Reading: Strategic Management Textbook Chapter 10
Chapter 10: Executing Strategy through
Organizational Design
10.1 Introduction
10.2 Why Organizational Design?
10.3 The Basic Building Blocks of Organizational Structure
10.4 Creating an Organizational Structure
10.5 Creating Organizational Control Systems
10.6 Legal Forms of Business
10.7 Conclusion
Learning Objectives
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. Why is a firm’s organizational structure important?
2. What are the basic building blocks of organizational structure?
3. What are strategic advantages and disadvantages of each organizational structure type?
4. What are the different forms of control and when should they be used?
5. What are the key legal forms of business, and what implications does the choice of a business
form have for organizational structure?
10.1 Introduction
With an understanding of developing business-level, corporate level, and international strategies, firms must
execute their strategies to be successful. The way a firm organizes itself is critical to its ability to implement
strategy. This chapter addresses why organizational structure is important to achieving a firm’s strategic
goals—which types of structures are deployed by firms, what control systems are used by firms, and what are
the options for establishing a legal entity. These organizational decisions should support and align with an
Chapter 10: Executing Strategy - Organizational Design | 259
Figure 10.1: General Electric’s
logo has changed little since its
creation in the 1890s, but the
company had grown to become
the sixth largest in the United
States before its downfall.
organization’s mission, vision, and values to ensure ethical as well as strategic outcomes. The role of social
responsibility and ethics in a corporate setting will be discussed in detail in the next and final chapter.
The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly
intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless professional
football team. In one game, McKay’s offensive unit played particularly poorly. When McKay was asked after the
game what he thought of his offensive unit’s execution, he wryly responded, “I am in favor of it.”
In the context of business, execution refers to how well a firm such as GE implements the strategies that
executives create for it. This involves the creation and operation of both an appropriate organizational structure
with an aligned organizational control process. Executives who skillfully orchestrate structure and control are
likely to lead their firms to greater levels of success. In contrast, those executives who fail to do so are likely
to be viewed by stakeholders such as employees and owners in much the same way McKay viewed his offense:
worthy of execution.
10.2 Why Organizational Design?
Can Oil Well Services Fuel Success for General Electric?
In the spring of 2010 the Deepwater Horizon fire and oil spill in the
Gulf of Mexico occurred. It resulted in 11 deaths, 17 injuries, and
millions of barrels of oil contaminating the Gulf and US shoreline. As a
result of this disaster, General Electric (GE) saw an opportunity. In
February 2011, General Electric reached an agreement to acquire the
well-support division of John Wood Group PLC for $2.8 billion. This
was GE’s third acquisition of a company that provides services to oil
wells in only five months. In October 2010, GE added the deepwater
exploration capabilities of Wellstream Holdings PLC for $1.3 billion. In
December 2010, part and equipment maker Dresser was acquired for
$3 billion. By spending more than $7 billion on these acquisitions, GE
executives made it clear that they had big plans within the oil well
services business.
While many executives would struggle to integrate three new
companies into their firms, experts expected GE’s leaders to smoothly execute the transitions. In
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describing the acquisition of John Wood Group PLC, for example, one Wall Street analyst noted,
“This is a nice bolt-on deal for GE” (Layne, 2011). In other words, this analyst believed that John
Wood Group PLC could be seamlessly added to GE’s corporate empire. The way that GE was
organized fueled this belief.
GE’s organizational structure includes six divisions, each devoted to specific product categories: (1)
Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business
Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are
three subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the
entire organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and
Dresser into GE, these three newly acquired companies would simply be added to the Oil & Gas
subdivisions within the Energy division.
In addition to the six product divisions, GE also had a division devoted to Global Growth &
Operations. This division was responsible for all sales of GE products and services outside the
United States. The Global Growth & Operations division was very important to GE’s future. Indeed,
GE’s CEO Jeffrey Immelt expected that countries other than the United States will account for 60%
of GE’s sales in the future, up from 53% in 2010. To maximize GE’s ability to respond to local needs,
the Global Growth & Operations was further divided into twelve geographic regions: China, India,
Southeast Asia, Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany,
Europe, and Japan (GE News Center, 2010).
Finally, like many large companies, GE also provided some centralized services to support all its
units. These support areas included public relations, business development, legal, global research,
human resources, and finance. By having entire units of the organization devoted to these
functional areas, GE hoped not only to minimize expenses but also to create consistency across
divisions.
Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s
oil well services operations would need the help of GE’s public relations and legal departments in
the future. Other important questions about GE’s acquisitions remained open as well. In particular,
would the organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser
mesh with the culture of GE? Most acquisitions in the business world fail to deliver the results that
executives expect, and the incompatibility of organizational cultures is one reason why.
This General Electric example highlights several concepts regarding the strategic role decisions
about the organization. First, how large, complex organizations organize themselves impact how
they accomplish their mission. Also, assessing the external environment can open up organizational
opportunities. Third, how the acquisition and then integration of companies into the home firm can
be challenging. And fourth, in hindsight, investing in the fossil fuel industry at a time of rising
energy renewables was a strategic mistake. Since this time, GE has sold off many of its business
lines for billions of dollars, and the downsized company is nowhere near the powerhouse it was a
Chapter 10: Executing Strategy - Organizational Design | 261
decade ago. GE is still struggling due to the strategic errors in a number of the industries it was
involved in.
Figure 10.2: GE fits a dizzying array of businesses into a relatively simple organizational chart.
Firms must be organized in an optimal way to be able to compete and accomplish its mission. As noted in an
earlier chapter, the external and competitive environments cannot be ignored. A firm must find the best “fit” to
deal with the business environment and maximize its internal resources, capabilities, and core competencies.
This organizational fit will determine its performance. It is unique to each organization; it is not “one size fits
all.”
The business-level strategy that a firm selects impacts the organizational structure, with some structures
better suited for certain strategies. There are trade-offs with each structure. The structure influences the firm’s
ability to respond quickly to outside forces, its adaptability, resource efficiency, and accountability.
Walmart uses a functional organizational structure (described later in this chapter) because it is the best design
to support a low cost strategy operating in a stable environment. A functional structure allows for excellent
resource efficiency, but the trade off is a reduction in its adaptability and responsiveness to external forces
(Harvard).
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References
GE News Center. (2010, November 8). GE names vice chairman John Rice to lead GE Global Growth &
Operations [Press release]. https://www.ge.com/news/press-releases/ge-names-vice-chairman-john-ricelead-
ge-global-growth-operations-0.
Layne, R. (2011, February 14). GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg.
https://www.bloomberg.com/news/articles/2011-02-14/ge-spending-spree-adds-2-8-billion-john-woodoil-
service-unit.
Image Credits
Figure 10.1: The General Electric Company. “The original version of the circular logo and trademark of the
General Electric Company.” Public Domain. Retrieved from https://en.wikipedia.org/wiki/
File:Early_General_Electric_logo_1899.png.
Figure 10.2: Kindred Grey (2020). “GE Organizational Structure” CC BY NC SA 3.0. Adaptation of Figure from
Mastering Strategic Management (2015) (CC BY NC SA 3.0). Retrieved from
https://open.lib.umn.edu/app/uploads/sites/11/2015/04/2dbd51773248b81bf185da22059b385a.jpg.
Chapter 10: Executing Strategy - Organizational Design | 263
10.3 The Basic Building Blocks of Organizational Structure
Legendary football coach Vince Lombardi once noted, “The achievements of an organization are the results of the
combined effort of each individual.” Understanding how people can be most efficiently organized is the basis for
modern management thought, and the building blocks of organizational structure are illustrated below.
Table 10.1 The Building Blocks of Organizational Structure
Division of
Labor
Division of labor is a process of splitting up a task into a series of smaller tasks, each of which is
performed by a specialist. In ancient Greece, historian Xenophon wrote about the division of labor in
shoe making: one person cut out the shoes, another sewed the uppers together, and a third person
assembled the parts.
Organizational
Chart An organizational chart is a diagram that depicts a firm’s structure.
Informal
Linkages
Informal linkages are unofficial relationships such as friendships that do not appear in organizational
charts. Examples are two department heads that build a relationship for better collaboration between
their departments, a mentor relationship, or an experienced staff member taking a new employee
“under their wing” to help them get off to a good start at the company.
Vertical
Linkages
Vertical linkages tie supervisors and subordinates together. These linkages show the lines of
responsibility through which a supervisor delegates authority to subordinates, oversees their activities,
evaluates their performance, and guides them toward improvement.
Horizontal
Linkages
Horizontal linkages are formal relationships between equals in an organization. They often take the
form of committees and task forces.
Unity of
Command
Employees may receive conflicting guidance about how to do their jobs if they work in a situation
where multiple bosses are present. This problem can be avoided by following the unity of command
principle, which states that each person should only report directly to one supervisor.
Division of Labor
General Electric (GE), although downsized, still offers an array of products and services, including power
generation, jet engines, medical equipment, and renewable energy. One way that GE could produce its jet
engines would be to have individual employees work on one jet engine at a time from start to finish. However,
this would be very inefficient so GE and most other organizations avoid this approach. Instead, organizations
rely on division of labor when creating their products (Table 10.1). Division of labor is a process of splitting up a
task (such as the creation of jet engines) into a series of smaller tasks, each of which is performed by a specialist.
Illustrated below is one of the oldest recorded stories from about 4300 years ago that is relevant to the design of
modern organizations.
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Table 10.2 Hierarchy of Authority
Hierarchy of Authority Example: Moses
After fleeing Egypt, Moses found himself as the sole
judge of the entire Hebrew population. This was a
daunting task because estimates suggest the
population may have exceeded one million people.
Moses’s father-in-law, Jethro, warned Moses that he would
wear himself out if he tried to handle such a heavy load alone.
Jethro offered Moses some practical advice. He told
Moses that he should teach the people decrees and
laws in an effort to minimize trouble and act as an
example to demonstrate how the people live and the
duties they were to perform.
Rather than handling all judging himself, Moses should appoint
capable and trustworthy officials over groups of thousands,
hundreds, fifties, and tens. These men would serve as judges
for the people at all times, and only the most difficult cases
would be brought to Moses.
This is perhaps the first recorded example of a clear hierarchy of authority—an arrangement of individuals
based on rank. A similar idea is used today in the US justice system where there are lower courts for easy-toresolve
cases and the Supreme Court only handles the most difficult cases.
The leaders at the top of organizations have long known that division of labor can improve efficiency.
Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating responsibility
to other judges offered perhaps the earliest known example (Table 10.2). In the eighteenth century, Adam
Smith’s book The Wealth of Nations quantified the tremendous advantages that division of labor offered for a pin
factory. If a worker performed all the various steps involved in making pins himself, he could make about twenty
pins per day. By breaking the process into multiple steps, however, 10 workers could make 48,000 pins a day.
In other words, the pin factory was a staggering 240 times more productive than it would have been without
relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford and
other industrial pioneers who sought to create efficient organizations.
Figure 10.3: Division of labor allowed eighteenth century pin factories to dramatically increase their
efficiency.
While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate different tasks
and the people who perform them. The solution is organizational structure, which is defined as the process by
which tasks are assigned and grouped together with formal reporting relationships. Creating a structure that
effectively coordinates a firm’s activities increases the firm’s likelihood of success. Meanwhile, a structure that
does not match well with a firm’s needs undermines the firm’s chances of prosperity.
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Figure 10.4: Division of labor was central to Henry Ford’s development of assembly lines in his
automobile factory. Ford noted, “Nothing is particularly hard if you divide it into small jobs.”
Vertical and Horizontal Linkages
Most organizations use a diagram called an organizational chart to depict their structure. These organizational
charts show how firms’ structures are built using two basic building blocks: vertical linkages and horizontal
linkages. Vertical linkages tie supervisors and subordinates together. These linkages show the lines of
responsibility through which a supervisor delegates authority to subordinates, oversees their activities,
evaluates their performance, and guides them toward improvement when necessary. Every supervisor except
for the person at the very top of the organizational chart also serves as a subordinate to someone else. In the
typical business school, for example, a department chair supervises a set of professors. The department chair
in turn is a subordinate of the dean.
Most executives rely on the unity of command principle when mapping out the vertical linkages in an
organizational structure. This principle states that each person should only report directly to one supervisor. If
employees have multiple bosses, they may receive conflicting guidance about how to do their jobs. The unity
of command principle helps organizations to avoid such confusion. In the case of GE, for example, the head
of the Energy division reports only to the chief executive officer. If problems were to arise with executing the
strategic move discussed in this chapter’s opening vignette, joining the John Wood Group PLC with GE’s Energy
division, the head of the Energy division would look to the chief executive officer for guidance.
Horizontal linkages are relationships between equals in an organization. These linkages are often called
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committees, task forces, or teams. Horizontal linkages are important when close coordination is needed
across different segments of an organization. For example, most business schools revise their undergraduate
curriculum every five or so years to ensure that students are receiving an education that matches the needs of
current business conditions. Typically, a committee consisting of at least one professor from every academic
area (such as management, marketing, accounting, and finance) will be appointed to perform this task. This
approach helps ensure that all aspects of business are represented appropriately in the new curriculum.
Figure 10.5: Committee meetings can be boring, but they are often vital for coordinating efforts across
departments.
The organic grocery store chain Whole Foods Market, owned by Amazon, is a company that relies heavily on
horizontal linkages. As noted on their website:
At Whole Foods Market we recognize the importance of smaller tribal groupings to maximize familiarity
and trust. We organize our stores and company into a variety of interlocking teams. Most teams have
between 6 and 100 Team Members and the larger teams are divided further into a variety of sub-teams.
The leaders of each team are also members of the Store Leadership Team and the Store Team Leaders
are members of the Regional Leadership Team. This interlocking team structure continues all the way
upwards to the Executive Team at the highest level of the company (Mackey, 2010).
This emphasis on teams is intended to develop trust throughout the organization, as well as to make full use of
the talents and creativity possessed by every employee.
Informal Linkages
Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In the
long-running comedy series The Simpsons, Homer Simpson is a low-level, low-performing employee at a
Chapter 10: Executing Strategy - Organizational Design | 267
nuclear power plant. In one episode, Homer gains power and influence with the plant’s owner, Montgomery
Burns, which far exceeds Homer’s meager position in the organization chart, because Mr. Burns desperately
wants to be a member of the bowling team that Homer captains. Homer tries to use his newfound influence for
his own personal gain and, naturally, the organization as a whole suffers. Informal linkages such as this one do
not appear in organizational charts, but they nevertheless can have (and often do have) a significant influence
on how firms operate.
Section Video
Organizational Design and Structure [02:44]
The video for this lesson explains the process of organizational design and its structure.
You can view this video here: https://youtu.be/Y4vEos6xuks.
Key Takeaway
• The concept of division of labor (dividing organizational activities into smaller tasks) lies at the
heart of the study of organizational structure. Understanding vertical, horizontal, and informal
linkages helps managers to organize better the different individuals and job functions within a
firm.
Exercises
1. How is division of labor used when training college or university football teams? Do you think
you could use a different division of labor and achieve more efficiency?
2. What are some formal and informal linkages that you have encountered at your college or
university? What informal linkages have you observed in the workplace?
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References
Mackey, J. (2010, March 9). Creating the high trust organization. Whole Foods Market.
https://www.wholefoodsmarket.com/tips-and-ideas/archive/creating-high-trust-organization.
Image Credits
Figure 10.4: Ford Company. “1913 photograph Ford company, USA.” Public Domain. Retrieved from
https://en.wikipedia.org/wiki/File:A-line1913.jpg.
Figure 10.5: Christina @ wocintechchat.com (2019). CC-BY SA 2.0. Cropped. Retrieved from
https://unsplash.com/photos/rg1y72eKw6o.
Video Credits
Gregg Learning. (2019, January 10). Organizational design and structure [Video]. YouTube.
https://youtu.be/Y4vEos6xuks.
10.4 Creating an Organizational Structure
Within most firms, executives rely on vertical and horizontal linkages to create a structure that they hope will
match the needs of their firm’s strategy. Four types of structures are available to executives:
1. Functional
2. Multi-divisional
3. Matrix
4. Boundaryless
Like snowflakes, however, no two organizational structures are exactly alike. When creating a structure for
their firm, executives will take one of these types and adapt it to fit the firm’s unique circumstances. As they
do this, executives must realize that the choice of structure will influence their firm’s strategy in the future.
Once a structure is created, it constrains future strategic moves. If a firm’s structure is designed to maximize
efficiency, for example, the firm may lack the flexibility needed to react quickly to exploit new opportunities.
Executives rely on vertical and horizontal linkages to create a structure that they hope will match the firm’s
needs. While no two organizational structures are exactly alike, four general types of structures are available to
executives: functional, multi-divisional, matrix, and boundaryless.
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Table 10.3 Common Organizational Structures
Functional
Structure
Within a functional structure, employees are divided into departments that each handle activities
related to a functional area of the business, such as marketing, production, human resources,
information technology, and customer service.
Multi-divisional
Structure
In this type of structure, employees are divided into departments based on product areas and/or
geographic regions. General Electric, for example, had six product divisions: Energy, Capital, Home &
Business Solutions, Healthcare, Aviation, and Transportation.
Matrix
Structure
The matrix structure can be thought of as a hybrid between functional and divisional structures.
Complex organizations or firms that engage in projects of limited duration may use a matrix
structure where employees can be put on different teams to maximize creativity and idea flow.
Boundaryless
Structure
The boundaryless organization is flat, with decentralized decision making and the use of many
cross-functional teams. This structure works well in knowledge industries such as IT, where
responsiveness to changing environmental and competitive forces must be quick.
Functional Structure
Organizations become more complex as they grow, and this can require more formal division of labor and a
strong emphasis on hierarchy and vertical links.
Functional structures rely on a division of labor whereby groups of people handle activities related to a specific
function of the overall business. Illustrated are functional structures in action within two types of organizations
that commonly use them.
Table 10.4 Functional Structure
Grocery Store Functions Spa Functions
Grocery stockers often work at night to make sure
shelves stay full during the day.
Some spa employees manicure fingernails, a practice that is over
four thousand years old. Many also provide pedicures, a service
whose popularity has nearly doubled in the recent past.
Pharmacists’ specialized training allows them to
command pay that can exceed $55 an hour.
Compared to other spa functions, little training is required of a
tanning bed operator—although the ability to tell time may help.
Bakers wake up early to give shoppers their daily
bread.
Almost anyone can buy a shotgun or parent a child without any
training, but every state requires a license in order to cut hair.
Bagging groceries requires a friendly personality
as well as knowing that eggs should not go on the
bottom.
Cucumber masks are usually applied by a skincare specialist who
has taken a professional training program.
Folks that work checkout aisles should be trusted
to handle cash.
The license required of massage therapists in many states ensures
that spa visits end happily.
The creation of produce, deli, and butcher
departments provides an efficient way to divide a
grocery store physically as well as functionally.
Within a functional structure, employees are divided into departments that each handle activities related to
a functional area of the business, such as marketing, production, human resources, information technology,
and customer service (Table 10.4). Each of these five areas would be headed up by a manager who coordinates
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all activities related to her functional area. Everyone in a company that works on marketing the company’s
products, for example, would report to the manager of the marketing department. The marketing managers
and the managers in charge of the other four areas in turn would report to the chief executive officer.
Figure 10.6: An example of a functional structure
Using a functional structure creates advantages and disadvantages. An important benefit of adopting a
functional structure is that each person tends to learn a great deal about his or her particular function. By being
placed in a department that consists entirely of marketing professionals, an individual has a great opportunity
to become an expert in marketing. Thus a functional structure tends to create highly skilled specialists. Second,
grouping everyone that serves a particular function into one department tends to keep costs low and to create
efficiency. Also, because all the people in a particular department share the same background training, they
tend to get along with one another. In other words, conflicts within departments are more rare.
Using a functional structure also has a significant downside: executing strategic changes can be very slow
when compared with other structures. Suppose, for example, that a textbook publisher decides to introduce
a new form of textbook that includes “scratch and sniff” photos that let students smell various products in
addition to reading about them. If the publisher is organized using a functional structure, every department
in the organization will have to be intimately involved in the creation of the new textbooks. Because the new
product lies outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately
for the books’ authors, the publication process will be halted whenever a functional area does not live up to its
responsibilities in a timely manner. More generally, because functional structures are slow to execute change,
they tend to work best for organizations that offer narrow and stable product lines.
The specific functional departments that appear in an organizational chart vary across organizations that use
functional structures. In the example offered earlier in this section, a firm was divided into five functional areas:
(1) marketing, (2) production, (3) human resources, (4) information technology, and (5) customer service. In the
TV show The Office, a different approach to a functional structure is used at the Scranton, Pennsylvania, branch
of Dunder Mifflin. The branch was divided into six functional areas: (1) sales, (2) warehouse, (3) quality control,
(4) customer service, (5) human resources, and (6) accounting. A functional structure was a good fit for the
branch at the time because its product line was limited to just selling office paper.
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Figure 10.7: The Scranton branch of Dunder Mifflin may be a dysfunctional organization, but it relies on
a functional structure.
Multi-Divisional Structure
Many organizations offer a wide variety of products and services. Some of these organizations sell their
offerings across an array of geographic regions. These approaches require firms to be very responsive to
customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many firms
abandon the use of a functional structure as their offerings expand. Often the new choice is a multi-divisional
structure. In this type of structure, employees are divided into departments based on product areas and/or
geographic regions.
General Electric (GE) is an example of a company organized this way. As shown in the organization chart
that accompanies this chapter’s opening vignette, most of the company’s employees belonged to one of six
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Figure 10.8: Problems can be created when delegating lots of
authority to local divisions. McDonald’s top executives were
angered when an ad by their French division suggested that
children should only eat at their restaurants once a week.
product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and Transportation) or to
a division that is devoted to all GE’s operations outside the United States (Global Growth & Operations).
A big advantage of a multi-divisional structure is that it allows a firm to act quickly. When GE makes a strategic
move such as acquiring the well-support division of John Wood Group PLC, only the relevant division (in this
case, Energy, needs to be involved in integrating the new unit into GE’s hierarchy. In contrast, if GE were
organized using a functional structure, the transition would be much slower because all the divisions in the
company would need to be involved. A multi-divisional structure also helps an organization to better serve
customers’ needs. For example, GE’s Capital division started to make real-estate loans after exiting that market
during the financial crisis of the late 2000s (Jacobius, 2011). Because one division of GE handled all the firm’s
loans, the wisdom and skill needed to decide when to re-enter real-estate lending was easily accessible.
Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that do not
fit with the company’s overall strategy. McDonald’s experienced this kind of situation. In particular, the French
division of McDonald’s ran a surprising advertisement in a magazine called Femme Actuelle. The ad included
a quote from a nutritionist that asserted children should not eat at a McDonald’s more than once per week.
Executives at McDonald’s headquarters in suburban Chicago were concerned about the message sent to their
customers, of course, and they made it clear that they strongly disagreed with the nutritionist.
Another downside of multi divisional structures is that
they tend to be more costly to operate than functional
structures. While a functional structure offers the
opportunity to gain efficiency by having just one
department handle all activities in an area, such as
marketing, a firm using a multi-divisional structure
needs to have marketing units within each of its
divisions. In GE’s case, for example, each of its seven
divisions must develop marketing skills. Absorbing the
extra expenses that are created reduces a firm’s profit
margin. Often a multi-divisional firm will employ a
functional structure within each of its divisions.
GE’s organizational chart highlights a way that firms
can reduce some of these expenses: the centralization
of some functional services. As shown in the
organizational chart, departments devoted to
important aspects of public relations, business development, legal, global research, human resources, and
finance are maintained centrally to provide services to the six product divisions and the geographic division. By
consolidating some human resource activities in one location, for example, GE creates efficiency and saves
money.
An additional benefit of such moves is that consistency is created across divisions. For example, the Coca-
Cola Company created an Office of Sustainability to coordinate sustainability initiatives across the entire
company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of the Office
of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-Cola had
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“made significant progress with our sustainability initiatives, but our current approach needs focus and better
integration” (Coca-Cola Company, 2011). In other words, a department devoted to creating consistency across
Coca-Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.
Matrix Structure
Within functional and multi-divisional structures, vertical linkages between bosses and subordinates define
most of the elements. Matrix structures, in contrast, rely heavily on horizontal relationships (Ketchen & Short,
2011). In particular, these structures create cross-functional teams that each work on a different project. This
offers several benefits: maximizing the organization’s flexibility, enhancing communication across functional
lines, and creating a spirit of teamwork and collaboration. A matrix structure can also help develop new
managers. In particular, a person without managerial experience can be put in charge of a relatively small
project as a test to see whether the person has a talent for leading others.
Using a matrix structure can create difficulties too. One concern is that a matrix structure violates the unity
of command principle, because each employee is assigned multiple bosses. Specifically, any given individual
reports to a functional area supervisor as well as one or more project supervisors. This creates confusion for
employees because they are left unsure about who should be giving them direction. Violating the unity of
command principle also creates opportunities for unsavory employees to avoid responsibility by claiming to
each supervisor that a different supervisor is currently depending on their efforts.
The potential for conflicts arising between project managers within a matrix structure is another concern.
Chances are that students have had some classes with professors who are excellent speakers, while being
forced to suffer through a semester of incomprehensible lectures in other classes. This mix of experiences
reflects a fundamental reality of management: in any organization, some workers are more talented and
motivated than others. Within a matrix structure, each project manager, naturally, will want the best people in
the company assigned to their project because their boss evaluates these managers based on how well their
projects perform. Because the best people are a scarce resource, infighting and politics can easily flare up
around which people are assigned to each project.
Given these problems, not every organization is a good candidate to use a matrix structure. Organizations such
as information technology, engineering, and consulting firms that need to maximize their flexibility to service
projects of limited duration can benefit from the use of a matrix. Matrix structures are also used to organize
research and development departments within many large corporations. In each of these settings, the benefits
of organizing around teams are so great that they often outweigh the risks of doing so.
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Figure 10.9: You won’t need to choose between a red pill and a blue pill within a matrix structure, but
you will have multiple bosses.
The matrix structure works well for other complex organizations that are not project based. These can be set up
on a permanent basis and fit well for firms with multiple locations. This works particularly well for standardizing
processes and policies across the various units of the firm. For example, a manufacturer with five plants
spread out across the Southeast United States can use this structure to standardize finance and accounting,
production, supply chain, marketing, and logistics. Each of these functional areas has a vice-president in charge
of that function and reports to the CEO. However, each function in each plant has a manager who reports both
to the functional VP and to the plant manager. The matrix structure is best suited for firms implementing a
related diversification corporate strategy in complex environments where responding quickly to external forces
is important.
Sentara Healthcare is a hospital system that operates 13 hospitals in Virginia. This organization uses a matrix
structure to provide consistency and standardization of policies, procedures, supplies, and equipment across
its hospitals. The diagram below illustrates how the reporting structure goes both vertically and horizontally.
This allows for standardization of the major functions across the hospital system. For example, the emergency
Chapter 10: Executing Strategy - Organizational Design | 275
rooms in all hospitals use the same medical equipment, the same computer systems, and the same processes
and paperwork, so nurses can easily work in any hospital without having to be retrained. Efficiency is improved,
best practices are implemented across the system easier, and volume discounts by purchasing identical
supplies and equipment for all the emergency departments saves money.
Figure 10.10: A hospital system organizational structure: matrix structure
Strategy at the Movies
Office Space
How much work can a man accomplish with eight bosses breathing down his neck? For Peter
Gibbons, an employee at information technology firm Initech in the movie Office Space, the answer
was zero. Initech’s use of a matrix structure meant that each employee had multiple bosses, each
representing a different aspect of Initech’s business. High-tech firms often use a matrix structure
to gain the flexibility needed to manage multiple projects simultaneously. Successfully using a
matrix structure requires excellent communication among various managers—however, excellence
that Initech could not reach. When Gibbons forgot to put the appropriate cover sheet on his TPS
report, each of his eight bosses—and a parade of his coworkers—admonished him. This fiasco and
others led to Gibbons to become cynical about his job.
Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant
Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately,
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Figure 10.11: Within a poorly
organized firm like Initech,
simply keeping possession of a
treasured stapler is a
challenge.
Joanna’s manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by
employees to enliven their uniforms. A series of mixed messages about the restaurant’s policy on
flair led Joanna to emphatically proclaim—both verbally and nonverbally—her disdain for the
manager. She then quit her job and stormed out of the restaurant.
Office Space illustrates the importance of organizational design
decisions to an organization’s culture and to employees’ motivation
levels. A matrix structure can facilitate resource sharing and
collaboration but may also create complicated working relationships
and impose excessive stress on employees. Chotchkie’s organizational
structure involved simpler working relationships, but these
relationships were strained beyond the breaking point by a manager’s
eccentricities. In a more general sense, Office Space shows that all
organizational structures involve a series of trade-offs that must be
carefully managed.
Boundaryless Organizations
Most organizational charts show clear divisions and boundaries between different units. The value of a much
different approach was highlighted by former GE CEO Jack Welch when he created the term boundaryless
organization. A boundaryless organization is one that removes the usual barriers between parts of the
organization as well as barriers between the organization and others (Askenas, et. al., 1995). Eliminating all
internal and external barriers is not possible, of course, but making progress toward being boundaryless
can help an organization become more flexible and responsive. One example is W. L. Gore, a maker of
fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids
organizational charts, management layers, and supervisors despite having approximately 9,000 employees
across 30 countries. Rather than granting formal titles to certain people, leaders with W. L. Gore emerge based
on performance, and they attract followers to their ideas over time. As one employee noted, “We vote with our
feet. If you call a meeting, and people show up, you’re a leader” (Hamel, 2007).
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Figure 10.12: The boundaryless approach to structure
embraced by W.L. Gore drives the kind of creative
thinking that led to their most famous product,
GORE-TEX.
Figure 10.13: In 2005, boundaries between
organizations hampered rescue efforts
following Hurricane Katrina.
Boundaryless organizations work best in knowledge
industries, such as information technology and
communications firms. They are characterized by the frequent
use of cross-functional teams and decision-making that is
highly decentralized. These organizations rely heavily on loose
boundaries and the informal linkages mentioned earlier in this
chapter. The boundaryless structure lends itself well to the
free-rein leadership style where the external environment
changes quickly, and for executing innovation strategies.
An illustration of how removing barriers can be valuable has its
roots in a very unfortunate event. During Hurricane Katrina in
2005, rescue efforts were hampered by a lack of coordination
between responders from the National Guard (who are
controlled by state governments) and from active-duty
military units (who are controlled by federal authorities).
According to one National Guard officer, “It was just like a solid
wall was between the two entities” (Elliott, 2011). Efforts were
needlessly duplicated in some geographic areas while
attention to other areas was delayed or inadequate. For
example, poor coordination caused the evacuation of
thousands of people from the New Orleans Superdome to be delayed by a full day. The results were immense
human suffering and numerous fatalities.
To avoid similar problems from arising in the future, barriers
between the National Guard and active-duty military units are being
bridged by special military officers called dual-status commanders.
These individuals will be empowered to lead both types of units
during a disaster recovery effort, helping to ensure that all areas
receive the attention they need in a timely manner.
Reasons for Changing an Organization’s
Structure
Creating an organizational structure is not a one time activity.
Executives must revisit an organization’s structure over time and
make changes to it if certain danger signs arise. For example, a
structure might need to be adjusted if decisions with the
organization are being made too slowly or if the organization is
performing poorly. Both these problems plagued Sears Holdings
leading executives to reorganize the company.
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Figure 10.14: Although it was created to emphasize the need
for unity among the American colonies, this famous 1754
graphic by Ben Franklin also illustrates a fundamental truth
about structure: If the parts that make up a firm do not work
together, the firm is likely to fail.
Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as
clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and finance),
(3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer, Craftsman,
and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S. Lampert noted that
“by creating smaller focused teams that are clearly responsible for their units, we [will] increase autonomy
and accountability, create greater ownership and enable faster, better decisions” (Jones, 2008). Unfortunately,
structural changes cannot cure all a company’s ills. Sears’s stock was worth just over half what it had been worth
five years earlier and it continues to close stores into 2020.
Sometimes structures become too complex and need
to be simplified. Many observers believe that this
description fits Cisco. The company’s CEO, John
Chambers, moved Cisco away from a hierarchical
emphasis toward a focus on horizontal linkages.
Before, Cisco had four types of such linkages. For any
given project, a small team of people reported to one
of 47 boards. The boards averaged 14 members each.
Forty-three of these boards each reported to one of 12
councils. Each council also averaged 14 members. The
councils reported to an operating committee
consisting of Chambers and 15 other top executives.
Four of the 47 boards bypassed the councils and
reported directly to the operating committee. These
arrangements are so complex and time consuming that
some top executives spend 30% of their work hours
serving on more than 10 of the boards and councils, as well as the operating committee.
Because it competes in fast-changing high-tech markets, Cisco needed to be able to make competitive moves
quickly. The firm’s complex structural arrangements were preventing this. A competitor, Hewlett-Packard
(HP), started promoting a warranty service that provided free support and upgrades within the computer
network switches market. Because Cisco’s response to this initiative had to work its way through multiple
committees, the firm did not take prompt action. During the delay, Cisco’s share of the market dropped as
customers embraced HP’s warranty. This problem and others created by Cisco’s overly complex structure were
so severe that one columnist wondered aloud “has Cisco’s John Chambers lost his mind?” (Blodget, 2009).
Finally, Chambers reversed course and decided to return Cisco to a more traditional structure while reducing
the firm’s workforce by 9%. Since the implementation of these structural changes, Cisco’s stock price more than
doubled.
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Section Video
Organizational Structure [04:49]
The video for this lesson explains organizational structure.
You can view this video here: https://youtu.be/zUd0UNHyy60.
Key Takeaway
• Executives must select among the four types of structure (functional, multi-divisional, matrix,
and boundaryless) available to organize operations. Each structure has unique advantages, and
the selection of structures involves a series of trade-offs.
Exercises
1. What type of structure best describes the organization of your college or university? What led
you to reach your conclusion?
2. The movie Office Space illustrates two types of structures. What are some other scenes or
themes from movies that provide examples or insights relevant to understanding organizational
structure?
References
Askenas, R., Ulrich, D., Jick, T., & Kerr, S. (1995). The boundaryless organization: Breaking down the chains of
organizational structure. Jossey-Bass.
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Blodget, H. (2009, August 6). Has Cisco’s John Chambers lost his mind? Business Insider.
http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8.
Coca-Cola Company. (2011, May 19). The Coca-Cola Company names Bea Perez chief sustainability officer.
CSRwire.
https://www.csrwire.com/press_releases/32250-The-Coca-Cola-Company-Names-Beatriz-Perez-Chief-
Sustainability-Officer.
Elliott, D. (2011, July 3). New type of commander may avoid Katrina-like chaos. NBC News.com.
http://www.nbcnews.com/id/43625625/ns/us_news-life/t/new-type-commander-may-avoid-katrinalike-
chaos.
Hamel, G. (2007, September 27). What Google, Whole Foods do best. CNNMoney.
https://money.cnn.com/2007/09/26/news/companies/management_hamel.fortune/index.htm.
Jacobius, A. (2011, July 25). GE Capital slowly moving back into lending waters. Pensions & Investments.
http://www.pionline.com/article/20110725/PRINTSUB/110729949.
Jones, S. (2008, January 23). Sears separates businesses. Chicago Tribune.
https://www.chicagotribune.com/news/ct-xpm-2008-01-23-0801231605-story.html.
Ketchen, D. J., & Short, J. C. (2011). Separating fads from facts: Lessons from “the good, the fad, and the ugly.”
Business Horizons, 54, 17–22.
Image Credits
Figure 10.6: Kindred Grey (2020). “Example of Simple Organizational Structure.” CC BY-SA 4.0. Retrieved from
https://commons.wikimedia.org/wiki/File:Example_of_Simple_Organizational_Structure.png.
Figure 10.8: Alfonsina Blyde. Everything to See You Smile. CC BY-NC-ND 2.0. Retrieved from
https://www.flickr.com/photos/alfon18/2503400459/.
Figure 10.9: Kindred Grey (2020). “Product Manager Organizational Structure.” CC BY-SA 4.0. Retrieved from
https://commons.wikimedia.org/wiki/File:Product_Manager_Organizational_Structure.png.
Figure 10.10: Kindred Grey (2020). “Hospital System Organizational Structure.” CC BY-SA 4.0. Retrieved from
https://commons.wikimedia.org/wiki/File:Hospital_System_Organizational_Structure.png.
Figure 10.11: Mrschimpf. “A picture of a Swingline 747 stapler.” Cropped. Public Domain. Retrieved from
https://en.wikipedia.org/wiki/Talk%3AOffice_Space#/media/File:Swingline_747.png.
Figure 10.12: Adifansnet. “adidas_Men’s_Winter Story_OT-Tech-Gore-Tex Hooded Jacket_E95062.” CC BY-SA
2.0. Retrieved from https://flic.kr/p/6DvjAX.
Figure 10.13: Niemi, Kyle. “New Orleans, Louisiana in the aftermath of Hurricane Katrina, showing Interstate 10
Chapter 10: Executing Strategy - Organizational Design | 281
at West End Boulevard, looking towards Lake Pontchartrain.” Public Domain. Retrieved from
https://en.wikipedia.org/wiki/File:KatrinaNewOrleansFlooded_edit2.jpg.
Figure 10.14: Franklin, Benjamin. “Join or Die.” Public Domain. Retrieved from
https://commons.wikimedia.org/wiki/File:Benjamin_Franklin_-_Join_or_Die.jpg.
Video Credits
Communication Coach Alex Lyon. (2018, January 7). Organizational structure [Video]. YouTube.
https://youtu.be/zUd0UNHyy60.
10.5 Creating Organizational Control Systems
In addition to creating an appropriate organizational structure, effectively executing strategy depends on the
skillful use of organizational control systems. Executives create strategies trying to achieve their organization’s
vision, mission, and goals. Organizational control systems allow executives to track how well the organization
is performing, identify areas of concern, and then take action to address the concerns. Three basic types
of control systems are available to executives: (1) output control, (2) behavioral control, and (3) clan control.
Different organizations emphasize different types of control, but most organizations use a mix of all three types.
Output Control
Stephen Covey said “start with the end in mind.” Output control is one way decision makers put this into
practice. Output control focuses on measurable results within an organization. Examples from the business
world include the number of hits a website receives per day, the number of microwave ovens an assembly
line produces per week, and the number of vehicles a car salesman sells per month (Table 10.5). In each of
these cases, executives must decide what level of performance is acceptable, communicate expectations to the
relevant employees, track whether performance meets expectations, and then make any needed changes. In an
ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their
paychecks had been lost—by the US Postal Service. The corrective action was simple: they started receiving
their pay via direct deposit rather than through the mail.
Many times the stakes are much higher. Delta Airlines was forced to face some facts as part of its use of output
control. Data gathered by the federal government revealed that only 77.4% of Delta’s flights had arrived on time
during the year. This performance led Delta to rank dead last among the major US airlines and fifteenth out
of 18 total carriers (Yamanouchi, 2011a). In response, Delta took important corrective steps. In particular, the
airline added to its ability to service airplanes and provided more customer service training for its employees.
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Figure 10.15: While most scholarships require a high GPA,
comedian David Letterman created a scholarship for a “C”
student at Ball State University. Ball State later named a new
communications and media building after its very famous
alumnus.
These changes and others paid off. For the second quarter of the following year, Delta enjoyed a $198 million
profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices (Yamanouchi, 2011b).
Outcome controls assess measurable production and other tangible results. Often output controls emphasize
“bottom-line” performance. We illustrate some outcome controls found in organizations below.
Table 10.5 Output Controls
Output Control Examples
Because real estate agents are paid a percentage of the selling price when a house sells, the number of dollars generated
in houses sold is an important metric. Many realty offices have designations like “five million dollar club” to recognize
very productive realtors.
Grade point averages provide a tangible means for employers and graduate schools to compare students.
In the classic movie Elf, the main character Buddy leaves Santa’s workshop when the number of Etch-A-Sketch toys he
produces is nearly 900 units lower than the standard pace.
To earn tenure in a research-focused business school, a professor’s output generally must include publishing numerous
high-quality articles at reputable scholarly journals.
Within restaurants, servers can increase a key output—amount of tips received—by providing customers with fast,
friendly, and high-quality service.
Output control also plays a big part in the college
experience. For example, test scores and grade point
averages are good examples of output measures. If you
perform badly on a test, a student might take
corrective action by studying harder or by studying in
a group for the next test. At most colleges and
universities, a student is put on academic probation
when his grade point average drops below a certain
level. If the student’s performance does not improve,
he may be removed from his major and even dismissed.
On the positive side, output measures can trigger
rewards too. A very high grade point average can lead
to placement on the dean’s list and graduating with
honors.
The balanced scorecard discussed in an earlier chapter
is an output measure used by firms to track their
progress toward achieving performance goals and
strategies. Sometimes an output measure may have unintended consequences and produce the opposite
impact desired. For example, if the sales team in a firm is rewarded based only on individual sales totals, sales
people may not cooperate, collaborate, or help each other. They may even attempt to sabotage each other in
their quest to achieve first place in sales for the period. Organizations must take care in how employees and
managers are incentivized.
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Figure 10.16: Although some behavioral
controls are intended for employees and not
customers, following them is beneficial to
everyone.
Behavioral Control
Behavioral controls dictate the actions of individuals. Such controls often emphasize rules and procedures. Some
behavioral controls found in organizations are illustrated below.
Table 10.6 Behavioral Controls
Behavioral Control Examples
No shoes, no shirt, no paycheck. Many food service companies have strict attire requirements to make sure employees
are in compliance with the rules of the Food and Drug Administration and those of local health departments.
Casual Fridays provide a welcome break in offices that enforce strict dress codes.
Many businesses require that checks are signed by two people. This prevents a dishonest employee from embezzling
money.
In a classroom setting, grading attendance is a behavioral control designed to force students to show up for class. This
can be very helpful because research shows that attendance is positively related to grades. Unfortunately, there are no
behavioral controls that force professors’ lectures to be interesting.
Gotta go? Be careful to not take too much time at certain auto factories, where bathroom breaks are monitored in an
effort to cut costs. Some employees of US firms are limited to 46 minutes of bathroom time per shift, while Japanese
automakers allow their American employees only 30 minutes per shift.
While output control focuses on results, behavioral control focuses
on controlling the actions that ultimately lead to results. In
particular, various rules and procedures are used to standardize or
to dictate behavior (Table 10.6). In most states, for example, signs are
posted in restaurant bathrooms reminding employees that they
must wash their hands before returning to work. To try to prevent
employee theft, many firms require direct deposit for paychecks.
And as an extreme example, some automobile factories and meat
processing plants dictate to workers how many minutes they can
spend in restrooms during their work shift.
Behavioral control also plays a significant role in the college
experience. An illustrative (although perhaps unpleasant) example is
penalizing students for not attending class. Instructors grade
attendance to control students’ behavior; specifically, to motivate
students to attend class. Meanwhile, student’s exert some control
over an instructor’s future behavior through their student evaluation
measures at the end of the semester. .
Outside the classroom, behavioral control is a major factor within
college athletic programs. The National Collegiate Athletic
Association (NCAA) governs college athletics using an enormous set of rules, policies, and procedures. The
NCAA’s rule book on behavior is so complex that virtually all coaches violate its rules at one time or another.
Critics suggest that the behavioral controls instituted by the NCAA have reached an absurd level. Despite this
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example, some degree of behavioral control is needed within virtually all organizations to ensure a productive
work environment for all employees.
While a firm may have many mechanisms within its behavioral control system, the priority given to a particular
set of control mechanisms can be influenced by the external environment. The Supreme Court ruling (June
2020) on LGBTQ workplace protections coupled with parallel outrage regarding social justice issues facing
Black, Indigenous, and other People of Color (BIPOC) have an impact on firm decision-making. As a result, firms
have been focused to pay more addition to making public statements on racial injustice while making changes
to the existing (or absent) practices ensuring enforcement of anti-discrimination and equity policies. These
changes may result in new prioritization within organizational behavior control systems. For example, in 2020
NASCAR banned the presence of the Confederate flag at its race venues following national demonstrations
against white supremacy.
Creating an effective reward structure is key to effectively managing behavior because people tend to focus
their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that seem
positive on the surface but that can actually undermine organizational goals under some circumstances. For
example, restaurant servers are highly motivated to serve their tables quickly because doing so can increase
their tips. But if a server devotes all his or her attention to providing fast service, other tasks that are vital to
running a restaurant, such as communicating effectively with managers, host staff, chefs, and other servers,
may suffer. Managers need to be aware of such trade-offs and strive to align rewards with behaviors. For
example, waitstaff who consistently behave as team players could be assigned to the most desirable and
lucrative shifts, such as nights and weekends.
Clan Control
Rather than measuring results (as in outcome control) or dictating behavior (as in behavioral control), clan
control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of
their organization. Some of the most interesting and unusual examples of clan control are found on college
campuses. Below we illustrate a few striking examples that help build school spirit and loyalty.
Table 10.7 Clan Controls
Clan Controls
Roughly one-quarter of Brandeis University’s student body gets adorned in paint—and nothing else—at the annual Liquid
Latex event.
No matter how you slice it, the Toast Toss seems strange to outsiders. University of Pennsylvania students fling the
breakfast staple into the air after the third quarter of home football games.
Students at Texas Tech University honor the school’s Southwest heritage by throwing tortillas at sporting events.
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Figure 10.17: As part of the team-building
effort at Google, new employees are known
as Noogles and are given a propeller hat to
wear.
Instead of measuring results (as in outcome control) or dictating
behavior (as in behavioral control), clan control is an informal type of
control. Specifically, clan control relies on shared traditions,
expectations, values, and norms to lead people to work toward the good
of their organization (Table 10.7). Clan control is often used heavily in
settings where creativity is vital, such as many high-tech businesses. In
these companies, output is tough to dictate, and many rules are not
appropriate. The creativity of a research scientist would be likely to be
stifled, for example, if she were given a quota of patents that she must
meet each year (output control) or if a strict dress code were enforced
(behavioral control).
Google is a firm that relies on clan control to be successful. Employees
are permitted to spend 20% of their workweek on their own innovative
projects. The company offers an ‘‘ideas mailing list’’ for employees to
submit new ideas and to comment on others’ ideas. Google executives
routinely make themselves available two to three times per week for
employees to visit with them to present their ideas. These informal
meetings have generated a number of innovations, including
personalized home pages and Google News, which might otherwise
have never been adopted. Another illustration is when NASCAR banned
the Confederate flag, all the race car drivers and crews walked the racetrack at Talladega, Alabama, in a
powerful support of the ban.
Some executives look to clan control to improve the performance of struggling organizations. In Florida,
officials became fed up with complaints about surly clerks within the state’s driver’s license offices. The solution
was to look for help with training employees from two companies that are well-known for friendly, engaged
employees and excellent customer service. The first was The Walt Disney Company, which offers world-famous
hospitality at its Orlando theme parks. The second was regional supermarket chain Publix, a firm whose motto
stressed that “shopping is a pleasure” in its stores. The goal of the training was to build the sort of positive team
spirit Disney and Publix enjoy. The state’s highway safety director summarized the need for clan control when
noting that “we’ve just got to change a little culture out there” (Bousquet, 2005).
Clan control is also important on many college campuses. Philanthropic and social organizations such as clubs,
fraternities, and sororities often revolve around shared values and team spirit. More broadly, many campuses
have treasured traditions that bind alumni together across generations. Purdue University, for example, proudly
owns the world’s largest drum. The drum is beaten loudly before home football games to fire up the crowd.
After athletic victories, Auburn University students throw rolls of toilet paper into campus oak trees. At Virginia
Tech, their spirit of service as modeled in their motto “That I May Serve” leads them to hold the largest Relay for
Life fundraising event on a university campus year after year. These examples and thousands of others spread
across the country’s colleges and universities help students feel like they belong to something special.
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Management Fads: Out of Control?
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises when
some element of culture—such as fashion, a toy, or a hairstyle—becomes enthusiastically embraced by a group of
people. Fads also seem to be a predictable aspect of the business world. Below we illustrate several fads that
executives have latched onto in an effort to improve their organizations’ control systems.
Table 10.8 Managing Management Fads
Management
by
Objectives
A supervisor and an employee create a series of goals that provide structure and motivation for the
employee. A huge set of studies shows that setting challenging but attainable goals leads to good
performance, but not every aspect of work can be captured by a goal.
Sensitivity
Training
Free-flowing group discussions are used to lead individuals toward greater understanding of themselves
and others. Because a “mob mentality” can take over a group, sensitivity training too often degenerates
into hostility and humiliation.
Quality
Circles
Volunteer employee groups developed to brainstorm new methods or processes to improve quality.
Quality is important, but managers face trade-offs among quality, cost, flexibility, and speed. A singular
obsession with quality sacrifices too much along other dimensions.
Strong
Culture
Fueled by 1982’s In Search of Excellence and fascination with Japanese management systems, having a
strong culture became viewed as crucial to organizational success. Within a few years, many of the
“excellent” companies highlighted in the book had fallen on hard times. However, firms such as Disney
continue to gain competitive advantage through their strong cultures.
Don’t chase the latest management fads. The situation dictates which approach best accomplishes the team’s
mission. -Colin Powell
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad arises
when some element of popular culture becomes enthusiastically embraced by a group of people. Over the
past few decades, for example, fashion fads have included leisure suits (1970s), “Members Only” jackets (1980s),
platform shoes (1990s), Crocs (2000s), and torn jeans (2010s). Ironically, the reason a fad arises is also usually
the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle creates “buzz”
and publicity but also ensures that its appeal is only temporary (Ketchen & Short, 2011).
Fads also seem to be a predictable aspect of the business world (Table 10.8 “Managing Management Fads”). As
with cultural fads, many provocative business ideas go through a life cycle of creating buzz, captivating a group
of enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly endless
supply of popular management books whose premises range from the intriguing to the absurd. Within the
topic of leadership, for example, various books promise to reveal the “leadership secrets” of an eclectic array of
famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun, and Santa Claus.
Beyond the striking similarities between cultural and business fads, there are also important differences. Most
cultural fads are harmless, and they rarely create any long-term problems for those that embrace them. In
contrast, embracing business fads could lead executives to make bad decisions. As our quote from Colin
Powell suggests, relying on sound business practices is much more likely to help executives to execute their
organization’s strategy than are generic words of wisdom from Old St. Nick.
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Many management fads have been closely tied to organizational control systems. For example, one of the bestknown
fads was an attempt to use output control to improve performance. Management by Objectives (MBO)
is a process wherein managers and employees work together to create goals. These goals guide employees’
behaviors and serve as the benchmarks for assessing their performance. Following the presentation of MBO in
Peter Drucker’s 1954 book The Practice of Management, many executives embraced the process as a cure-all for
organizational problems and challenges.
Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an objective
for every aspect of employees’ activities eventually discovered that this was unrealistic. The creation of explicit
goals can conflict with activities involving tacit knowledge about the organization. Intangible notions such as
“providing excellent customer service,” “treating people right,” and “going the extra mile” are central to many
organizations’ success, but these notions are difficult if not impossible to quantify. Thus, in some cases, getting
employees to embrace certain values and other aspects of clan control is more effective than MBO.
Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in Japan in
the 1960s and were first introduced in the United States in 1972. A quality circle is a formal group of employees
that meets regularly to brainstorm solutions to organizational problems. As the name “quality circle” suggests,
identifying behaviors that would improve the quality of products and the operations management processes
that create the products was the formal charge of many quality circles.
While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent
that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the production
process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions often results in a
product that simply cannot satisfy customers’ needs. Many products with perfect quality, for example, would be
created too slowly and at too great a cost to compete in the market effectively. Thus trade-offs among quality,
speed, cost, and flexibility are inevitable.
Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many
organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen white people openly
discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the rigid
nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These discussions were
thought to lead individuals to greater understanding of themselves and others. The anticipated results were
more enlightened workers and a greater spirit of teamwork.
Research on social psychology has found that groups are often far crueler than individuals. Unfortunately, this
meant that the candid nature of T-group discussions could easily degenerate into accusations and humiliation.
Eventually, the T-group fad gave way to recognition that creating potentially hurtful situations has no place
within an organization. Hints of the softer side of T-groups can still be observed in modern team-building fads,
however. Perhaps the best known is the “trust game,” which claims to build trust between employees by having
individuals fall backward and depend on their coworkers to catch them.
Improving clan control was the basis for the fascination with organizational culture that was all the rage in
the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from America’s
Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they viewed as stellar
performers and distilled eight similarities that were shared across the companies. Most of the similarities,
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Figure 10.18: Spirited games of kickball can help build an
organization’s culture, but such events should not substitute
for holding employees accountable for delivering results.
including staying “close to the customer” and “productivity through people,” arose from powerful corporate
cultures. The book quickly became an international sensation; more than three million copies were sold in the
first four years after its publication.
Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both the
popular press and academic research revealed that many of Peters and Waterman’s “excellent” companies
quickly had fallen on hard times. Basic themes such as customer service and valuing one’s company are quite
useful, but these clan control elements often cannot take the place of holding employees accountable for their
performance.
The history of fads allows us to make certain
predictions about today’s hot ideas, such as
empowerment, “good to great,” and viral marketing.
Executives who distill and act on basic lessons from
these fads are likely to enjoy performance
improvements. Empowerment, for example, builds on
important research findings regarding
employees—many workers have important insights to
offer to their firms, and these workers become more
engaged in their jobs when executives take their
insights seriously. Relying too heavily on a fad,
however, seldom turns out well.
Just as executives in the 1980s could not treat In Search
of Excellence as a recipe for success, today’s executives should avoid treating James Collins’s 2001 best-selling
book Good to Great: Why Some Companies Make the Leap…and Others Don’t as a detailed blueprint for running
their companies. Overall, executives should understand that management fads usually contain a core truth that
can help organizations improve but that a balance of output, behavioral, and clan control is needed within most
organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who yield
to trends and fads and popular opinion.”
Key Takeaway
• Organizational control systems are a vital aspect of executing strategy because they track
performance and identify adjustments that need to be made. Output controls involve measurable
results. Behavioral controls involve regulating activities rather than outcomes. Clan control relies
on a set of shared values, expectations, traditions, and norms. Over time, a series of fads
intended to improve organizational control processes have emerged. Although these fads tend to
be seen as cure-alls initially, executives eventually realize that an array of sound business
practices is needed to create effective organizational controls.
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Exercises
1. What type of control do you think works most effectively with you and why?
2. What are some common business practices that you predict will be considered fads in the
future?
3. How could you integrate each type of control into a college classroom to maximize student
learning?
References
Bousquet, S. (2005, September 23). For surly license clerks. a pound of charm. St Petersburg Times.
Ketchen, D. J., & Short, J. C. (2011). Separating fads from facts: Lessons from “the good, the fad, and the ugly.”
Business Horizons, 54, 17–22.
Yamanouchi, K. (2011a, February 10). Delta ranks near bottom in on-time performance. Atlanta-Journal
Constitution.
https://www.ajc.com/business/delta-ranks-near-bottom-time-performance/PbZFT87JuyiSXkNxotBrfN.
Yamanouchi, K. (2011b, July 27). Delta has $198 million profit, says 2,000 took buyouts. Atlanta-Journal
Constitution.
https://www.ajc.com/business/delta-has-198-million-profit-says-000-took-buyouts/
mqaPWvYuo5nflnAOCcXBUJ.
Image Credits
Figure 10.15: Flood, Kyle. “David Letterman Communication and Media Building, Dedication Ceremony.” Public
Domain. Retrieved from https://commons.wikimedia.org/wiki/File:David_Letterman_building.jpg.
Figure 10.16: Sterilgutassistentin. “Employees must wash hands before returning to work.” CC BY-SA 3.0.
Retrieved from https://en.wikipedia.org/wiki/
File:Manhattan_New_York_City_2009_PD_20091130_209.JPG.
Figure 10.17: Lozupone, Alex. “Photo of someone wearing a Google NOOGLER hat.” CC BY-SA 3.0. Retrieved
from
https://en.wikipedia.org/wiki/File:Noogler.png.
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Figure 10.18: Joe Mabel (2015). “Waiting to play kickballat Gas Works Park, Seattle, Washington, U.S.” CC BY-SA
3.0. Retrieved from: https://commons.wikimedia.org/wiki/Category:Kickball#/media/
File:Waiting_to_play_kickball_at_Gas_Works_Park_01.jpg.
10.6 Legal Forms of Business
Making a profit is a key goal for the overwhelming majority of firms. How a firm’s owners benefit from profits
and suffer from losses varies across different legal forms of business. Below we illustrate how profits and losses
are treated within different business forms.
Table 10.9 Business Forms
Treatment of Profits and Losses within Different Business Forms
A sole proprietorship is owned by one person. The firm and its owner are treated interchangeably—the owner is the only
beneficiary of any profits and is personally responsible for any losses and debts. Most sole proprietorships are small, but
entrepreneur James Cash Penney operated JCPenney as one for many years after buying out his two partners.
In a partnership, two or more partners jointly own the firm. A successful partnership requires trust because profits and
losses are shared and because each partner is accountable for the actions of others. Partnerships are a common business
form for dental practices and law offices.
A corporation such as Southwest Airlines separates ownership and management by issuing ownership shares that are
publicly traded in stock markets. Shareholders do not directly receive profits or absorb losses, but profits and losses
tend to be reflected in whether the firm’s stock price rises or falls. Shareholders can also benefit from profits in the form
of dividends. Most large companies are C corporations with multiple stockholders. A disadvantage of this business form
is double taxation: taxes are paid on corporate profits and on any dividends that corporate pays to stockholders, at their
personal tax rate. An S corporation is limited to 100 stockholders and is more for smaller companies. It does not have
double taxation. Taxes are paid on profits distributed to stockholders at their personal tax rate.
A limited liability company (LLC) can be thought of as a hybrid of a corporation and partnership. Like in a corporation,
owners are not accountable for the firm’s debts. A winner of a legal judgement against an LLC, for example, cannot claim
the personal assets of the LLC’s owners. LLC’s also enjoy the management flexibility of partnerships. For federal tax
purposes, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship. Many architectural
and consulting firms are organized as LLCs.
Choosing a Form of Business
The legal form a firm chooses to operate under is an important decision with implications for how a firm
structures its resources and assets. Several legal forms of business are available to executives. Each involves a
different approach to dealing with profits and losses (Table 10.9).
There are three primary considerations that firms should take into account when deciding which legal form of
business should be chosen. These are:
1. How taxes are handled
2. How liability of the owners is handled
3. How easy to set up and operate the entity
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There are five basic forms of business entities:
1. Sole Proprietorship
2. Partnership
3. Corporation
4. S Corporation
5. Limited Liability Company—LLC
A sole proprietorship is a firm that is owned by one person. From a legal perspective, the firm and its owner are
considered one and the same. On the plus side, this means that all profits are the property of the owner (after
taxes are paid, of course). On the minus side, however, the owner is personally responsible for the firm’s losses
and debts. This presents a tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for
example, the owner could find his personal assets forfeited. Most sole proprietorships are small and many have
no employees. In most towns, for example, there are a number of self-employed repair people, plumbers, and
electricians who work alone on home repair jobs. Also, many sole proprietors run their businesses from their
homes to avoid expenses associated with operating an office. Along with the disadvantage of personal liability
for the owner, sole proprietorships enjoy two advantages. Taxes on profits are assessed at the owner’s personal
tax rate. Also, this is the easiest form of business to set up and operate.
In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole
proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also responsible
for any losses and debts. Partnerships can be especially attractive if each person’s expertise complements the
others. For example, an accountant who specializes in preparing individual tax returns and another who has
mastered business taxes might choose to join forces to offer customers a more complete set of tax services
than either could offer alone.
From a practical standpoint, a partnership allows a person to take time off without closing down the business
temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida. When Lawrence
suffered a serious injury a few years ago, Sander was able to take over supervising his projects and see them
through to completion. Had Lawrence been a sole proprietor, his customers would have suffered greatly.
However, a person who chooses to be part of a partnership rather than operating alone as a sole proprietor
also takes on some risk; your partner could make bad decisions that end up costing you a lot of money. Thus
developing trust and confidence in one’s partner is very important. As with the sole proprietorship, the owners
and the partnership are considered as one. Being personally liable for the debts and actions of the partnership
and the partner(s) is certainly a downside, however setting up a partnership is relatively easy. Taxes are also
paid at the partners individual rate, a tax advantage generally.
Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between a
corporation and a sole proprietorship or partnership is that corporations involve the separation of ownership
and management. Corporations sell shares of ownership that are publicly traded in stock markets, and they are
managed by professional executives. These executives may own a significant portion of the corporation’s stock,
but this is not a legal requirement.
Another unique feature of corporations is how they deal with profits and losses. Unlike in sole proprietorships
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and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive profits or absorb losses.
Instead, profits and losses indirectly affect shareholders in two ways. First, profits and losses tend to be
reflected in whether the firm’s stock price rises or falls. When a shareholder sells her stock, the firm’s
performance while she has owned the stock will influence whether she makes a profit relative to her stock
purchase. Shareholders can also benefit from profits if a firm’s executives decide to pay cash dividends to
shareholders. Unfortunately, for shareholders, corporate profits and any dividends that these profits support
are both taxed. This double taxation is a big disadvantage of corporations. Corporations (also called C
corporations) are also the most difficult form of business to set up and have a number of regulations to comply
with.
A specialized type of corporation called an S corporation is designed for smaller companies.. Much like in a
partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with each
owner’s share of the firm, so double taxation is avoided. Although this is an attractive feature, an S corporation
would be impractical for most large firms because the number of shareholders in an S corporation is capped,
usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For smaller
firms, such as many real-estate agencies, the S corporation is an attractive form of business. S corporations
also provide liability protection for their stockholders as C corporations do, and are easier to set up and operate
than C corporations.
A final form of business is very popular, yet it is not actually recognized by the federal government as a form
of business. Instead, the ability to create a limited liability company (LLC) is granted in state laws. LLCs
mix attractive features of corporations and partnerships. The owners of an LLC are not personally liable for
debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible manner (like
in a partnership). When paying federal taxes, however, an LLC must choose to be treated as a corporation,
a partnership, or a sole proprietorship. Many home builders (including Sander & Lawrence), architectural
businesses, and consulting firms are LLCs. The ease of setting up and operating an LLC is similar to a sole
proprietorship or partnership.
Table 10.10 Key Factors for Different Forms of Business
Taxes Liability Ease of Operation
Sole Proprietor Personal tax return Unlimited liability Easiest
Partnership Personal tax return Unlimited liability Easy
C Corporation Double taxation Limited liability Hardest
S Corporation Personal tax return Limited liability Hard
Limited Liability Company Personal tax return Limited liability Moderate
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Section Video
Finding the Right Business Structure [03:58]
The video for this lesson further explains the various forms of business ownership.
You can view this video here: https://youtu.be/A-Up-JUkaj0.
Key Takeaway
• The five major forms of business in the United States are sole proprietorships, partnerships,
LLCs, and C and S corporations. Each form has implications for how individuals are taxed, the
personal liability of the owners, and how resources are managed and deployed in the set up and
operations.
Exercises
1. Why are so many small firms sole proprietorships?
2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm
chose this form of business over others?
3. Why might different forms of business be more likely to rely on a different organizational
structure?
Video Credits
John Deere. (2016, May 26). Finding the right business structure [Video]. YouTube.
https://youtu.be/A-Up-JUkaj0.
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10.7 Conclusion
This chapter explains elements of organizational design that are vital for executing strategy. Leaders of firms,
ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about
the delegation of authority and responsibility when organizing activities within their firms. Deciding how to
best divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions
that lead to the creation of formal organizational charts. While small businesses rarely create organization
charts, firms that embrace functional, multidivisional, matrix, and boundaryless structures often have reporting
relationships with considerable complexity. To execute strategy effectively, managers also depend on the
skillful use of organizational control systems that involve output, behavioral, and clan controls. Although
introducing more efficient business practices to improve organizational functioning is desirable, executives
need to avoid letting their firms become “out of control” by being skeptical of management fads. Finally, the
legal form a business takes is an important decision with implications for a firm’s organizational structure.
Figure 10.19: Three Government Branches
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Exercises
1. The preceding chart is an organizational chart for the US federal government. What type of the
four structures mentioned in this chapter best fits what you see in this chart?
2. How does this structure explain why the government seems to move at an incredibly slow pace?
3. What changes could be made to speed up the government? Would they be beneficial?
Image Credits
Figure 10.19: Kindred Grey (2020). “Three Government Branches.” CC BY NC SA 3.0 Adaptation of Figure 9.6
from Mastering Strategic Management (2015) (CC BY NC SA 3.0). Retrieved from
https://open.lib.umn.edu/app/uploads/sites/11/2015/04/ea8dfc0653c92ca873e0d4602037591a.jpg.
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