P ART TH R EE
ORGANIZING: BUILDING A DYNAMIC ORGANIZATION
chapter
8
“
Organization Structure
Take my assets—but leave me my organization and in five years I’ll have it all back.
”
— Alfred P. Sloan Jr.
LEARNING OBJECTIVES
CHAPTER OUTLINE
After studying Chapter 8, you will be
able to:
Fundamentals of Organizing
Differentiation
Integration
LO 1
Explain how differentiation
and integration influence an
organization’s structure. p. 276
LO 2
Summarize how authority operates.
p. 278
LO 3
Define the roles of the board of
directors and the chief executive
officer. p. 279
LO 4
Discuss how span of control
affects structure and managerial
effectiveness. p. 282
LO 5
Explain how to delegate effectively.
p. 284
LO 6
Distinguish between centralized and
decentralized organizations. p. 285
LO 7
Summarize ways organizations can
be structured. p. 287
LO 8
Identify the unique challenges of the
matrix organization. p. 292
LO 9
Describe important integrative
mechanisms. p. 296
The Vertical Structure
Authority in Organizations
Hierarchical Levels
Span of Control
Delegation
Decentralization
The Horizontal Structure
The Functional Organization
The Divisional Organization
The Matrix Organization
The Network Organization
Organizational Integration
Coordination by Standardization
Coordination by Plan
Coordination by Mutual Adjustment
Coordination and Communication
Looking Ahead
Management Close-Up
CAN NANCY SNYDER’S BRIGHT IDEA SECURE WHIRLPOOL’S FORTUNES?
For decades, the name Whirlpool has been synonymous
production floor all the way to executives in the corner
with top-quality, high-performing appliances: refrigeraoffices. His invitation: send me your thoughts for what
tors, dishwashers, freezers, ranges, washers and dryers,
could be new Whirlpool moneymakers.
and more. Founded in 1911, Whirlpool Corporation
Whitwam named Whirlpool employee Nancy R.
rose to become the world’s largest manufacturer
Snyder Chief Innovation Officer. With the promotion
of home appliances, with annual sales of more than
came the directive to figure out how to make Whirl$10 billion. By the late 1990s,
pool the leader in innovation,
however, Whirlpool’s growth
as well as the market leader
A well-known company with a solid repwith those big-ticket items had
in
appliances.
Whirlpool
utation, Whirlpool needed to find a way
ground to a halt. The compaemployees around the globe
to break out of its doldrums and begin
ny’s profits were falling, and its
responded to Whitwam’s mesgrowing again. As you read this chapter,
share price hit an all-time low.
sage, and Snyder received over
consider how Nancy Snyder adapted
Whirlpool leaders sought
a thousand ideas—some of
Whirlpool’s organizational structure to
to stop the bleeding by cutting
them interesting, others fanfind the solution to the problem.
costs and laying off 10 percent
ciful. To manage the deluge,
of the company’s 60,000she mobilized a team of 75
member workforce. At the
employees at all levels across
same time, however, they knew Whirlpool couldn’t
the company to evaluate the new ideas and brainstorm
trim its way to prosperity.
others. Although this group did generate one successThat was when CEO David R. Whitwam had a revful idea—the Gladiator line of cabinets and appliances
olutionary notion. At the time, Whirlpool was orgafor garages—the 75-person team was too cumbernized traditionally in terms of product development—it
some. Furthermore, Whirlpool’s middle managers
was the responsibility of the marketing and engineergrew annoyed with their employees spending time puring departments. But Whitwam decided to cast his
suing creative projects, many with little or no potennet wider for new-product ideas. He sent a message
tial for marketability, instead of focusing on the work
to every Whirlpool employee—from laborers on the
at hand.1
{
}
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Many of us know about Whirlpool and would think of it as enormously successful. Yet, a few years ago, growth at the company had slowed. Profits were falling,
and the Whirlpool brands were perceived as “status quo.” How could the company
respond to this situation? The way in which a company organizes itself to address
an issue such as declining profits may
well be the most important factor in
determining whether its strategy will
succeed. Whirlpool, like many other
companies, is working hard to make
certain that its strategy and structure
are aligned.
This chapter focuses on the vertical
and horizontal dimensions of organization structure. We begin by covering
basic principles of differentiation and
integration. Next, we discuss the vertical structure, which includes issues
of authority, hierarchy, delegation,
and decentralization. We continue on
to describe the horizontal structure,
which includes functional, divisional,
and matrix forms. Finally, we illustrate
the ways in which organizations can
integrate their structures: coordinaWhirlpool’s profits were falling, growth at the company was slowing down, and their products
tion by standardization, coordination
were perceived as being “status quo.” How can the company respond to this situation?
Whirlpool Corporation and Chinese electronics company Hisense have recently formed a joint
by plan, and coordination by mutual
venture. The 50-50 joint venture was formed for the delivery of new world-class and innovative
adjustment.
appliances to consumers in the U.S. and China. The companies will share research, technology,
In the next chapter, we continue
and procurement and development resources to produce state-of-the art refrigerators and
washing machines to a worldwide market.
with the topic of organization structure but take a different perspective.
In that chapter we focus on the flexibility and responsiveness of an organization, that
is, how capable it is of changing its form and adapting to strategy, technology, the
environment, and other challenges it confronts.
Fundamentals of Organizing
LO 1
organization chart
The reporting structure
and division of labor in an
organization.
To get going, let’s start simple. We often begin to describe a firm’s structure by looking at its organization chart. The organization chart depicts the positions in the firm
and the way they are arranged. The chart provides a picture of the reporting structure
(who reports to whom) and the various activities that are carried out by different individuals. Most companies have official organization charts drawn up to give people this
information.
Figure 8.1 shows the traditional organization chart. Note the various types of information that are conveyed in a very simple way:
1.
2.
3.
4.
The boxes represent different work.
The titles in the boxes show the work performed by each unit.
Reporting and authority relationships are indicated by solid lines showing
superior–subordinate connections.
Levels of management are indicated by the number of horizontal layers in the
chart. All persons or units that are at the same rank and report to the same
person are on one level.
Although the organization chart presents some important structural features, other
design issues related to structure—while not so obvious—are no less significant. Two
Organization Structure
Chapter 8
277
President
Finance
R&D
Marketing
Chemical
Products
Division
Personnel
Metal
Products
Division
Personnel
Finance
Personnel
Finance
Manufacturing
Sales
Manufacturing
Sales
fundamental concepts around which organizations are structured are differentiation
and integration. Differentiation means that the organization is composed of many
different units that work on different kinds of tasks, using different skills and work
methods. Integration means that these differentiated units are put back together so
that work is coordinated into an overall product.2
Differentiation
Several related concepts underlie the idea of structural differentiation. For example,
differentiation is created through division of labor and job specialization. Division
of labor means the work of the organization is subdivided into smaller tasks. Various
individuals and units throughout the organization perform different tasks. Specialization refers to the fact that different people or groups often perform specific parts
of the larger task. The two concepts are, of course, closely related. Administrative
assistants and accountants specialize in, and perform, different jobs; similarly, marketing, finance, and human resources tasks are divided among the respective departments. The many tasks that must be carried out in an organization make specialization
and division of labor necessities. Otherwise, the complexity of the overall work of the
organization would be too much for any individual.3
Differentiation is high when an organization has many subunits and many kinds of
specialists who think differently. Harvard professors Lawrence and Lorsch found that
organizations in complex, dynamic environments (plastics firms in their study) developed a high degree of differentiation to cope with the complex challenges. Companies
in simple, stable environments (container companies) had low levels of differentiation. Companies in intermediate environments (food companies) had intermediate
differentiation.4
FIGURE 8.1
A Conventional
Organization Chart
differentiation
An aspect of the
organization’s internal
environment created by job
specialization and the division
of labor.
integration
The degree to which
differentiated work
units work together and
coordinate their efforts.
division of labor
The assignment of different
tasks to different people or
groups.
specialization
A process in which different
individuals and units perform
different tasks.
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Integration
coordination
The procedures that
link the various parts of
an organization for the
purpose of achieving the
organization’s overall
mission.
As organizations differentiate their structures, managers must simultaneously consider
issues of integration. All the specialized tasks in an organization cannot be performed
completely independently. Because the different units are part of the larger organization, some degree of communication and cooperation must exist among them. Integration and its related concept, coordination, refer to the procedures that link the
various parts of the organization to achieve the organization’s overall mission.
Integration is achieved through structural mechanisms that enhance collaboration
and coordination. Any job activity that links different work units performs an integrative function. Remember, the more highly differentiated your firm, the greater
the need for integration among the different units. Lawrence and Lorsch found that
highly differentiated firms were successful if they also had high levels of integration.
Organizations are more likely to fail if they exist in complex environments and are
highly differentiated but fail to integrate their activities adequately.5 In contrast, focusing on integration may slow innovation, at least for a while. In a study tracking the
outcomes at information technology companies that acquired other firms, companies
with more structural integration were less likely to introduce new products soon after
the acquisition, but integration had less of an impact on product launches involving
more experienced target companies.6
These concepts permeate the rest of the chapter. First, we discuss vertical differentiation within organization structure. This concept includes issues pertaining to
authority within an organization, the board of directors, the chief executive officer,
and hierarchical levels, as well as issues pertaining to delegation and decentralization. Next, we turn to horizontal differentiation in an organization’s structure, exploring
issues of departmentalization that create functional, divisional, and matrix organizations. Finally, we cover issues pertaining to structural integration, including coordination, organizational roles, interdependence, and boundary spanning.
The Vertical Structure
LO 2
To understand issues such as reporting relationships, authority, responsibility, and the
like, we need to begin with the vertical dimension of a firm’s structure.
Authority in Organizations
At the most fundamental level, the functioning of every organization depends on the
use of authority, the legitimate right to make decisions and to tell other people what
to do. For example, a boss has the authority to give an order to a subordinate.
The legitimate right to make
Traditionally, authority resides in positions rather than in people. Thus, the job of
decisions and to tell other
vice
president of a particular division has authority over that division, regardless of
people what to do.
how many people come and go in that position and who currently holds it.
In private business enterprises, the owners have ultimate authority. In most small,
simply structured companies, the owner also acts as manager. Sometimes the owner
hires another person to manage the business and its employees. The owner gives this
manager some authority to oversee the operations, but the manager is accountable
to—that is, reports and defers to—the owner. Thus, the owner still has the ultimate
authority.
Formal position authority is generally the primary means of running an organization. An order that a boss gives to a lower-level employee is usually carried out. As this
occurs throughout the organization day after day, the organization can move forward
and achieve its goals.7 However,
authority in an organization is not
“Authority without wisdom is like a heavy axe without an edge, fitter to bruise than
always position-dependent. Peopolish.”
ple with particular expertise, expe—Anne Bradstreet
rience, or personal qualities may
authority
Organization Structure
Chapter 8
279
have considerable informal authority—scientists in research companies, for example,
or employees who are computer-savvy. Effective managers are aware of informal
authority as a factor that can help or hinder their achievement of the organization’s
goals; we will say more about informal authority in the next chapter. For now, we discuss the formal authority structure of the organization from the top down, beginning
with the board of directors.
Board of Directors In corporations, the owners are the stockholders. But LO
3
because there are numerous stockholders and these individuals generally lack timely
information, few are directly involved in managing the
organization. Stockholders elect a board of directors to
oversee the organization. The board, led by the chair,
makes major decisions affecting the organization, subject to corporate charter and bylaw provisions. Boards
perform at least three major sets of duties: (1) selecting,
assessing, rewarding, and perhaps replacing the CEO;
(2) determining the firm’s strategic direction and reviewing financial performance; and (3) ensuring ethical,
socially responsible, and legal conduct.8 In a move that
addresses both the board’s responsibility for CEO compensation and public concern that directors have become
too cozy with executives, the board of directors at Aflac
recently decided they would ask shareholders to vote on
the pay packages of the insurance company’s executives.
The votes serve an advisory purpose. Aflac’s directors
Large corporations have a
still decide on the pay packages, but they can see whether they are acting in accordance shareholder-elected board of
directors. Small-business leaders
with shareholders’ wishes.9
can benefit from the expertise of
The board’s membership usually includes some top executives—called inside direc- outside executives in the same
tors. Outside members of the board tend to be executives at other companies. The way by forming peer groups
trend in recent years has been toward reducing the number of insiders and increasing or attending monthly meetings
with business owners from
the number of outsiders. Today most companies have a majority of outside directors. noncompeting companies to trade
Boards made up of strong, independent outsiders are more likely to provide different advice.
information and perspectives and to preIn today’s large corporations, most boards of directors have between 9 and 13
vent big mistakes. Successful boards tend
directors. Boards are relying more on outside directors, including retired chief
to be those who are active, critical parexecutive and chief financial officers.11
ticipants in determining company strategies. Even so, in the wake of scandals
Percentage of directors
Percentage of boards where
and lawsuits, many boards have shifted
who are independent
CEO is only inside director
their focus to compliance issues, such
as audits, financial reporting, and laws
1998
1998
78%
23%
against discrimination. These issues are
critically important, but a board staffed
2008
2008
82%
44%
mainly with legal and regulatory experts
cannot always give management the nec20% 40% 60% 80% 100%
10% 20% 30% 40% 50%
essary direction on strategy.10
The owner and managers of a small
business may need the expertise of a
Percentage of new directors
with financial backgrounds
board of directors at least as much as a
large company does. To obtain some of
these benefits without the expense or
1998
6%
loss of day-to-day control, small-business
2008
leaders may seek advisers who will hold
18%
them accountable for their goals and
performance. Some owners set up a
5% 10% 15% 20%
board of advisers, such as owners of
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noncompeting companies, retired
executives, and perhaps their banker
or accountant. Others hire a business
consultant or coach, and they have
regular meetings at which they discuss
progress toward goals. Owners might
even take on a partner who has more
skills or experience in an area where
the owner is relatively weak. Business development coach Jack Tester
advocates such efforts based on his
own experience, which has taught him
that he works harder when he knows
someone is watching and will hold
him accountable.12
Two respected top executives,
Bill Gates (left) of Microsoft and
Brad Anderson (right) of Best Buy,
discuss the Xbox 360 at the grand
opening of the store in Bellevue,
Washington.
Chief Executive Officer The
authority officially vested in the board
of directors is assigned to a chief
executive officer (CEO), who occupies the top of the organizational pyramid. The
CEO is personally accountable to the board and to the owners for the organization’s
performance.
In some corporations, one person holds all three positions of CEO, chair of the
board of directors, and president.13 More commonly, however, one person holds two
of those positions, with the CEO serving also as either the chair of the board or the
president of the organization. When the CEO is president, the chair may be honorary
and may do little more than conduct meetings. In other cases, the chair may be the
CEO and the president is second in command.
In recent years the trend has been to separate the position of CEO and chairman of
the board. Sometimes this change is related to improved corporate governance; board
oversight is easier when the CEO is not quite as dominant a figure. In other cases, the
board has acted to reduce an unpopular CEO’s power or to help prepare for a successor to the CEO.
Top Management Team Increasingly, CEOs share their authority with other
key members of the top management team. Top management teams typically are composed of the CEO, president, chief operating officer, chief financial officer, and other
key executives. Rather than make critical decisions on their own, CEOs at companies
such as Shell, Honeywell, and Merck regularly meet with their top management teams
to make decisions as a unit.14
Hierarchical Levels
hierarchy
The authority levels of the
organizational pyramid.
corporate governance
The role of a corporation’s
executive staff and board
of directors in ensuring
that the firm’s activities
meet the goals of the firm’s
stakeholders.
In Chapter 1, we discussed the three broad levels of the organizational pyramid, commonly called the hierarchy. The CEO occupies the top position and is the senior
member of top management. The top managerial level also includes presidents and
vice presidents. They are the strategic managers in charge of the entire organization.
The key responsibilities at this top level include corporate governance—a term
describing the oversight of the firm by its executive staff and board of directors. In
recent years, as a result of corporate scandals and extremely generous executive-pay
packages, the public’s trust in corporate governance has eroded significantly. Some
firms, including Enron and WorldCom, went bankrupt as a result of executive or
board action or inaction, with enormous hardship to employees, pension holders,
and investors. As we mentioned in Chapter 5, Congress responded by passing the
Sarbanes-Oxley Act, which, along with requirements by the Securities and Exchange
Organization Structure
Commission, imposed much tighter corporate governance rules. For example, company CEOs and CFOs (chief financial officers) now have to personally certify the
accuracy of their firm’s financial statements. The “From the Pages of BusinessWeek”
feature describes how the Sarbanes-Oxley Act has made the role of directors more
challenging.
The second broad level of the organization is middle management. At this level,
managers are in charge of plants or departments. The lowest level is made up of lower
management and workers. It includes office managers, sales managers, supervisors,
and other first-line managers, as well as the employees who report directly to them.
This level is also called the operational level of the organization.
Board of Hard Knocks
A new era for directors dawned with the passage of the Sarbanes-Oxley Act of 2002.
Then board members were hit with the frightening prospect of real financial liability in a
smattering of lawsuits that followed the corporate crime wave. Now the heat on directors is growing more intense. Their reputations are increasingly at risk when the companies they watch over are tainted by scandal. Their judgment is being questioned by
activist shareholders outraged by sky-high pay packages. And investors and regulators are
subjecting their actions to higher scrutiny. Long gone are the days when a director could
get away with a quick rubber-stamp of a CEO’s plans.
The new dynamic has played out in recent board dramas involving Home Depot,
Hewlett-Packard, and Morgan Stanley, among others. If Home Depot’s directors had any
hope that the spotlight on them would fade in the wake of departure of ex-CEO Robert
L. Nardelli on January 3, 2007, they now know better. Unhappy investors are continuing to agitate for new blood in the company’s boardroom. “The culpability is not on the
CEO for asking [for high pay] but the directors” for approving it, says Richard Ferlauto,
director of pensions and benefits policy for the American Federation of State, County &
Municipal Employees, one of the more vocal investment funds putting pressure on Home
Depot’s Board. “Compensation is a symptom. It flags for us a board that is unwilling to
challenge a CEO.”
And that just won’t do. The old rules of civility that discouraged directors from asking
managers tough or embarrassing questions are eroding. At the same time, board members are being forced to devote more time and energy to many of their most important
duties: setting CEO compensation, overseeing the auditing of financial statements, and,
when needed, investigating crises. That’s the good news. The bad news is they are so busy
delving into the minutiae of compliance that they don’t have nearly as much time to advise
corporate chieftains on strategy.
The hottest issue for boards is shaping up to be executive compensation. For the
first time ever, companies are required to disclose a complete tally of everything they
have promised to pay their executives, including such until now hidden or difficult-to-find
items as severance, deferred pay, accumulated pension benefits, and perks worth more
than $10,000. They will also have to provide an explanation of how and why they’ve
chosen to pay executives as they do. The numbers are likely to be eye-popping. Michael
S. Melbinger, a top compensation lawyer in Chicago, thinks that when all the proxies are
filed, there could be 50 companies or more with CEO pay packages worth $150 million
or more.
And this is, believe it or not, coming as just as big a surprise to many directors as it
will be to investors. Up to now, most directors have never seen a tally for the total pay
they’ve promised to executives. “Pay was all compartmentalized: Boards would approve a
salary, a certain amount for a bonus, or a certain amount if he got fired, but no one ever
added it all up,” says Fred Whittlesey, the head of Compensation Venture Group.
Boards are digging deep into compensation consultant reports and questioning the
logic of these packages—and even sometimes, in awkward meetings, asking CEOs and
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281
A structure with fewer
horizontal layers saves
time and money.
F R O M T H E PAG ES O F
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other highly paid officers for givebacks. Melbinger tells of a meeting several months
ago in which he sat down with a board and the CEO and outlined his perks. The
CEO had a provision in his contract that not only required the company to reimburse him for his medical coverage, deductibles, and co-pays, but also had to give
him a “tax gross-up” for the payments. One of the stunned board members said,
“Now, let me get this straight—not only do you not have to pay the amounts for
your medical coverage that every other employee of this company has to pay, we
pay your taxes on it, too?” The CEO turned bright red, recognizing how bad that
was going to look on the disclosure forms. He quickly agreed to give up the perk.
It’s not just compensation committee members who find the world changing.
Audit committees used to meet only twice a year: once when it was time to take
the audit in and once more to ratify it. Dick Swanson, chair of the audit committees of two companies, says he now holds 8 to 12 meetings a year for each
committee.
Some argue that as a result of the heightened pressure, boards are getting better.
“One of the reasons bad stuff went on so much in the past,” says Warren L. Batts,
former chairman and CEO of Tupperware Brands Corporation and now a director
of Methode Electronics, “was the board wasn’t organized to deal with them.”
SOURCE: Excerpted from Nanette Byrnes and Jane Sasseen, “Board of Hard Knocks,” BusinessWeek,
January 22, 2007, downloaded from Business & Company Resource Center, http://galenet.galegroup.com.
An authority structure is the glue that holds these levels together. Generally, but
not always, people at higher levels have the authority to make decisions and tell lowerlevel people what to do. For example, middle managers can give orders to first-line
supervisors; first-line supervisors, in turn, direct operative-level workers.
A powerful trend for U.S. businesses over the past few decades has been to reduce
the number of hierarchical layers. General Electric used to have 29 levels; today it has
only a handful of layers and its hierarchical structure is basically flat. Most executives
today believe that fewer layers create a more efficient, fast-acting, and cost-effective
organization. This also holds true for the subunits of major corporations. A study of
234 branches of a financial services company found that branches with fewer layers
tended to have higher operating efficiency than did branches with more layers.15
This trend and research might seem to suggest that hierarchy is a bad thing, but
entrepreneur Joel Spolsky learned that a completely flat structure is not necessarily
ideal. When Spolsky and Michael Pryor started Fog Creek Software, they decided
they would empower employees by having everyone report to the two owners. The
system worked fine for a few years until Fog Creek grew to 17 full-time employees. At
that size, the company was no longer one small happy family; employees had concerns
and were finding it difficult to approach the partners and set up three-way meetings
with them. So Spolsky and Pryor tapped two of the employees to serve as leaders
of programming teams. Employees found it easier to talk to their team leader, and
Spolsky concludes that this layer of “middle management” is helping his company run
more smoothly.16
subunits
Subdivisions of an
organization.
LO 4
span of control
The number of subordinates
who report directly to an
executive or supervisor.
Span of Control
The number of people under a manager is an important feature of an organization’s
structure. The number of subordinates who report directly to an executive or supervisor is called the span of control. The implications of differences in the span of
control for the shape of an organization are straightforward. Holding size constant,
narrow spans build a tall organization that has many reporting levels. Wide spans
create a flat organization with fewer reporting levels. The span of control can be too
narrow or too wide. The optimal span of control maximizes effectiveness because it is
Organization Structure
Chapter 8
283
(1) narrow enough to permit managers to maintain control over subordinates but
(2) not so narrow that it leads to overcontrol and an excessive number of managers
who oversee a small number of subordinates.
What is the optimal number of subordinates? Five, according to Napoleon
Bonaparte.17 Some managers today still consider five a good number. At one Japanese
bank, in contrast, several hundred branch managers report to the same boss.
Actually, the optimal span of control depends on a number of factors. The span
should be wider when (1) the work is clearly defined and unambiguous, (2) subordinates are highly trained and have access to information, (3) the manager is highly
capable and supportive, (4) jobs are similar and performance measures are comparable, and (5) subordinates prefer autonomy to close supervisory control. If the opposite
conditions exist, a narrow span of control may be more appropriate.18
Delegation
As we look at organizations and recognize that authority is spread out over various
levels and spans of control, the issue of delegation becomes paramount. Delegation
is the assignment of authority and responsibility to a subordinate at a lower level. It
often requires that the subordinate report back to his or her boss about how effectively
the assignment was carried out. Delegation is perhaps the most fundamental feature
of management, because it entails getting work done through others. Thus, delegation is important at all hierarchical levels. The process can occur between any two
individuals in any type of structure with regard to any task.
Some managers are comfortable fully delegating an assignment to subordinates;
others are not. Consider the differences between these two office managers and the
ways they gave out the same assignment in the following example. Are both of these
examples of delegation?
delegation
The assignment of new or
additional responsibilities to
a subordinate.
Manager A: “Call Tom Burton at Nittany Office Equipment. Ask him to give you the
price list on an upgrade for our personal computers. I want to move up to a Core 2 Duo
processor with 4 gigs of RAM and at least a 500-gigabyte hard drive. Ask them to give you
a demonstration of the Vista operating system and Microsoft Office Communication Services (OCS). I want to be able to establish collaboration capability for the entire group.
Invite Cochran and Snow to the demonstration, and let them try it out. Have them write
up a summary of their needs and the potential applications they see for the new systems.
Then prepare me a report with the costs and specifications of the upgrade for the entire
department. Oh, yes, be sure to ask for information on service costs.”
Manager B: “I’d like to do something about our personal computer system. I’ve been
getting some complaints that the current systems are too slow, can’t run current software, and don’t allow for networking. Could you evaluate our options and give me a
recommendation on what we should do? Our budget is around $2,500 per person, but
I’d like to stay under that if we can. Feel free to talk to some of the managers to get their
input, but we need to have this done as soon as possible.”
Responsibility, Authority, and Accountability When delegating work, it is
helpful to keep in mind the important distinctions among the concepts of authority,
responsibility, and accountability. Responsibility means that a person is assigned a
task that he or she is supposed to carry out. When delegating work responsibilities,
the manager also should delegate to the subordinate enough authority to get the job
done. Authority, recall, means that the person has the power and the right to make
decisions, give orders, draw on resources, and do whatever else is necessary to fulfill
the responsibility. Ironically, it is quite common for people to have more responsibility than authority; they must perform as well as they can through informal influence
responsibility
The assignment of a task that
an employee is supposed to
carry out.
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accountability
The expectation that
employees will perform a
job, take corrective action
when necessary, and report
upward on the status and
quality of their performance.
LO 5
Effective delegation
raises the quality of
subordinates and the
service they provide
to customers or
coworkers.
Organizing: Building a Dynamic Organization
tactics instead of relying purely on authority. More will be said about informal power
and how to use it in Chapter 12.
As the manager delegates responsibilities, subordinates are held accountable for
achieving results. Accountability means that the subordinate’s manager has the right
to expect the subordinate to perform the job, and the right to take corrective action if
the subordinate fails to do so. The subordinate must report upward on the status and
quality of his or her performance of the task.
However, the ultimate responsibility—accountability to higher-ups—lies with the
manager doing the delegating. Managers remain responsible and accountable not only
for their own actions but also for the actions of their subordinates. Managers should
not resort to delegation to others as a means of escaping their own responsibilities.
In many cases, however, managers refuse to accept responsibility for subordinates’
actions. Managers often “pass the buck” or take other evasive action to ensure they are
not held accountable for mistakes.19 Ideally, however, empowering employees to make
decisions or take action results in an increase in employee responsibility.
Advantages of Delegation Delegating work offers important advantages, particularly when it is done effectively. Effective delegation leverages the manager’s
energy and talent and those of his or her subordinates. It allows managers to accomplish much more than they would be able to do on their own. Conversely, lack of delegation, or ineffective delegation, sharply reduces what a manager can achieve. The
manager also saves one of his or her most valuable assets—time—by giving some of
his or her responsibility to somebody else. He or she is then free to devote energy to
important, higher-level activities such as planning, setting objectives, and monitoring
performance.
Another very important advantage of delegation is that it helps develop effective
subordinates. Look again at the different ways the two office managers gave out the
same assignment. The approach that is more likely to empower subordinates and help
them develop will be obvious to you. (You may also quickly conclude which of the two
managers you would prefer to work for.) Delegation essentially gives the subordinate
a more important job. The subordinate acquires an opportunity to develop new skills
and to demonstrate potential for additional responsibilities and perhaps promotion.
In essence, the subordinate receives a vital form of on-the-job training that could
pay off in the future. In addition, there is evidence that, at least for some employees,
delegation promotes a sense of being an important, contributing member of the organization, so these employees tend to feel a stronger commitment, perform their tasks
better, and engage in more innovation.20
Through delegation, the organization also receives payoffs. Allowing managers to
devote more time to important managerial functions while lower-level employees carry
However, imagine delegation taken to the extreme—allowing managers to institute takeovers of other companies. That’s exactly what Illinois Tool Works has done. ITW has
built a reputation on its ability to acquire smaller firms, quickly and efficiently. Now a conglomerate with 750 business units worldwide, ITW was originally a toolmaker. Its products still tend to be small and industrial—screws, auto parts, the plastic rings that hold
a six-pack of soda, and the like. But ITW makes much of its money by buying and selling
smaller firms. That’s where managers like John Stevens, a mechanical engineer, come in.
Stevens, and many others like him, are being trained in the art of acquisition. CEO
David Speer believes that employees like this are the perfect choice for the task because
they know and understand the business they are in. So ITW executives are now giving
two-day acquisition workshops for business-unit managers, then sending them out to buy.
“We weren’t necessarily banging on doors as we should have,” explains Speer. “It was a
question of getting people trained and re-energized.”21
Organization Structure
out assignments means that jobs are done more efficiently and cost
effectively. In addition, as subordinates develop and grow in their own
jobs, their ability to contribute to the organization increases as well.
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Define the goal succinctly
How Should Managers Delegate? To achieve the advantages
we have just discussed, delegation must be done properly. As Figure 8.2
shows, effective delegation proceeds through several steps.22
Select the person for the task
The first step in the delegation process, defining the goal, requires
the manager to have a clear understanding of the outcome he or she
wants. Then the manager should select a person who is capable of performing the task. Delegation is especially beneficial if you can identify
Solicit the subordinate’s views
an employee who would benefit from developing skills through the
about suggested approaches
experience of taking on the additional responsibility.
The person who gets the assignment should be given the authority,
time, and resources to carry out the task successfully. The required
resources usually involve people, money, and equipment, but often
Give the subordinate the authority,
they may also involve critical information that will put the assignment
time, and resources (people, money,
in context. (“Review every cost item carefully, because if we’re the low
equipment) to perform the assignment
bidder, we’ll get the account.”) Throughout the delegation process,
the manager and the subordinate must work together and communicate about the project. The manager should know the subordinate’s
Schedule checkpoints for
ideas at the beginning and inquire about progress or problems at perireviewing progress
odic meetings and review sessions. Thus, even though the subordinate
performs the assignment, the manager is available and aware of its
current status. These checkups also provide an important opportunity
to offer encouragement and praise.
Follow through by discussing
Some tasks, such as disciplining subordinates and conducting perprogress at appropriate intervals
formance reviews, should not be delegated. But when managers err,
it usually is because they delegated too little rather than too much.
The manager who wants to learn how to delegate more effectively
FIGURE 8.2
should remember this distinction: If you are not delegating, you are merely doing The Steps in Effective
things; but the more you delegate, the more you are truly building and managing an Delegation
organization.23
Decentralization
The delegation of responsibility and authority decentralizes decision making. In a centralized organization, important decisions usually are made at the top. In decentralized organizations, more decisions are made at lower levels. Ideally, decision making
occurs at the level of the people who are most directly affected and have the most intimate knowledge about the problem. This is particularly important when the business
environment is fast-changing and decisions must be made quickly and well. Balanced
against these criteria, centralization may be valuable when departments have different
priorities or conflicting goals, which need to be mediated by top management. For
example, when researchers modeled the search for new ideas in organizations, they
found that the worst performance occurred in decentralized organizations where the
search for new ideas was carried out at lower levels, because ideas were presented for
approval only if they benefited the particular department doing the search.24
Sometimes organizations change their degree of centralization, depending on the
particular challenges they face. Tougher times often cause senior managements to
take charge, whereas in times of rapid growth, decisions are pushed farther down the
chain of command. For example, in the 1980s Harley-Davidson was in great financial
difficulty and faced tough competition from Honda, Suzuki, and Yamaha. It needed
strong, centralized leadership that could react quickly and decisively to survive. But
once the crisis was past, this approach wasn’t as effective in gaining the commitment
LO 6
centralized
organization
An organization in which
high-level executives make
most decisions and pass
them down to lower levels
for implementation.
decentralized
organization
An organization in which
lower-level managers make
important decisions.
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and energy of employees, who were the ones building the products and the relationships with customers.
Harley-Davidson made the transition to a flatter, more
empowered organization that decentralizes decision making. Today, the traditional hierarchy at the company has
been replaced with collaborative leadership, based on the
assumption that all employees can make decisions and
take responsibility for meeting the organization’s goals.25
Most American executives today understand the advantages of pushing decision-making authority down to the
point of the action. The level that deals directly with
problems and opportunities has the most relevant information and can best foresee the consequences of decisions. Executives also see how the decentralized approach
allows people to take timelier action.26
The traditional hierarchy at
Harley-Davidson has been
replaced with collaborative
leadership, based on the
assumption that all employees
can make decisions and take
responsibility for meeting the
organization’s goals. Why would
this be an effective form of
decision making?
The bottom line
SPEED
Decentralization often speeds
decision making.
When times get tough, people tend to want to seize greater control over their situation, and if you’re a senior executive, a centralized structure often seems to be the safest
course. Nevertheless, executives at Johnson & Johnson have been sticking to decentralization, even during the recent severe recession.
Johnson & Johnson, best known for brands like Band-Aid bandages and Splenda artificial sweetener, operates 250 business units in 57 countries. Besides the famous consumer
brands, it also makes medical devices and pharmaceuticals—all products linked to health
care. With so many product lines in so many geographic areas, executives at the company’s New Jersey headquarters couldn’t possibly make all the right decisions. So within
the three broad divisions of consumer products, medical devices and diagnostics, and
pharmaceuticals, line managers are charged with running business units specializing in
particular products and regions.
Not only does this arrangement push decisions closer to the customers, but it also
helps J&J develop a huge pool of management talent. Managers can improve their skills
while serving a small market segment and take on additional responsibilities as they learn.
The company’s chief executive officer and chief financial officer both built careers at J&J
by working in various businesses to develop broad skills. Similarly, Sheri McCoy, who
leads the pharmaceuticals division, held various positions in devices and diagnostics. That
kind of experience is hard to get in a company that is smaller or more centralized, so J&J
is using its organizational structure as a source of competitive advantage.27
According to Raj Gupta, president of Environmental Systems Design (ESD), the
engineering design firm decentralized as a necessary response to growth. A traditional
“command and control” approach to management worked fine when the company
was starting out, but now with 240 engineering and design professionals designing
for diverse clients working on commercial, transportation, residential, manufacturing,
energy, and other projects, it would be impossible for a few people at the top to dictate solutions. In fact, it wouldn’t even be desirable, given the diverse expertise of its
employees. So instead of grouping staff into functional departments such as sustainable design or electrical work, ESD has a structure in which studios of professionals
serve particular clients, making decisions to meet their specialized needs.28
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The Horizontal Structure
Up to this point, we’ve talked primarily about vertical aspects of organization structure. Issues of authority, span of control, delegation, and decentralization are important because they give us an idea of how managers and employees relate to one another
at different levels. Yet, separating discussion of vertical differentiation from horizontal
differentiation is a bit artificial because the elements work simultaneously.
As the tasks of organizations become increasingly complex, the organization inevitably must be subdivided—that is, departmentalized—into smaller units or departments. One of the first places this can be seen is in the distinction between line
and staff departments. Line departments are those that have responsibility for the
principal activities of the firm. Line units deal directly with the organization’s primary goods or services; they make things, sell things, or provide customer service. At
General Motors, for example, line departments include product design, fabrication,
assembly, distribution, and the like. Line managers typically have much authority
and power in the organization. They have the ultimate responsibility for making
major operating decisions. They also are accountable for the bottom-line results of
their decisions.
Staff departments are those that provide specialized or professional skills that
support line departments. They include research, legal, accounting, public relations,
and human resources departments. Each of these specialized units often has its own
vice president, and some are vested with a great deal of authority, as when accounting
or finance groups approve and monitor budgetary activities.
In traditionally structured organizations, conflicts could arise between line and staff
departments. One reason was that career paths and success in many staff functions
have depended on being an expert in that particular functional area, while success in
line functions is based more on knowing the organization’s industry. Thus, while line
managers might be eager to pursue new products and customers, staff managers might
seem to stifle these ideas with a focus on requirements and procedures. Line managers might seem more willing to take risks for the sake of growth, while staff managers
seem more focused on protecting the company from risks. But in today’s organizations, staff units tend to be less focused on monitoring and controlling performance
and more interested in moving toward a new role focused on strategic support and
expert advice.29 For example, human resource managers have broadened their focus
from merely creating procedures that meet legal requirements to helping organizations plan for, recruit, develop, and keep the kinds of employees who will give the
organization a long-term competitive advantage. This type of strategic thinking not
only makes staff managers more valuable to their organizations but also can reduce
the conflict between line and staff departments.
As organizations divide work into different units, we can detect patterns in the way
departments are clustered and arranged. The three basic approaches to departmentalization are functional, divisional, and matrix. We will talk about each and highlight
some of their similarities and differences.
LO 7
line departments
Units that deal directly with
the organization’s primary
goods and services.
staff departments
Units that support line
departments.
departmentalization
Subdividing an organization
into smaller subunits.
The Functional Organization
In a functional organization, jobs (and departments) are specialized and grouped
according to business functions and the skills they require: production, marketing, human
resources, research and development, finance, accounting, and so forth. Figure 8.3
illustrates a basic functional organization chart.
Functional departmentalization is common in both large and small organizations.
Large companies may organize along several different functional groupings, including
groupings unique to their businesses. For example, Carmike Cinema, which operates
functional
organization
Departmentalization around
specialized activities such as
production, marketing, and
human resources.
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CEO
Purchasing
Manufacturing
Marketing
Finance
Information
Technology
Human
Resources
FIGURE 8.3
The Functional
Organization
more than 2,400 screens in 289 theaters in 37 states, has vice presidents of finance,
concessions, film, and entertainment and digital cinema, as well as a general manager
of theater operations.
The traditional functional approach to departmentalization has a number of potential advantages for an organization:30
The bottom line
1.
COST
When like functions are
grouped, savings often result.
2.
3.
4.
5.
6.
Economies of scale can be realized. When people with similar skills are grouped,
more efficient equipment can be purchased, and discounts for large purchases
can be used.
Monitoring of the environment is more effective. Each functional group is more
closely attuned to developments in its own field and therefore can adapt more
readily.
Performance standards are better maintained. People with similar training and
interests may develop a shared concern for performance in their jobs.
People have greater opportunity for specialized training and in-depth skill
development.
Technical specialists are relatively free of administrative work.
Decision making and lines of communication are simple and clearly understood.
The functional form does have disadvantages, however. People may care more
about their own function than about the company as a whole, and their attention to
functional tasks may make them lose focus on overall product quality and customer
satisfaction. Managers develop functional expertise but do not acquire knowledge of
the other areas of the business; they become specialists, but not generalists. Between
functions, conflicts arise, and communication and coordination fall off. In short, while
functional differentiation may exist, functional integration may not.
As a consequence, the functional structure may be most appropriate in rather simple, stable environments. If the organization becomes fragmented (or disintegrated),
it may have difficulty developing and bringing new products to market and responding quickly to customer demands and other changes. Particularly when companies
are growing and business environments are changing, organizations need to integrate
work areas more effectively so that they can be more flexible and responsive. Other
forms of departmentalization can be more flexible and responsive than the functional
structure.
One organization that has capitalized on the benefits of integrating functions is
pharmaceutical firm AstraZeneca. Developing and bringing a new drug to market is
a complex procedure, particularly for a company with global reach, so AstraZeneca
brought employees from different functions and regions together on product teams.
For example, when the company was working on approvals for its anticholesterol drug,
Crestor, it set up a global product team, with both technical research and commercial
heads to oversee the drug’s development and marketing. Communication among the
team members not only helped the drug through its clinical trials in various countries
but also allowed the marketers who would be responsible for disseminating information to physicians and patients learn about the drug early in its development.31
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Demands for total quality, customer service, innovation, and speed have made clear
the shortcomings of the functional form for some firms. Functional organizations
are highly differentiated and create barriers to coordination across functions. Crossfunctional coordination is essential for total quality, customer service, innovations,
and speed. The functional organization will not disappear, in part because functional
specialists will always be needed, but functional managers will make fewer decisions.
The more important units will be cross-functional teams that have integrative responsibilities for products, processes, or customers.32
The Divisional Organization
The discussion of a functional structure’s weaknesses leads us to the divisional organization. As organizations grow and become increasingly diversified, they find that
functional departments have difficulty managing a wide variety of products, customers,
and geographic regions. In this case, organizations may restructure to group all functions into a single division and duplicate each of the functions across all the divisions.
In the divisional organization chart in Figure 8.4, Division A has its own operations,
marketing, and finance department, Division B has its own operations, marketing, and
finance department, and so on. In this structure, separate divisions may act almost as
separate businesses or profit centers and work autonomously to accomplish the goals
of the entire enterprise. Table 8.1 presents examples of how the same tasks would be
organized under functional and divisional structures.
Organizations create a divisional structure in several ways. It can be created around
products, customers, or geographic regions. Each of these is described in the following sections.
divisional
organization
Departmentalization
that groups units around
products, customers, or
geographic regions.
Product Divisions In the product organization, all functions that contribute to a
given product are organized under one manager. In the product organization, managers in charge of functions for a particular product report to a product manager.
Johnson & Johnson is one example of this form. J&J has more than 250 independent
company divisions, many of which are responsible for particular product lines. For
example, its subsidiary Cordis Corporation has divisions that develop and sell products for treating vascular diseases, while McNeil-PPC’s products include Listerine
and Plax mouthwashes.
The product approach to departmentalization offers a number of advantages:33
1.
Information needs are managed more easily. Less information is required, because
people work closely on one product and need not worry about other products.
Functional Organization
Divisional Organization
TABLE 8.1
TAB
A central purchasing department.
Each division has its own purchasing unit.
Exam
Examples
of Functional and
Divisional Organization
Divis
Separate companywide marketing,
production, design, and engineering
departments.
Each product group has experts in
marketing, design, production, and
engineering.
A central-city health department.
The school district and the prison have
their own health units.
Plantwide inspection, maintenance,
and supply departments.
Production Team Y does its own
inspection, maintenance, and supply.
A university statistics department
teaches statistics for the entire
university.
Each department hires statisticians to
teach its own students.
SOURCE: George Strauss and Leonard R. Sayles, Strauss and Sayles’s Behavioral Strategies for Managers, © 1980, p. 221.
Reprinted by permission of Prentice Hall, Inc., Englewood Cliffs, New Jersey.
Marketing
The Divisional Organization
FIGURE 8.4
Operations
Division A
Operations
Finance
Marketing
Division B
Finance
Operations
Marketing
Division C
Finance
Operations
Marketing
Division D
Finance
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Organization Structure
2.
3.
4.
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People have a full-time commitment to a particular product line. They develop a
greater awareness of how their jobs fit into the broader scheme.
Task responsibilities are clear. When things go wrong in a functional organization,
functional managers can pass the buck (“That other department is messing up,
making it harder for us to do our jobs”). In a product structure, managers are
more independent and accountable because they usually have the resources they
need to perform their tasks. Also, the performances of different divisions can be
compared by contrasting their profits and other measures.
People receive broader training. General managers develop a wide variety of skills,
and they learn to be judged by results. Many top executives received crucial
early experience in product structures.
Because the product structure is more flexible than the functional structure, it is
best suited for unstable environments, when an ability to adapt rapidly to change is
important. But the product structure also has disadvantages. It is difficult to coordinate across product lines and divisions. And although managers learn to become
generalists, they may not acquire the depth of functional expertise that develops in the
functional structure.
Furthermore, functions are not centralized at headquarters, where they are done
for all product lines or divisions. Such duplication of effort is expensive. Also, decision making is decentralized in this structure, and so top management can lose some
control over decisions made in the divisions. Proper management of all the issues
surrounding decentralization and delegation, as discussed earlier, is essential for this
structure to be effective.34
Customer and Geographic Divisions Some companies build divisions around
groups of customers or around different geographic areas. Pfizer recently replaced
divisions based on location with three based on customer groups: primary care, specialty care, and emerging markets. The pharmaceutical company hopes that this structure will make the company more responsive to the needs of doctors and their patients
in each group.35 Similarly, a hospital may organize its services around child, adult,
psychiatric, and emergency cases. Bank loan departments commonly have separate
groups handling consumer and business needs.
In contrast to customers, divisions can be structured around geographic regions.
Sears, for example, was a pioneer in creating geographic divisions. Geographic distinctions include district, territory, region, and country. Macy’s Group, formerly Federated
Department Stores, has geographic divisions for its operations serving particular states
or regions of the United States: Macy’s East, Macy’s Florida, Macy’s Midwest, Macy’s
North, Macy’s Northwest, Macy’s South, and Macy’s West, as well as Macys.com for
online shoppers. Executives at Ford Motor Company include the CEO of Ford of
Europe, the CEO of Ford of Mexico, and the president of Ford Motor (China) Ltd.
The primary advantage of both the product and customer/regional approaches to
departmentalization is the ability to focus on customer needs and provide faster, better service. But again, duplication of activities across many customer groups and geographic areas is expensive.
Establishing customer divisions improved strategic decisions at Det Norske Veritas
(DNV), a Norwegian firm that provides services related to risk management. Initially, the
company’s management assumed that any collaboration across divisions would build sales
and profits, but the first effort flopped. Management tried combining the efforts of two
business units: its consulting group and a unit that inspects food companies’ production
chains. The idea was that the combined groups could help food companies reduce risks in
their supply chains. However, the group members were slow to share information about
customers, thought that time spent on the joint project undermined the work of their
Customer and geographic
divisions often serve
customers faster.
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own division (which was how their performance was measured), and engaged in conflicts
that caused project delays and cost overruns.
Disappointed with these early results, DNV’s executives evaluated their decision making and realized they were assembling a collaboration project without first prioritizing
the market opportunities, identifying the impact on each division’s profits, and rewarding
employees for collaborating. To improve future decisions, they restructured the company
into business units serving particular markets. With their market knowledge, each unit
then investigated where collaboration would make sense to serve its market’s needs.
Because the whole unit would benefit, it was now easier to tie rewards to collaboration.
One success came from the business unit serving the maritime industry. Managers determined that the information technology specialists in this unit could collaborate with the
risk management group to help shipping companies manage the risk of their computer
systems’ malfunctioning. This time, customers and employees were enthusiastic.36
LO 8
matrix organization
An organization composed of
dual reporting relationships
in which some managers
report to two superiors—a
functional manager and a
divisional manager.
The Matrix Organization
A matrix organization is a hybrid form of organization in which functional and divisional forms overlap. Managers and staff personnel report to two bosses—a functional
manager and a divisional manager. Thus, matrix organizations have a dual rather than
a single line of command. In Figure 8.5, for example, each project manager draws
employees from each functional area to form a group for the project. The employees
working on those projects report to the individual project manager as well as to the
manager of their functional area.
A good example of the matrix structure can be found at Time Inc., the top magazine publisher in the United States and United Kingdom. At major Time Inc. titles
such as Time, Sports Illustrated, and People, production managers who are responsible
for getting the magazines printed report both to the individual publishers and editors of each title and to a senior corporate executive in charge of production. At the
corporate level, Time Inc. achieves enormous economies of scale by buying paper and
printing in bulk and making sure production activities in the company as a whole are
FIGURE 8.5
CEO
Matrix Organizational
Structure
Production
Manager
Engineering
Manager
Personnel
Manager
Finance
Manager
Project
Manager A
Production
group
Two bosses
Engineering
group
Two bosses
Personnel
group
Two bosses
Accounting
group
Two bosses
Project
Manager B
Production
group
Two bosses
Engineering
group
Two bosses
Personnel
group
Two bosses
Accounting
group
Two bosses
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coordinated. At the same time, production managers working at each
title make sure the different needs and schedules of their individual
magazines are being met. Similar matrix arrangements are in place for
other key managers, such as circulation and finance. In this way, the
company attempts to gain the benefits of both the divisional and functional organization structure.
The matrix form originated in the aerospace industry, first with TRW
in 1959 and then with NASA. Applications now occur in hospitals and
health care agencies, entrepreneurial organizations, government laboratories, financial institutions, and multinational corporations.37 Other
companies that have used or currently use the matrix form include
IBM, Boeing, Xerox, Shell Oil, Texas Instruments, Bechtel, and Dow
Corning.
Pros and Cons of the Matrix Form Like other organization
structures, the matrix has both strengths and weaknesses. Table 8.2
summarizes the advantages of using a matrix structure. The major potential advantage
is a higher degree of flexibility and adaptability.
Table 8.3 summarizes the potential shortcomings of the matrix form. Many of the
disadvantages stem from the matrix’s inherent violation of the unity-of-command
principle, which states that a person should have only one boss. Reporting to two
superiors can create confusion and a difficult interpersonal situation, unless steps are
taken to prevent these problems from arising.
Organizations with highly
specialized staff, such as NASA
astronaut Susan J. Helms (left),
shown here with Russian
cosmonaut Yury V. Usachev in
the International Space Station,
typically use a matrix structure.
Matrix Survival Skills The value of collaboration is particularly pronounced in
unity-of-command
principle
a matrix organization. For example, in the kind of structure illustrated in Figure 8.5,
project group members may not be permanently assigned to the project manager.
They will return to their functional area once the project has been completed. For this
group to work effectively, the traditional command-and-control management style
A structure in which each
worker reports to one boss,
who in turn reports to one
boss.
• Decision making is decentralized to a level where information is processed
properly and relevant knowledge is applied.
• Extensive communications networks help process large amounts of information.
TABLE 8.2
TA
Advantages of the Matrix
Adv
Des
Design
• With decisions delegated to appropriate levels, higher management levels are not
overloaded with operational decisions.
• Resource utilization is efficient because key resources are shared across several
important programs or products at the same time.
• Employees learn the collaborative skills needed to function in an environment
characterized by frequent meetings and more informal interactions.
• Dual career ladders are elaborated as more career options become available on
both sides of the organization.
SOURCE: H. Kolodny, “Managing in a Matrix,” Business Horizons, March–April 1981, pp. 17–24.
• Confusion can arise because people do not have a single superior to whom they
feel primary responsibility.
• The design encourages managers who share subordinates to jockey for power.
• The mistaken belief can arise that matrix management is the same thing as group
decision making—in other words, everyone must be consulted for every decision.
• Too much democracy can lead to not enough action.
SOURCE: H. Kolodny, “Managing in a Matrix,” Business Horizons, March–April 1981, pp. 17–24.
TABLE 8.3
TAB
Disa
Disadvantages
of the Matrix
Design
Desi
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may not be the most appropriate; it might gain compliance from group members, but
not their full commitment, making it harder to achieve the project’s goals. Also, as the
matrix organization draws on members of functional groups to tap their expertise, it
is very important to get their full contribution. A collaborative process, in which the
manager and participants develop a shared sense of ownership for the work they are
doing, will generate better ideas, participation, and commitment to the project and its
outcomes.
To a large degree, problems can be avoided if the key managers in the matrix learn
the behavioral skills demanded in the matrix structure.38 These skills vary depending
on the job in the four-person diamond structure shown in Figure 8.6.
The top executive, who heads the matrix, must learn to balance power and emphasis
between the product and functional orientations. Product or division managers and functional managers must learn to collaborate and manage their conflicts constructively.
Finally, the two-boss managers or employees at the bottom of the diamond must learn
how to be responsible to two superiors. This means prioritizing multiple demands
and sometimes even reconciling conflicting orders. Some people function poorly
under this ambiguous, conflictual circumstance; sometimes this signals the end of
their careers with the company. Others learn to be proactive, communicate effectively
with both superiors, rise above the difficulties, and manage these work relationships
constructively.
The Matrix Form Today The popularity of the matrix form waned during the
late 1980s, when many companies had difficulty implementing it. But recently, it has
come back strong. Reasons for this resurgence include pressures to consolidate costs
and be faster to market, creating a need for better coordination across functions in the
business units, and a need for coordination across countries for firms with global business strategies. Many of the challenges created by the matrix are particularly acute in
an international context, mainly because of the distances involved and the differences
in local markets.39
The key to managing today’s matrix is not the formal structure itself but the realization that the matrix is a process. Managers who have appropriately adopted the
matrix structure because of the complexity of the challenges they confront, but have
had trouble implementing it, often find that they haven’t changed the employee and
managerial relationships within their organizations in ways that make the matrix
Top Executive
Needs to balance power
and emphasis between
functions and divisions
Product Manager
Must collaborate and
manage conflicts with
functional manager
FIGURE 8.6
The Matrix Diamond
Functional Manager
Must collaborate and
manage conflicts with
product/division manager
“Two-Boss” Manager/Employee
Must learn how to respond to
two superiors and prioritize
multiple demands
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effective. It is not enough to create a flexible organization merely by changing its
structure. To create an environment that allows information to flow freely throughout the organization, managers must also attend to the norms, values, and attitudes
that shape how people within their organizations behave.40 We will address these
issues in the next chapter and in Part Four of the book, which focuses on how to lead
and manage people.
The Network Organization
So far, the structures we have been discussing are variations of the traditional, hierarchical organization, within which all the business functions of the firm are performed.
In contrast, the network organization is a collection of independent, mostly singlefunction firms that collaborate to produce a good or service. As depicted in Figure 8.7,
the network organization describes not one organization but the web of relationships
among many firms. Network organizations are flexible arrangements among designers,
suppliers, producers, distributors, and customers where each firm is able to pursue its
own distinctive competence, yet work effectively with other members of the network.
Often members of the network communicate electronically and share information to
be able to respond quickly to customer demands. In effect, the normal boundary of the
organization becomes blurred or porous, as managers within the organization interact
closely with network members outside it. The network as a whole, then, can display
the technical specialization of the functional structure, the market responsiveness of
the product structure, and the balance and flexibility of the matrix.41
A very flexible version of the network organization is the dynamic network—also
called the modular or virtual corporation. It is composed of temporary arrangements
among members that can be assembled and reassembled to meet a changing competitive environment. The members of the network are held together by contracts that
stipulate results expected (market mechanisms) rather than by hierarchy and authority. Poorly performing firms can be removed and replaced.
Such arrangements are common in the electronics, toy, and apparel industries, each
of which creates and sells trendy products at a fast pace. Dynamic networks also are
suited to organizations in which much of the work can be done independently by
experts. For example, the more than 200 graphic designers affiliated with Logoworks
provide design services to small-business customers looking for professional work
without the overhead expense of an advertising agency. A popular Logoworks product
is a $399 set of logo design ideas from three designers; the client picks his or her
Designers
network organization
A collection of independent,
mostly single-function firms
that collaborate on a good or
service.
dynamic network
Temporary arrangements
among partners that can be
assembled and reassembled
to adapt to the environment.
Networks can
improve cost,
quality, service,
speed, and
innovation.
Producers
Brokers/
Managers
Suppliers
Distributors
SOURCE: From R. Miles and C. Snow, “Organizations: New Concepts for New Forms,” California Management Review, Spring
1986, p. 65. Copyright © 1986 by The Regents of the University of California. Reprinted from the California Management
Review, vol. 28, no. 3.
FIGURE 8.7
A Network Organization
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favorite, all the designers are paid a set fee, and the designer whose idea is chosen
earns a bonus. Logoworks conducts marketing online, hires some designers, and
negotiates freelance contracts with the rest.42
Successful networks potentially offer flexibility, innovation, quick responses to
threats and opportunities, and reduced costs and risk. But for these arrangements to
be successful, several things must occur:
The firm must choose the right specialty. It must be something (good or service)
that the market needs and which the firm is better at providing than other firms.
The firm must choose collaborators that also are excellent at what they do and
that provide complementary strengths.
The firm must make certain that all parties fully understand the strategic goals of
the partnership.
Each party must be able to trust all the others with strategic information and also
trust that each collaborator will deliver quality products even if the business
grows quickly and makes heavy demands.
broker
A person who assembles and
coordinates participants in a
network.
The role of managers shifts in a network from that of command and control to
more like that of a broker. Broker/managers serve several important boundary roles
that aid network integration and coordination:
Designer role. The broker serves as a network architect who envisions a set of
groups or firms whose collective expertise could be focused on a particular good
or service.
Process engineering role. The broker serves as a network co-operator who takes the
initiative to lay out the flow of resources and relationships and makes certain that
everyone shares the same goals, standards, payments, and the like.
Nurturing role. The broker serves as a network developer who nurtures and
enhances the network (like team building) to make certain the relationships are
healthy and mutually beneficial.43
Organizational Integration
LO 9
At the beginning of this chapter, we said organizations are structured around differentiation and integration. So far, our discussion has focused on differentiation—the way
the organization is composed of different jobs and tasks, and the way they fit on an
organization chart. But as organizations differentiate their structures, they also need
to be concerned about integration and coordination—the way all parts of the organization will work together. Often, the more differentiated the organization, the more
difficult integration may be. Because of specialization and the division of labor, different groups of managers and employees develop different orientations. Depending on
whether employees are in a functional department or a divisional group, are line or
staff, and so on, they will think and act in ways that are geared toward their particular
work units. In short, people working in separate functions, divisions, and business
units literally tend to forget about one another. When this happens, it is difficult for
managers to combine all their activities into an integrated whole.
A variety of approaches are available to managers to help them make certain that
interdependent units and individuals will work together to achieve a common purpose. In some situations, managers might see that employees need to work closely
together to achieve joint objectives, so they build mutual trust, train employees in
a common set of skills, and reward teamwork. In other situations, the organization
might rely more on individuals with unique talents and ideas, so they set up flexible
work arrangements and reward individual achievements to inspire the best from each
individual, while encouraging individual employees to share knowledge and develop
respect for one another’s contributions.44 In general, however, coordination methods
include standardization, plans, and mutual adjustment.45
Organization Structure
Chapter 8
297
Coordination by Standardization
When organizations coordinate activities by establishing
routines and standard operating procedures that remain
in place over time, we say that work has been standardized. Standardization constrains actions and integrates
various units by regulating what people do. People often
know how to act—and how to interact—because standard operating procedures spell out what they should do.
For example, managers may establish standards for which
types of computer equipment the organization will use.
This simplifies the purchasing and computer-training
process—everyone will be on a common platform—and
makes it easier for the different parts of the organization
to communicate with each other.
To improve coordination, organizations may also rely on formalization—the
presence of rules and regulations governing how people in the organization interact.
Simple, often written, policies regarding attendance, dress, and decorum, for example,
may help eliminate a good deal of uncertainty at work. But an important assumption
underlying both standardization and formalization is that the rules and procedures
should apply to most (if not all) situations. These approaches, therefore, are most
appropriate in situations that are relatively stable and unchanging. In some cases, when
the work environment requires flexibility, coordination by standardization may not be
very effective. Who hasn’t experienced a time when rules and procedures—frequently
associated with a slow bureaucracy—prevented timely action to address a problem? In
these instances, we often refer to rules and regulations as “red tape.”46 As you read the
“Management Close-Up: Taking Action” feature, consider how employees are likely
to view the new formal innovation procedures at Whirlpool.
Coordination by Plan
If laying out the exact rules and procedures by which work should be integrated is difficult, organizations may provide more latitude by establishing goals and schedules for
interdependent units. Coordination by plan does not require the same high degree
of stability and routinization required for coordination by standardization. Interdependent units are free to modify and adapt their actions as long as they meet the deadlines and targets required for working with others.
In writing this textbook, for example, we (the authors) sat down with a publication
team that included the editors, the marketing staff, the production group, and support staff. Together we ironed out a schedule for developing this book that covered
approximately a two-year period. That development plan included dates and “deliverables” that specified what was to be accomplished and forwarded to the others in the
organization. The plan allowed for a good deal of flexibility on each subunit’s part,
and the overall approach allowed us to work together effectively.
Banks are among the most
standardized of organizations, from
operating procedures through
dress codes, reinforcing to their
customers and employees that
the organization and their dealings
with it are stable and reliable.
standardization
Establishing common
routines and procedures that
apply uniformly to everyone.
formalization
The presence of rules and
regulations governing how
people in the organization
interact.
coordination by plan
Interdependent units are
required to meet deadlines
and objectives that
contribute to a common
goal.
Coordination by Mutual Adjustment
Ironically, the simplest and most flexible approach to coordination may just be to have
interdependent parties talk to one another. Coordination by mutual adjustment
involves feedback and discussions to jointly figure out how to approach problems and
devise solutions that are agreeable to everyone. The popularity of teams today is in
part due to the fact that they allow for flexible coordination; teams can operate under
the principle of mutual adjustment.
But the flexibility of mutual adjustment as a coordination device does not come
without some cost. Hashing out every issue takes time and may not be the most
coordination by
mutual adjustment
Units interact with
one another to make
accommodations to achieve
flexible coordination.
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Management Close-Up
TAKING ACTION
Although Whirlpool’s Nancy Snyder had to abandon her initial strategy of using a
75-person innovation team to vet product ideas and create new ones, she knew Whirlpool’s structure could support innovation. With a doctorate in organizational behavior, Snyder recognized that although creativity is an innate human behavior, people
needed training to build their skills. For that reason, she brought innovation training to
Whirlpool—coursework mandated for all salaried employees and tied to their bonuses.
She also established an intranet as a central place for communicating and monitoring
innovation, and she made the training materials available there to hourly workers.
The training equipped the selected employees to serve as “I-mentors,” who would
foster new ideas within their business units. They apply their learning not only to generate ideas for new products but also to solve business problems within the company. Once
the I-mentor format was in place, Snyder brought greater structure to the process. Top
managers now evaluate new proposals at monthly meetings. Projects that clear initial hurdles receive an executive sponsor to shepherd them through the next stages. Software
tools enable Whirlpool to track an idea’s progress through the pipeline and measure it on
several dimensions, even its intangible value. Managers receive concrete innovation goals,
and their performance is measured. Bonuses are at risk for managers who don’t hit their
innovation target.
Ideas that came out of the new process include a fast-fill water dispenser built into a
refrigerator’s door and a portable device called a Fabric Freshener, which uses steaming
and air-drying to remove wrinkles and odors from dry-clean-only garments.
After Whirlpool adopted the new system for innovation, the company’s performance
turned around. By 2006, the company could identify more than $2.5 billion in worldwide
revenues as stemming from brand innovation.47
• Does the idea-generation system that Nancy Snyder set up at Whirlpool resemble the
matrix organization structure? If so, how?
• Previously, new-product development at Whirlpool was centered only in its engineering and marketing departments, but CEO David Whitwam and Nancy Snyder modified
that practice. How does a change in the division of labor affect organization structure?
China may be the next hub of motorcycle manufacturing. That’s because the Chinese
motorcycle industry has figured out how to coordinate literally hundreds of different
suppliers in the design and manufacturing of motorcycles. Together, these small firms
collaborate by working from rough blueprints to design, construct, and assemble components that are related to each other, then deliver them to another plant for final assembly. Because design and assembly are decentralized, suppliers can move quickly to make
adjustments, try out new components, and make more changes if necessary before delivering a product for final assembly.
Using this approach, the Chinese motorcycle industry is now designing and building
new motorcycles faster and less expensively than any other country in the world. In fact,
the industry has been so successful that its production has quadrupled from 5 million
motorcycles a year to 20 million—which gives China about 50 percent of the worldwide
motorcycle market. Experts believe that this type of mass collaboration is the future of
most manufacturing, whether the product is simple or complex.48
Organization Structure
General
Strategies
Chapter 8
299
Specific
Techniques
Create slack
resources
Reduce the
need for
information
Create
self-contained
tasks
High
informationprocessing
demands
Invest in
information
systems
Process
more
information
Create
horizontal
relationships
FIGURE 8.8
Managing High InformationProcessing Demands
expedient approach for organizing work. Imagine how long it would take to accomplish even the most basic tasks if subunits had to talk through every situation. At the
same time, mutual adjustment can be very effective when problems are novel and cannot be programmed in advance with rules, procedures, or plans. Particularly during
crises, in which rules and procedures don’t apply, mutual adjustment is likely to be the
most effective approach to coordination.
Coordination and Communication
Today’s environments tend to be complex, dynamic, and therefore uncertain. Huge
amounts of information flow from the external environment to the organization and
back to the environment. To cope, organizations must acquire, process, and respond
to that information. Doing so has direct implications for how firms organize. To function effectively, organizations need to develop structures for processing information.
To cope with high uncertainty and heavy information demands, managers can use the two general strategies shown in Figure 8.8. First, management can act to
reduce the need for information. Second, it can increase
its capacity to handle more information.49
Option 1: Reducing the Need for Information
Managers can reduce the need for information in two
ways: (a) creating slack resources and (b) creating selfcontained tasks. Slack resources are simply extra resources
on which organizations can rely in a pinch so that if they
get caught off guard, they can still adjust. Inventory, for
example, is a type of slack resource that provides extra
stock on hand in case it is needed. With extra inventory, an organization does not have to have as much
information about sales demand, lead time, and the like.
Information sharing is vital at
the National Counterterrorism
Center, shown here. Technology
is used to enable the efficient and
safe sharing of this information.
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Employees also can be a type of slack resource. For example, many companies augment their full-time staffs with part-time and temporary employees. This way, they
do not have to perfectly forecast sales peaks but can rely on supplementary workers
to handle irregularities.
Like slack resources, creating self-contained tasks allows organizations to reduce the
need for some information. Creating self-contained tasks refers to changing from a
functional organization to a product or project organization and giving each unit the
resources it needs to perform its task. Information-processing problems are reduced
because each unit has its own full complement of specialties instead of functional specialties that have to share their expertise among a number of different product teams.
Communications then flow within each team rather than among a complex array of
interdependent groups.
Option 2: Increasing Information-Processing Capability Instead of reduc-
The bottom line
Innovation
Cross-unit coordination can
lead to effective problem
solutions.
ing the need for information, an organization may take the approach of increasing
its information-processing capability. It can invest in information systems, which usually means employing or expanding computer systems. But increasing an organization’s information-processing capability also means what we referred to in Chapter 1
as knowledge management—capitalizing on the intellect and experience of the organization’s human assets to increase collaboration and effectiveness. One way to do that is
by creating horizontal relationships between units to foster coordination. Such horizontal relationships are effective because they increase integration, which Lawrence
and Lorsch suggest is necessary for managing complex environments. As uncertainty
increases, the following horizontal processes may be used, ranging from the simplest
to the most complex:50
1.
Direct contact (mutual adjustment) among managers who share a problem. In a
university, for example, a residence hall adviser might call a meeting to resolve
differences between two feuding students who live in adjacent rooms.
2. Liaison roles, or specialized jobs to handle communications between two
departments. A fraternity representative is a liaison between the fraternity and
the interfraternity council, the university, or the local community.
3. Task forces, or groups of representatives from different departments, brought
together temporarily to solve a common problem. For example, students,
faculty, and administrators may be members of a task force charged with
bringing distinguished speakers to campus for a current-events seminar.
4. Teams, or permanent
interdepartmental decision“An organization’s ability to learn, and translate that learning into action rapidly, is
making groups. An
the ultimate competitive advantage.”
executive council made up
—Jack Welch
of department heads might
meet regularly to make
decisions affecting a college of engineering or liberal arts.
5. Product, program, or project managers who direct interdisciplinary groups with
a common task to perform. In a college of business administration, a faculty
administrator might head an executive education program of professors from
several disciplines.
6. Matrix organizations, composed of dual relationships in which some managers
report to two superiors. Your instructors, for example, may report to
department heads in their respective disciplines and also to a director of
undergraduate or graduate programs.
Several of these processes are discussed further in Chapter 14, where we examine
managing teams and intergroup relations.
Organization Structure
Chapter 8
301
Looking Ahead
The organization chart, differentiation, integration, authority, delegation, coordination, and the like convey fundamental information about an organization’s structure.
However, the information so far has provided only a snapshot. The real organization
is more like a motion picture—it moves! More flexible and innovative—even virtual—
forms of organizations are evolving. Today’s organizations are far removed, in many
of their fundamental characteristics, from the traditional forms they once had. They
may be more networked, flexible, and global, using the electronic sharing of information to move faster than 20th-century managers could have envisaged.
No organization is merely a set of static work relationships. Because organizations
are composed of people, they are hotbeds of social relationships. Networks of individuals cutting across departmental boundaries interact with one another. Various
friendship groups or cliques band together to form coalitions—members of the organization who jointly support a particular issue and try to ensure that their viewpoints
determine the outcome of policy decisions.
Thus, the formal organization structure does not describe everything about how
the company really works. Even if you know departments and authority relationships,
you still have much to understand. How do things really get done? Who influences
whom, and how? Which managers are the most powerful? How effective is the top
leadership? Which groups are most and which are least effective? What is the nature
of communication patterns throughout the organization? These issues are discussed
throughout the rest of the book.
Now you are familiar with the basic organizing concepts discussed in this chapter.
In the next chapter, we will discuss the current challenges of designing the modern
organization with which the modern executive constantly grapples.
Management Close-Up
ASSESSING OUTCOMES AND SEIZING
OPPORTUNITIES
Today, Whirlpool has more than 1,000 I-mentors worldwide.
They apply the knowledge from their innovation training not only
to develop marketable ideas but also to improve the company’s
processes and procedures continually. For example, Whirlpool’s
human resource systems, such as its hiring, training, and pay, now
reflect the new enterprisewide emphasis on idea development.
Whirlpool acquired rival Maytag Company in 2005. Knowing
that speed is of the essence when merging companies, Whirlpool
worked quickly to integrate Maytag’s employees and product
lines. Managers made sure that high-performing employees were
identified in plants slated to be closed and found ways to integrate them into other operations. They also educated remaining
employees in both former companies of what the newly combined company would produce. Then the company streamlined
and modernized its larger supply chain to operate more efficiently. Under Whirlpool’s ownership, the Maytag brand is now
recovering; it had been dropped by Best Buy.
Creative thinking also helps support Whirlpool’s efforts to
achieve environmental sustainability. From research studies,
the firm found that resource-saving appliances are critical, since
93 percent of greenhouse gas emissions come from in-home
appliance use. Through improvements in the design and
manufacture of its products, by 2006 Whirlpool had reduced
greenhouse gas emissions an estimated 19 percent. The following year, it pledged to reduce its emissions an additional 6.6
percent by the year 2012—an amount whose positive impact
would be equivalent to nearly 7,000 square miles of trees, an
area roughly the size of Rhode Island and Connecticut.
The company also strives to rethink its recycling program. By
2007, Whirlpool was recycling nearly 90 percent of the 400-plus
metric tons of waste its manufacturing plants produce annually.
It has also found ways to recycle the plastic-foam packaging that
protects its products during shipping. The foam is ground up to
make plastic furniture and playground equipment.51
• Industry observers suggest that by encouraging companywide
participation in idea formation, Nancy Snyder has created a
competitive advantage for Whirlpool. What evidence supports
this opinion? What role do employees play in this process?
• The innovation team approach that cut across Whirlpool’s
divisions and departments provides it with continual information for new-product ideas and improved operations.
Snyder set up a company intranet to centralize training for
I-mentors and enhance communication across all of Whirlpool’s divisions. How did this help the company improve its
products and processes?
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KEY TERMS
Accountability, p. 284
Authority, p. 278
Broker, p. 296
Centralized organization, p. 285
Coordination, p. 278
Coordination by mutual
adjustment, p. 297
Coordination by plan, p. 297
Corporate governance, p. 280
Decentralized organization, p. 285
Delegation, p. 283
Departmentalization, p. 287
Differentiation, p. 277
Division of labor, p. 277
Divisional organization, p. 289
Dynamic network, p. 295
Formalization, p. 297
Functional organization, p. 287
Hierarchy, p. 280
Integration, p. 277
Line departments, p. 287
Matrix organization, p. 292
Network organization, p. 295
Organization chart, p. 276
Responsibility, p. 283
Span of control, p. 282
Specialization, p. 277
Staff departments, p. 287
Standardization, p. 297
Subunits, p. 282
Unity-of-command principle, p. 293
SUMMARY OF LEARNING OBJECTIVES
Now that you have studied Chapter 8, you should be able to:
LO 1
Explain how differentiation and integration
influence an organization’s structure.
Differentiation means that organizations have many parts. Specialization means that various individuals and units throughout
the organization perform different tasks. The assignment of tasks
to different people or groups often is referred to as the division of labor. But the specialized tasks in an organization cannot
all be performed independently of one another. Coordination
links the various tasks in order to achieve the organization’s
overall mission. An organization with many different specialized
tasks and work units is highly differentiated; the more differentiated the organization is, the more integration or coordination
is required.
LO 2
Summarize how authority operates.
Authority is the legitimate right to make decisions and tell other
people what to do. Authority is exercised throughout the hierarchy, as bosses have the authority to give orders to subordinates.
Through the day-to-day operation of authority, the organization
proceeds toward achieving its goals. Owners or stockholders
have ultimate authority.
LO 3
Define the roles of the board of directors and
the chief executive officer.
Boards of directors report to stockholders. The board of directors controls or advises management, considers the firm’s legal
and other interests, and protects stockholders’ rights. The chief
executive officer reports to the board and is accountable for the
organization’s performance.
LO 4
Discuss how span of control affects structure
and managerial effectiveness.
Span of control is the number of people who report directly to a
manager. Narr...
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