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.