Management 411: Organizational Theory

Thomas G. Goddard

Agenda

® Administrative issues

® Chapters 8-9

® Case 10

Administrative Issues

® Status check on groups.

® Anything else on exam?

Chapter 8 -- Managing the International Environment

® What is the International Environment?

® Creating Value from Global Expansion

® Factors Influencing the Choice of Global Expansion Strategy

® Strategies for Managing the International Environment

® Global Expansion Strategy, Structure, & Culture

® International Strategic Alliances

What is the International Environment?

® The IE is the set of available global resources.

® Remember the “OT” from “SWOT” -- what are the opportunities & threats?

® New markets (O), but

® increasing environmental uncertainty & complexity (T).

The Specific International Environment

® What specific forces & outside stakeholders make organizational domain difficult to manage?

® Foreign competitors have advantage: more product choices.

® Suppliers are located worldwide; competitors search for low-cost suppliers.

® Distributors & marketers must tailor advertising & promotion.

® The workforce entails knowledge of foreign employee attitudes toward pay, seniority, & working conditions. A firm needs relationships with the new workforce & unions.

® Government regulations & legal system impose constraints on a company.

The General International Environment

® What general international environmental forces & outside stakeholders make the organizational domain difficult to manage?

® Economic forces (diff. In int. rates, wage levels, GDP) impact global operations.

® Technological forces need to be accessed in a foreign country for a low-cost or differentiation advantage.

® Demographic, cultural & social forces affect a country’s attitudes toward foreign products. A product’s value depends on nation’s lifestyle, values, & customs.

Creating Value from Global Expansion: 4 Approaches

® Transferring Core Competences Abroad: Facilitates low-cost or differentiated products & a competitive advantage.

® Establishing a Global Network: Entails organizing task & reporting relationships among managers, functions, & divisions that connect value creation activities.

® How can a company lower costs?

® Production can occur in a country with low “Factor costs”, like labor, land, taxes, & raw materials.

Creating Value from Global Expansion: 4 Approaches (cont.)

® Gaining Access to Global Resources & Skills: Gives an organization a competitive advantage. (e.g., accessing Japanese technology & QM approaches)

® Using Global Learning to Enhance Core Competences: New skills learned abroad are transferred to the US & improved, & vice versa.

Factors Influencing the Choice of Global Expansion Strategy

® Pressures for Global Integration

® An organization must integrate value creation activities, use skills efficiently to reduce costs, & increase quality to gain a low-cost advantage.

® Foreign competitors pursue global learning, making it important to protect an existing competitive advantage.

Factors Influencing the Choice of Global Expansion Strategy, cont.

® Pressures for Local Responsiveness

® Localized customer tastes & preferences.

® Relationship with stakeholders (suppliers, workforce).

® Increase when differences are greater.

® Responding appropriately creates a differentiation advantage

® Bureaucratic Costs

® As pressures for integration & responsiveness increase, resource transfers & customization increase costs

® Bureaucratic costs are affected by the choice of global expansion strategy.

Strategies for Managing the International Environment:

® Multidomestic Strategy

® International Strategy

® Global Strategy

® Transnational Strategy

Multidomestic Strategy: Characteristics

® Reaction to high pressures for local responsiveness.

® Products tailored to meet customer needs in each country of operation

® Wholly owned foreign divisions created; core competencies transferred from home country.

® Each division has value creation activities (mftg., product design, marketing).

® Each division has strategic control.

® Sole link is transferring profits.

Multidomestic Strategy: Advantages & Disadvantages

® Advantages:

® Access to resources & skills

® Differentiation advantage through combined core competences

® Becoming the dominant competitor

® Increased profits

® Reduced bureaucratic costs.

® Disadvantages:

® Lack of global learning due to little interaction among divisions

® Missed opportunities for long-term value creation

International Strategy: Characteristics

® Not responsive to high pressures for local responsiveness or global integration.

® Duplicates domestic operations abroad.

® Core competences in manufacturing & distribution are transferred.

® R&D, product development, & marketing are centralized.

® Foreign divisions do not customize, so customers get a standardized product: COCA-COLA!

International Strategy: Advantages & Disadvantages

® Advantages:

® Consistent product.

® Continual transfer of core competences to foreign markets.

® Disadvantages:

® Limited local responsiveness.

® Higher production costs because manufacturing is located in many countries.

® No global learning.

® No access to foreign resources & skills because core competences are exported.

® Higher bureaucratic costs because resource transfers must be coordinated.

Global Strategy: Characteristics

® Responds to pressures for global integration.

® Standardized product is manufactured at a few low-cost locations.

® Product sold globally.

® Limited customization.

Global Strategy:
Advantages & Disadvantages

® Advantages

® Economies of scale with decreased costs & prices.

® Competitive advantage of a high quality product.

® Network with value creation functions established in low-cost markets.

® Long-term contracts with low-cost suppliers

® Disadvantages

® High bureaucratic costs because of centralization.

® Controlled resource transfers by corporate headquarters.

® Lack of local responsiveness.

® Decreasing product demand.

® No learning to differentiate products.

® No differentiation.

Transnational Strategy: Characteristics

® Responds to pressures for global integration & local responsiveness.

® Combines advantages of global strategy (value creation activities located in countries with low factor costs) & multidomestic strategy (value creation activities located in foreign countries for customization).

Transnational Strategy: Advantages & Disadvantages

® Advantages

® Low-cost & differentiation achieved by transferring core competencies to countries with low cost & differentiation advantages.

® Network for skill transfer among domestic & foreign divisions.

® Divisions build on skills received & transfer improved products & process.

® Global coordination results in low-cost, high-quality products.

® Disadvantages

® Higher bureaucratic costs.

® Complex design structure & control systems due to high level of coordination & customization.

Global Expansion Strategy, Structure, & Culture

® What is Vertical Differentiation?

® VD determines the hierarchical levels & decision making.

® Minimum chain of command: structure should be as flat as possible.

® International expansion increases levels needed for adequate control.

® Size of the hierarchical levels depends on the coordination needed.

® Does a multidomestic strategy imply a flat or tall hierarchy?

® Flat, & not much coordination. Global & international strategies have tall hierarchies because value creation must be coordinated. Transnational strategy involves much coordination but has a flatter hierarchy.

® Why does transnational have such a flat hierarchy despite much coordination?

® Tall hierarchy results in communication & motivation problems.

® Remote HQ managers do not understand problems faced by foreign managers.

Vertical Differentiation: Centralization of Authority

® Choices about degree of centralization depends on the global expansion strategy:

® Multidomestic: Decentralized authority to foreign divisions. HQ uses financial information such as sales to monitor performance.

® Global: Centralizes decision making at HQ. Divisions control local distribution, marketing, & submit local information. Resource coordination at HQ through rules & procedures.

® International: Centralizes decisions about resource coordination, but manufacturing & marketing decisions are decentralized.

® Transnational: Centralized control for global learning & transferring competences, but decentralization for local responsiveness.

Horizontal Differentiation

® Three structures support global expansion:

® Global geographic: Good for multidomestic strategy.

® Global product group: Good for global or international strategy.

® Global matrix: Transnational structure. Maximizes quick decision making & enhancement of core competencies, but it is costly & hard to manage.

Increasing Integration

® Electronic Integration

® Teleconferencing to coordinate decision making & facilitate global yearning.

® Email shares information globally.

® Management Networks

® Def: Groups of managers who have made various personal contacts with other managers around the world.

® Used to integrate geographic areas & product groups.

® Company rotates managers. Learning fostered. Subunit orientations overcome.

Developing an International Organization Culture

® Culture can control resource transfers & realize advantages of global network.

® International organizational culture important for resource sharing.

International Strategic Alliances

® Long-Term Contracts: Licensing or franchising core competences to a foreign company is an alternative to establishing a foreign division.

® Network Organizations: Interconnected global companies that perform value creation activities, removing the need for foreign divisions. Fosters “matrix in the mind.”

® Minority Ownership: Develops loyalty within a network.

® Joint Ventures: 2 or more organizations pool resources & create new organization.

Chapter 9 -- Organizational Design & Technology

® What is Technology?

® Technology & Organizational Effectiveness

® Technical Complexity

® Routine Tasks & Complex Tasks

® Task Interdependence

What is technology?

® Def: Combination of skills, abilities, techniques, materials, machinery, & other equipment that people use to transform inputs into outputs.

® Three levels

® Individual

® Functional or departmental

® Organizational

Technology & Organizational Effectiveness

® 3 Stages of value creation process

® Input: skills & procedures used to manage relationships with outside stakeholders in the org’s specific environment.

® Conversion: combines machines, techniques, & procedures to transform inputs into outputs.

® Output: Technology used for distribution to external stakeholders.

Measuring & Increasing Effectiveness

® External resource approach: for managing & controlling outside stakeholders.

® Internal systems approach: for innovation, product development, & reduced development time.

® Technical approach: for increasing efficiency & quality, & reducing costs.

Three Complementary Theories

® Because each function develops technologies to create value, the organizational structure must maximize the effectiveness of technology.

® Technology influences structure.

® Three theories consider the relationship between technology & design:

® Technical complexity

® Differences between complex & routine tasks

® Task interdependence

Technical Complexity (TC), Generally

® Def: A measure of the extent to which a production process can be programmed so that it can be controlled and made predictable.

® Woodward (1965) argues that TC is the dimension that distinguishes technologies.

® High complexity occurs when conversion processes, programmed in advance and fully automated, make work standardized and predictable.

® Low TC occurs when the conversion process relies mainly on individual skills, not machines.

® Low TC makes quality and consistent production difficult.

® Woodward associated 10 levels of technical complexity with 3 steps of technology:

TC: Small-Batch & Unit Technology

® This type produces customized products or small quantities.

® Low TC: personal skills more important than machines.

® Advantage: Flexibility for a wide range of products tailored to individuals.

® Costly, but ideal for new or complex products.

TC: Large-Batch & Mass Production Technology

® This technology uses machines to increase TC and efficiency.

® Large volumes of standardized products are produced with tasks programmed into machines, resulting in standardized work and controlled production.

® Lower production costs lead to lower prices.

® Ford used mass production to decrease production costs and create a mass market.

® Mass production is generally connected with automated equipment, but people perform assembly operations when labor costs are low.

TC: Continuous-Process Technology

® This is the height of TC because production is almost totally automated and mechanized.

® Employees only handle exceptions in the work process, such as machine breakdowns.

® Continuous production, little variation, greater technical efficiency, more predictability in production, lower costs.

® Not always practical, however: e.g., research.

® People will pay premium for customized products.

TC & Organizational Structure

® Because technology affects structure, Woodward developed a model showing the structure of each type of technology.

® Increased TC makes organizations taller with a wider span of control, at least for CEO.

® However, 1st level supervisors have narrow span of control in small-batch, wide in mass production, & narrow in continuous-process.

® Note that in mass production, rules and procedures substitute for supervision, allowing wider span of control.

® Continuous-process has programmable tasks & predictable process; however, breakdowns are possible, so close monitoring requires very tall structure. Organic structure, narrow span of control, and mutual adjustment fits the needs of this technology.

The Technological Imperative

® This is the argument that technology determines structure.

® Some argue that Woodward’s sample, focusing as it did on small firms, was not representative.

® Technology may have a smaller affect on larger companies than Woodward found.

® Size may be more important than technology in determining structure.

Routine Tasks & Complex Tasks

® Perrow: 2 dimensions underlie the difference between routine & nonroutine or complex tasks and technology: task variability and task analyzability. He assessed technology along these dimensions.

® Task Variability: the number of new or unexpected situations faced while performing a task.

® Task Analyzability: the need for search activity to solve problems.

Perrow’s Four Types of Technology

Routine Technology & Organizational Structure

® Perrow’s types of technology affect structure.

® He and others have proposed that an organization should move from a mechanistic to an organic structure as tasks become more complex and less routine.

® So, routine technology suggests:

® A tall structure

® Centralized decision making

® Jobs simplified

® Mechanistic structure

Nonroutine Technology & Organizational Structure

® Nonroutine technology suggests:

® Flat structure

® Decentralized decision making

® Mutual adjustment through teams and task forces

® Organic structure

® These considerations operate at the department level

® R&D requires organic structure

® Manufacturing requires mechanistic structure

Task Interdependence (TI)

® TI: The manner in which different organizational tasks are related to one another.

® James D. Thompson looked at the relationship among tasks, TI, and the impact on technology & structure.

® People & departments who work independently have low TI; those who rely on each other have high TI.

® Thompson identified 3 types of technology: mediating, long-linked, and intensive, each associated with a different type of TI.

TI: Mediating Technology & Pooled Interdependence

® Meditating technology is a work process in which input, conversion, and output can be performed independently.

® It is based on pooled TI.

® Each part of the organization contributes independently to performance.

® Because individuals do not work with others, TI is low.

® Advantages:

® Monitoring, controlling, and evaluating performance are easier by measuring outputs objectively.

® Costs are low because of control through standardization.

® Computers facilitate mediating technology to coordinate production.

® Companies using mediating technology may use outsourcing.

® Example: sales force.

TI: Long-Linked Technology & Sequential Interdependence

® Based on sequential interdependence: one person’s actions affect another’s, performed in a series.

® Mass production technology is founded on sequential TI, which requires coordination.

® How are sequentially interdependent activities coordinated?

® Program conversion processes standardize procedures.

® Planning & scheduling manage connections between input, conversion, & output.

® Slack resources and extra resources handle unexpected situations.

® Vertical integration acquires a supplier or distributor.

Evaluating Long-Linked Technology & Sequential TI

® Advantages

® Specialization and division of labor to increase productivity.

® Simplifies tasks

® Reduces task variability

® Increases task analyzability, making tasks routine.

® Repetition of routine tasks increases efficiency.

® Disadvantages

® Coordination costs are higher

® Employees do not become skilled.

® Sensitive to bad timing.

TI: Intensive Technology & Reciprocal Interdependence

® The work of all people and departments is inseparable, making tasks impossible to program.

® More complex and nonroutine tasks decrease technical complexity.

® Hospitals and R&D departments use intensive technology.

® Much coordination is required, usually through mutual adjustment.

® Product team and matrix structures provide coordination and decentralized control.

® Some organizations avoid through long-linked technology and specialism.

Technology & Culture

® Technology affects culture, values, norms.

® Sociotechnical systems theory contends that:

® Managers need a fit between technical systems and social systems or technology & culture.

® If change occurs, managers must ensure that technology, structure, & culture are matched.

® Team-oriented system promotes values that enhance efficiency & product quality.

® TQM uses sociotechnical systems theory.

Case 10: The Lincoln Electric Company

® What kind of technology does LE use to produce its main products?

® Routine mass-production.

® Sequential task interdependencies.

® Highly vertically integrated.

® Components made in factories-within-the-factory, & stored close to the main assembly lines for final assembly.

® LE’s control over all mftg stages accounts for product reliability and quality.

Lincoln Electric, Continued

® According to Woodward’s model of technology, what kind of organizational structure is typically found in a company with a technology like LE’s? Is this what LE uses?

® Woodward: manufacturing has a tall hierarchy with wide span of control. Programming & production line speed are the main ways of monitoring and controlling employees. Mechanistic structure, top-down communication, standardization, division of labor.

® LE: No formal org. chart. Employees find best person to resolve problem. Mutual adjustment is main control. Flat organization. Huge span of control. Low costs.

Lincoln Electric, Continued

® What are LE’s primary means of coordinating and motivating employees?

® Programming

® Sequential TI

® Well-developed and well-understood division of labor.

® Incentive management plan

® Strong workers’ property rights

® Cultural values/ organizational norms.

Lincoln Electric, Continued

® What are the main elements of LE’s incentive & property rights system?

® Bonus plan

® Stock ownership system

® Continuous employment policy

® Promotions

® Open-door policy

® What kinds of instrumental values do they create?

® Cooperation, open communication, loyalty, continuous quality improvement.