Why is shared information so important in a learning organization in comparison to an efficient performance organization? Discuss how an organization’s approach to sharing info

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Organization Theory & Design, Eleventh Edition Richard L. Daft

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2

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

What Is an Organization? Definition • From Multinationals to Nonprofits • Importance of Organizations

Dimensions of Organization Design Structural Dimensions • Contingency Factors • Performance and Effectiveness Outcomes

The Evolution of Organization Theory and Design Historical Perspectives • It All Depends: Key Contingencies

An Example of Organizational Configuration

Organic and Mechanistic Designs

Contemporary Design Ideas Open Systems • Chaos Theory

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

Design Essentials

Learning Objectives After reading this chapter you should be able to: 1. Define an organization and the importance

of organizations in society. 2. Identify current challenges facing

organizations. 3. Understand how organization design concepts

apply to a major company like Xerox. 4. Recognize the structural dimensions of

organizations and the contingencies that influence structure.

5. Understand efficiency and effectiveness, and the stakeholder approach to measuring effectiveness.

6. Explain historical perspectives on organizations.

7. Describe Mintzberg’s five basic parts of an organization.

8. Explain the differences in organic and mechanistic organization designs and the contingency factors typically associated with each.

Organizations and

Organization Theory

1

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3

?Managing by

Design Questions

Before reading this chapter, please check whether you agree or disagree with each of the following statements:

1 An organization can be understood primarily by understanding the people who make it up.

I Agree I DIsAgree

2 The primary role of managers in business organizations is to achieve maximum efficiency.

I Agree I DIsAgree

3 A CeO’s top priority is to make sure the organization is designed correctly.

I Agree I DIsAgree

A LooK insiDe | XeRoX CoRPoRAtion

On the eve of the twenty-first century, Xerox Corporation seemed on top of the world, with fast-rising earnings, a soaring stock price, and a new line of computerized copier-printers that were technologically superior to rival prod- ucts. Less than two years later, however, many considered Xerox a has-been, destined to fade into history. Consider the following events:

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

• Xerox’s losses for the opening year of the twenty-first century totaled $384 million, and the company continued to bleed red ink. Debt mounted to $18 billion.

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

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

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

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

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4 Part 1: Introduction to Organizations

“BurOx” TAkEs HOlD

Xerox was founded in 1906 as the Haloid Company, a photographic supply house that developed the world’s first xerographic copier, introduced in 1959. Without a doubt, the 914 copier was a money-making machine. By the time it was retired in the early 1970s, the 914 was the best-selling industrial product of all time, and the new name of the company, Xerox, was listed in the diction- ary as a synonym for photocopying. Yet, like many profitable organizations, Xerox became a victim of its own success. Leaders no doubt knew that the company needed to move beyond copiers to sustain its growth, but they found it difficult to look beyond the 70 percent gross profit margins of the 914 copier.

Xerox’s Palo Alto Research Center (PARC), established in 1970, became known around the world for innovation—many of the most revolutionary technologies in the computer industry, including the personal computer, graph- ical user interface, Ethernet, and laser printer, were invented at PARC. But the copier bureaucracy, or Burox as it came to be known, blinded Xerox lead- ers to the enormous potential of these innovations. While Xerox was plodding along selling copy machines, younger, smaller, and hungrier companies were developing PARC technologies into tremendous money-making products and services.

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

EnTErIng THE DIgITAl AgE

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

Desktop printing, combined with the increasing use of the Internet and e-mail, cut heavily into Xerox’s sales of copiers. People didn’t need to make as many photocopies, but they still needed effective ways to create and share docu- ments. Rebranding Xerox as “The Document Company,” Allaire pushed into the digital era, hoping to remake Xerox in the image of the rejuvenated IBM, offer- ing not just “boxes (machines)” but complete document management solutions.

As part of that strategy, Allaire picked Richard Thoman, who was then serving as Louis Gerstner’s right-hand man at IBM, as his successor.

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Chapter 1: Organizations and Organization Theory 5

Thoman came to Xerox as president, chief operating officer, and eventually CEO, amid high hopes that the company could regain the stature of its glory years. Only 13 months later, as revenues and the stock price continued to slide, he was fired by Allaire, who had remained as Xerox’s chairman.

A DysFunCTIOnAl CulTurE

Allaire and Thoman blamed each other for the failure to successfully imple- ment the digital strategy. Outsiders, however, believe the failure had much more to do with Xerox’s dysfunctional culture. The culture was already slow to adapt, and some say that under Allaire it became almost totally paralyzed by politics. Thoman was brought in to shake things up, but when he tried, the old guard rebelled. A management struggle developed, with the outsider Thoman and a few allies on one side lined up against Allaire and his group of insiders who were accustomed to doing things the Xeroid way. Recognized for his knowledge, business experience, and intensity, Thoman was also consid- ered to be somewhat haughty and unapproachable. He was never able to exert substantial influence with key managers and employees or to gain the support of board members, who continued to rally behind Allaire.

The failed CEO succession illustrates the massive challenge of reinventing a century-old company. By the time Thoman arrived, Xerox had been going through various rounds of restructuring, cost cutting, rejuvenating, and rein- venting for nearly two decades, but little had really changed. Some observ- ers doubted that anyone could fix Xerox because the culture had become too dysfunctional and politicized. “There was always an in-crowd and an out- crowd,” says one former executive. “They change the branches, but when you look closely, the same old monkeys are sitting in the trees.”

An InsIDEr sHAkEs THIngs uP

In August 2001, Allaire turned over the CEO reins to Anne Mulcahy, a popu- lar 24-year veteran, who had started at Xerox as a copier saleswoman and worked her way up the hierarchy. Despite her insider status, Mulcahy proved that she was more than willing to challenge the status quo. She surprised skep- tical analysts, stockholders, and employees by engineering one of the most extraordinary business turnarounds in recent history.

How did she do it? Few people thought Mulcahy would take the tough actions Xerox needed to survive, but she turned out to be a strong decision maker. She quickly launched a turnaround plan that included massive cost cutting and the closing of several money-losing operations, including the divi- sion she had previously headed. She was brutally honest about “the good, the bad, and the ugly” of the company’s situation, as one employee put it, but she also showed that she cared about what happened to employees and she gave them hope for a better future. People knew she was working hard to save the company. After major layoffs, Mulcahy walked the halls to tell people she was sorry and let them vent their anger. She personally negotiated the settlement of a long investigation into fraudulent accounting practices, insisting that her personal involvement was necessary to signal a new commitment to ethical business practices. She appealed directly to creditors, begging them not to pull the plug until a new management team could make needed changes.

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6 Part 1: Introduction to Organizations

Welcome to the real world of organization theory and design. The shifting fortunes of Xerox illustrate organization theory in action. Xerox managers were deeply involved in organization theory and design each day of their working lives—but many never real- ized it. Company managers didn’t fully understand how the organization related to the environment or how it should function internally. Organization theory concepts have enabled Anne Mulcahy and Ursula Burns to analyze and diagnose what is happening

Mulcahy transferred much of production to outside contractors and refo- cused Xerox on innovation and service. In addition to introducing new prod- ucts, Xerox moved into high-growth areas such as document management services, IT consulting, and digital press technology. A series of small acquisi- tions enabled the company to enter new markets and expand its base of small and medium-sized business customers.

A nEW ErA AT xErOx

Mulcahy also thought carefully about succession plans, and in 2009 she handed the top job to her second-in-command, Ursula Burns, who became the first African-American woman to head a Fortune 500 company. Burns, like Mulcahy, spent decades climbing the ranks at Xerox, actually starting her career there as an intern before earning a master’s degree in engineering from Columbia University. Within days of being named CEO, Burns was on a plane, taking a 30-day tour to meet with staff and discuss ways to increase sales. Just weeks after she took over, she announced the biggest acquisition in the company’s history—the buyout of outsourcing firm Affiliated Computer Services. As a result of the acquisition, Xerox boosted its services revenue from 23 percent to 50 percent within a year. This signaled the beginning of Burns’s new course focused on becoming a state-of-the-art technology resource that other businesses rely on to operate more efficiently. In addition to offering hardware, Xerox now provides everything from mobile printing to cloud ser- vices to business process outsourcing. Burns is emphasizing collaboration with other organizations, such as Cisco Systems, which partners with the company to provide managed print tools, mobile printing, and cloud IT outsourcing services. She has also formed numerous partnerships with smaller organiza- tions, in the United States and abroad, to offer both products and services.

Xerox has won accolades for its leaders’ commitment to ethical and socially responsible behavior. It has been recognized as one of the World’s Most Ethi- cal Companies by the Ethisphere Institute; voted the World’s Most Admired Company in the computer industry in Fortune magazine’s survey; named one of the 100 Best Corporate Citizens by Corporate Responsibility Officer magazine; and ranked Number 1 in the Green Outsourcing Survey list. In addition, Xerox is recognized for its commitment to diversity and is considered one of the best places to work for women and minorities.

A decade or so after this American icon almost crashed, Xerox is once again admired in the corporate world. Has the “perfect storm” of troubles been re- placed with a “perfect dawn?” Burns and her top management team believe Xe- rox is positioned to be resilient in the face of the current economic slowdown, but in the rapidly changing world of organizations, nothing is ever certain.1

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Chapter 1: Organizations and Organization Theory 7

and the changes needed to help Xerox keep pace with a fast-changing world. Organiza- tion theory gives us the tools to explain the decline of Xerox, understand Mulcahy’s turnaround, and recognize some steps Burns can take to keep Xerox competitive.

Similar problems have challenged numerous organizations. American Airlines, for example, was once the largest airline in the United States, but managers have been struggling for the past decade to find the right formula to keep the once-proud company competitive. American’s parent company, AMR Corporation, accumu- lated $11.6 billion in losses from 2001 to 2011 and hasn’t had a profitable year since 2007.2 Or consider the dramatic organizational missteps illustrated by the 2008 crises in the mortgage industry and finance sector in the United States. Bear Stearns disappeared and Lehman Brothers filed for bankruptcy. American Inter- national Group (AIG) sought a bailout from the U.S. government. Another icon, Merrill Lynch, was saved by becoming part of Bank of America, which had already snapped up struggling mortgage lender Countrywide Financial Corporation.3 The 2008 crisis in the U.S. financial sector represented change and uncertainty on an unprecedented scale, and it would, to some extent, affect managers in all types of organizations and industries around the world for years to come.

Organization Theory in Action Organization theory and design gives us the tools to evaluate and understand how a huge, powerful firm like Lehman Brothers can die and a company like Bank of Amer- ica can emerge almost overnight as a giant in the industry. It enables us to comprehend how a band like the Rolling Stones, which operates like a highly sophisticated global business organization, can enjoy phenomenal success for nearly half a century, while some musical groups with equal or superior talent don’t survive past a couple of hit songs. Organization theory helps us explain what happened in the past, as well as what may happen in the future, so that we can manage organizations more effectively.

Topics

Each of the topics to be covered in this book is illustrated in the Xerox case. I ndeed, managers at organizations such as Xerox, Lehman Brothers, American Airlines, and even the Rolling Stones are continually faced with a number of challenges. For example:

• How can the organization adapt to or control such external elements as com- petitors, customers, government, and creditors in a fast-paced environment?

• What strategic and structural changes are needed to help the organization attain effectiveness?

• How can the organization avoid management ethical lapses that could threaten its viability?

• How can managers cope with the problems of large size and bureaucracy? • What is the appropriate use of power and politics among managers? • How should internal conflict and coordination between work units be managed? • What kind of corporate culture is needed and how can managers shape that

culture? • How much and what type of innovation and change is needed?

These are the topics with which organization theory and design is concerned. Organization theory concepts apply to all types of organizations in all industries.

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8 Part 1: Introduction to Organizations

Managers at Hyundai, for example, turned the Korean auto manufacturer once known for producing inexpensive no-frills cars with a poor reputation into the world’s fifth largest automaker by relentlessly focusing on quality, cost-control, and customer satisfaction. Bob Iger and his top management team revitalized the Walt Disney Company by effectively managing internal conflicts and enhancing coordi- nation both within the company and with outside partners. Managers at high-end cosmetics firm Estée Lauder undertook a major reorganization to improve sales in a weak economy.4 All of these companies are using concepts based in organization theory and design. Organization theory also applies to nonprofit organizations such as the United Way, the American Humane Association, local arts organizations, col- leges and universities, and the Make-A-Wish Foundation, which grants wishes to ter- minally ill children.

Organization theory and design draws lessons from organizations such as Xerox, Walt Disney Company, and United Way and makes those lessons available to students and managers. As our opening example of Xerox shows, even large, successful organizations are vulnerable, lessons are not learned automatically, and organizations are only as strong as their decision makers. Organizations are not static; they continuously adapt to shifts in the external environment. Today, many companies are facing the need to transform themselves into dramatically different organizations because of new challenges in the environment.

Current Challenges

Research into hundreds of organizations provides the knowledge base to make Xerox and other organizations more effective. Challenges facing organizations today are different from those of the past, and thus the concept of organizations and organization design is evolving. The world is changing more rapidly than ever before, and managers are responsible for positioning their organizations to adapt to new needs. Some specific challenges today’s managers and organizations face are globalization, intense competition, rigorous ethical scrutiny, the need for rapid response, adapting to a digital world, and embracing diversity.

globalization. The cliché that the world is getting smaller is dramatically true for today’s organizations. With rapid advances in technology and communications, the time it takes to exert influence around the world from even the most remote lo- cations has been reduced from years to only seconds. Markets, technologies, and organizations are becoming increasingly interconnected.5 Today’s successful organi- zations feel “at home” anywhere in the world. Companies can locate different parts of the organization wherever it makes the most business sense: top leadership in one country, technical brainpower and production in other locales.

Related trends are global outsourcing, or contracting out some functions to organizations in other countries, and strategic partnering with foreign firms to gain a global advantage. Cross-border acquisitions and the development of effective business relationships in other countries are vital to many organizations’ success. Large multinational corporations are actively searching for managers with strong international experience and the ability to move easily between cultures. A poll by the Association of Executive Search Consultants found China, India, and Brazil to be the top three countries in which companies want star talent, reflecting these or- ganizations’ increasing investment in those regions.6

As an organization manager, keep these guidelines in mind: Do not ignore the external environment or protect the organiza tion from it. Because the environ- ment is unpredict- able, do not expect to achieve complete order and rationality within the organiza- tion. Strive for a bal- ance between order and flexibility.

BRIefCAse

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