Overview:part 2 (Based on 6th edition)
Deze samenvatting is gebaseerd op het studiejaar 2013-2014.
CHAPTER H: OPERATING IN A CHANGING GLOBAL ENVIRONMENT
Strategy
A strategy is all the specific decisions and actions a manager takes to use core competences to gain competitive advantage and outperform competitors. Organizations develop a strategy to create more value for their stakeholders. Core competences are the skills and abilities of managers in value-creating business that allow a company to accomplish superior efficiency, innovation, quality, or customer responsiveness. The strategy of an organization allows it to shape its domain to exploit its existing core competences and develop new competences. The more resources an organization can obtain from its environment, the better it can develop long-term goals and a strategy and invest resources to create core competences that give an organization its competitive advantage. This is the cyclical value-creation process (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 230, figure 8.1).
Sources of core competences
The strength of core competences is a product of the specialized resources and coordination abilities that an organization possesses and others lack. There are two kinds of resources that provide an organization with core competences that give it a competitive advantage: functional and organizational resources. Functional resources are the skills possessed by an organization’s functional personnel. To be a source of competitive advantage an organization’s functional resources must be of high quality, but most importantly, they have to be unique and difficult to imitate. Organizational resources are company-specific attributes that give an organization its competitive advantage, like the vision of its founder or CEO, the possession of scarce resources, and the skills of the top management team. They also include intangibles like an organization’s brand name and its reputation. To be a source of competitive advantage they have to be unique and difficult to imitate. Another source of core competences is coordination ability, that is, an organization’s ability to coordinate its functional and organizational resources to create the most value. Effective coordination of resources gives a company its competitive advantage. The control systems that a company uses to coordinate and motivate employees at all levels can be a core competence. An organization is able to protect its domain better than its competitors by the way it centralizes and decentralizes authority and the way it develops and promotes shared cultural values that increase effectiveness. An organization ability to coordinate structure, culture, people, and resources determines the strength of its core competences. When functional and organizational resources are not unique and can be imitated, it is important to coordinate and motivate functions and departments in a way that makes it difficult to imitate.
Global expansion
There are four ways in which global expansion allows a company to develop core competences and create value for its stakeholders. The first one is transferring core competences abroad to produce cheaper or improved products that will give an organization a low-cost or differentiation advantage over its competitors. The second is establishing a global network. When organizations transfer competences abroad they locate their value-creation activities in countries where political, economic, and cultural conditions are likely to enhance their low-cost or differentiation advantage.
They then establish a global network, or sets of task and reporting relationships among functions, managers, and divisions that link an organization’s value-creation activities around the world. Organizations locate their value-creation functions in countries where production costs are lowest, to lower costs. The third is gaining access to global resources and skills. Organizations with a global network have access to skills and resources around the world. Each country has different resources and skills that give them a competitive advantage.
The fourth is using global learning to enhance core competences. The access to global resources and skills that a global network provides allow organizations to find new ways of improving organizational effectiveness. Outsourcing important functional competencies to companies abroad has dangers. Organizations risk losing control of their core skills and technology by sharing it with partner organizations abroad, these partner organizations can improve the skills and become a strong competitor. When outsourcing functional activities organizations are no longer investing resources in improving those activities, so they are giving away a potential source of competitive advantage.
Levels of strategy
Organizations should match their strategy and structure to create value from its functional and organizational resources. Strategy is formulated at four organizational levels: functional, business, corporate, and global. Organizations’ ability to create value at one level indicates their ability to create value at other levels. Functional-level strategy is a plan of strengthening organizations’ functional resources, organizational resources, and coordination abilities to create core competences. Functional managers train subordinates to ensure the organizational skills match or exceed the skills of its competitors and they also scan their environment to make sure that all managers understand the changes that may affect the way the organization operates. Business-level strategy is a plan to use and combine organizations’ functional core competences to position them so they have a competitive advantage in their domain or segment of their industry. The top-management team is responsible for the business-level strategy. They have to decide how to position the organization to compete for resources in its environment. Corporate-level strategy is a plan to use and develop core competences so organizations not only can protect and enlarge its existing domain but can also expand into new domains. Corporate-level managers are responsible for the corporate level-strategy. They take value-creation skills in an organization’s divisions and combine them to improve the competitive position of the divisions and the organization. Corporate strategists try to find ways to merge and use the resources of every division to create more value than if they operated independently. Global expansion strategy entails choosing the best strategy for expanding into overseas markets to obtain scarce resources and develop core competences.
Functional-level strategy
Organizations create value by using their functional skills and knowledge to transform inputs into outputs of finished goods and services. Organizations gain a competitive advantage by performing their functional activities at a lower cost than their rivals so they can charge lower prices or by differentiating their products from those of their competitors by giving them unique qualities that customers want so they can charge premium prices.
Functions that can lower the costs at which a product is produced or can differentiate products add value to the product and the organization (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 235, table 8.1). The manufacturing function can lower costs by using the most efficient production methods, like computer-controlled flexible manufacturing systems. Manufacturing can also contribute to product differentiation because it possesses skills and competences that can improve product quality and reliability. The human resource management (HRM) function can lower costs by designing the right control and reward systems to increase employee motivation and reduce absenteeism and turnover. HRM can also contribute to product differentiation by hiring high-quality employees and managers and using innovative training programs. The materials management function can reduce costs on the input and the output side by using just-in-time inventory systems and computerized warehousing to reduce the costs of carrying and shipping inventory.
There are two things the materials management function can do to develop a low-cost or differentiation advantage: fostering an organization’s reputation and purchasing managers’ skills in developing long-term relationships with suppliers and distributors. At the output end of the value-creation process, the sales and marketing function can lower costs by having a core competence in marketing so it can increase demand and lower production costs. Marketing and sales can contribute to differentiation by targeting customer groups, tailoring products to customers, and promoting brand names. The R&D function can reduce costs by developing cheaper ways to make a product. R&D can also contribute to differentiation by improving existing products or creating new products.
The strength of a function’s core competence depends on the function’s resources and its ability to coordinate the use of its resources. The coordination abilities are a product of an organization’s structure. According to the contingency theory, an organization’s design should allow each function develop a structure that suits its human and technical resources. The R&D function has a flat decentralized structure in which mutual adjustment is the main means of coordinating human and technical resources, the result is an organic structure. The manufacturing function has a tall hierarchy in which decision making is centralized and the speed of the production line controls the pace of work. Standardization is achieved by the use of extensive rules and procedures, and the result is a mechanistic structure. The sales function has a flat decentralized structure to coordinate its activities because incentive pay systems, instead of direct supervision, are the main control mechanisms. Salespeople often work alone, so little mutual adjustment is needed. The structure of the sales function is relatively mechanistic compared to the R&D function, but not as mechanistic as the structure used by manufacturing. The same strategic considerations help form the structure of other functions.
The development of functional abilities that lead to core competences is also a result of organizational culture. Competitors can imitate organizational structure, but it is very difficult for them to imitate organizational culture because it is embedded in the day-to-day interactions of employees. Because culture is so difficult to control and manage, especially to imitate or copy, organizations with an effective culture have an important source of competitive advantage. It is important to choose the property rights, functional structure, and functional managers that are most likely to improve a function’s coordination ability, so functional abilities can be developed that produce a core competence.
Functional managers should identify the functional resources or coordination abilities that give their functions a core competence, establish a plan to strengthen them, and create a set of goals to measure the progress. They have to study their competitors and the methods and practices they use to control their functional activities. And they have to pick the most effective competitor to study its methods and use them as a benchmark. It is important that they analyze the way their functional structure and culture affect functional resources and abilities and that they experiment with changing the components of their structure and culture to enhance their function’s core competence.
Business-level strategy
Organizations need a business-level strategy that selects the domain to compete in and positions the organization so it can use resources and abilities to manage its specific and general environment to protect and enlarge that domain.
Once organizations have chosen their domain, they have two bases on which they can position themselves to compete with rivals. They can use a low-cost business-level strategy, which means they use their skills in low-cost value creation to produce for a customer group that wants low-priced goods and services. They can also choose a differentiation business-level strategy, which means that they use their skills at differentiation to produce for a customer group that wants and can afford differentiated products for a premium price. Organizations can also pursue both strategies simultaneously by producing differentiated products at a low cost. It is very difficult to do that because it requires an exceptionally strong set of core competences. As time passes, organizations have to change their business-level strategy to match the changes in their environment. Changing customer needs and tastes, new technological developments, and foreign competitors affect the way organizations compete for resources. Organizations have to protect, defend, and sometimes alter the sources of their competitive advantage to control their environment.
The focus strategy is a business-level strategy specializing in one segment of the market and focusing all of the organizations resources on that segment. The ability of an organization to use its core competences to gain a competitive advantage and create value at the business level is the product of an organization’s structure. Organizations that have chosen a differentiation business-level strategy face different design choices than organizations that have chosen a low-cost business-level strategy (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 242, figure 8.4). Organizations pursuing a differentiation strategy have to develop products quickly to get them to customers ahead of their competition because this is the only way to exploit their differentiation advantage. An organic structure is the key to speedy new product development because it involves a decentralized, cross-functional team approach to decision making. With a low-cost strategy, there is a need for close control of functional activities to lower the costs of product development. Manufacturing and materials management are the central functions for organizations pursuing a low-cost strategy. Low-cost organizations imitate the differentiator’s product and remain one step behind to keep the costs low. They use a mechanistic structure and centralized decision making helps to maintain close control over functional activities and the costs (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 243, figure 8.5).
A mechanistic structure provides enough coordination to meet the demands of the competitive domain because there is no need for quick and innovative responses. The contingency theory also supports the match between differentiation strategy and organic structure, and the match between low-cost strategy and mechanistic structure. According to the contingency theory, organizations that operate in uncertain, rapidly changing environments need more differentiation and integration than do organizations in more stable environments. There are three factors, from a strategy perspective, that affect an organization’s choice of a structure to create a competitive advantage. Firstly, organizations that produce a wider range of products need more control over the development, marketing, and production of these products. Secondly, organizations need a structure that allows them to serve the needs of its customers when it seeks for new customer groups. Finally, organizations need a structure that increases coordination among functions when the pace of new product development in an industry increases. A functional structure is sufficient to coordinate the core competences of a low-cost organization because it produces one or a few products and it has no problems of coordinating its functions because it is an imitator. Differentiators need a structure that allows functional experts to cooperate so they can quickly develop and introduce new products because competition is based on the development of new and innovative products. A product structure will suffice when the need is to handle a wide range of products. When the need is to handle different groups of customers a market structure or a geographic structure will do.
A product team structure or a matrix structure are helpful when quick product development and speedy response to competitors are the keys to competitive advantage.
Organizational culture also determines the ability to use functional and organizational resources effectively. Organizations pursuing a low-cost strategy have to develop values of economy and frugality. Often, specific norms and rules develop that reflect an organization’s terminal and instrumental values. In a low-cost organization, a common language and a code of behavior based on low-cost values develops. An organization pursuing a differentiation strategy puts product development and marketing at center stage. Cultural values of innovation, excellence, uniqueness, and quality help a differentiator implements its strategy and become a source of competitive strength.
Functional members should examine their interactions with other functional members to develop new ways of reducing costs or develop a differentiated appeal. Managers have to act like entrepreneurs and be on the lookout for new opportunities to protect and enlarge the organizational domain. They also have to evaluate if the organizational structure and culture are compatible with the organization’s business-level strategy.
Corporate-level strategy
Corporate-level strategy is a continuation of business-level strategy because organizations use their existing core competences to apply them in new domains. Integration and diversification are two important corporate-level strategies to help an organization create value (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 247, figure 8.6). Vertical integration means taking over and buying suppliers (backward vertical integration) or distributors (forward vertical integration). Organizations can control the production of inputs or the disposal of outputs this way.
They can also keep the profits previously earned by their suppliers or distributors. Production savings arise by owning a supplier because inputs can be designed so they can be assembled at a lower cost. The reliability and quality of inputs can be controlled, this also saves money. Organizations can draw attention to their uniqueness by making the inputs that make a product unique. Taking over a supplier avoids the problem that arises when there are a few suppliers that act opportunistically and try to cheat the organization by reducing the quality of inputs or raising the prices. Controlling the distribution can also lead to a low-cost or differentiation advantage. Organizations have to look at the bureaucratic costs of vertical integration and evaluate whether minority ownership, strategic alliances, and other interorganizational strategies are viable alternatives. Related diversification is the entry of an organization into a new domain in which it can use one or more existing core competences to create a low-cost or differentiation advantage. When a company pursues unrelated diversification it enters new domains that have nothing to do with its core domain. Unrelated diversification means creating value by taking advantage of one specific core competence: a top management team’s ability to operate a set of organizations in concert more effectively than if each of the organizations were controlled by separate top-management teams. Organizations pursue a strategy of unrelated diversification when they take over inefficient companies and restructure them to create value.
Organizations have to choose the right structure to realize the value associated with vertical integration and related and unrelated diversification. A multidivisional structure is appropriate for organizations that operate in more than one domain. There are a few variants of the multidivisional structure. Organizations pursuing unrelated diversification need to adopt a conglomerate structure (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 250, figure 8.8) where each unrelated business is a self-contained division.
There is no need to coordinate activities between divisions so only a small corporate headquarters staff is needed. Communication is top down and occurs often on issues that concern bureaucratic costs. Organizations pursuing related diversification try to obtain value by sharing resources or by transferring functional skills from one division to another. This requires a great deal of coordination and integration. A large corporate headquarters staff is needed to coordinate interdivisional activities. Coordination problems often become so severe that a multidivisional matrix structure is used to increase integration. The bureaucratic costs of managing related diversification is much greater than those of managing vertical integration or unrelated diversification. A lot more communication and coordination are needed to create value from related diversification than any other corporate-level strategy. Bureaucratic costs increase when the size of the corporate staff increases.
Designing the right organizational culture can also reduce bureaucratic costs. Cultural values, common norms, rules, and goals that reflect those values can help the management of a corporate strategy. Organizations that pursue related diversification require a lot of coordination and integration, thus organizational norms and values need to emphasize cooperation between divisions. This type of culture lowers costs of exchanging resources and develops a common corporate language. Each division has its own culture , but a corporate culture can overcome these differences. Organizations have to design a culture that reinforces and builds on the strategy they pursue and the structure they adopt. Interorganizational strategies can increase value through corporate strategy by avoiding bureaucratic costs associated with managing a new organization in a new domain.
Managers have to analyze the environment to protect an organization’s existing domains and exploit an organization’s core competences. They should also evaluate the benefits and costs associated with entering a new domain. When they do enter a domain, it is important to weigh the benefits and costs of various strategies. Finally, they must match the structure and culture to the strategy the organization pursues.
Global expansion strategy
Global expansion strategy can help increase an organization’s control over the environment. Companies can use four strategies when they begin to market their products and establish production facilities abroad. The multidomestic strategy is oriented toward local responsiveness, this means that organizations decentralize control to subsidiaries and divisions in each country in which it operates to produce and customize products to local markets. The international strategy is based on R&D and marketing being centralized at home and the other functions are decentralized to national units. The global strategy is oriented toward cost reduction and all the principal value-creation functions are centralized at the lowest cost location. The transnational strategy is focused so it can achieve both local responsiveness and cost reduction. Some functions are centralized and others are decentralized to global locations to achieve these objectives. As companies change from a multidomestic to an international, global, or transnational strategy, they need a more complex structure, control system, and culture. The choice of structure and control system depends on three factors. The first is the decision how to distribute and allocate authority between managers at home and abroad to effectively control an organization’s global operations. The second is the selection of organizational structure that groups divisions at home and abroad to use resources and effectively serve the needs of foreign customers. The third is the selection of integrating and control mechanisms and organizational culture to make the global structure function effectively.
Company’s that pursue a multidomestic strategy usually use a global geographic structure (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 253, table 8.2).Organizations duplicate their value-creation activities and establish an overseas division in each country or world area. The organization is relatively flat and decision-making authority is decentralized to managers in each overseas division. Managers at global headquarters use market and output controls to evaluate the performance of overseas divisions. Grouping overseas divisions into world regions allows the same set of output and behavior controls to be applied across all divisions in a region. This reduces communication and transfer problems because information is easily transmitted. Overseas divisions have little or no contact with others in different regions so the need for integration is low. A global organizational culture does not have to develop because skills, resources, or personnel are not transferred between regions. A problem with the global geographic structure and the multidomestic strategy is the costs because specialists activities are duplicated across countries. The company is also not taking advantage of opportunities to transfer, share, or leverage its competences and capabilities on a global level.
Companies implementing an international strategy usually adopt a global product group structure because they produce many products and face the challenge of coordinating the flow of different products across different countries.
They create product group headquarters to coordinate activities of both home and international divisions within each product group, this reduces transaction costs. Managers abroad are under the supervision of managers in international divisions and when the number of levels of managers at the product group level becomes too great, corporate headquarters lose control and managers will compete for control of strategy making. This can lead to conflict and a lack of cooperation. Often, significant strategic control is decentralized to overseas divisions. When managers reassess their strategy due to cost pressures, resistance is provoked.
Companies implementing a global strategy locate their manufacturing and other value chain activities at the global location that will increase efficiency and quality. As a result, they have to solve the problems of coordinating and integrating their global activities. They have to find a structure that lowers bureaucratic costs and provides centralized control, so most of them adopt a global product group structure. This way they can coordinate the activities of home and overseas operations and decide where to locate the different functions at the optimal global location for performing that activity.
The problem of the global product-group structure is its weak responsiveness to customers because the focus is on centralized control. Many organizations implemented a global matrix structure in the 1990s to lower their global cost structures and differentiate their activities through superior innovation and strong responsiveness to customers (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 257, figure 8.11). On the vertical axis are the company’s overseas divisions and on the horizontal axis are the company’s corporate product groups. A matrix structure decentralizes enough control to overseas managers and still gives corporate managers the centralized control that they need. The matrix structure allows knowledge and experience to be shared. A global corporate culture can be developed because there are many opportunities for face-to-face contact.
CHAPTER I: TECHNOLOGY
Technology
Technology is the combination of abilities, knowledge, skills, techniques, machines, materials, tools, computers, and other equipment that people use to convert problems, raw materials, and new ideas into valuable goods and services. Technology exist at three levels in an organization. At the individual level, technology is the competences, knowledge, and personal skills that individual persons possess. At the functional or departmental level, technology is the procedures and techniques that groups work out to perform their work. At the organizational level, technology is characterized as the way an organization converts inputs into outputs. Mass production is the organizational technology based on an organization’s competences of using a standardized, progressive assembly process to manufacture goods. Craftswork is the technology where groups of skilled workers interact closely and combine their skills to produce custom-designed products.
Organizational effectiveness
Technology (skills, procedures, techniques, and competences) at the input stage allows each function to handle relationships with outside stakeholders so the organization can manage its specific environment effectively. Technology (a combination of machines, techniques, and work procedures) at the conversion stage transforms inputs into outputs. The best technology helps an organization add the most value at the least cost of organizational resources. Organizations try to improve the efficiency of their conversion process by training employees in new time-management techniques and by allowing employees to develop better ways of performing their jobs. Technology at the output stage helps an organization effectively dispose of finished goods and services. To do this effectively, organizations have to possess competences in testing the quality of products, selling and marketing the products, and managing after-sales service to customers. Technology can be an important source of competitive advantage. The three principal approaches to measuring and increasing organizational effectiveness were discussed in chapter A. The external resource approach involves using technology to increase an organization’s ability to control and manage external stakeholders. Any new technological developments that help an organization to improve its service to customers increases organizational effectiveness. The internal systems approach involves using technology to increase the success of an organization’s attempts to innovate, to develop new products, services, and processes, and to reduce the time needed to bring products to the market. Organizations taking the technical approach use technology to improve efficiency, reduce costs, and enhance the quality and reliability of products. When organizations have technology that enables them to create value, they need a structure that maximizes the effectiveness of the technology. The three theories that are discussed next are attempts to capture the way different departmental and organizational technologies work and affect organizational design. These theories are complementary, they all highlight different aspects of technology. Managers can use these theories to choose the technology that will most effectively transform inputs into outputs and design a structure that allows an organization to operate the technology effectively.
Technical complexity
Some technologies are more complex and difficult to control because they are more difficult to program. Technology is programmed when procedures for converting inputs into outputs can be specified in advance. As a result, tasks are standardized and the work process is predictable. The more difficult it is to program technology, the more difficult it is to control the production process and make it predictable. According to Joan Woodward, the technical complexity of a production process is the extent to which it can be programmed and it is the most important dimension that differentiates technologies.
When the conversion process can be programmed in advance and fully automated, technical complexity is high. When the conversion process depends primarily on people and their skills and knowledge and not machines, technical complexity is low. Woodward identified ten levels of technical complexity, which are associated with three types of production technology: small-batch and unit technology, large-batch and mass production technology, and continuous-process technology (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 266, figure 9.2).
Organizations using small-batch and unit technology make one-of-a-kind customized products or small quantities of products. Small-batch and unit technology scores lowest on the dimension of technical complexity. People’s skills and knowledge are most important, machines used during the conversion process are less important. The conversion process is flexible because the worker adapts techniques to suit the needs of individual customers. It is a relatively expensive technology to operate because the work process is unpredictable and the production of customized products makes advance programming difficult. Organizations using large-batch and mass production technology produce massive volumes of standardized products. They need increased control over the work process and make it predictable, so they increase the use of machines and equipment (thus increasing the level of technical complexity). The control that results from this helps organizations save money on production and charge a lower price for their products. Technical complexity reaches its height with continuous-process technology. Organizations that use this technology include the ones that make oil-based products and chemicals, and brewing companies. The conversion process is almost entirely automated and mechanized, employees are generally not directly involved. Employees monitor the plant and its machinery and ensure its efficient operation. The smoothness of its operations is the hallmark of continuous-process technology. It is more technically efficient than mass production because it is more mechanized and automated. It is more cost efficient than unit and mass production because labor costs are a small proportion of the overall cost. When operated at full capacity, it has the lowest production costs. According to Woodward, organizations usually seek to increase their use of machines and move from a small-batch to mass production to continuous-process production to reduce costs. For many organizational activities, however, the move to automate production is not possible or practical.
One of Woodward’s goals was to discover if an organization’s technology affected the design of its structure. She wanted to find out if effective organizations had structures that matched the needs of their technologies.
She found that each technology is associated with a different structure because each technology presents different control and coordination problems (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 269, figure 9.3). Organizations with small-batch technology usually have three levels in the hierarchy, so the organization is relatively flat with a narrow span of control. As technical complexity increases the span of control of the CEO widens. The span of control of the CEO is four with small-batch technology. Decision making is decentralized to small teams where first-line supervisors have a relatively small span of control. The most appropriate structure is an organic structure because small-batch technology requires mutual adjustment and a lot of face-to-face communication. In organizations that use mass production technology, the span of control of the first-line supervisor increases to forty-eight because there is a high degree of standardization. The hierarchy has four levels and decision making is centralized. A mechanistic structure is appropriate for controlling work activities and the organizational structure is very tall and wide. With continuous-process technology, tasks can be programmed but there is the potential for major systems breakdown. The principal control problem is monitoring the production process to control and correct unforeseen events before they lead to disaster.
Continuous-process technology is associated with the tallest hierarchy of control because the operating system has to be monitored constantly. The hierarchy is diamond-shaped which means that first-line supervisors have a narrow span of control. The structure is organic because people must have quick, flexible responses in case of unpredictable events. Mutual adjustment is the primary means of coordination because employees work together as teams to work out procedures for managing unexpected situations. One researcher, Charles Perrow, believes that the number of unexpected events that can occur when technical complexity is high is so great that managers cannot react quickly enough to solve the problems that might arise. One complication of his view is that nuclear power stations should be closed because they are too complex to operate safely.
The technological imperative is the argument that technology determines structure. Other researchers became concerned that Woodward’s results were the consequence of the sample of organizations she studied and that she may have overstated the importance of technology. They point out that the organizations that she studied were relatively small and suggested that her sample had biased her results. In the Aston Studies, researchers agreed that the more an organization’s technology is mechanized and automated, the more likely the organization has a highly centralized and standardized mechanistic structure. But, according to the Aston Studies, organizational size is more important than technology in determining an organization’s choice of structure. For small organizations, the importance of technology as a predictor of structure may be more important than it is for large organizations.
Routine and complex tasks
To understand why some technologies are more complex than others, it is necessary to understand why the tasks associated with some technologies are more complex than the tasks associated with other technologies. According to Charles Perrow, task variability and task analyzability are the two dimensions that underlie the difference between routine and nonroutine or complex tasks. Task variability is the number of exceptions (new or unexpected situations) that people come across while performing a task.
When people expect to encounter many new situations or problems when performing their task, task variability is high. When a task is highly standardized or repetitious so people encounter the same situation over and over again, task variability is low. The degree to which search and information-gathering activity is required to solve a problem is called task analyzability. Tasks are routine when little search activity is needed, rules have been worked out and formalized, they can be programmed in advance and information and procedures needed to complete it have been discovered. Tasks are complex and nonroutine when a great deal of search activity is required to find a solution to a problem, procedures cannot be programmed in advance, and when people encounter an exception they must actively seek for the information needed to create procedures for dealing with the problem.
Perrow used task analyzability and task variability to differentiate among four types of technology (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 273, figure 9.4). His model makes it possible to categorize the technology in an organization. Routine manufacturing is characterized by high task analyzability and low task variability. The low-cost advantages of mass production are acquired by making tasks high in analyzability and low in variability. Craftswork is low in task analyzability and low in task variability. Employees need to adapt existing procedures to new situations and find new techniques to handle existing problems more effectively. With engineering production, task analyzability is high and task variability is high. Workers encounter many exceptions, but finding a solution is easy because there are well-understood standard procedures to handle exceptions.
Engineering production is, like craftswork, a form of small-batch technology where people are responsible for developing techniques to solve problems. Nonroutine research technology is characterized by low task analyzability and high task variability. This is the most complex and least routine of the four technologies in Perrow’s classification.
Perrow and others have argued that organizations should move from a mechanistic to an organic structure when tasks become more complex and less routine (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 275, table 9.1). When technology is routine, the work process is programmed in advance and standardized. Employees only have to learn the procedures for performing the task effectively. The organizational hierarchy is relatively tall and decision making is centralized. All important production decisions are made at the top of the production hierarchy and are transmitted down the chain of command. It has been said that organizations intentionally ‘de-skill’ tasks to simplify jobs and minimize the degree to which employees’ initiative or judgment is needed. When organizations make these design choices, they use a mechanistic structure. Organizations operating a nonroutine technology use organic structures that are based on mutual adjustment between employees who work together. Tasks forces and teams facilitate communication and integration between team members. It is difficult to separate out each individual’s contribution because employees perform closely related activities. Organizations with nonroutine technology have a flat decentralized structure. When departments employ different technologies, they also need different structures.
Task interdependence
James D. Thompson focused on the way in which task interdependence affects an organization’s technology and structure. Task interdependence is the method used to relate or sequence different tasks to one another. Task interdependence is low when people and departments are individually specialized, thus when they work separately and independently. Task interdependence is high when people and departments are jointly specialized, thus when they depend on one another for supplying the inputs and resources to get the work done. Thompson identified three types of technology: mediating, long linked, and intensive (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 277, figure 9.5). Each one is associated with a different form of task interdependence.
Mediating technology means that input, conversion, and output activities can be performed independently of one another. It is based on pooled task interdependence, which means that each part of the organization contributes separately to the performance of the whole organization. Task interdependence is low because people do not directly rely on others to help them perform their tasks. Piecework systems best characterize the way the technology operates at the departmental level because each employee performs a task independently from other employees. The use of mediating technology makes it easy to monitor, control, and evaluate the performance of each individual. Mediating technology at the organizational level is found in organizations where activities of different departments are performed separately and there is little need for integration between departments. It is also found at the organizational level in organizations that use franchise arrangements. Mediating technology is relatively inexpensive to operate because organizational activities are controlled by standardization. Network organizations develop as computer technologies allow the different departments of an organization to operate separately. The growth of outsourcing shows the increasing use of mediating technology as a way of doing business.
Long-linked technology is based on a work process where input, conversion, and output activities are performed in series. It is based on sequential task interdependence where actions of one person or department directly affect the actions of another.
Mass production is based on sequential task interdependence. Long-linked technology requires more coordination than mediating technology. When an error occurs at the beginning of the production process, it becomes magnified at later stages. Organizations can program the conversion process to standardize the procedures used to transform inputs into outputs. They can also use planning and scheduling to manage linkages among input, conversion, and output process. An organization creates slack resources (extra or surplus resources) that enhance an organization’s ability to deal with unexpected situations, this way there is less need to coordinate the stages of production. Another strategy to control the supply of inputs or distribution of outputs is vertical integration. Because there is a great need for coordination, coordination costs are high. Tasks are routine because sequential interdependence allows managers to simplify tasks so the variability is reduced and the analyzability increased. There are two disadvantages: employees do not become highly skilled and they do not develop the ability to improve their skills. At the organizational level, the performance of one department determines the performance of another because the outputs of one department are the inputs for another. As the pressures from global competition increase, more organizations adopt a product team structure to increase interdepartmental coordination.
Intensive technology is characterized by a work process where input, conversion, and output activities are inseparable. It is based on reciprocal task interdependence, that means that the activities of all people and all departments fully depend on one another. It is impossible to program a sequence of tasks or procedures in advance to solve a problem because, according to Thompson, ‘the selection, combination, and order of [the tasks’] application are determined by feedback from the object [problem] itself.’ With reciprocal interdependence, technical complexity declines as the ability of managers to control and predict the work process lessens, and tasks become more nonroutine and complex. Hospitals, for example, operate an intensive technology. On a departmental level, the sequence and content of the R&D department’s activities are determined by the problems it is trying to solve. R&D is expensive because of the unpredictability of the input-conversion-output process. The difficulty of specifying the sequencing of tasks makes a high degree of coordination necessary, this makes intensive technology more expensive to manage than mediating or long-linked technology. Product team and matrix structures are best suited for operating intensive technologies. Mutual adjustment and a flat structure help an organization take advantage of new developments, they can also use self-managed teams to do this. Often organizations are forced to use intensive technology because of the nature of their products. They try to reduce task interdependence to revert to a less expensive and more predictable long-linked technology. Organizations can reduce costs associated with intensive technology by pursuing the strategy of specialism, that means producing a narrow range of outputs.
Managers have to analyze an organization’s input-conversion-output process. They should also analyze the level of technical complexity to see if it can be increased to improve efficiency and reduce costs. The level of task variety and task analyzability should be examined to find ways of reducing task variability or increase tasks analyzability to increase effectiveness. The form of task interdependence has to be studied to see if it results in the most effective way of producing goods and servicing the needs of customers. Managers should also see if there is a right fit between technology and structure, if not, they have to adjust it.
Mass production
Companies using the mass production technology introduced by Henry Ford can reduce costs is two ways. The first is by using dedicated machines and standardized work procedures. The second is by protecting the conversion process against production slowdowns or stoppages. Traditional mass production uses dedicated machines, which are machines that can perform only one operation at a time. They produce a narrow range of products, but do so cheaply. A dedicated machine has to be retooled (fitted with new dies or jigs) when the component being manufactured needs to be changed. Organizations can increase their control over the conversion process by using production lines to assemble the final product and the employment of fixed workers (employees that perform standardized work procedures). Organizations try to control their access to inputs at the input stage by keeping raw materials and semifinished components on hand (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 283, figure 9.6A). At the output stage, they try to control the disposal of their outputs by stockpiling finished products an advertising heavily to maintain customer demand.
Organizations become inflexible because of high technical complexity, routine tasks, and sequential task interdependence. Fixed automation is a term used to describe the traditional way of organizing production. The combination of dedicated machines, fixed workers, and large stocks of inventory makes it expensive and difficult for organizations to produce different kind of products when customer preferences change. Organizations try to be more flexible in their responses to customers by changing their technology. New developments are sometimes called flexible production, lean production, or computer-aided production. They are components of advanced manufacturing technology (AMT), that means innovations in materials technology and in knowledge technology that change the work process of traditional mass production organizations.
Materials technology
Materials technology includes machinery, other equipment and computers. Innovation in materials technology are based on a new view of linkages among input, conversion, and output activities. AMT allows an organization to reduce uncertainty by developing the capacity to adjust and control its procedures quickly, so it eliminates the need for inventory at the in- and output stages (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 283, figure 9.6B). Computer-aided design, computer-aided materials management, and just-in-time inventory systems are techniques for coordinating the input and conversion stages of production. Computer-integrated manufacturing is a technique that increases the technical complexity of the conversion stage.
A large part of the costs associated with mass production are made at the design stage. Computer-aided design (CAD) is an advanced manufacturing technique that extremely simplifies the design process. New components or microcircuits can be designed on a computer screen and then, by pressing a button, the plans for the part are not printed out but it physically produces the part itself. Using CAD to cut costs of product design can contribute to a low-cost and a differentiation advantage. The efficiency of manufacturing can be improved by design advances that CAD makes possible. The risk of breakdown is reduced if potential problems have been eliminated at the design stage. Competitive advantage can be improved and costs can be reduced if quality is designed up front into a product. CAD reduces the difficulty and lowers the cost of customizing a product by enhancing flexibility. It also enhances an organization’s ability to quickly respond to the environment.
Computer-aided materials management (CAMM) is an advanced manufacturing technique that is used to develop master production schedules for manufacturing, to manage the flow of raw materials and component parts into the conversion process, and to control inventory. Traditional mass production uses the push approach, this means that the inputs are pushed into the conversion process according to a predetermined plan. CAMM makes possible the pull approach, this means that inputs are pulled into the conversion process in response to a pull from the output stage (customer requests) rather than a push from the input stage. CAMM helps an organization integrate its input, conversion, and output activities. CAMM increases task interdependence because each stage has to quickly react to demands from other stages. It also increases technical complexity because it makes input, conversion, and output activities a continuous process. For these reasons an organization needs to move to an organic structure that provides greater coordination, and extra integration. CAMM also helps organizations pursue a low-cost or differentiation advantage.
Just-in-time inventory (JIT) system is developed from the Japanese kanban (card) system and demands inputs and components needed for production to be delivered to the conversion process just as they are needed, neither earlier nor later. This way, inventories can be kept to a minimum. Components are kept in bins, when the bin is empty it is send back to the supplier with a request on the bin’s card (kanban) for more components. CAMM is essential for a JIT system to work effectively because it provides computerized linkages with suppliers. A JIT system increases task interdependence between stages and it also increases technical complexity because organizational activities become a continuous process. JIT systems provide flexibility because organizations have the ability to order components as they are needed, this way organizations can widen their range of products and customize them. The systems does require an extra measure of coordination and new methods to manage the technology, like new strategies for managing relations with suppliers. Owning a supplier is expensive and organizations try to avoid that by using long-term contracts.
Flexible manufacturing technology allows the production of many kinds of components at little or no extra cost on the same machine. It combines the advantages of small-batch production with the low-cost advantages of continuous-process production. Computer-integrated manufacturing (CIM) prevents the costs from increasing with changing operations. It is an advanced manufacturing technique that controls the changeover from one operation to another by giving demands to the machines through computer software. Machines do not have to be retooled physically. CIM depends on computers programmed to feed the machine with components, assemble the product from components and move it from one machine to another, and unload the final product from the machine to the shipping area.
CHAPTER J: ORGANIZATIONAL CHANGE
Organizational change
Organizational change means that organizations move from their present state to a desired future state to increase effectiveness. The goal is to find new or improved ways of using resources and capabilities to increase their ability to create value and improve returns to their stakeholders. Organizations in decline need to restructure their resources to improve their fit with the environment. Managers of high-performing organizations have to constantly search for better ways to use resources to develop new and improved products or find new markets to existing products.
Planned organizational change is usually targeted at improving effectiveness at one or more of four different levels: human resources, functional resources, technological capabilities, and organizational capabilities. Human resources are organizations’ most important asset. Organizations’ competences lie in the skills and abilities of their workers. An organization has to continually monitor its structure to find ways of motivating and organizing human resources to acquire and use their skills to gain a competitive advantage. When the environment changes, organizations transfer resources to the functions where the most value can be created. Organizations can improve the value that their functions create by changing their technology, culture, and structure. Technological capabilities give a company enormous capacity to change itself to exploit market opportunities. The ability to constantly develop new products or modify existing ones is one of an organization’s core competences. With the help of organizational capabilities, organizations design their structure and culture to harness their human and functional resources to take advantage of technical opportunities. Organizational change often involves changing relationships between people and functions to increase their ability to create value. These four levels at which change takes place are interdependent.
Forces for change
If managers do not respond quickly enough to the forces from the environment their organizations will lag behind their competitors and their effectiveness will be compromised (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 294, figure 10.1). Competitive forces are forces for change because organizations have to match or surpass their competitors in quality, efficiency, or their capability to innovate new or improved goods or services, otherwise they will not survive. Economic, political, and global forces constantly affect organizations and force them to change where and how they produce goods and services. Economic and political unions are becoming an increasingly important force for change. Several global challenges facing an organization are the need to help expatriate managers adapt to the economic, cultural, and political values of countries in which they are located, the need to adapt to different national cultures, and the need to change an organizational structure to allow expansion into foreign markets. Demographic and social forces also play a big role. The changing composition of the workforce and the increasing diversity of employees have presented challenges and opportunities for organizations. Changes in the demographic characteristics of the workforce have caused managers to change their style of managing employees and to learn how to understand, supervise, and motivate them effectively. They had to accept the importance of equity in the recruitment and promotion of new hires.
Organizations are beginning to realize that the ultimate source of competitive advantage and organizational effectiveness lies in fully utilizing the skills of their employees. Ethical forces compel organizations to take steps to promote ethical behavior because of the increasing government, political, and social demands for more responsible and honest corporate behavior. Many organizations have an ethics officer, that is somebody who employees can turn to, to report unethical behavior. Organizations also try to promote ethical behavior by protecting whistle-blowers who turn to the organization when they perceive unethical behavior.
Resistances to change
One of the main reasons for some organizations’ inability to change is organizational inertia, that is the tendency of organizations to resist change and maintain their status quo. It lowers an organization’s effectiveness and reduces the chances for its survival. Resistances to change are found at the organization, group, and individual levels.
The most powerful organization-level resistances to change are power and conflict, differences in functional orientation, mechanistic structure, and organizational culture. Change often benefits some people at the expense of others. If change causes power struggles and organizational conflict, organizations are likely to resist it. Differences in functional orientation create tunnel vision because different functions and divisions see an issue or problem primarily from their own viewpoint. This can increase organizational inertia because organizations have to spend time and effort to secure agreement about the source of a problem before they can consider the need to change. Mechanistic structures are more resistant to change than organic structures because people working in mechanistic structures are expected to act in a certain way and do not develop the capacity to adjust their behavior to changing conditions. It is a principal source of inertia, especially in large organizations. The values and norms in an organization’s culture cause people to behave in predictable ways. When organizations change taken-for-granted values and norms and force people to change, their organizational cultures will cause resistance to change.
Often, many groups develop strong informal norms that govern the interactions between group members. With organizational change, task and role relationships are altered, which disrupts group norms and the informal group expectations group members have of one another. Group cohesiveness (the attractiveness of a group to its members) promotes group performance, but too much cohesiveness reduces performance because it stifles opportunities for the group to change. Groupthink means that group members discount negative information to arrive at a unanimous agreement, as a result, a pattern of faulty decision making occurs. Escalation of commitment makes this situation worse because even when group members realize the decision is wrong, they still pursue it because they are committed to it. Therefore, changing a group’s behavior is very difficult.
Individuals tend to resist change because they feel uncertain and insecure about what its outcome will be. Absenteeism and turnover may increase as change takes place. Workers may become uncooperative, attempt to delay or slow the change process, and they may also passively resist the change. When change takes place, workers tend to focus only on how it will affect them or their division. The difficulty of breaking habits and adopting new styles of behavior shows how resistant habits are to change.
Lewin’s force-field theory
According to Lewin’s force-field theory, forces that make organizations resistant to change and forces that push organizations toward change are always in opposition in an organization (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 299, figure 10.2). When the forces are evenly balanced, the organization is in a state of inertia and will not change. To change an organization, managers have to increase the forces for change and reduce the resistance to change, or do both simultaneously.
Managers should periodically analyze the organizational environment and identify forces for change. They should also examine how the change in response to these forces will affect people, functions, and divisions. With this information, they have to choose what type of change to pursue, develop a plan to reduce resistance to change, and increase forces for change.
Different types of change
Evolutionary change is incremental, gradual, and narrowly focused. Sociotechnical systems theory, total quality management, and the creation of empowered, flexible work groups are three instruments of evolutionary change. Revolutionary change is dramatic, rapid, and broadly focused. It involves bold attempts to quickly find new ways to be effective and it is likely to result in a radical shift in ways of doing things, a new structure, and new goals. Reengineering, restructuring, and innovation are instruments of revolutionary change.
Evolutionary change
Sociotechnical systems theory was one of the first theories that suggested the importance of changing role and task or technical relationships to increase organizational effectiveness. Managers need to fit or ‘jointly optimize’ the workings of an organization’s technical and social systems to increase organizational effectiveness. The important lesson here is that when managers change task and role relationships, they have to recognize the need to adjust the technical and social systems gradually so group norms and cohesiveness are not disrupted.
Total quality management (TQM) is an ongoing effort by functions to find new ways of improving the quality of an organization’s goods and services. The initial decision to adopt a TQM approach signals a radical change in the way activities are organized. Once TQM is adopted, it leads to continuous, incremental change, and all functions are expected to cooperate with each other to improve quality. Total quality management, first developed by American business consultants such as W. Edwards Deming and Joseph Juran, was eagerly embraced by Japanese companies after World War II. For them the implementation of the new TQM system was an incremental step because they already had a tradition of long-term working relationships between functions. Employees had long been organized into quality circles, groups of workers that meet regularly to discuss the way work is performed to find new ways of increasing organizational performance. The emphasis in TQM is on the fit between technical and social systems, just as in the sociotechnical systems theory. Changing cross-functional relationships to improve the quality is very important in TQM. Coordinating the design of several inputs so they fit together smoothly and operate effectively is one area of TQM.
The changes associated with TQM are changes in task, role, and group relationships. A lot of organizations have found that implementing a TQM program is not easy because it requires workers and managers to adopt new ways of viewing their roles. Managers have to be willing to decentralize control of decision making, empower workers, and adopt the role of facilitator instead of supervisor. The ‘command and control’ model changes into an ‘advice and support’ model. Two reasons for the lack of success with TQM are underestimates of the degree of commitment from people and the long time frame necessary for TQM efforts to succeed and show results. It is an evolutionary process that will only succeed when it becomes a way of life in a company.
The goals behind sociotechnical systems theory and TQM has led many organizations to embrace the concept of flexible workers and work teams to change employee attitudes and behaviors. Employees have to develop the skills to perform any of the tasks necessary for assembling a range of products. Flexible workers can be transferred to the task most needed by an organization when the demand for components or finished products rises or falls.
This way, organizations can respond quickly to environmental changes. Performing more than one task reduces boredom, repetition, and fatigue and raises workers’ incentives to improve product quality. When employees learn one another’s tasks, they learn how the different tasks relate to each other. This can lead to new ways of combining tasks or the redesign of a product to make its manufacture more efficient and less expensive. A flexible work team is a group of flexible workers that take responsibility for performing all the operations necessary for finishing a specified stage in the manufacturing process (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 304, figure 10.3).
Revolutionary change
‘Reengineering’ is the process by which managers redesign how tasks are bundled into roles and functions to improve organizational effectiveness. According to Michael Hammer and J. Champy, who popularized the term, reengineering is the ‘fundamental rethinking, and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance such as cost, quality, service, and speed’. The managers of reengineered organizations focus on business processes instead of functions. A business process is any activity that cuts across functional boundaries. It is the ability of people and groups to act in a cross-functional way that is important in determining how quickly goods and services are delivered to customers or that promotes low costs or high quality. Organizations deliberately ignore the existing arrangement of roles, tasks, and work activities. Most organizations have put purchasing, production control, and distribution inside one function, materials management. This speeds up the production process. There are three guidelines for performing reengineering successfully. The first is to organize around outcomes, not tasks. It is important to organize work so one person or function can perform all the activities necessary to complete the process. The second is to let the people who use the output of the process, perform the process because they know what they want. The third is decentralizing decision making to the point where the decision is made. Reengineering and TQM are highly interrelated and complementary. E-engineering is an organization’s attempt to use all kinds of information systems to improve its performance.
Reengineering and restructuring are closely linked because often the move to a more efficient structure results in layoffs, that is why reengineering is unpopular among employees. Restructuring is the process by which managers change task and authority relationships and redesign organizational structure and culture to improve the effectiveness of the organization. The most common kinds of restructuring are the move from a functional to some type of divisional structure, and the move from one divisional structure to another. Another common type of organizational restructuring is downsizing, the process by which managers streamline the organizational hierarchy and fire employees to reduce bureaucratic costs. Often, when one company downsizes, others in the industry follow because they are forced to examine their own structures. Some analysts argue that this process has gone too far, because there are more and more reports that managers are working under severe stress. There are also concerns that organizations are trading off short-term gains from cost savings for long-term losses because of lost opportunities. The terms anorexic and hollow refer to organizations that have downsized too much. Organizations have to downsize because of several reasons: an unforeseen change in the environment occurs, organizations have excess capacity because customers no longer want the goods and services they provide, and organizations can grow too tall and bureaucratic and their operating costs can become too high. When organizations pay no attention to the need to reengineer, they are forced into a position where restructuring becomes the only option.
Innovation is the successful use of skills and resources to create new goods and services or new technologies so an organization can change and better respond to the needs of the customers. It is one of the most difficult instruments of change to manage.
Action research
According to Lewin, change is a three-step process: unfreezing the organization from its present state, making the change, and refreezing it in the new, desired state so employees do not revert to their previous work attitudes and role behaviors. Action research is a strategy for generating knowledge that managers can use to define an organization’s desired future state and to plan a change program that allows the organization to reach that state.
The first step in action research is diagnosing the organization. Managers first have to recognize the existence of a problem that needs to be solved and acknowledge that some type of change is needed to solve it. The recognition of the need for change arises when there is a gap between desired performance and actual performance. Managers need to analyze what is going on and why problems are occurring, they also have to distinguish between symptoms and causes. They must collect information from all stakeholders about the organization to diagnose the problem and get employees committed to the change process.
The second step in action research is determining the desired future state. Managers have to work out various courses of action that could move the organization to where they would like it to be and determine what type of change to implement. They must also decide what the organization’s strategy and structure should be.
The third step of action research is implementing action. It is a three-step process. First, managers have to identify possible resistances to change that they will encounter as they make changes. The more revolutionary the change, the greater the problem of implementing it. Managers need to devise strategies to foster employees’ commitment to the change process. They should also find a way to refreeze the changes so employees do not go back to their old behavior. Second, the decision needs to be made about who will be responsible for making the changes and controlling the change process. The choices are to employ external change agents, outside consultants who are experts in managing change; internal change agents, managers inside the organization who know about the situation; or some combination of both. Internal change agents can be seen as politically involved and biased toward certain groups. External change agents are less influenced by internal politics and have a detached view of an organization’s problems. Third, the specific change strategy to unfreeze, change, and refreeze the organization has to be chosen. Top-down change is implemented by managers at a high level in the organization. Top-down change is the result of radical organizational restructuring and reengineering. Bottom-up change is implemented by employees at low levels in the organization and gradually rises until it is felt throughout the organization. Managers involve employees in the change process, to obtain their input and lessen their resistance. Organizations that implement bottom-up change, are generally well-run organizations that pay attention to change, are used to change, and change often. Poorly run organizations are forced to implement top-down restructuring to survive.
The fourth step in action research is evaluating the action that has been taken and determining if the changes have accomplished the desired objectives. Measures or criteria help managers to decide whether the organization has reached its objectives. Change may emerge slow, thus assessing the impact of change is difficult.
The fifth step is institutionalizing action research, that is, make it a required habit or a norm adopted by all organizational members. Employees should be rewarded for being part of successful change efforts. Tangible, performance-related rewards help refreeze an organization in its new state because they help employees learn and sustain desired behaviors.
Managers have to develop criteria to evaluate if change is necessary, and use them during the change process to assess the progress toward the ideal future state. They must design a plan that both reduces resistance to and facilitates change. They should recognize that change is easiest to manage when an organization’s members are used to change, and consider using TQM.
Organizational development
Organizational development (OD) is a series of techniques and methods that managers can use in their action research program to increase their organization’s adaptability. The goal of OD is to improve organizational effectiveness and to help employees reach their potential and realize their goals.
OD tactics that managers can use to reduce resistance to change are education and communication, participation and empowerment, facilitation, bargaining and negotiation, manipulation, and coercion.
One of the most important resistances to change is uncertainty about what is going to happen. With the help of education and communication, internal and external change agents can give organizational members information about change and how it will affect them. Participation complements empowerment, increases employees’ involvement in decision making, and gives them greater autonomy to change work procedures to improve organizational performance. Because empowered workers make many decisions that middle managers used to do, the number of middle managers has reduced. The remaining middle managers serve as coaches, facilitators, teachers, and sponsors of the empowered groups. Organizations facilitate their members in managing stress by providing them with training, providing them with time off from work, or giving them senior members sabbaticals to recuperate. A lot of companies also hire psychologists and consultants to help employees handle the stress associated with change. Bargaining and negotiation are important tools that help managers manage conflict. The ultimate way to eliminate resistance to change is to coerce employees to accept change and threaten with consequences if they resist. The advantage of this is the speed at which change takes place, and the disadvantage is that it can leave people angry so the refreezing process becomes difficult.
Counseling, sensitivity training, and process consultation are OD techniques directed at changing the attitudes and behavior of individuals. Employees who are perceived by their superiors to have certain problems in appreciating the viewpoints of others or in dealing with certain types of employees are counseled by trained professionals. Sensitivity training is an intense type of counseling. Employees who are perceived as having problems in dealing with others meet in a group with a trained facilitator to learn how they and other group members view the world. Process consultation is similar to counseling and sensitivity training. A trained process consultant works closely with a manager on the job to help him or her improve interactions with other group members. The consultant helps the manager to understand what is going on in the group setting, and also helps to discover interpersonal dynamics that determine the quality of work relationships.
To manage change within a group or between groups, change agents can use three different kinds of OD techniques. Team building is a common method of improving relationships within a group. It is similar to process consultation except that all group members participate together to improve their work interactions. Team building is important when reengineering reorganizes the way people from different functions work together. Intergroup training takes team building one step further and uses it to improve the ways different functions work together. Organizational mirroring is a popular form of intergroup training, it is designed to improve the effectiveness of interdependent groups. One group describes its perceptions of what is happening and another group listens, after that, the roles are switched. This way, groups learn to appreciate each other’s perspectives. Organizational confrontation meetings can be used at the organizational level to promote organization-wide change. All managers meet to confront the issue whether the organization is effectively meeting its goals. Restructuring, reengineering, and TQM often originate in organization-wide OD interventions.
CHAPTER K: ORGANIZATIONAL TRANSFORMATIONS
Organizational life cycle
It has been argued that organizations experience a predictable sequence of stages of growth and change: the organizational life cycle. Birth, growth, decline, and death are the four principal stages of the organizational life cycle. Organizations pass through these stages at different rates, and some do not experience every stage (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 326, figure 11.1).
Organizational birth
Organizations are born when entrepreneurs recognize and take advantage of opportunities to use their skills and competences to utilize resources in new ways to create value. The founding of an organization, or organizational birth, is a dangerous stage because it is associated with the greatest chance of failure. The failure rate is high because new organizations experience the liability of newness, that is, the dangers associated with being the first to operate in a new environment. The liability is great for several reasons. Entrepreneurs undertake new ventures, so there is no way to predict or guarantee success. New organizations are fragile because they lack a formal structure to give its value-creation processes and actions reliability and stability. The conditions in the environment may also be hostile to a new organization.
Managers can address all the above issues by developing a business plan to compete in the environment. The planning begins when an entrepreneur notices an opportunity to develop a new or improved good or service for the whole market of for a specific market niche. The next step is to test the feasibility of the new product. Entrepreneurs conduct a thorough strategic planning exercise, using a SWOT analysis, to determine organizational strengths and weaknesses and environmental opportunities and threats. If the entrepreneur than decides that the new product idea is feasible, the business plan that will be used to attract investors and funds from banks has to be developed. The business plan must contain a statement of mission, goals, and financial objectives, a statement of strategic objectives, a list of necessary resources, and an organizational timeline of events.
Population ecology theory seeks to explain the factors that affect the rate at which new organizations are born and die in a population of existing organizations. A population of organizations are all the organizations that are competing for the same resources in the environment. Different organizations within a population may choose to focus on different environmental niches, those are particular sets of resources or skills.
The availability of resources determines the number of organizations in a population, according to the population ecology theory. The amount of resources in an environment limits population density, that is, the number of organizations that can compete for the same resources in a particular environment. The growth in the number of organizational births in a new environment is rapid at first as new organizations are founded to take advantage of new environmental resources. Two factors account for the rapid birthrate. The first is an increase in knowledge and skills when new organizations are founded. The second is that when a new kind of organization is founded and survives, it becomes a role model.
Once the environment is populated with a number of successful organizations, the organizational birthrate tapers off (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 330, figure 11.2). Two factors cause the organizational birthrate to taper off. First, the availability of resources diminishes in the environment for late entrants. First-mover advantages are the benefits (customer support, a recognized brand name, and the best locations for new businesses) an organization gets from being an early entrant.
Second, the difficulty of competing with existing organizations for resources decreases the birthrate.
Population ecologists have identified two sets of strategies that organizations can use to gain access to resources and enhance their survival changes in the environment: (1) r-strategy versus K-strategy and (2) specialist strategy versus generalist strategy. Organizations that follow an r-strategy are founded early in the environment, they are early entrants. Organizations that follow a K-strategy are founded late, they are late entrants. The advantages of an r-strategy are that organizations obtain first-mover advantages and have first pick of the resources in their organizational environment. As a result, organizations grow rapidly and develop skills and procedures that increase their chances of survival. Organizations that follow a K-strategy are often established in other environments and wait to enter an environment until the uncertainty is reduced and the correct way to compete is apparent.
The difference between a specialist and a generalist strategy is defined by the number of environmental niches, or sets of different resources (customers), for which organizations compete. Specialists concentrate their competences and skills to compete for resources in a single niche. Generalists use their well-developed competences to compete for resources in many or all niches in an environment. Specialists often develop core competences that allow them to outperform generalists in that nice because they only focus on one niche. Generalists can often outcompete specialists because they can survive in an uncertain environment because they have spread their resources over many niches. If one niche disappears they have others in which to operate. Specialists and generalists usually coexist in many environments because generalists create the conditions that allow specialists to compete successfully.
The two sets of strategies give rise to four strategies that organizations can pursue: r-specialist, r-generalist, K-specialist, and K-generalist (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 333, figure 11.3). Early in an environment, new organizations are likely to be r-specialists, those are organizations that move quickly to focus on serving the needs of particular customer groups. As organizations grow, they often become generalists and compete in new niches. While this is happening, K-generalists move into the market and threaten the weakest r-specialists. Ultimately, the strongest r-specialists, r-generalists, and K-generalists dominate the environment by serving multiple market segments and by pursuing a low-cost or differentiation strategy. Large organizations that have chosen the K-generalist strategy often create niches for new firms to enter the market, so K-specialists are founded to exploit new market segments. Generalists and specialists can coexist in an environment because they are competing for different sets of resources. Natural selection is the driving force behind the population ecology model of birth.
It is the process that secures the survival of the organizations that have the skills and abilities that best fit with the environment. Natural selection is a competitive process.
Organizational growth
Organizational growth is the life cycle stage in which organizations develop value-creation skills and competences that help them to obtain extra resources. Growth allows companies to gain a competitive advantage because they can increase their division of labor and specialization. Organizations should not pursue growth as an end in itself, it should be a by-product of an organization’s ability to develop core competences that satisfy stakeholders’ needs. Institutional theory studies how organizations increase their ability to grow and survive in a competitive environment by becoming legitimate, or accepted, reliable, and accountable in the eyes of stakeholders.
Institutional theory argues that companies adopt many of the rules of conduct found in the institutional environment surrounding them, to increase their chances of survival. The institutional environment is the set of values and norms that govern the behavior of a population of organizations.
When organizations grow, they can gain and strengthen their legitimacy by copying one another’s strategies, cultures, and structures. As a result, organizational isomorphism increases, that is, the process by which organizations in a population become more alike. There are three processes that explain why organizations become more alike: coercive, mimetic, and normative isomorphism. Coercive isomorphism means that organizations adopt certain kinds of values and norms because they are pressured by other organizations or by society in general. Mimetic isomorphism means that organizations intentionally imitate one another to increase legitimacy. Especially new organizations in uncertain environments imitate to increase their chances of survival. Due to mimetic isomorphism, a population of similar organizations will increasingly come to resemble one another along the lines suggested by the S-shaped curve (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 330, figure 11.2). There is a limit to how much a new organization should seek to imitate existing ones, because it has to develop some unique competences to differentiate itself. Normative isomorphism means that organizations come to resemble each other over time because they indirectly adopt norms and values of other organizations in their environment. Managers and employees often move from one organization to another and bring with them the norms and values of their former employers. Organizations also acquire norms and values through membership in industry, trade, and professional associations. The disadvantage of isomorphism is that the way organizations have learned to operate may become outdated, inertia sets in, and organizational effectiveness decreases. The pressure to imitate competitors and beat them at their own game reduces innovativeness.
Greiner’s model is one of the best known life cycle models of organizational growth (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 337, figure 11.4). He argues that organizations pass through five sequential growth stages, and that at each stage a specific organizational problem causes a crisis that has to be solved to advance to the next stage.
The first stage is called growth through creativity. Entrepreneurs develop the skills and abilities to create and introduce new products for new market niches. They create completely new procedures and learn to improve them, as a result, a lot of organizational learning occurs. In this stage, the norms and values of the organization’s culture control people’s behavior, rather than the hierarchy and organizational structure. Entrepreneurs are so involved in getting the organization off the ground that they forget the need to manage organizational resources efficiently. Often, when an entrepreneur takes control of the management of the organization, problems arise that will lead to a crisis of leadership. Investors realize that the founding entrepreneur is not the best person to manage the organization because he or she lacks the organizational skills to develop the right strategy and structure.
The crisis of leadership ends with the recruitment of a strong top-management team to lead the organization through the second stage: growth through direction. The new top-management team takes responsibility for directing the company’s strategy, and lower-level managers assume key functional responsibilities. Because professional managers are now in charge, organizations experience a crisis of autonomy. The organization’s creative people in departments such as R&D, marketing, and product engineering are frustrated by their lack of control over innovation and new product development.
They feel lost in the growing organizational bureaucracy and some internal entrepreneurs leave the organization when the crisis of autonomy is not resolved. This reduces an organization’s ability to innovate and it also creates new competitors in the industry.
The third stage is called growth through delegation. To solve the crisis of autonomy, organizations have to delegate authority to lower-level managers in all functions and link their increased control over organizational activities to a reward structure. This allows organizations to find the balance between recruiting experienced managers to improve performance and providing room for entrepreneurship so the organization can find ways to innovate. A crisis of control arises when top managers compete with functional managers or corporate-level managers compete with divisional managers for control of organizational resources. Sometimes top management tries to recentralize decision making, but this is doomed to failure because it brings back the crisis of autonomy.
To resolve the crisis of control, organizations have to find the right balance between centralization and decentralization. This fourth stage is called growth through coordination. Corporate managers monitor divisional activities to ensure that divisions efficiently use their resources, and they initiate company-wide programs to review their performance. Organizations often create an internal labor market to motivate managers and align their goals with those of the organization. When managers fail to manage growth through coordination, they experience a crisis of red tape. The number of rules and procedures increases, this can reduce organizational effectiveness.
The fifth stage, growth through collaboration, becomes the way to solve the crisis of red tape and push the organization up the growth curve. Growth through collaboration emphasizes greater spontaneity in management action through teams and the skillful confrontation of interpersonal differences.
Formal control is replaced by social control and self-discipline. Greiner recommends the use of product team and matrix structures, which many large organizations use to improve their ability to quickly respond to customer needs.
Managers should analyze the resources available in an environment to determine if a niche exists that can be exploited. If such a niche is discovered, they have to examine how the population of organizations will compete with them for resources. Managers must develop the competences necessary to pursue a specialist strategy to attract resources. They must carefully study the institutional environment to learn values and norms that control the behavior of organizations in the environment. They should imitate them, but they should also be careful to differentiate themselves. If the organization survives the birth stage, it must recognize that it will encounter a series problems as it grows. It is also important to create an effective top-management team and delegate authority to professional managers. Finally, managers have to manage the process of organizational design to meet each growth crisis.
Organizational decline and death
Organizational decline is the life cycle stage that an organization enters when it fails to anticipate, avoid, neutralize, recognize, or adapt to internal or external pressures that threaten its long-term survival. Decline sometimes occurs because organizations grow too much or too fast, they tend to grow past the point that maximizes their effectiveness (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 342, figure 11.5).
An important method that stakeholders use to assess organizational effectiveness is by comparing the relative profitability of one company in an industry to another. To evaluate organizational effectiveness, it is important to understand the difference between a company making a profit and being profitable.
Profit is the total or absolute monetary difference between an organization’s sales revenues and operating costs. Profitability measures how well an organization is making use of its resources by investing them in ways that create goods and services that it can sell at prices that generate the most profit. The difference is that the size of the profit says little about how well an organization has made use of its resources and its ability to generate future profits. Profitability gives more information to assess how well one company is performing against others in its industry. Organizations that have invested capital in such a way that they make the most productive use of their resources and have created a product that customers want to buy even at a premium price will have the highest profitability. Determining profitability is a two-step process. First, it is necessary to compute an organization’s profit. Second, it is necessary to divide that profit by the amount of capital invested in productive resources. Two factors that often lead to continuing decline and loss in effectiveness are organizational inertia and environmental changes.
Organizational inertia, or the factors inside an organization that make it resistant to change, makes it difficult for organizations to adapt to changes occurring in the environment. Although Greiner and other adaption theorists believe companies have the ability to change and adapt to new conditions in their environments, population ecology theorists are more pessimistic. They believe that companies are subject to considerable inertia and do not have the ability to quickly or easily change their strategy or structure to avoid decline.
Factors that cause inertia are risk aversion, the desire to maximize rewards, and an overly bureaucratic culture. As organizations grow, managers often become more risk averse, that is, they become unwilling to bear uncertainty associated with entrepreneurial activities. Managers’ desire for prestige, power, job security, and strong property rights that bring large rewards often lead them to focus on strategies that increase organizational size, even if this reduces organizational effectiveness and future profitability. Managers create an overly bureaucratic culture by spending all their time protecting their property rights instead of working in the organization’s interest. They also multiply their subordinates to protect their power.
Environmental changes that affect an organization’s ability to obtain scarce resources can lead to organizational decline. The main sources of uncertainty in the environment are complexity, dynamism, and richness. The greater the uncertainty in the environment, the more likely that some organizations in a population will go into decline.
Weitzel and Jonsson have identified five stages of decline (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 346, figure 11.7). At each stage except the dissolution stage, if managers take prompt action, they can reverse the decline. In the first stage, the blinded stage, organizations are not able to recognize internal or external forces and problems that threaten their long-term survival. Remedial action to gain access to good information and effective top managers can stop the decline. To avoid decline in the first place, managers must monitor internal and external factors continually. If organizations do not realize they are in trouble in the blinded stage, they advance to the inaction stage. Despite clear signs of deteriorating performance, top managers make little attempt to correct problems. They may be misinterpreting the available information or they are focused on the pursuit of goals that benefit them in the short run, but hurt other stakeholders in the long run. Prompt wide-ranging action by managers is vital to reverse the decline. If managers fail to halt decline at the inaction stage, the organization moves into the faulty action stage. Problems keep multiplying despite corrective action. Organizations often reach the faulty action stage because managers become too committed to their present strategy and structure and fear changing them even though they are clearly not working to stop the decline. When the crisis stage has arrived, only radical top-down changes to an organization’s strategy and structure can stop organizational decline.
Organizations in the crisis stage have reached a critical point in their history, the only chance of recovery is an effective reorganization that will change the very nature of their cultures. Change becomes very difficult if no action has been taken up until this stage, because stakeholders have begun to dissolve their relationships with the organization. Often only a new top-management team can turn a company around. When an organization reaches the dissolution stage, it cannot recover. The organization has lost the support of its stakeholders and its access to resources.
It is important that managers continually analyze the organization’s structure to pinpoint any sources of inertia. They should also analyze the environment, and the niche or niches to identify changes in the amount or distribution of resources. They have to rely on other managers, members of the board of directors, and outside consultants to analyze an organization’s current stage of decline.
The founders of businesses have a duty to their stakeholders to maximize the chances of their organizations’ survival and must be prepared to step aside when new leadership is required.
CHAPTER L: DECISION MAKING
Decision making
Organizational decision making is the process of responding to a problem by searching for and selecting a solution or course of action that will create the most value for organizational stakeholders. To make the best choices, managers have to make programmed and nonprogrammed decisions. Programmed decision making means choosing the most effective, easy, repetitive, and routine operating procedures to handle an organization’s ongoing value-creation activities. Nonprogrammed decision making means striving to create and implement the most effective, creative, novel, and unstructured solutions to allow an organization to adapt to uncertain conditions. Nonprogrammed decision making requires much more search for information and active cooperation between managers, functions, and divisions than does programmed decision making. Programmed decisions are based on the results of past experience and can be improved over time. Nonprogrammed decisions lead to the creation of a new set of rules and procedures that would allow employees to make programmed decisions that can be improved on over time. Programmed decision making allows organizations to increase their efficiency and reduce the costs of making goods and services. Nonprogrammed decision making allows organizations to change and adapt to their environment and to generate new ways of behaving so they can effectively take advantage of their environment.
Models of organizational decision making
According to the rational model, decision making is a straightforward three-stage process. At the first stage, managers identify problems that need to be solved. At the second stage, managers design a series of alternative courses of action to solve their problems. At the third and final stage, managers compare the possible consequences of each alternative and decide on the best course of action. The rational model ignores the ambiguity, uncertainty, and chaos of organizational decision making. Researchers have criticized as unrealistic three assumptions that underlie the rational model: the assumption that decision makers have all the information they need, the assumption that decision makers have the ability to make the best decisions, and the assumption that decision makers agree about what needs to be done. The assumption that managers are aware of all alternative courses of action and their consequences is unrealistic. They cannot collect all the information that is needed to make the best decision because the environment is uncertain. Even if it was possible to collect all the information, the costs would be too high. Managers only have a limited ability to process the information needed to make choices, and most do not even have the time to act according to the demands of the rational model. Different managers have different preferences and values and norms and use different rules to decide on the best alternative.
The Carnegie model (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 358, table 12.1) recognizes the effects of ‘satisficing’, bounded rationality, and organizational coalitions. Managers avoid the costs of obtaining information by engaging in satisficing, that is, limited information searches to identify problems and alternative solutions. This puts less of a burden on managers than does the rational model. Managers’ abilities are restricted by bounded rationality, they only have a limited capacity to process information about alternatives. Decision making is subjective and its quality depends on managers’ prior experience, beliefs, knowledge, and intuition.
The Carnegie model also recognizes that managers have different preferences and values and that disagreement and conflict between managers is inevitable. Organizations are coalitions of different interests, in which decision making takes place by bargaining, compromise, and negotiation. Any solution must be approved by the dominant coalition.
According to the incrementalist model, when selecting a set of new alternative courses of action, managers tend to choose those that are only slightly different from those used in the past, thus reducing the chances of making a mistake.
The incrementalist approach works best in a relatively stable environment. In an unstable environment, the incrementalist approach would prevent managers from changing quickly enough to meet new conditions. The unstructured model of decision making, developed by Henry Mintzberg and his colleagues, describes how decision making takes place when uncertainty is high. Decision making involves a series if incremental steps that collectively have a major effect on organizational effectiveness over time. Incremental decisions are made within an overall decision-making framework consisting of three stages: identification, development, and selection. In the identification stage, managers develop routines to recognize problems and to understand what is happening to the organization. In the development stage, they search for and select alternatives to solve the problems. In the selection stage, managers use an incremental selection process to reach a final decision. In the unstructured model, unlike the incrementalist model, whenever organizations encounter roadblocks, they rethink their alternatives. Decision making is not a linear, sequential process but a process that may evolve unpredictably in an unstructured way. The unstructured model shows how and why managers make nonprogrammed decisions, and the incrementalist model shows how and why managers improve their programmed decision making.
Unstructured decision making is taken to its extreme in the garbage-can model of organizational decision making. Managers are as likely to start decision making from the solution side as from the problem side. They may propose solutions for problems that do not exist, they create a problem they can solve with solutions that are already available. Decision making becomes like a ‘garbage can’ in which problems, solutions, and the preferences of different managers and coalitions mix and contend with one another for organizational action and attention. Organizations become an ‘organized anarchy’, in which the manager or coalition with the most influence or power sways other decision makers. Chance, luck, and timing also determine which alternative is selected.
Organizational learning
Organizational learning is the process through which managers seek to improve organizational members’ desire and ability to understand and manage the organization and its environment so they make decisions that raise organizational effectiveness. It helps managers to make better nonprogrammed decisions. Managers continually restructure and reengineer their organizations to learn new ways of operating more efficiently and to survive and prosper. James March identified two types of organizational learning strategies. Exploration means that organizational members search for and experiment with new forms of organizational activities and procedures to increase effectiveness. Exploration might involve finding new ways to manage the environment or inventing new kinds of organizational structures for managing resources.
Exploitation means that organizational members learn ways of refining and improving existing organizational activities and procedures to increase effectiveness. Exploitation might involve implementing a TQM program to promote continuous refinement of existing operating procedures, or developing an improved set of rules to perform specific kinds of functional activities more effectively. A learning organization is an organization that purposefully designs and constructs its structure, strategy, and culture so to enhance and maximize the potential for explorative and exploitative organizational learning to take place.
To create a learning organization, managers need to encourage learning at four levels: individual, group, organizational, and interorganizational. Some of the following principles have been developed by Peter Senge. At the individual level, managers have to do all they can to facilitate the learning of new norms, values, skills and rules so individuals increase their personal abilities and help build an organization’s core competences. Senge argued that each organizational member should develop a sense of personal mastery, that is, organizations have to empower all employees and allow them to experiment and create and explore what they want. To help them achieve personal mastery, and to give employees a deeper understanding of what is involved in performing a particular activity, organizations need to encourage them to develop complex mental models that challenge them to find new or better ways of performing a task. According to Senge, organizations have to encourage each individual to develop a similar commitment to their job so they develop a taste for risk taking and experimenting. Learning organizations can encourage employees to develop complex mental models and form a sense of personal mastery by giving them the opportunity to assume more responsibility for their decisions. At the group level, managers have to encourage learning by promoting the use of various kinds of groups, such as self-managed or cross-functional teams, so employees can share their skills and abilities to solve problems. Groups provide a setting for synergy to develop, that is the idea that the whole is much more than the sum of its parts, which can increase organizational performance. Senge argues that team learning is more important than individual learning in promoting organizational learning because most important decisions are made in subunits such as functions, divisions, and groups. At the organizational level, managers can promote learning through the way they create the structure and culture. Mechanistic structures facilitate exploitative learning, and organic structures facilitate explorative learning. Organizations should find a balance between these two. Cultural values and norms also influence learning at the organizational level. Senge emphasizes the importance of building shared vision, that is, creating an ongoing mental model that all organizational members can use to frame problems or opportunities and that binds them to an organization. John Kotter and James Heskett distinguish between adaptive cultures and inert cultures. Adaptive cultures are cultures that value innovation and encourage experimenting and risk taking by middle and lower-level managers. Inert cultures are cultures that are cautious and conservative, do not value middle and lower-level managers taking risks and may actively discourage such behavior. According to Kotter and Heskett, organizational learning is higher in organizations with adaptive cultures. Organizational structure and culture also determine how learning occurs at the interorganizational level. Organizations with adaptive, organic cultures are more likely to actively seek new ways to manage linkages with other organizations than organizations with mechanistic, inert cultures. Interorganizational learning is important because organizations can improve their effectiveness by imitating each other’s distinctive competences.
Organizations can encourage explorative and exploitative learning by cooperating with suppliers and distributors. Network organizations, enterprise-wide IT systems, strategic alliances, and business-to-business networks help increase the speed at which new learning takes place. Senge’s fifth principle of organizational learning is systems thinking, that means that managers have to recognize the effects of one level of learning on others, to create a learning organization.
Knowledge management
Knowledge management is the sharing and integrating of expertise within and between functions and divisions through real-time, interconnected IT. Knowledge management has important implications for organizational learning and decision making. One important advantage of using a knowledge management system is the development of synergies between people and groups that can lead to a competitive advantage in the form of product or service differentiation.
IT-enabled organizations can respond quickly to changing environmental conditions. Hansen, Nohria, and Tierney argue that organizations should choose between a codification or personalization approach to creating an IT-based knowledge management system. With a codification approach, knowledge is carefully collected, analyzed, and stored in databases where it can be retrieved easily. This approach is only suitable when the product or service itself is quite standardized so best practices can be discovered and entered into the knowledge management system. A knowledge management system allows an organization with a mechanistic structure to react in a more ‘organic’ fashion. A personalization approach is pursued when an organization provides customized products or solutions to clients, when technology is changing rapidly, and when employees rely much more on knowhow, insight, and judgment to make decisions. In the personalization approach, information systems are designed to show employees who in the organization might possess the knowledge they need. Organizations’ ability to provide a quick, customized solution, and to translate this rapidly into best practices, often depends on the degree to which they are specialized, and therefore deal with a narrower range of problems. Knowledge management is an important tool for increasing the level of integration inside an organization, but it is also very expensive.
Factors affecting organizational learning
Paul C. Nystrom and William H. Starbuck developed a model that illustrates how problems may arise that prevent organizations from learning and adapting to their environment and so result in an organizational crisis. According to Nystrom and Starbuck, past (successful) learning may inhibit new learning and lead to organizational inertia. If programmed decision making drives out nonprogrammed decision making, the level of organizational learning falls. Blindness and rigidity in organizational decision making may then set in and lead to a crisis. Managers often discount warnings that problems are impending, they adopt an incrementalist approach to decision making because sticking to what they know is much safer than setting off in new directions where consequences are unknown. Past learning also inhibits new learning because managers’ mindsets or cognitive structures shape their perception and interpretation of problems and solutions. A cognitive structure is the system of interrelated beliefs, preferences, values, and expectations that people use to define problems and events. In an organization, cognitive structures reveal themselves in goals, plans, myths, stories, and jargon. Cognitive structures shape decision making and determine the degree to which forces in the environment are perceived as opportunities and threats.
Cognitive biases systematically bias managerial decision making and lead to poor organizational learning and decision making. Cognitive dissonance, illusion of control, frequency and representativeness, projection and ego-defensiveness, and escalation of commitment are cognitive biases that influence organizational learning and decision making (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 372, figure 12.3). Cognitive dissonance is the state of discomfort or anxiety that people feel when there is an inconsistency between their beliefs and actions. Managers seek or interpret information that confirms their beliefs, and they ignore information that does not. Illusion of control is a cognitive bias that leads managers to overestimate the extent to which they can control a situation because they have the skills and abilities needed to manage uncertainty and complexity. Often, when top managers lose control they centralize more authority, in the mistaken belief that this will give them greater control and allow them to solve their problems. Frequency and representativeness are tendencies that frequently lead managers to misinterpret information. Frequency is a cognitive bias that deceives people into assuming that extreme instances of a phenomenon are more prevalent than they really are. Representativeness is a cognitive bias that leads managers to form judgments based on small and unrepresentative samples. Exposure to a couple of unreliable suppliers, for example, can lead to managers believing all suppliers are untrustworthy and unreliable. Projection is a cognitive bias that allows managers to justify and reinforce their own preferences and values by attributing them to others. Ego-defensiveness is a cognitive bias that leads managers to interpret events in such a way that their actions appear in the most favorable way. Escalation of commitment is a cognitive bias that leads managers to remain committed to a losing course of action and to refuse to admit they are wrong. In later decision making, they try to correct their prior decision rather than acknowledge that have made a mistake.
Improving decision making
Organizations can overcome the effect of cognitive biases and promote learning and change by implementing strategies for organizational learning, using game theory, increasing the breadth and diversity of the top-management team, using devil’s advocacy and dialectical inquiry, and developing a collateral organizational structure.
There are three strategies for organizational learning: listening to dissenters, converting events into learning opportunities, and experimenting. Top managers can improve the quality of their decision making by surrounding themselves with people who hold different and opposing points of view. This way, managers can collect new information to evaluate new alternatives generated by dissenters and so find the best solution. To encourage explorative learning, organizations have to encourage experimenting, the process of generating new alternatives and testing the validity of old ones. Experimenting can be used to improve incremental and garbage-can decision-making processes.
In understanding the dynamics of decision making between competitors in the environment, a useful tool that can help managers improve decision making and enhance learning is game theory, in which interactions between organizations are viewed as a competitive game. Organizations in an industry can be viewed as players that are all simultaneously making decisions to maximize their effectiveness.
In a sequential move game, players move in turn, and one player selects a strategy to pursue after considering it’s competitor’s choice of strategies. In a simultaneous move game, players act at the same time, in ignorance of their competitors’ current actions. The basic principles of game theory can be useful in determining which choices to make and strategies to select to manage the environment. A fundamental premise of game theory is that when making decisions, managers have to think in two related ways. First, they need to think ahead and anticipate how competitors will respond to their competitive moves. Second, they have to reason backward to determine which moves their organization should pursue today given their assessment of how their competitors will respond to future moves. This principle is known as look forward and reason back. Decision trees can be used to help in the process of looking forward and reasoning back (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 376, figure 12.4). A second basic principle of game theory is: Know thy rivals!
The way the top-management team is constructed and the type of people who are on it affect the level of organizational learning. There are two top-management configurations, each of which has different implications for the level of learning that takes place (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 377, figure 12.5). In the wheel configuration, managers from different functions report separately to the CEO, this decreases organizational learning. The wheel works best when problems are simple and require minimal coordination among top team members. In the circle configuration, top managers from different functions interact with each other and with the CEO, this promotes team and organizational learning. The circle works best for complex problems requiring coordination among group members to arrive at a solution.
The personal characteristics and backgrounds of team members also determine the level and quality of organizational learning and decision making. Organizations that draw their top-management team from many different industries and different functional backgrounds can promote organizational learning and decision making. Groupthink can be avoided when managers bring different information and viewpoints to bear on a problem. Groupthink is the conformity that arises when like-minded people reinforce one another’s tendencies to interpret events and information in similar ways. Top management teams function most effectively when their membership is stable. Designing and managing the top-management team is a vital task for a CEO.
A devil’s advocate is the person willing to stand up and question the beliefs of more powerful people, resist influence attempts, and convince others that new ideas or plans may be wrong. An organization that uses dialectical inquiry creates teams of decision makers. Each team evaluates alternative scenarios and courses of action and recommend the best one. Top managers then synthesize a final plan that offers the best chance of success (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 379, figure 12.6).
Organizations can try to improve learning and decision making by establishing a collateral organizational structure, that is, an informal organization of managers set up parallel to the formal organizational structure to ‘shadow’ the decision making and actions of managers in the formal organization. Collateral organizational structures allow organizations to maintain their capacity for change at the same time they maintain their stability.
Managers have to be on the lookout for new problems, and be open to new solutions, to guard against blindness and rigidity in decision making. They should develop a questioning attitude, and never discount warnings that problems are impending. Managers must analyze the cognitive structures through which they and their subunits define problems, and question whether these beliefs or values reflect the realities of the situation. They have to examine their decision making to determine whether cognitive biases are affecting the quality of their decisions. Finally, they should protect the quality of their decisions by developing strategies to enhance organizational learning.
CHAPTER M: INNOVATION
Innovation
Innovation is the process by which organizations use their resources and competences to develop new and improved products or to find better ways to make products and thus increase effectiveness. Innovation brings about change, but it is also associated with a high level of risk because the outcomes of R&D are often uncertain. The world is characterized by rapid technological change. Advances in technology are very important in the innovation process. There are two types of technological change. Quantum technological change is a fundamental shift in technology that revolutionizes products or the way in which they are produced. Quantum innovations are new products or operating systems that incorporate a quantum technological improvement. Incremental technological change are refinements and improvements that are continually made to a particular technology over time. Incremental innovations are products or operating systems that incorporate and benefit from those refinements. Quantum innovations are relatively uncommon. Anderson and Tushman call quantum innovations ‘technological discontinuities’. In their model of innovation, a technological discontinuity sets off an era of ferment (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 386, figure 13.1). At the beginning, intense competition between organizations arise to develop the design that will become the dominant model for others to copy. After the dominant design emerges, the next period of the technology cycle involves an era of incremental change and innovation where organizations work on and improve a specific technology. Competition to improve a technology in order to offer customers a better product is the type of innovation pursued by most companies. Some organizations benefit from technological change, but others see their markets being threatened. Technological change is thus both an opportunity and a threat, it is creative and destructive.
Property rights
Property rights give companies and people the right to own and control productive resources and profit from them. Individual investors and organizations are given the legal property rights to own and protect their creations by the granting of patents, copyrights, and trademarks. Patents give their owners the property right to use, control, license, and otherwise profit from their creation for a period of twenty years from the date the patent is issued by the U.S. Patent Office. Thus, patents confer a monopoly right on their owner. Once a patent has expired, any company can manufacture a copy of the original product, which is sold at a much lower price than the patented product. Copyrights also confer a monopoly right on their owner. They are typically given to people who create intellectual property, such as written or visual works. Copyrights can be sold by the owners to other people or organizations. Copyrights last for much longer periods than patents, often the lifetime of the work’s creator and beyond. Trademarks are property rights to the name of a product, any symbols or logos associated with it, and the company that produces it.
Intrapreneurship and creativity
Intrapreneurs are leaders of innovation and new product development in established companies. They are employees who notice opportunities for quantum or incremental product improvements and are responsible for managing the product development process.
A lot of intrapreneurs become dissatisfied when their organization does not support their creative new product ideas or do not fund development efforts that the they think will succeed. When this happens, intrapreneurs become entrepreneurs because they leave their organizations and found their own organizations that may compete with the organizations they left. Organizations need to take steps to promote internal entrepreneurship in order to prevent the departure of talented people.
Creativity means going beyond the current boundaries, whether those boundaries are knowledge, technology, beliefs, or social norms. Creativity is not just making new things, it is also combining and synthesizing two or more previously unrelated ideas and making something new out of them. It is also modifying something to give it a new use or make it perform better. Synthesis and modification are much more common than creation, this is also the reason why incremental innovation is more common than radical innovation. The process of innovation and creating new knowledge depends on the ability of managers to tap into the tacit or hidden and highly subjective insights, hunches, and intuitions of employees. Tacit knowledge is difficult to verbalize because it is know-how accumulated by experience and it is too hard to articulate in principles, formulas, and rules. Tacit knowledge can be obtained by observation, modeling, or imitation. A knowledge-creating organization is one where innovation is going on at all levels and in all areas. Different teams regularly meet to pool their information.
‘Creative destruction’
The process of ‘creative destruction’ is the widespread changes brought about by increasing global competition and advancing technology. This process leads old, inefficient organizations to be driven out of business by new, more efficient ones. This is ‘creative’ because the new companies use new global and technological opportunities to make better products or lower the costs of making existing products.
Product life cycle
Organizational survival requires that managers quickly adopt new technologies to innovate new products when technology is changing. The rate of technological change and the length of the product life cycle determines how important it is for managers to innovate. This is especially true when copyrights and patents do not stop competitors from bringing their own version of a product to the market. The product life cycle reflects the changes in demand for a product that occur over time. Demand for the most innovative, successful, new products passes through four stages: the embryonic, growth, mature, and decline stage. In the embryonic stage a product has yet to gain widespread acceptance. Customers are not sure what the technology embedded in the product has to offer them so there is little demand. In the growth stage a lot of consumers are entering the market and buying the product for the first time, demand increases rapidly. The mature stage begins when market demand peaks because most customers have already bought the product. Demand is typically replacement demand because incremental innovation has resulted in a new generation of products that have better features. The decline stage follows the mature stage if and when demand for a product falls because quantum technological change has resulted in the emergence of a superior alternative product. The most important determinant of the length of a product’s life cycle is the rate of technological change (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 392, figure 13.2).
Fads and fashion are also an important determinant of the length of the product life cycle. Customers have a major impact on the kinds of technological change that organizations pursue. The Web and massive flows of information quickly make it apparent what kinds of products are in demand. Companies increasingly watch the changing needs of customers (their fads and fashion) and invest resources to develop new technologies and products that will meet those needs. The faster technology changes a product’s life cycle, the more important it is to innovate products quickly and on a continuing basis. The problem facing organizations is how best to promote intrapreneurship, innovation, and creativity.
Managing the innovation process
Project management is a technique that is useful at promoting quantum, but especially incremental, innovation. It is the process of leading and controlling a specific ongoing work program so it results in the creation of new or improved products. A project is a subunit whose goal centers on developing a program of activities that delivers a product or service on time, within budget, and that meets predetermined performance standards. Effective project management begins with a clearly defined plan that takes a product from its concept phase, to its initial test face, to the modification phase, and the final manufacturing or, in the case of services, setup phase. The concept phase involves the most work and cost because the product development team has to use the latest research developments to create new products. A project manager (PM) manages a higher proportion of highly skilled and educated professionals than typical managers. A major project design choice involves the decision of how to centralize or decentralize authority. The process of harmonizing team members creative efforts with cost and time considerations is the most difficult task of a PM. One of the hardest tasks of a PM is to maintain the momentum of the project as team members fail repeatedly to come up with solutions to problems, and the project threatens to fail. PM’s have to overcome inertia, think ahead, perform effective advance planning, suggest solutions, brainstorm, and provide positive feedback and encouragement. They should also prepare how to respond to top managers who are continually watching and evaluating the performance of the project. ‘Selling’ their ideas and project is a never-ending task for PM’s. They commonly use quantitative modeling to perform effective advanced planning, to uncover potential bottlenecks, and to speed the progress toward successfully completing a project. One common modeling approach is to develop a PERT/CAM network or GANTT chart, which are flowcharts of a project that can be build with many proprietary software packages. The critical path method (CPM) captures the essence of what these models try to achieve. The goal of CPM is to determine which particular tasks or activities of the many that have to be performed are critical in their effect on project time and cost and thus to determine how to sequence critical tasks (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 396, figure 13.3). By carefully analyzing the steps of a task, many unforeseen interactions between these steps can be uncovered. The path can then be shortened by reorganizing or combining tasks to cut time and cost. Modern IT systems can completely change task sequencing, especially when other types of organizing such as network structures, product teams, and flexible work teams are included.
Top managers often make the mistake of funding too many development projects simultaneously. A stage-gate development funnel (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 397, figure 13.4) establishes a structured and coherent innovation process that improves control over product development and forces managers to make choices among competing new product development projects so resources are not spread too thinly over too many projects. At stage one, the funnel has a wide mouth to promote innovation and encourage as many new product ideas as possible. The ideas are reviewed and the ones that meet the criteria are passed on to stage two. At stage two, the PM designs a detailed new product development plan that will help the senior management committee to decide whether or not to approve the idea and allow the new project managers to go ahead and pursue a full-blown development effort. The stage three development effort can last from six months to ten years depending on the industry and product type.
Establishing cross-functional teams is a critical factor in any structured new product development effort. Although successful innovation begins in the R&D function, R&D activities have to be coordinated with the activities of other functions. But because different groups have different orientations and attitudes, coordinating their activities is difficult.
The small group of functional experts who bear primary responsibility for the product development effort are called core members. They are usually assigned to one project at a time so they do not get distracted. A product team structure or a matrix structure are suitable for managing innovation in high-tech organizations. A lot of companies use additional integrating mechanisms to facilitate innovation: team leaders and project champions, ‘skunk works’, new venture divisions, and joint ventures.
Cross-functional teams have to have the right kind of leadership to succeed, and they must to be managed effectively. Lightweight team leaders are mid-level functional managers who have a lower status than the head of a functional department. They are not given the control over human, financial, and functional resources. Lightweight team leaders are appropriate for cases where minor modifications of an existing product are all that is required. Heavyweight team leaders are true project managers who have a higher status within the organization. They are given primary control over key human, technological, and financial resources. They often function as product champions, the people who take ownership of the project, solve problems as they occur, smooth over disputes between team members, and provide leadership.
A skunk works is a task force, a temporary team that is created to promote new product design and innovation by coordinating the activities of functional groups. The task force consists of members of R&D, manufacturing, marketing, and engineering functions who are assigned to a separate facility, at a location isolated from the rest of the organization. A skunk works provides a large organization with a small-organization-type setting in which skunk works members have the opportunity and motivation to quickly bring a new product to the market. When potentially successful new product ideas are discovered by the R&D function, an organization creates a new venture division, a self-contained, independent division given the resources to develop a complete set of value-creating functions to manage a project.
A skunk works is dissolved when the product is brought to the market, but a new venture division assumes full responsibility for the commercialization of the product. Establishing the balance of control between corporate headquarters and a new venture division can become a problem. The main problems of a new venture division are the high costs, the fact that new divisions can use their autonomy to pursue their own goals, and the considerable organizational skill that is required to manage new venture divisions.
A joint venture between two or more organizations can be used to manage high-tech innovation. Joint ventures allow companies to combine their skills and technologies and pool their resources to embark on risky R&D projects. They can also cause problems if the venture partners begin to come into conflict over future development plans.
Developing a culture for innovation
Culture plays a big role in shaping and promoting innovation. Values and norms can reinforce the entrepreneurial spirit and allow a company to respond quickly and creatively to a changing environment. Three factors shape organizational culture and the degree to which its values and norms emphasize innovation: organizational structure, people, and property rights. Organizational structure influences the way people behave, so creating the right setting is important to fostering an entrepreneurial culture. A number of factors can stunt innovation and reduce an organization’s ability to introduce new products as it grows. Increasing organizational size may slow innovation, because decision making slows down as organizations grow. As organizations age, they tend to become less flexible and innovative and so may fail to notice opportunities to develop new products. With organizational growth comes complexity, and an increase in vertical and horizontal differentiation may hurt innovation.
An increase in hierarchical levels makes it hard for employee intrapreneurs to exercise meaningful authority over projects. Organic structures, like matrix and product team structures, based on norms and values that emphasize lateral communication and cross-functional cooperation tend to promote innovation. The culture of innovation in high-tech organizations is fostered by the characteristics of the people. Employees cooperate so closely on product development that they become increasingly similar to one another. Organizations need to guard against groupthink and prevent employees from suffering from cognitive biases, or else they lose sight of new or emerging trends in the industry. Organizations must strive to maintain diversity in their skilled employees and to allow them to follow divergent paths. It is important that organizational members are adaptable and open to new ideas because of the uncertainty associated with innovation. Much technological innovation occurs in new organizations founded by the scientists who have left large organizations to branch out on their own. For this reason, organizations need strong property rights to align the interests of talented employees with their interests.
Managers must integrate R&D activities with the activities of other functions if the innovation process is to be successful. They must also give employees autonomy and encouragement to use organizational resources to facilitate the ongoing development of new products and processes. Project managers, cross-functional teams, a stage-gate development funnel, a skunk works, and new venture divisions should be created to provide a setting that encourages entrepreneurship.
Top management has to create a culture that supports innovation and recognizes and rewards the contributions of employees.
Information technology
Information efficiencies are cost and time savings that occur when IT allows employees to perform their current tasks at a higher level, assume additional tasks, and expand their roles in the organization owing to advances in the ability to gather and analyze data. The ability of IT to enhance a person’s task knowledge and technical skills is also an important input into the innovation process. Knowledge or information availability alone will not lead to innovation, it is the ability to creatively use knowledge that is key to promoting innovation and creating competitive advantage. A reshuffling of tasks likely will occur as new IT systems increase the ability of employees or subunits to acquire and process information. This leads to many more opportunities for creatively combining, modifying, and synthesizing information leading to the incremental innovations. IT also facilitates cross-functional and divisional communication and coordination.
Information synergies
Individuals or subunits can create information synergies by pooling their resources and cooperate and collaborate across role or subunit boundaries. IT changes organizational forms and promotes creativity and innovation inside both network and virtual organizational forms. IT-enabled virtual forms composed of electronically connected people or firms facilitate knowledge sharing and innovation. It is possible, however, that not only the amount of good advice information seekers receive will increase, bad advice may increase as well. Developing a knowledge management system helps to ensure high-quality information and advice, given when requested. IT allows for an increase in boundary-spanning activity, that is, interacting with individuals and groups outside the organization to obtain valuable information and knowledge from the environment and so promote innovation.
IT
IT affects the innovation process through its many effects on organizational structure. To speed innovation, many organizations have decentralized decision making to take advantage of specialized workers who possess more accurate and timely local information. IT helps this process in three ways: IT gives employees more detailed and current knowledge of consumer and market trends and opportunities, IT produces information synergies, and IT makes the organization flatter. IT also promotes innovation through its effects on organizational culture because it facilitates the sharing of beliefs, values, and norms.
CHAPTER N: CONFLICT
Organizational conflict
Each stakeholder group has its own goals and interests, which overlap somewhat with those of other groups because all stakeholders have a common interest in an organization’s survival. But stakeholders’ goals and interests are not identical, as a result, conflict can arise. Organizational conflict is the clash that occurs when the goal-directed behavior of one group blocks the goals of another. Research suggests that some conflict is good for an organization and can improve effectiveness. Beyond some point (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 411, figure 14.2), however, extreme conflict can hurt organizational performance. Conflict can be beneficial because it can overcome organizational inertia and lead to organizational learning and change. The conflict that arises when different groups perceive the organization’s problems in different ways and are willing to act on their beliefs is a built-in defense against the organizational inertia produced by a top-management team whose members have the same vision of the world. Organizations need to be open to conflict, to recognize the way it both helps managers to identify problems and promotes the generation of alternative solutions that improve decision making. To take advantage of the value-creating aspects of conflict and avoid its dysfunctional effects, managers have to learn how to control it.
Pondy’s model of organizational conflict
Pondy views conflict as a process that consists of five sequential stages. No matter how or why conflict arises, managers can use Pondy’s model to interpret and analyze a conflict situation and take action to resolve it (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 413, figure 14.3).
In the first stage, latent conflict, no outright conflict exists, however, the potential for conflict to arise is present because of the way an organization operates. According to Pondy, all organizational conflict arises because vertical and horizontal differentiation lead to the establishment of different organizational subunits with different goals. There are five potential sources of conflict between subunits: interdependence, subunits’ differing goals, bureaucratic factors, incompatible performance criteria, and competition for resources. The activities of different subunits are interdependent, and their desire for autonomy leads to conflict between groups. Ultimately, each subunit’s desire for autonomy comes into conflict with the organization’s desire for coordination. When task interdependence is high, conflict is likely to occur at the individual, functional, and divisional levels. Differences in subunit orientation affect the way each function or division views the world and cause each subunit to pursue different goals that are often incompatible. Another potential source of conflict is the way in which task relationships develop in organizations. Over time, conflict can occur because of status inconsistencies between different groups in the organization’s bureaucracy. A classic type of bureaucratic conflict occurs between staff and line functions. A line function is directly involved in the production process, and staff functions advice and support the line function. In many organizations, people in line functions see themselves as the critical organizational resource and people in staff functions as secondary players. The result is conflict. Sometimes conflict arises between subunits because of the organization’s way of monitoring, evaluating, and rewarding different subunits. When resources are scarce, choices about resource allocation have to be made, and subunits have to compete for their share.
To increase access to resources, functions promote their interests and importance often at one another’s expense.
The second stage, perceived conflict, begins when a subunit or stakeholder group perceives that its goals are being thwarted by the actions of another group. Each subunit begins to define why the conflict is emerging and to analyze the events that have led up to it. They search for the origin of the conflict and construct a scenario that accounts for the problems they are experiencing. Usually at this point the conflict escalates as the different subunits or stakeholders battle over the cause of the problem.
At the third stage, felt conflict, subunits in conflict quickly develop an emotional response toward each other. Each subunit closes ranks and develops a polarized us-versus-them mentality that puts the blame for the conflict on the other subunit. The conflict escalates, and organizational effectiveness and cooperation between subunits fall.
In the fourth stage, manifest conflict, one subunit gets back at another subunit by attempting to thwart its goals. This can take many forms. Open aggression between people and groups is common, but also passive aggression, frustrating the goals of the opposition by doing nothing, is a form. Managers need to do all they can to prevent conflict from reaching the manifest stage, for two reasons: because of the breakdown in communication and because of the aftermath of conflict.
Sooner or later, organizational conflict is resolved in some way, often by the decision of a senior manager. And sooner or later, if the sources of the conflict have not been resolved, the disputes and the problems that caused the conflict arise again in another context. Every conflict leaves a conflict aftermath that affects the way both parties perceive and react to future conflicts.
Conflict resolution strategies
Managing organizational conflict is an important priority. Organizations have to balance the need to have some ‘good’ conflict with the need to prevent ‘good’ conflict from escalating into ‘bad’ conflict. The method organizations use to manage conflict depends on the source of the problem. There are two strategies managers can use: changing an organization’s structure to reduce or eliminate the cause of the conflict, and trying to change the attitudes of individuals or replacing the individuals themselves. Task interdependence and differences in goals are two major sources of conflict, thus altering the level of differentiation and integration to change task relationships is a way to resolve conflict. Another way to manage conflict is to make sure the design of an organization’s hierarchy of authority is in line with its current needs. Good organizational design should result in the creation of an organizational structure that minimizes the potential for conflict. However, many organizations fail to manage their structures and change them to suit the needs of a changing environment because of organizational inertia. As a result, conflict increases and organizational effectiveness falls. Differences in goals and in beliefs about the best way to achieve those goals are inevitable because of the differences between divisions and functions. To harness conflict between subunits and prevent the polarization of attitudes that results during the felt conflict stage in Pondy’s model is to create a procedural system that allows parties in conflict to air their grievances and hear the points of view of other groups.
This system is very important in managing industrial conflicts between managers and unions. An important component of bargaining in labor disputes is attitudinal structuring, this is a process created to influence the attitudes of the opposing party and to encourage the perception that both parties are on the same side and want to solve the conflict. Organizations often use a third-party negotiator to moderate a dispute between subunits or stakeholders. Another way of managing conflict is by exchanging and rotating people between subunits to encourage groups to learn each other’s points of view. When attitudes are difficult to change, the conflict may be resolved by changing the people involved.
This can be done by transferring them to other parts of the organization, promoting them, or firing them. CEO’s are an important influence on attitudes in a conflict.
Managers must analyze the organizational structure to identify potential sources of conflict. They should change or redesign the organizational structure to eliminate the potential for conflict. If conflict cannot be eliminated, they have to be prepared to intervene quickly and early in the conflict to find a solution. They must choose a way of managing conflict that matches the source of the conflict. Finally, they should always try to achieve a good conflict aftermath so that cooperative attitudes can be maintained.
Organizational power
According to most researchers, organizational power is the mechanism through which conflict gets resolved. It is the ability of one person or group to overcome resistance by others to achieve a desired objective. Organizational power is the ability of A to cause B to do something that B would not otherwise have done. When power is used to resolve conflict, the element of coercion exists. The possession of power is an important determinant of the kind of decisions that will be selected to resolve a conflict. There are seven sources of power in an organization.
Authority is the ultimate source of power in an organization that is legitimized by the legal and cultural foundations on which an it is based. People who join an organization accept the legal right of the organization to control their behavior. In centralized organizations, a culture often develops in which people become afraid to take responsibility for decisions or initiate new action for fear they will overstep their authority and will be censured by top management. Managers have to realize that there is a difference between the decentralization of authority and the loss of authority. Decentralizing authority does not necessarily reduce a manager’s authority because the manager continues to bear the responsibility for the decisions that their subordinates make. Empowerment is important at the corporate-divisional level. It is impossible to manage a large company unless divisional managers and lower-level managers have the authority and responsibility to innovate and make decisions. In most large organizations the primary role of corporate managers is to make resource allocation decisions, and monitor the performance of each division.
Power is not a fixed quantity. Managers who make decisions and perform actions that benefit the organization can increase their power. The power within organizations comes from the ability to control resources. Money and capital is the ultimate organizational resource because money buys other resources. Top managers have the ultimate power because they legally control the way an organization allocates its financial resources.
The ability to generate financial resources is also a major source of power.
Information is a very important and scarce organizational resource. Access to strategic information and the control of the information flow to, from, and between subunits are sources of incredible power in organizational decision making. It is possible to shape the views of other people or subunits by carefully tailoring the information they receive. The control of information is the source of the power of many people or subunits in specialized roles. As a result, they are able to influence decision-making outcomes and bring about change in their interests, but there is no guarantee that the whole organization will benefit from such change. The problem is how to ensure change that will increase rather than reduce organizational performance.
If no one else can perform the tasks that a person or subunit performs, that person or subunit is nonsubstitutable.
The subunits that control the flow of resources through an organization’s production systems are most central and have the ability to reduce uncertainty facing other subunits. An organization’s strategy is often a crucial determinant of which subunit is central in the organization.
Subunits that can directly control and reduce the main sources of uncertainty or contingencies facing the organization have significant power. The power of subunits rises and falls as their ability to cope with organizational uncertainties changes.
Another source of power stems from the power of the dominant coalition, the set of managers who form a partnership and use their combined power secretively to influence decision making in ways that favor their interests. This is called unobtrusive power because other managers are usually not aware that the coalition is shaping their perceptions of a situation. A specific coalition’s ability to resolve conflict in its favor depends on its ability to control the balance of power in the organization. Organizational power is dynamic because organizational strategy can change quickly if the balance of power shifts from one coalition to another.
Organizational politics
Organizational politics is, according to Jeffrey Pfeffer, ‘activities taken within organizations to acquire, develop, and use power and other resources to obtain one’s preferred outcomes in a situation in which there is uncertainty or disagreement about choices’. To manage the change process to get disputes resolved in their favor, individuals, coalitions, and subunits often engage in political behavior to increase the power and influence they have. Even if organizational members have no personal desire to play politics, they still have to understand how politics operates because sooner or later they will come up against a master player of the political game.
Individuals and subunits can use many political tactics to obtain the power they need to achieve their goals and objectives. One tactic is to become indispensable to the organization. Indispensability can be achieved by an increase in nonsubstitutability or an increase in centrality.
Another way to obtain power is by associating with powerful managers who are clearly on their way to the top. By attaching oneself to a powerful manager and making oneself indispensible to that person, it is possible to rise up the organizational ladder with that person. Planning for the managerial succession is an important organizational task of top managers, so they often become mentors to aspiring lower-level managers. Indicators to determine which people hold the power are their reputation and ability to influence decision-making outcomes, control significant organizational resources, and display symbols of prestige and status. A second way to form an attachment with powerful people is by taking advantage of common ties such as similar socioeconomic backgrounds. Flattery is never wasted on those with power. Building and managing a coalition around an issue that is important to certain managers is a political tactic that managers use to obtain the power needed to resolve a conflict in their favor. Building alliances with important customers, officers of financial institutions, and managers of the most important subunits is very important. Skills in coalition building are important to success in organizational politics because the interests of parties change frequently as the environment changes. To maintain agreement among coalition members requires skillful negotiation and management such as cooptation.
One of the most important political tactics a manager can use to influence the politics of decision making is developing the personal ability to utilize power to manipulate decision making. Possessing and using power is the first skill needed to play politics. Knowing how and when to use power effectively is equally important. Controlling the agenda and bringing in an outside expert are two tactics for controlling decision making so the use of power seems to be legitimate. Managers and coalitions like to be on committees so they can control the agenda or business decisions of the committee. This way, they are able to control the issues that important decision makers will consider. When there is a conflict, self-interested managers and coalitions often bring in an outside expert who is considered neutral, so they can legitimize their position. Then the supposedly objective views of the expert are used to support the position of the coalition in power. Sometimes, however, the experts are not neutral at all.
Cost and benefits of organizational politics
To manage organizational politics and gain its benefits, organizations have to establish a balance of power in which alternative views and solutions can be offered and considered by all parties (Organizational Theory, Design and Change, Jones, 2010, 6th edition, page 428, figure 14.5). The balance of power has to shift over time, toward the party that can best manage the uncertainty and contingencies facing the organization. Politics can improve organizational effectiveness if it results in change that allocates organizational resources to where they can produce more value. An organization’s ability to obtain the benefits of politics depends on the assumption that power flows to those who can be of most help to the organization. Power holders are notoriously reluctant to give up the positions that give them the right to allocate resources and enrich themselves.
Managers must recognize that politics is a fact of organizational life, and they have to develop the skills to understand how politics shapes organizational decision making. They should develop a personal power base to influence decision making, and use it to prevent political managers from pursuing their own interests at the expense of organizational interests. To obtain power, they have to associate with powerful managers, make themselves central and nonsubstitutable, develop personal skills, seek membership on committees, and obtain control of organizational resources. Managers should seek to maintain a power balance between individuals or subunits to preserve the quality of organizational decision making.
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