order. The ideas of chaos theory suggest that orga-
manager, keep these nizations should be viewed more as natural systems than as well-oiled, predictable
guidelines in mind: machines.
When designing an orga-
nization for learning and Many organizations are shifting from strict vertical hierarchies to flexible, de-
adaptation in a turbulent centralized structures that emphasize horizontal collaboration, widespread infor-
environment, include ele- mation sharing, and adaptability. This shift can clearly be seen in the U.S. Army,
ments such as horizontal once considered the ultimate example of a rigid, top-down organization. Today’s
structure, shared informa- army is fighting a new kind of war that demands a new approach to how it trains,
tion, empowered roles, equips, and uses soldiers. Fighting a fluid, fast-moving, and fast-changing terrorist
collaborative strategy, and network means that junior officers in the field who are experts on the local situation
adaptive culture. In stable have to make quick decisions, learning through trial and error and sometimes de-
environments, organiza- parting from standard Army procedures. For example, when Captain Nicholas
tions can achieve efficient Ayers was leading a unit in Iraq, he says he often had to come up with new solu-
performance with a verti- tions to situations the Army had never before encountered. Ayers and other junior
cal structure, formal infor- officers share what they learn via e-mail and on Web sites. A lesson learned in one
mation and control sys- unit is often applied successfully elsewhere. “This is entirely a bottom-up war,” says
tems, routine tasks, Major John Nagl, third-in-command of a battalion near Fallujah, Iraq. “It is the
competitive strategy, and platoon leaders and company commanders that are fighting it.”40
a stable culture.
Although the stakes might not be as high, business and nonprofit organizations
today also need greater fluidity and adaptability. Many managers are redesigning
their companies toward something called the learning organization. The learning or-
ganization promotes communication and collaboration so that everyone is engaged
in identifying and solving problems, enabling the organization to continuously ex-
periment, improve, and increase its capability. The learning organization is based on
equality, open information, little hierarchy, and a culture that encourages adapt-
ability and participation, enabling ideas to bubble up from anywhere that can help
the organization seize opportunities and handle crises. In a learning organization,
the essential value is problem solving, as opposed to the traditional organization de-
signed for efficient performance.

Efficient Performance versus the Learning Organization

As managers struggle toward the learning organization, they are finding that specific
dimensions of the organization have to change. Exhibit 1.8 compares organizations
designed for efficient performance with those designed for continuous learning by
looking at five elements of organization design: structure, tasks, systems, culture,
and strategy. As shown in the exhibit, all of these elements are interconnected and
influence one another.

From Vertical to Horizontal Structure. Traditionally, the most common organiza-
tional structure has been one in which activities are grouped together by common
work from the bottom to the top of the organization. Generally little collaboration
occurs across functional departments, and the whole organization is coordinated and
controlled through the vertical hierarchy, with decision-making authority residing
with upper-level managers. This structure can be quite effective. It promotes efficient
production and in-depth skill development, and the hierarchy of authority provides
a sensible mechanism for supervision and control in large organizations. However, in
a rapidly changing environment, the hierarchy becomes overloaded. Top executives
are not able to respond rapidly enough to problems or opportunities.

Mechanical System Design Natural System Design Chapter 1: Organizations and Organization Theory

Vertical Horizontal
Structure Structure

Routine Rigid Organizational Change Empowered Adaptive
Tasks Culture in the Service of Roles Culture
Performance

Formal Competitive Shared Collaborative
Systems Strategy Information Strategy

Stable Environment Turbulent Environment
Efficient Performance Learning Organization

EXHIBIT 1.8
Two Organization Design Approaches
Source: Adapted from David K. Hurst, Crisis and Renewal: Meeting the Challenge of Organizational Change (Boston, Mass.: Harvard Business School Press, 1995).

29