Chapter 7: Management and Leadership in Today’s Organization

Business in the 21^st Century

Using current management techniques appropriate to the production process is essential to the success of the Alexander Doll Co. Today’s companies rely on managers to guide the daily process using human, technological, financial, and other resources to create competitive advantage. For many beginning business students, being in management is an attractive, but somewhat vague, future goal. This vagueness is due in part to an incomplete understanding of what managers do and how they contribute to organizational success or failure. This chapter introduces the basic functions of management and the skills required by managers to drive an organization toward its goals. We will also discuss how leadership styles influence a corporate culture and highlight the trends that are shaping the future role of managers.

Management

Management is the process of guiding the development, maintenance, and allocation of resources to attain organizational goals. Managers are the people in the organization responsible for developing and carrying out this management process. Management is dynamic by nature and evolves to meet needs and constraints in the organization’s internal and external environments. In a global marketplace where the rate of change is rapidly increasing, flexibility and adaptability are crucial to the managerial process. This process is based in for key functional areas of the organization: planning, organization, leadership and control. Although these activities are discussed separately in the chapter, they actually form a tightly integrated cycle of thoughts and actions. From this perspective, the managerial process can be described as (1) anticipating potential problems or opportunities and designing plans to deal with them, (2) coordinating and allocating the resources needed to implement plans, (3) guiding personnel through the implementation process, and (4) reviewing results and making any necessary changes. This last stage provides information to be used in ongoing planning efforts, and thus the cycle starts over again.

Exhibit 7-1 What Managers Do and Why

As shown in Exhibit 7-1, managerial work can be divided into four activities: planning, organizing, leading, and controlling. The four functions are highly interdependent, with managers often performing more than one of them at a time and each of them many times over the course of a normal workday. As you will learn in the following sections, all of the functions require sound decision making and communication skills.

Planning

Planning begins by anticipating potential problems or opportunities the organization may encounter. Managers then design strategies to solve problems, prevent future problems, or take advantage of opportunities. These strategies serve as the foundation for goals, objectives, policies, and procedures. Put simply, planning is deciding what needs to be done to achieve organizational objectives, identifying when and how it will be done, and determining by whom it should be done. Effective planning requires extensive information about the external business environment in which the firm competes, as well as its internal environment.

There are four basic types of planning: strategic, tactical, operational, and contingency. Most of us use these different types of planning in our own lives. Some plans are very broad and long term (more strategic in nature). such as planning to spend a few hours in the library this weekend. Your short-term plans support your long-term plans. If you study now, you’ll have a better chance of achieving some figure goal, such as getting a job interview or attending graduate school. Like you, organizations tailor their plans to meet the requirements of future situations or events. A summary of the four types of planning appears in Exhibit 7-2.

Strategic Planning

Strategic planning involves creating long-range (one to five years), broad goals for the organization and determining what resources will be needed to accomplish those goals. An evaluation of external environmental factors such as economic, technological, and social issues is critical to successful strategic planning.

Mission

Strategic plans, such as the organization’s long-term mission, are formulated by top level managers and put into action at lower levels in the organization.

Mission Statement

An organization’s mission is formalized in its mission statement, a document that states the purpose of the organization and its reason for existing. For example, Ben & Jerry’s mission statement addresses three fundamental issues and states the basic philosophy of the company. In all organizations, plans and goals at the tactical and operational levels should clearly support the organization’s mission statement.

Tactical Planning

Tactical planning begins the implementation of strategic plans. Tactical plans have a shorter (less than 1 year) time frame than strategic plans and more specific objectives designed to support the broader strategic goals. Tactical plans begin to address issues of coordinating and allocating resources to different parts of the organization.

Operational Planning

Operational planning creates specific standards, methods, polices, and procedures that are used in specific functional areas of the organization. Operational objectives are current, narrow, and resource focused. They are designed to help guide and control the implementation of tactical plans.

All of these types of planning are apparent in the history of Gap, Inc. Mickey Drexler is the driving force behind the company’s strategic vision, namely, to become a global brand on the level of Coca-Cola. Gillette, and Disney. On a strategic planning level, Drexler hopes to make Gap clothing a universal wardrobe staple by saturating the market with retail stores and supplying the world with fundamental clothing such as pocket-Ts, khakis, and denim. At the tactical level, Drexler’s planning focuses on different ways the company can grow the Gap brand. Creation of GapKids and Old Navy were both tactical plans designed to extend the Gap brand and increase market coverage. Even at the operational level, Drexler has a say in the planning process.

Contingency Plans

The key to effective planning is anticipating future situations and events. Yet even the best prepared organization must sometimes cope with unforeseen circumstances such as natural disaster, an act of terrorism, or a radical new technology. Therefore, many companies have developed contingency plans that identify alternative courses of action for very unusual or crisis situations. The contingency plan typically stipulates the chain of command, standard operating procedures, and communication channels the organization will use during an emergency. Failure to have adequate contingency plans for emergencies can have serious consequences for an organization.

Organizing

A second key function of managers is organizing, which is the process of coordinating and allocating a firm’s resources in order to carry out its plans. Organizing includes developing a firm’s resources in order to carry out its plans. Organizing includes developing a structure for the people, positions, departments, and activities within the firm. Managers can arrange the structural elements of the firm to maximize the flow of information and the efficiency of work processes. They accomplish this by doing the following:

          -Dividing up tasks (division of labor)

          -Grouping jobs and employees (departmentalization)

          -Assigning authority and responsibilities (delegation)

These and other elements of organizational structure are discussed in detail in Chapter 8. In this chapter, however, you should understand the three levels of a managerial hierarchy. This hierarchy is often depicted as a pyramid as in Exhibit 7-4, page 208. the fewest managers are found at the highest level of the pyramid.

Top Management

Called top management, they are the small group of people at the head of the organization (such as the CEO, presidents, and vice-presidents). Top-level managers develop strategic plans and address long-range issues such as which industries to complete in, how to capture market share, and what to do with profits. These managers design and approve the firm’s basic policies and represent the firm to other organizations. The also define the company’s values and ethics and thus set the tone for employee standards of behavior.

Middle Management and Supervisory Management

The second and third tiers of the hierarchy are called middle management and supervisory management, respectively. Middle managers (such as division heads, departmental managers, and regional sales managers) are responsible for beginning the implementation of strategic plans. They design and carry out the tactical plans in specific areas of the company. the begin the process of allocating resources to meet organizational goals, and they oversee supervisory managers throughout the firm. Supervisors, the most numerous of the managers, are at the bottom of the managerial pyramid. These managers design and carry out operational plans for the ongoing daily activities of the firm. They spend a great deal of their time guiding and motivating the employees who actually produce the goods and services.

Leadership

Leadership, the third key management function, is the process of guiding and motivating others toward the achievement of organizational goals. Managers are responsible for directing employees on a daily basis as the employees carry out the plans and work within the structure created by management. Organizations need strong effective leadership at all levels in order to meet goals and remain competitive.

Power

To be effective leaders, managers must be able to influence others’ behavior. This ability to influence others to behave in a particular way is called power. Researchers have identified five primary sources, or bases, of power:

          -Legitimate power, which is derived from an individual’s position in

  an organization.

          -Reward power, which is derived from an individual’s control over

  rewards.

-Coercive power, which is derived from an individual’s ability to

  threaten negative outcomes.

          -Expert power, which is derived from an individual’s extensive

  knowledge in one or more area.

          -Reverential power, which is derived from an individual’s person

  charisma and the respect and/or admiration the individual inspires.

Many leaders use a combination of all of these sources of power to influence individuals toward goal achievement. Bill Gates, for example gets his legitimate power from his position as CEO of Microsoft. He is able to offer incentives such as stock options to reward high-performing employees and to threaten low performers with undesirable consequences. His technical expertise in computer software, technical innovation, and financial management allows him to greatly influence the decisions made at Microsoft, and many people find his strong focus and ability to convey his vision compelling enough to warrant great respect and admiration.

Leadership Styles

Individuals in leadership positions tend to be relatively consistent in the way they attempt to influence the behavior of others, meaning that each individual has a tendency to react to people and situations in a particular way. This pattern of behavior is referred to as leadership style. As Exhibit 7-5 shows, leadership styles can be placed on a continuum that encompasses the distinct styles: autocratic, participative, and free rein.

Exhibit 7-5   Leadership Styles of Managers

Autocratic Leaders

Autocratic leaders are directive leaders, allowing for very little input from subordinates. These leaders prefer to make decisions and solve problems on their own and expect subordinates to implement solutions according to very specific and detailed instructions. In this leadership style, information typically flows in one direction, from manager to subordinate. The military, by necessity, is generally autocratic. When autocratic leaders treat employees with fairness and respect, they may be considered knowledgeable and decisive. But often autocrats are perceived as narrow-minded and heavy-handed in their unwillingness to share power, information, and decision making in the organization.

Participative Leadership

There are three types of participative leadership: democratic, consensual, and consultative.

          Democratic Leaders

Democratic leaders solicit input from all members of the group and then allow the group members to make the final decision through a voting process. This approach works well with highly trained professionals. The president of a physician’s clinic might use the democratic approach.

          Consensual Leaders

Consensual leaders encourage discussion about issues and then require that all parties involved agree to the final decision about issues and then require that all parties involved agree to the final decision. This is the general style used by labor mediators.

          Consultative Leaders

Consultative leaders confer with subordinates before making a decision, but retain the final decision-making authority. This technique has been used to dramatically increase the productivity of assembly-line workers.

          Free-rein or Laissez-faire Leadership (French for “leave-it-alone)

The third leadership style, at the opposite end of the continuum from the autocratic style, is free rein or laissez-faire leadership. Managers who use this style turn over all authority and control to subordinates. Employees are assigned a task and then given free rein to figure out the best way to accomplish it. The manager doesn’t get involved unless asked. Under this approach, subordinates have unlimited freedom as long as they do not violate existing company policies. This approach is also sometimes used with highly trained professionals as in a research laboratory. Although one might at first assume that subordinates would prefer the free-rein style, this approach can have several drawbacks. If free-rein leadership is accompanied by unclear expectations and lack of feedback from the manager, the experience can be frustrating for an employee. Employees may perceive the manager as being uninvolved and indifferent to what is happening or as unwilling or unable to provide the necessary structure, information, and expertise.

Employee Empowerment

Empowerment

Participative and free-rein leaders us a technique called empowerment to share decision-making authority with subordinates. Empowerment means giving employees increased autonomy and discretion to make their own decisions, as well as control over the resources needed to implement those decisions. When decision-making power is shared by at all levels of the organization, employees feel a greater sense of ownership in, and responsibility for, organizational outcomes.

Corporate Culture

Corporate Culture

The leadership style of managers in an organization is usually indicative of the underlying philosophy, or values, of the organization. The set of attitudes, values, and standards of behavior that distinguishes one organization from another is called corporate culture. A corporate culture evolves over time and is based on the accumulated history of the organization, including the vision of the founders. Evidence of a company’s culture is seen in its heroes (e.g., Andy Grove of Intel), myths (stories about the company are passed from employee to employee), symbols (e.g., the Nike swoosh), and ceremonies, Procter & Gamble’s corporate culture is so strong that is sometimes referred to as a cult, and employees are said to be “Procterized,” rather than socialized.

Controlling

The fourth key function that managers perform is controlling. Controlling is the process of assessing the organization’s progress toward accomplishing its goals. It includes monitoring the implementation of a plan and correcting deviations from that plan. As Exhibit 7-6 on page 214 shows, controlling can be visualized as a cyclical process made up of five stages.

          1. Setting performance standards (goals)

          2. Measuring performance

          3. Comparing actual performance to established performance

    standards

          4. Taking corrective action (if necessary)

          5. Using information gained from the process to set future

    performance standards.

Performance standards are the levels of performance the company wants to attain. These goals are based on strategic, tactical, and operational plans. The most effective performance standards state a measurable behavioral objective that can be achieved in a specified time frame. For example, the performance objective for the sales division of a company could be stated as “$100,000 in gross sales for the month of January.” Each individual employee in that division would also have a specified performance goal. Actual firm division, or individual performance can be measured against desired performance standards to see if a gap exists between the desired level of performance and the actual level of performance. If a performance gap does exist, the reason for it must be determined and corrective action taken.

Feed back is essential to the process of control. Most companies have a reporting system that identifies areas where performance standards are not being met. A feedback system helps managers detect problems before they get out of hand. If a problem exists, the managers take corrective action.

…Why is controlling such an important part of a manager’s job? First, it helps managers to determine the success of the other three functions: planning, organizing, and leading. Second, control systems direct employee behavior toward achieving organizational goals. Third, control systems provide a means or coordinating employee activities and integrating resources throughout the organization.

Informational Roles, Interpersonal Roles, Decisional Roles

In carrying out the responsibilities of planning, organizing, leading, and controlling, managers take on many different roles. A role is a set of behavioral expectations, or a set of activities that a person is expected to perform. Managers’ roles fall into three basic categories: informational roles, interpersonal roles, and decisional roles. These roles are summarized in Exhibit 7-7.

Exhibit 7-7   The Many Roles That Managers Play in an Organization

Informational Role

In an informational role, the manager may act as an information gatherer, an information distributor, or a spokesperson for the company.

Interpersonal Role

A manager’s interpersonal roles are based on various interactions with other people. Depending on the situation, a manager may need to act as a figurehead, a company leader, or a liaison.

Decisional Role

When acting in a decisional role, a manager may have to think like an entrepreneur, making decisions about resource allocation, help resolve conflicts, or negotiate compromises.

Managerial Decision Making

In every function performed, role taken on, and set of skills applied, a manager is a decision maker. Decision making means choosing among alternatives. Decision making occurs in response to the identification of a problem or an opportunity. The decisions managers make fall into two basic categories: programmed and nonprogrammed.

Programmed Decisions

Programmed decisions are made in response to routine situations that occur frequently in a variety of settings throughout an organization. For example, the need to hire new personnel is a common situation for most organizations. Therefore, standard procedures for recruitment and selection are developed and followed in most companies.

Nonprogrammed Decisions

Infrequent, unforeseen, or very unusual problems and opportunities require nonprogrammed decisions by managers. Because these situations are unique and complex, the manager rarely has a precedent to follow. Preparing manufacturing companies for the year 2000 is an example of nonprogrammed decision making.

Addressing the Y2K problem required a systematic approach to decision making as illustrated in Exhibit 7-8.

Exhibit 7-8   The Decision-Making Process

Managers typically follow five steps in the decision making process.

          1. Recognize or identify a problem or opportunity. Although it is more

common to focus on problems because of their obvious negative

effects, managers who do not take advantage of new opportunities

may lose competitive advantage to other firms.

          2. Gather information so as to identify alternative solutions or actions.

          3. Choose one or more alternative after evaluating the strengths and

          weaknesses of each possibility.

          4. Put the chosen alternative into action.

          5. Gather information to obtain feedback on the effectiveness of the

chosen plan. Some very practical questions to ask during the decision-

making process are shown in Exhibit 7-9.

Exhibit 7-9   Questions to Ask Yourself to Help Make Better Decisions

Managerial Skills

Skill

In order to be successful in planning, organizing, leading, and controlling, managers must use a wide variety of skills. A skill is the ability to do something proficiently. The degree to which each type of skill is used depends upon the level of the manager’s position as seen in Exhibit 7-10, page 218. Additionally, in an increasingly global marketplace, it pays for managers to develop a special set of skills to deal with global management issues.

Technical Skills

Technical Skills

Specialized areas of knowledge and expertise and the ability to apply that knowledge make up a manager’s technical skills. Preparing a financial statement, programming a computer, designing an office building, and analyzing market research are all examples of technical skills. These types of skills are especially important for supervisory managers because they work closely with employees who are producing the goods and/or services of the firm. Supervisory managers need to be knowledgeable about the specific production and operation tools, techniques, and methods relevant to their specific area of the organization, as demonstrated in the Applying Technology box.

Human Relations Skills

Human Relations Skills

Human relations skills are the interpersonal skills managers use to accomplish goals through the use of human resources. This set of skills includes the ability to understand human behavior, to communicate effectively with others, and to motivate individuals to accomplish their objectives. Giving positive feedback to employees, being sensitive to their individual needs, and showing a willingness to empower subordinates are all examples of good human relation skills.

Conceptual Skills

Conceptual skills include the ability to view the organization as a whole, understand how the various parts are interdependent, and assess how the organization relates to its external environment. These skills allow managers to evaluate situations and develop alternative courses of action. Good conceptual skills are especially necessary for managers at the top of the management pyramid where strategic planning takes place.

Global Management Skills

Global Management Skills

The increasing globalization of the world market, as discussed in Chapter 3, has created a need for managers who have global management skills, that is, the ability to operate in diverse cultural environments. With more and more companies choosing to do business in multiple locations around the world, employees are often required to learn the geography, language, and social customs of other cultures. It is expensive to train employees for foreign assignments and pay their relocations costs; therefore, choosing the right person for the job is especially important. Individuals who are open-minded, flexible, willing to try new things, and comfortable in a multicultural setting are good candidates for international management positions.

Capitalizing On Trends In Business

Three important trends in management today are: increasing employee empowerment, the growing use of information technology, and the increasing need for global management skills. Each will be examined in turn.

Managers Empowering Employees

Most of the firms discussed in this chapter are including more employees in the decision-making process than ever before. This increased level of employee involvement comes from the realization that people at all levels in the organization possess unique knowledge, skills, and abilities that can be of great value to the company. With empowerment, managers share information and responsibility with employees at all levels in the organization. Along with the authority to make decisions, empowerment also gives employees control over resources needed to implement those decisions. Empowering employees enhances their commitment to the organization by giving them a feeling ownership in the firm and an increased sense of complexity.

In order for empowerment to work, managers have to facilitate employee decision making by providing access to necessary information, clear expectations for results, behavioral boundaries, and the resources employees need to carry out their decisions.

Managers And Information Technology

The second trend having a major impact on managers is the proliferation of information technology. An increasing number of organizations are selling technology, and an increasing number are looking for cutting-edge technology to make and market the products and services they sell. A brief look at PeopleSoft, a rapidly growing provider of automated human resource functions, provides some insight into the crucial role information technology can play in today’s organizations. Plenty of new technology is being used at PeopleSoft, but it is “people-oriented” technology, and it starts with a backpack. Every new employee is issued a backpack filled with a laptop, pager, cell phone, and digital assistant. Every employee has access to PeopleSoft’s “massive information infrastructure that spans continents and time zones.” PeopleSoft uses information systems to create “infomacracy,” an organization where members have access to the information they need to make and implement decisions.

Managing In A Global Marketplace

Geographic boundaries no longer constrain businesses the way they once did. To fully realize their potential, many companies must look to international markets to expand the sales of their products and services. This presents significant new challenges to managers. Global management can mean flying thousands of miles a week to keep up with business units spread across the world. Although new information technology makes communication easier than ever before, sometimes it cannot substitute for face-to-face contact. Ensuring that employees in far-flung locations still feel part of a cohesive organizational team can be difficult. Global managers often have to adapt to a new culture, learn a new language, manage a diverse workforce, and operate in a foreign economic system. For many managers, accepting an international position also means helping their spouses and children to the new environment. And in some companies, managers must try to translate an entire company philosophy into another language and culture.

Effective Time Management

Successful managers use their time wisely. Adopting the following time management techniques will help you become a more successful student now and will help prepare you for the demands of your future workplace:

          -Plan Ahead. This is first and most obvious. Set both long-term and short-term goals. Review your list often and revise it when your situation changes.

          -Establish Priorities. Decide what is most important and what is most urgent. Sometimes they are not the same thing. Keep in mind the 80-20 rule: 20 percent of one’s effort delivers 80 percent of the results.

          -Delegate. Ask yourself if the task can be accomplished as effectively by someone else. Empower other people, and you may be surprised by the quality of the outcome.

          -Learn to say no. Be stingy with your time. Be realistic about long tasks will take. Don’t feel guilty when you don’t have the time, ability, or inclination to take on an additional task.

          -Batch. Group activities together so they take up less of your day. For example, set aside a certain time to return phone calls, answer email, and do any necessary written correspondence.

          -Stay on task. Learn how to handle diversions. For example, let your answering machine take messages until you finish a particular task. Create a routine that helps you stay focused.

          -Set deadlines. Don’t let projects drag on. Reward yourself each time you cross a certain number of items off your “to-do” list.

Decision-Making Skills

One of the best ways to prepare for any career, including a career in business, is to improve your ability to make good decisions. But what is a “good” decision? Is it one that is made quickly, but with incomplete information? Or is it one that is made more slowly, but with more facts and figures to support it? Is a good decision always objective? Or should it be based on a gut feeling? And, if you practice making decisions, do you actually get better at making them? Some recognized decision-makers offer these guidelines.

          -Have confidence in your judgment, and always go by the evidence,

says Ed Koch, former mayor of New York City.

          -Think about the long-term consequences of your decision, says

Pamela Lopker, CEO of QAD, Inc. and America’s richest self-made

woman.

-Listen to your inner wisdom, says W. Brian Arthur, Citigroup Professor at the Santa Fe Institute.

          -By flexible, says Chung-Jen Tan, senior manager at IBM’s Watson

Research Center.

          -Listen to your intuition, says Deborah Traint, CEO of check Point

Software Technologies, Inc.

          -Ask yourself how you want things to turn out and how things could

go wrong, says Roger Rainbow, vice-president at Shell International

Ltd.

          -Think in terms of opportunities instead of problems, says Howard

Raiffa, Professor Emeritus at Harvard Business School.

          -Sometimes the “wrong” decision is the right thing to do, says Chris

Newell, executive director at the Lotus Institute.

>lg 1. What is the role of management?

Management is the process of guiding the development, maintenance, and allocation of resources to attain organizational goals. Managers are the people in the organization responsible for developing and carrying out this management process. The four primary functions of managers are planning, organizing, leading, and controlling.

>lg 2. What are the four types of planning?

Planning is deciding what needs to be done, identifying when and how it will be done, and determining by whom it should be done. Managers use four different types of planning: strategic, tactical, operational, and contingency planning. Strategic planning involves creating long-range (one to five years), broad goals and determining the necessary resources to accomplish those goals. Tactical planning has a shorter time frame (less than one year) and more specific objectives that support the broader strategic goals. Operational planning creates specific standards, methods, policies, and procedures that are used in specific functional areas of the organization. Contingency plans identify alternative courses of action for very unusual or crisis situations.

>lg 3. What are the primary responsibilities of managers in organizing

activities?

Organizing involves coordinating and allocating a firm’s resources in order to carry out its plans. It includes developing a structure for the people, positions, departments, and activities within the firm. This is accomplished by dividing up tasks (division of labor), grouping jobs and employees (departmentalization), and assigning authority and responsibilities (delegation).

>lg 4. How do leadership styles influence a corporate culture?

Leading is the process of guiding and motivating others toward the achievement of organizational goals. Managers have unique leadership styles that range from autocratic to free rein. The set of attitudes, values, and standards of behavior that distinguishes one organization from another is called corporate culture. A corporate culture evolves over time and is based on the accumulated history of the organization, including the vision of the founders. The dominant leadership style within the organization is a powerful determinant of that corporate culture.

>lg 5. How do organizations control activities?

Controlling is the process of assessing the organization’s progress toward accomplishing its goals. The control process is as follows: (1) set performance standards (goals), (2) measure performance, (3) compare actual performance to established performance standards, (4) take corrective action (if necessary), and (5) use information gained from the process to set future performance standards.

>lg 6. What roles do managers take on in different organizational

settings?

In an informational role, the manager may act as an information gatherer, an information distributor, or a spokesperson for the company. A manager’s interpersonal roles are based on various interactions with other people. Depending on the situation, a manager may need to act as a figurehead, a company leader, or a liaison. When acting in a decisional role, a manager may have to think like an entrepreneur, make decisions about resource allocation, help resolve conflicts, or negotiate compromises.

>lg 7. What set of managerial skills is necessary for managerial success?

Managerial skills fall into three basic categories: technical, human relations, and conceptual skills. Specialized areas of knowledge and expertise and the ability to apply that knowledge make up a manager’s technical skills. Human relations skills include the ability to understand human behavior, to communicate effectively with others, and to motivate individuals to accomplish their objectives. Conceptual skills include the ability to view the organization as a whole, understand how the various parts are interdependent, and assess how the organization relates to its external environment.

>lg 8. What trends will affect management in the future?

Three important trends in management today are increasing employee empowerment, the increasing use of information technology, and the growing need to for global management skills. Empowerment means giving employees increased autonomy and discretion to make their own decisions, as well as control of the resources needed to implement those decisions. when decision-making power is shared at all levels in the organization, employees feel a greater sense of ownership in, and responsibility for, organizational outcomes. Using the latest information technology, managers can make quicker, better, informed decisions. It also keeps organization members connected. As more companies go global, the need for global management skills is growing. Global managers often have to adapt to a new culture, learn a new language, manage a diverse workforce, and operate in a foreign economic system.

Chapter 8:  Designing Organizational Structures

Business in the 21^st Century

In today’s dynamic business environment, organizational structures need to be designed so that the organization can quickly respond to new competitive threats and changing customer needs. In the future, companies such as Proctor and Gamble will achieve long-term success only if they have the ability to manage change and organize their resources effectively. In this chapter, we’ll present the five structural building blocks of organizations and look at how each can be used to build unique organizational structures. We’ll explore how communication, authority, and job specialization are combined to create both formal and informal organizational structures. Finally, we’ll consider how reengineering and new business trends are changing the way businesses organize.

Structural Building Blocks

As you learned in Chapter 7, the key functions that managers perform include planning, organizing, leading, and controlling. This chapter focuses specifically on the organizing function. Organizing involves coordinating and allocating a firm’s resources so that the firm can carry out it’s plans and achieve its goals. This organizing, or structuring, process is accomplished by

          -determining work activities and dividing up tasks (division of labor),

          -grouping jobs and employees (departmentalization), and

          -assigning authority and responsibilities (delegation).

Formal Organization

The result of the organizing process is a formal organizational structure. A formal organization is the order and design of relationships within the firm. It consists of two or more people working together with a common objective and clarity of purpose. Formal organizations also have well-defined lines of authority, channels for information flow, and means of control. Human, material, financial, and information resources are deliberately connected to form the business organization. Some connections are long lasting, such as the links among people in the finance or marketing department. Others can be changed at almost any time, as when a committee is formed to study a problem.

Five structural building blocks are used in designing an efficient and effective organizational structure. They are division of labor, departmentalization, managerial hierarchy, span of control, and centralization of decision-making.

Division of Labor

Division of Labor

The process of dividing work into separate jobs and assigning tasks to workers is called division of labor. In a fast-food restaurant, for example, some employees take or fill orders, others prepare food, a few clean and maintain equipment, and at least one supervises all the others. In an auto assembly plant, some workers install rearview mirrors, while others mount bumpers on bumper brackets.

Specialization

The degree to which the tasks are subdivided into smaller jobs is called specialization. Employees who work at highly specialized jobs, such as assembly line workers, perform a limited number and a variety of tasks. Employees who become specialists at one task, or a small number of tasks, develop greater skill in doing that particular job. This can lead to greater efficiency and consistency in production and other work activities. However, a high degree of specialization can also result in employees who are disinterested or bored due to the lack of variety and challenge.

Departmentalization

Departmentalization

The second building block used to create a strong organizational structure is called departmentalization. After the work is divided into jobs, jobs are then grouped together so that similar or associated tasks and activities can be coordinated. This grouping of people, tasks, and resources into organizational units facilitates the planning, leading, and control processes.

Organization Chart

An organization chart is a visual representation of the structural relationships among tasks and the people given the authority to do those tasks. In the organization chart in Exhibit 8-1, page 231, each figure represents a job, and each job includes several tasks. The sales manager, for instance, must hire salespeople, establish sales territories, motivate and train the salespeople, and control sales operations. The chart also indicates the general type of work done in each position. As Exhibit 8-2 shows, five basic types of departmentalization are commonly used in organizations:

Exhibit 8-2   Five ways to Organize

As Exhibit 8-2 shows, five basic types of departmentalization are commonly used in organizations.

Functional Departmentalization, which is based on the primary functions performed within an organizational unit (marketing, finance, production, sales, and so on).

Product Departmentalization, which is based on the goods or services produced or sold by the organizational unit (such as outpatient/emergency services, pediatrics, cardiology, and orthopedics).

Process Departmentalization, which is based on the production process used by the organizational unit (such as lumber cutting and treatment, furniture finishing, shipping).

Customer Departmentalization, which is based on the primary type of customer served by the organizational unit (such as wholesale or retail purchasers).

Geographic Departmentalization, which is based on the geographic segmentation of organizational units (such as U.S. and Canadian marketing, European marketing, South American marketing).

People are assigned to a particular organizational unit because they perform similar or related tasks, or because they are jointly responsible for a product, client, or market. Decisions about how to departmentalize affect the way management assigns authority, distributes resources, rewards performance, and sets up lines of communication. Many large organizations use several types of departmentalization. For example, a global company may be departmentalized first geographically (North American, European, and Asian units), then by product line (foods/beverages and health care), and finally by functional area (marketing, operations, finance, and so on).

Managerial Hierarchy

Managerial Hierarchy

The third building block used to create effective organizational structure is the managerial hierarchy (also called the management pyramid), or the levels of management within the organization. Generally, the management structure has three levels: top, middle, and supervisory management. These three levels were introduced in Chapter 7.

In a managerial hierarchy, each organizational unit is controlled and supervised by a manager in a higher unit. The person with the most formal authority is at the top of the hierarchy. The higher a manager, the more power he or she has. Thus, the amount of power decreases as you move down the management pyramid. At the same time, the number of employees increases as you move down the hierarchy.

Although the trend in organizations today is to eliminate layers of middle management in order to create a leaner, “flatter” organization, sometimes companies find that adding another layer to the hierarchy can actually simplify the reporting relationships in the company. Home Depot, the world’s largest home improvement retailer, recently discovered this. The company’s phenomenal growth rate was straining the capabilities of the six division heads who reported directly to the CEO. So the company hired four new group presidents, adding a layer of management between the CEO and the division heads. As often happens when a structure is changed, there was some initial negative reaction to the decision. Eventually, most of the resistance was overcome as managers realized the new positions were needed to deal with business areas outside the company’s traditional core competencies (for example, direct marketing expert and retail sales expert). Adding new positions actually freed the division heads to concentrate on the duties central to the their particular area of business.

Chain of Command

An organization with a well-defined hierarchy has a clear chain of command, which is the line of authority that extends from one level of the corporation to the next, from top to bottom, and makes clear who reports to whom. The chain of command is shown in the organization chart and can be traced from the CEO all the way down to the employees producing goods and services.

          Unity of Command Principle

Under the unity of command principle, everyone reports to and gets instructions from only one boss. Unity of command guarantees that everyone will have a direct supervisor and will not be taking orders from a number of different supervisors. Unity of command and chain of command give everyone in the organization clear directions and help coordinate people doing different jobs.

The increasing number of mergers among organizations has given rise to an interesting trend. The unity of command principle used to be clearly evident in most top management hierarchies, but now a number of firms are choosing dual leadership at the very top of the organization.

Authority

Individuals who are part of the chain of command have authority over other persons in the organization. Authority is legitimate power, granted by the organization and acknowledged by employees, that allows an individual to request action and expect compliance. Exercising authority means making decisions and seeing that they are carried out.

Delegation of Authority

Most managers delegate or assign, some degree of authority and responsibility to others below them in the chain of command. The delegation of authority makes the employees accountable to their supervisor. Accountability means responsibility for outcomes. Typically, authority and responsibility move downward through the organization as management assigns activities to, and share decision making with, their subordinates. Accountability moves upward in the organization as managers in each successively higher level are held accountable for the actions of their subordinates.

Span of Control

The fourth structural building block is the managerial span of control. Each firm must decide how many managers are needed at each level of the management hierarchy to effectively supervise the work performed within the organizational units.

Span of Control

A manager’s span of control (sometimes called span of management) is the number of employees the manager directly supervises. It can be as narrow as 2 or 3 employees or as wide as 50 or more. In general, the larger the span of control, the more efficient the organization. As Exhibit 8-3 shows, however, both narrow and wide spans of control have benefits and drawbacks.

Exhibit 8-3   Narrow and Wide Spans of Control

If hundreds of employees perform the same job, one supervisor may be able to manage a very large number of employees. Such might be the case at a clothing plant, where hundreds of sewing machine operators work from identical patterns. But if employees perform complex and dissimilar tasks, a manager can effectively supervise only a much smaller number. For instance, a supervisor in the research and development area of a pharmaceutical company might oversee just a few research chemists due to the highly complex nature of their jobs.

The optimal span of control is determined by the following five factors:

          -Nature of the task. The more complex the task, the narrower the

  span of control.

          -Location of the workers. The more locations, the narrower the span

  of control.

-Ability of the manager to delegate responsibility. The greater the    

  ability to delegate, the wider the span of control.

          -Amount of interaction and feedback between the workers and

  the manager. The more feedback and interaction required, the

  narrower the span of control.

          -Level of skill and motivation of the workers. The higher the skill

  level and motivation, the wider the span of control.

Centralization of Decision Making

Centralization

The final component in building an effective organizational structure is deciding at what level in the organization decisions should be made. Centralization is the degree to which formal authority is concentrated in one area or level of the organization. In a highly centralized structure, top management makes most of the key decisions in the organization, with very little input from lower-level employees. Centralization lets top managers develop a broad view of operations and exercise tight financial controls. It can also help to reduce costs by eliminating redundancy in the organization. But centralization may also mean that lower-level personnel don’t get a chance to develop their decision-making and leadership skills and that the organization is less able to respond quickly to customer demands.

Decentralization

Decentralization is the process of pushing decision-making authority down the organizational hierarchy, giving lower-level personnel more responsibility and power to make and implement decisions. Benefits of decentralization can include quicker decision-making, increased levels of innovation and creativity, greater organizational flexibility, faster development of lower-level managers, and increased levels of job satisfaction and employee commitment. But decentralization can also be risky. If lower-level personnel don’t have the necessary skills and training to perform effectively, they make costly mistakes. Additionally, decentralization may increase the likelihood of inefficient lines of communication, incongruent or competing objectives, and duplication of effort.

Several factors must be considered when deciding how much decision-making authority to delegate throughout the organization. These factors include the size of the organization, the speed of change in its environment, managers’ willingness to give up authority, employees’ willingness to accept more authority, and the organization’s geographic dispersion. Decentralization is usually desirable when the following conditions are met:

          -The organization is very large, like Exxon, Ford, or General Electric.

          -The firm is a dynamic environment where quick, local decisions must

  be made, as in many high-tech industries.

          -Managers are willing to share power with their subordinates.

          -Employees are willing and able to take more responsibility.

          -The company is spread out geographically, such as JC Penny, Mobile

  Oil, or Proctor & Gamble.

As organizations grow and change, they continually reevaluate the organizational structure to determine whether it is helping the company to achieve its goals. Firms can alter the degree of centralization/decentralization in the organizational structure as the needs of the company change.

Mechanistic Versus Organic Structures

Using different combinations of the building blocks described above, organizations can build a wide variety of organizational structures. Nevertheless, structural design generally follows one of the two basic models described in Exhibit 8-4: mechanistic or organic.

Exhibit 8-4 Mechanistic versus Organic Structure

Mechanistic Organization

A mechanistic organization is characterized by a relatively high degree of job specialization, rigid departmentalization, many layers of management (particularly middle management), narrow spans of control, centralized decision making, and a long chain of command. This combination of elements results in what is called a tall organizational structure. Military organizations typically have tall structures.

Organic Organization

In contrast, an organic organization is characterized by a relatively low degree of job specialization, loose departmentalization, few levels of management, wide spans of control, decentralized decision making, and a short chain of command. This combination of elements results in what is called a flat organizational structure. Colleges and universities tend to have flat organizational structures, with only two or three levels of administration between faculty and the president. Exhibit 8-5, page 238, show examples of flat and tall organizational structures.

Although few organizations are purely mechanistic or purely organic, most organizations tend more toward one type or the other. The decision to create a more mechanistic or a more organic structural design is based on factors such as the firm’s overall strategy, the size of the organization, the types of technologies used in the organization, and the stability of its external environment.

Common Organizational Structures

There is no single best way to design an organization. Within the basic mechanistic and organic models and the hybrids that contain elements of both, an almost infinite variety of organizational structures can be developed. Many organizations use a combination of elements from different structural types to meet their unique organizational needs. Some of the most common structural designs are discussed in this section.

Line Organization

Line Organization

The line organization is designed with direct, clear lines of authority and communication flowing from top managers downward. Managers have direct control over all activities, including administrative duties. An organization chart for this type of structure would show that all the positions in the firm are directly connected via an imaginary line extending from the highest position in the organization to the lowest (where production of goods and services take place). This structure with its simple design, clear chain of command, and broad managerial control is often well suited to small, entrepreneurial firms.

Line-and-Staff Organization

As an organization grows and becomes more complex, the line organization can be enhanced by adding staff positions to the design. Staff positions provide specialized advisory and support services to line managers in the line-and-staff organization, shown in Exhibit 8-6, page 239. In daily operations, those individuals in line positions are directly involved in the process used to create goods and services. Those individuals in staff positions provide the administrative and support services that line employees need to achieve the firm’s goals. Line positions in organizations are typically in areas such as production, marketing, and finance. Staff positions are found in areas such as legal counseling, managerial consulting, public relations, and human resource management.

Committee Structure

Committee Structure

In committee structure, authority and responsibility are held by a group rather than an individual. Committees are typically part of the larger line-and-staff organization. Often the committee’s role is only advisory, but in some situations the committee has the power to make and implement decisions. Committees can make the coordination of tasks in the organization much easier. At Toyota, for example, product and manufacturing engineers work together in committees. Using this process, the factory machinery is developed concurrently with new car prototypes so it is able to accommodate them. Committees bring diverse viewpoints to a problem and expand the range of possible solutions, but there are some drawbacks. Committees can be slow to reach a decision and are sometimes dominated by a single individual. It is more difficult to hold any one individual accountable for a decision made by a group.

Matrix Structure

The matrix structure (also called the project management approach) is sometimes used in conjunction with the traditional line-and-staff structure in an organization. Essentially, this structure combines two different forms of departmentalization, functional and product, that have complementary strengths and weaknesses. The matrix structure brings people together from different functional areas of the organization (such as manufacturing, finance, and marketing) to work on a special project. Each employee has two direct supervisors : the line manager from her or his specific functional area and the project manager. Exhibit 8-7, page 240, shows a matrix organization with four special project groups (A, B, C, D), each with its own project manager. Because of the duel chain of command, the matrix structure presents some unique challenges for both managers and subordinates.

          Advantages of the matrix structure include:

          -Teamwork. By pooling the skills and abilities of various specialists,

  the company can increase creativity and innovation and tackle more

  complex tasks.

          -Efficient use of resources. Project managers use only the specialized

  staff they need to get the job done, instead of building large groups

  of underused personnel.

          -Flexibility. The project structure is flexible and can adapt quickly to

  changes in the environment; the group can be disbanded quickly

  when it is no longer needed.

-Ability to balance conflicting objectives. The customer wants a quality product and predictable costs. The organization wants high profits and the development of technical capability for the future. These competing goals serve as a focal point for directing activities and overcoming conflict. The marketing representative can represent the customer, the finance representative can advocate high profits, and the engineers can push for technical capabilities.

          -Higher performance. Employees working on special project teams

  may experience increased feelings of ownership, commitment, and

  motivation.

          -Opportunities for personal and professional development. The project

  structure gives individuals the opportunity to develop and strengthen

  technical and interpersonal relationships.

          Disadvantages of matrix structure include:

          -Power struggles. Functional and product managers may have

  different goals and management styles.

          -Confusion among team members. Reporting relationships and job

  responsibilities may unclear.

          -Lack of cohesiveness. Team members from different functional areas

  may have difficulty communicating effectively and working together

  as a team.

Reengineering Organizational Structure

Reengineering

Periodically, all businesses must reevaluate the way they do business. This includes assessing the effectiveness of the organizational structure. to meet the formidable challenges of the future, companies are increasingly turning to reengineering—the complete redesign of business structures and processes in order to improve operations. Every company has many formal and informal rules based on assumptions about technology, people, and organizational goals that no longer hold. Thus, the goal of reengineering is to redesign business processes to achieve improvements in cost control, product quality, customer service and speed. The reengineering process should result in a more efficient and effective organizational structure that is better suited to the current (and future) competitive climate of the industry.

The Informal Organization

Thus far in the chapter we have focused on the elements of formal organizational structures, many of which can be seen in the boxes and lines of the organizational chart. Yet many important relationships within an organization do not show up on an organizational chart. Nevertheless, these relationships can affect the decisions and performance of employees at all levels of the organization.

Informal Organization

The network of connections and channels of communication based on the informal relationships of individuals inside the organization is known as the informal organization. Informal relationships can be between people at the same hierarchical level or between people at different levels and in different departments. Some connections are work related, such as those formed among people who carpool or ride the same train to work. Others are based on non work commonalities such as belonging to the same church or health club or having children who attend the same school. The informal channels of communication of the information organization are often referred to as the grapevine, the rumor mill, or the intelligence network.

Functions of the Informal Organization

The informal organization has several functions: First, if provides a source of friendships and social contact for organizational members. Second, the interpersonal relationships and informal groups help employees feel better informed and connected with what’s going on in their firm, thus giving them some sense of control over their work environment. Third, the informal organization can provide status and recognition that the formal organization cannot or will not provide employees. Fourth, the network of relationships can aid in the socialization of new employees by informally passing along rules, responsibilities, basic objectives, and job expectations. Finally, the organizational grapevine helps employees to be more aware of what is happening in their workplace by transmitting information quickly and conveying it to places that the formal system does not reach.

Although the informal organization can help the formal organization to achieve its goals, it can also create problems if not managed well. Group norms (commonly accepted standards of behavior) may conflict with the company’s standards and cause problems.

Capitalizing On Trends In Business

To achieve long-term objectives, organizations consistently evaluate and alter their organizational structures. The increased use of information technology and globalization are creating new options for organizing a business.

The Virtual Corporation

One of the biggest challenges for companies today is adapting to the technological changes that are affecting all industries. Organizations are struggling to find new organizational structures that will help them transform information technology into a competitive advantage.

Virtual Corporation

One alternative that is becoming increasingly prevalent is the virtual corporation, which is a network of independent companies (suppliers, customers, even competitors) linked by information technology to share skills, costs, and access to one another’s markets. This network structure allows companies to come together quickly to exploit rapidly changing opportunities. The attributes of a virtual corporation are:

          -Technology. Information technology helps geographically distant

  companies form alliances and work together.

          -Excellence. Each partner brings its core competencies to the alliance,

  so it is possible to create an organization with higher quality in every

  functional area and increase competitive advantage.

          -Trust. The network structure makes companies more reliant on each

  other and forces them to strengthen relationships with partners.

          -No boarders. This structure expands the traditional boundaries of an

  organization.

In the concept’s purest form, each company that links up with others to create a virtual corporation is stripped to its essence. Ideally, the virtual corporation has neither central office nor organizational chart, no hierarchy, and no vertical integration. It contributes to an alliance only its core competencies, or key capabilities. It mixes and matches what it does best with the core competencies of other companies and entrepreneurs. For example, a manufacturer would only manufacture, while relying on a product design firm to decide what to make and a marketing company to sell the end result.

Although firms that are purely virtual organizations are still relatively scarce, many companies are embracing several of the characteristics of the virtual structure. One of the best examples is Cisco Systems, Inc., the global leader of networking for the Internet. Cisco produces the tools needed to build the powerful networks that link businesses to their customers and suppliers—access products, Web scaling products, security products, and more.

Structuring for Global Mergers

Recent mergers creating megafirms (such as DaimlerChrysler and Exxon Mobile) raise some important questions regarding corporate structure. How can managers hope to organize the global pieces of these huge, complex new firms into a cohesive, successful whole? Should decision making be centralized or decentralized? Should the firm be organized around graphic markets or product lines? And how can managers consolidate distinctly different corporate cultures? These issues and many more must be resolved if mergers of global companies are to succeed.

Summary of Learning Goals

>lg 1. What are the five structural building blocks that managers use to

design organizations?

The five structural building blocks that are used in designing an efficient and effective organizational structure are (1) division of labor, which is the process of dividing work into separate jobs and assigning tasks to workers; (2) departmentalization; (3) the managerial hierarchy (or the management pyramid), which is the levels of management within the organization (generally consists of top, middle, and supervisory management); (4) the managerial span of control (sometimes called span of management), which is the number of employees the manager directly supervises; and (5) the amount of centralization or decentralization in the organization, which entails deciding at what level in the organization decisions should be made. Centralization is the degree to which formal authority is concentrated in one area of level of the organization.

>lg 2. What are the five types of departmentalization?

Five basic types of departmentalization (see Exhibit 8-2) are commonly used in organizations:

          -Functional. Based on the primary functions performed within an

  organizational unit.

          -Product. Based on the goods and services produced or sold by the

  organizational unit.

          -Process. Based on the production process used by the organizational

  unit.

          -Customer. Based on the primary type of customer served by the

  organizational unit.

          -Geographic. Based on the geographic segmentation of

  organizational units.

>lg 3. How can the degree of centralization/decentralization be altered

to make an organization more successful?

In a highly centralized structure, top management makes most of the key decisions in the organization with very little input from lower-level employees. Centralization lets top managers develop a broad view of operations and exercise tight financial controls. In a highly decentralized organization, decision-making authority is pushed down the organizational hierarchy, giving lower level personnel more responsibility and power to make and implement decisions. Decentralization can result in faster decision-making and increased innovation and responsiveness to customer preferences.

>lg 4. How do mechanistic and organic organizations differ?

A mechanistic organization is characterized by a relatively high degree of work specialization, rigid departmentalization, many layers of management (particularly middle management), narrow spans of control, centralized decision making, and a long chain of command. This combination of elements results in a tall organizational structure. In contrast, an organic organization is characterized by a relatively low degree of work specialization, loose departmentalization, few levels of management, wide spans of control, decentralized decision-making, and a short chain of command. This combination of elements results in a flat organizational structure.

>lg 5. What is the difference between line positions and staff positions?

In daily operations, those individuals in line positions are directly involved in the process used to create goods and services. Those individuals in staff positions provide the administrative and support services that line employees need to achieve the firm’s goals. Line positions in organizations are typically in areas such as production, marketing, and finance. Staff positions are found in areas such as legal consulting, managerial consulting, public relations, and human resource management.

>lg 6. What is the goal of reengineering?

Reengineering is a complete redesign of business structures and processes in order to improve operations. The goal of reengineering is to redesign business processes to achieve improvements in cost control, product quality, customer service, and speed.

>lg 7. How does the informal organization affect the performance of a

company?

The informal organization is the network of connections and channels of communication based on the informal relationships of individuals inside the organization. Informal relationships can be between people at the same hierarchal level or between people at different levels and in different departments; the relationships can be based on connections made inside or outside the workplace. Informal organizations give employees more control over their work environment by delivering a continuous stream of company information throughout the organization, thereby helping employees stay informed.

>lg 8. What trends are influencing the way businesses organize?

The virtual corporation is a network of independent companies (suppliers, customers, even competitors) linked by information technology to share skills, costs, and access to one another’s markets. This network structure allows companies to come together quickly to exploit rapidly changing opportunities. The key attributes of a virtual corporation are technology, opportunism, excellence, trust, and no boarders.

Large global mergers, like DaimlerChrysler created from the merger of America’s Chrysler Corp. and Germany’s Daimler Benz, raise important issues in organizational structure. The ultimate question is how does management take two huge global organizations and create a single, successful, cohesive organization? Should it be centralized or decentralized? Should it be organized along geographic lines? These are some of the questions management must answer.