Strategy Development Discussion Questions Assignment

Strategy Development Discussion Questions Assignment

This is a Socratic exercise – an opportunity for you to think and express your thoughts. This assignment is a reflection of the degree to which you are engaged in the course material, and how well you learned the topics assigned this week. The emphasis of this assignment is synthesis – the connecting of dots – where you tie together in a meaningful way (1) the assigned readings and videos, (2) current business and world events, and (3) your previous knowledge and experience.

Attached is “Socratic Skill Builder 1”, which should be used as an example of how the questions should be answered.

Do not plagarize!!! This is an independent thought exercise.

Do not take this assignment if you cannot complete by the deadline to satisfaction.



MADM 760: Organizational Strategy and Policies
Louisiana State University Shreveport – Dr. Michael D. Meeks

Socratic Skill Builder #4: Key Issues [40 points]
Due Date: Saturday April 15thby 11pm (no late assignments accepted – no exceptions!)

Download this WORD file, then type your answers directly into this WORD file. Write a minimum of 100 words for each question, save your changes, and upload the completed WORD file to Moodle.
Focus on thoughts and reasoning rather than spelling and grammar. You will NOT be penalized for incorrect spelling or improper grammar or sentence structure. This is a Socratic exercise – an opportunity for you to think and express your thoughts. This assignment is a reflection of the degree to which you are engaged in the course material, and how well you learned the topics assigned this week. The emphasis of this assignment is synthesis – the connecting of dots – where you tie together in a meaningful way (1) the assigned readings and videos, (2) current business and world events, and (3) your previous knowledge and experience. There is no correct or incorrect answer, but rather YOUR answer, based on YOUR thoughts and understanding of the material/concepts. Please avoid trying to answer what others would say, or copying what someone else has thought or written. There are two fundamental mistakes students often make on these assignments: (1) simply rambling unsupported opinions, and (2) failing to apply one’s personal perspective (i.e. writing as if it were a research paper, with no personal perspective applied)
Question 1: Based on your experience, education (including the videos and materials assigned this week), and knowledge, how would you best incorporate the following concepts into your view of how to get the best performance out of an organization: core competency, organization structure, MBO (Management by Objectives).
Type answer here…

Question #2: Summarize and expand on Chapter #8 of the textbook (Corporate-Level Strategies), and describe what YOU think about the world of large corporate level strategy. Should firms diversify, and is unrelated diversification as bad as most experts suggest? How important is it for a firm to identify and bolster their core competencies? Do mergers and acquisitions help or hurt employees and customers? Use personal examples/experience to expand on these concepts, if you can.
Type answer here…
Question #3: Summarize and expand on Chapter #9 of the textbook (Organizational Design), and the importance of organization structure, a chosen legal form of the organization, and organization control systems. Also rate (good or bad) MBO as a management style, and whether you believe it will lead to improved firm performance (or other benefits).
Type answer here…
Question #4: This week there were videos (and readings) covering somewhat disparate topics in business and strategic management. Which of these videos most resonated with you in regards to understanding business and strategic management (and why)?
Type answer here…

Question #5: For Apple, describe the firm’s competencies. Once you have identified core competencies (in your opinion), what types of diversifications should Apple target – what kinds of companies should it attempt to acquire (and why)?
Type answer here…
SB4 Support Videos

Read Read the following early in the week to help you respond to the discussion questions and to complete your assignment(s).
• MSM Textbook Chap 08 (Selecting Corporate Level Strategies)
• MSM Textbook Chap 09 (Executing Srategy through Organizational Design)
• PTW Textbook Chap 07 (Think Through Strategy)

Watch Videos Online Lecture Material: Watch videos on the following topics.
REQUIRED VIDEO LECTURES (click each title for link to video lecture)
•PowerPoint slides of Textbook Chapter 8: Corporate Level Strategy (link to download in pdf format)
•PowerPoint slides of Textbook Chapter 9: Organization Design & Structure (link to download in pdf format)

•Developing a Product: Don’t Overthink It [1 min]
•Why You Shouldn’t Rush into a Product Launch [1 min]
•Integration Strategies [2 min]
•Harvard Evaluate M&As the Right Way [2 min]
•Top 10 Business Mergers and Acquisitions of All Time [10 min]
•Diversification, Related and Unrelated [3 min]
•Rumelt about Good Strategy/Bad Strategy [14 min]
•Richard Rumelt’s Big Idea: What is Strategy? [2 min]
•TED BCG Growth-Share Matrix [2 min]
•Business Strategy – Retrenchment [7 min]
•Porter State of Shared Value (2013) [35 min]
•Porter Per Capita to Pro Capita (2013) [17 min]
•Steve Jobs – Organizational Structure [1 min]
•What is Organization Design? [5 min]
•What is Organization Development and Change [2 min]
•What is Organization Development [4 min]
•What is OD [2 min]
•The Future of OD & Change [2 min]
•Organization Change & Letting Go [3 min]
•Porter Shared Value Leadership 2015 [38 min]
•Porter on Charlie Rose (Healthcare) (2013) [34 min]
•The World’s Future MEGAPROJECTS 2015-2030’s [30 min]
•Roger Martin’s How Strategy Really Works [60 min]
•Webinar: The Play-to-Win Canvas [62 min]

Selecting Corporate-Level
After reading this chapter, you should be able to understand and articulate answers to the following
1. Why might a firm concentrate on a single industry?
2. What is vertical integration and what benefits can it provide?
3. What are the two types of diversification and when should they be used?
4. Why and how might a firm retrench or restructure?
5. What is portfolio planning and why is it useful?
What’s the Big Picture at Disney?
Walt Disney remains a worldwide icon five decades after his death.
The animated film Cars 2 was released by Pixar Animation Studios in late June 2011. This sequel to the smash
hit Cars made $66 million at the box office on its opening weekend and appeared likely to be yet another
commercial success for Pixar’s parent corporation, The Walt Disney Company. By the second weekend after its
release, Cars 2 had raked in $109 million.
Although Walt Disney was a visionary, even he would have struggled to imagine such enormous numbers
when his company was created. In 1923, Disney Brothers Cartoon Studio was started by Walt and his brother
Roy in their uncle’s garage. The fledgling company gained momentum in 1928 when a character was invented
that still plays a central role for Disney today—Mickey Mouse. Disney expanded beyond short cartoons to
make its first feature film, Snow White and the Seven Dwarves, in 1937.
Following a string of legendary films such as Pinocchio (1940), Fantasia (1940), Bambi (1942), and
Cinderella (1950), Walt Disney began to diversify his empire. His company developed a television series for the
American Broadcasting Company (ABC) in 1954 and opened the Disneyland theme park in 1955. Shortly
before its opening, the theme park was featured on the television show to expose the American public to
Walt’s innovative ideas. One of the hosts of that episode was Ronald Reagan, who twenty-five years later
became president of the United States. A larger theme park, Walt Disney World, was opened in Orlando in
1971. Roy Disney died just two months after Disney World opened; his brother Walt had passed in 1966 while
planning the creation of the Orlando facility.
The Walt Disney Company began a series of acquisitions in 1993 with the purchase of movie studio
Miramax Pictures. ABC was acquired in 1996, along with its very successful sports broadcasting company,
ESPN. Two other important acquisitions were made during the following decade. Pixar Studios was purchased
in 2006 for $7.4 billion. This strategic move brought a very creative and successful animation company under
Disney’s control. Three years later, Marvel Entertainment was acquired for $4.24 billion. Marvel was attractive
because of its vast roster of popular characters, including Iron Man, the X-Men, the Incredible Hulk, the
Fantastic Four, and Captain America. In addition to featuring these characters in movies, Disney could build
attractions around them within its theme parks.
With annual revenues in excess of $38 billion, The Walt Disney Company was the largest media
conglomerate in the world by 2010. It was active in four key industries. Disney’s theme parks included not only
its American locations but also joint ventures in France and Hong Kong. A park in Shanghai, China, is slated to
open by 2016. The theme park business accounted for 28 percent of Disney’s revenues.
Disney’s presence in the television industry, including ABC, ESPN, Disney Channel, and ten television
stations, accounted for 45 percent of revenues. Disney’s original business, filmed entertainment, accounted for
18 percent of revenue. Merchandise licensing was responsible for 7 percent of revenue. This segment of the
business included children’s books, video games, and 350 stores spread across North American, Europe, and
Japan. The remaining 2 percent of revenues were derived from interactive online technologies. Much of this
revenue was derived from Playdom, an online gaming company that Disney acquired in 2010.[1]
By mid-2011, questions arose about how Disney was managing one of its most visible subsidiaries. Pixar’s
enormous success had been built on creativity and risk taking. Pixar executives were justifiably proud that they
made successful movies that most studios would view as quirky and too off-the-wall. A good example is
2009’s Up!, which made $730 million despite having unusual main characters: a grouchy widower, a misfit
“Wilderness Explorer” in search of a merit badge for helping the elderly, and a talking dog. Disney executives,
however, seemed to be adopting a much different approach to moviemaking. In a February 2011 speech,
Disney’s chief financial officer noted that Disney intended to emphasize movie franchises such as Toy Story and
Cars that can support sequels and sell merchandise.
When the reviews of Pixar’s Cars 2 came out in June, it seemed that Disney’s preferences were the driving
force behind the movie. The film was making money, but it lacked Pixar’s trademark artistry. One movie critic
noted, “With Cars 2, Pixar goes somewhere new: the ditch.” Another suggested that “this frenzied sequel
seldom gets beyond mediocrity.” A stock analyst that follows Disney perhaps summed up the situation best
when he suggested that Cars 2 was “the worst-case scenario.…A movie created solely to drive merchandise. It
feels cynical. Parents may feel they’re watching a two-hour commercial.”[2] Looking to the future, Pixar
executives had to wonder whether their studio could excel as part of a huge firm. Would Disney’s financial
emphasis destroy the creativity that made Pixar worth more than $7 billion in the first place? The big picture
was definitely unclear.
Will John Lassiter, Pixar’s chief creative officer, be prevented from making more quirky films like Up! by
parent company Disney?
When dealing with corporate-level strategy, executives seek answers to a key question: In what industry or
industries should our firm compete? The executives in charge of a firm such as The Walt Disney Company
must decide whether to remain within their present domains or venture into new ones. In Disney’s case, the
firm has expanded from its original business (films) and into television, theme parks, and several others. In
contrast, many firms never expand beyond their initial choice of industry.
FIGURE 8.1 Concentration Strategies
concentration strategies
Actions that firms use to try
to compete successfully only
within a single industry.
market penetration
An attempt to gain additional
share of existing markets
using existing products.
Nike relies in part on a
market penetration strategy
within the athletic shoe
market development
Trying to sell existing
products within new markets.
1. Name and understand the three concentration strategies.
2. Be able to explain horizontal integration and two reasons why it often fails.
For many firms, concentration strategies are very sensible. These strategies involve trying to compete
successfully only within a single industry. McDonald’s, Starbucks, and Subway are three firms that
have relied heavily on concentration strategies to become dominant players.
1.1 Market Penetration
There are three concentration strategies: (1) market penetration, (2) market development, and (3)
product development (Figure 8.1). A firm can use one, two, or all three as part of their efforts to excel
within an industry.[3] Market penetration involves trying to gain additional share of a firm’s existing
markets using existing products. Often firms will rely on advertising to attract new customers with existing
Nike, for example, features famous athletes in print and television ads designed to take market
share within the athletic shoes business from Adidas and other rivals. McDonald’s has pursued market
penetration in recent years by using Latino themes within some of its advertising. The firm also maintains
a Spanish-language website at; the website’s name is the Spanish
translation of McDonald’s slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers
through initiatives such as this website.
1.2 Market Development
Market development involves taking existing products and trying to sell them within new markets.
One way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped
beyond selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks
to reach consumers that do not visit its coffeehouses.
Starbucks’ market
development strategy has
allowed fans to buy its beans
in grocery stores.
product development
Creating new products to
serve existing markets.
Entering new geographic areas is another way to pursue market development. Philadelphia-based
Tasty Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining
states. The firm’s products have become something of a cult hit among customers, who view the
products as much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In
April 2011, Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made
this acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake’s
products within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.
1.3 Product Development
Product development involves creating new products to serve existing markets. In the 1940s, for example,
Disney expanded its offerings within the film business by going beyond cartoons and creating
movies featuring real actors. More recently, McDonald’s has gradually moved more and more of its
menu toward healthy items to appeal to customers who are concerned about nutrition.
In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to
their customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink
industry is a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce
new varieties—such as Coke Zero and Pepsi Cherry Vanilla—in an attempt to take market share
from each other and from their smaller rivals.
Product development is a popular strategy in the soft-drink industry, but not all developments pay off. Coca-Cola
Black (a blending of cola and coffee flavors) was launched in 2006 but discontinued in 2008.
Seattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm introduces
a holiday-themed set of unusual flavors. Jones Soda’s 2006 set focus on the flavors of Thanksgiving.
It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas. The
flavors of Christmas were the focus of 2007’s set, which included Sugar Plum, Christmas Tree, Egg
Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via
a poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of
these holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the
unusual flavors each year will grab customers’ attention and get them to try—and become hooked
on—Jones Soda’s more traditional flavors.
horizontal integration
Pursuing a concentration
strategy by acquiring or
merging with a rival.
When one company
purchases another company.
The joining of two similarly
sized companies into one
1.4 Horizontal Integration: Mergers and Acquisitions
FIGURE 8.2 Horizontal Integration
Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquiring
or merging with one of their rivals. This strategic move is known as horizontal integration
(Figure 8.2). An acquisition takes place when one company purchases another company. Generally,
the acquired company is smaller than the firm that purchases it. A merger joins two companies into
one. Mergers typically involve similarly sized companies. Disney was much bigger than Miramax and
Pixar when it joined with these firms in 1993 and 2006, respectively, thus these two horizontal integration
moves are considered to be acquisitions.
Horizontal integration can be attractive for several reasons. In many cases, horizontal integration
is aimed at lowering costs by achieving greater economies of scale. This was the reasoning behind several
mergers of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and
Chevron and Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of
these six corporations believed that greater efficiency could be achieved by combining forces with a
former rival. Considering horizontal integration alongside Porter’s five forces model highlights that
such moves also reduce the intensity of rivalry in an industry and thereby make the industry more
Some purchased firms are attractive because they own strategic resources such as valuable brand
names. Acquiring Tasty Baking was appealing to Flowers Foods, for example, because the name
Tastykake is well known for quality in heavily populated areas of the northeastern United States. Some
purchased firms have market share that is attractive. Part of the motivation behind Southwest Airlines’
purchase of AirTran was that AirTran had a significant share of the airline business in cities—especially
Atlanta, home of the world’s busiest airport—that Southwest had not yet entered. Rather than build a
presence from nothing in Atlanta, Southwest executives believed that buying a position was prudent.
Horizontal integration can also provide access to new distribution channels. Some observers were
puzzled when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased
rival mixed martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within
MMA that Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure
on network television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce
might help Zuffa gain mainstream exposure of its product.[4]
The combination of UFC and Strikeforce into one company may accelerate the growing popularity of mixed martial
Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing.
One study found that more than 60 percent of mergers and acquisitions erode shareholder
wealth while fewer than one in six increases shareholder wealth.[5] Some of these moves struggle because
the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests
that Disney and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays
more for a target company than that company is worth and the buyer never earns back the premium it
In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at
huge losses.[6] For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold
it a year later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz
bought Chrysler in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped
only $1.5 billion worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious
when considering using horizontal integration.
< A concentration strategy involves trying to compete successfully within a single industry.
< Market penetration, market development, and product development are three methods to grow within an
industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but
executives need to be cautious about horizontal integration because the results are often poor.
1. Suppose the president of your college or university decided to merge with or acquire another school.
What schools would be good candidates for this horizontal integration move? Would the move be a
2. Given that so many mergers and acquisitions fail, why do you think that executives keep making
horizontal integration moves?
3. Can you identify a struggling company that could benefit from market penetration, market development,
or product development? What might you advise this company’s executives to do differently?
FIGURE 8.3 Vertical Integration at American Apparel
vertical integration
When a firm gets involved in
new portions of the value
1. Understand what backward vertical integration is.
2. Understand what forward vertical integration is.
3. Be able to provide examples of backward and forward vertical integration.
When pursuing a vertical integration strategy, a firm gets involved in new portions of the value
chain (Figure 8.3). This approach can be very attractive when a firm’s suppliers or buyers have too
much power over the firm and are becoming increasingly profitable at the firm’s expense. By entering
the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or
buyer has over the firm. Considering vertical integration alongside Porter’s five forces model highlights
that such moves can create greater profit potential. Firms can pursue vertical integration on their own,
such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when
eBay purchased PayPal.
In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm
controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the
fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills themselves.
Having control over all elements of the production process ensured the stability and quality of
key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never before seen
in the steel industry.
Today, oil companies are among the most vertically integrated firms. Firms such as ExxonMobil
and ConocoPhillips can be involved in all stages of the value chain, including crude oil exploration,
drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline, distributing
fuel to gas stations, and operating gas stations.
The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in
the Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least
some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services
(which created the cement casing for the rig on the ocean floor) and Cameron International Corporation
(which had sold Transocean blowout prevention equipment that failed to prevent the disaster).
In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.
The 2010 explosion of the Deepwater Horizon oil rig cost eleven lives and released nearly five million barrels of
crude oil into the Gulf of Mexico.
Vertical integration also creates risks. Venturing into new portions of the value chain can take a firm
into very different businesses. A lumberyard that started building houses, for example, would find that
the skills it developed in the lumber business have very limited value to home construction. Such a firm
would be better off selling lumber to contractors.
Vertical integration can also create complacency. Consider, for example, a situation in which an
aluminum company is purchased by a can company. People within the aluminum company may
backward vertical
A strategy that involves a
buyer entering the industry
that it purchases goods or
services from.
forward vertical integration
A strategy that involves a
supplier entering the industry
that it supplies inputs to.
believe that they do not need to worry about doing a good job because the can company is guaranteed
to use their products. Some companies try to avoid this problem by forcing their subsidiary to compete
with outside suppliers, but this undermines the reason for purchasing the subsidiary in the first place.
2.1 Backward Vertical Integration
A backward vertical integration strategy involves a firm moving back along the value chain and entering
a supplier’s business. Some firms use this strategy when executives are concerned that a supplier
has too much power over their firms. In the early days of the automobile business, Ford Motor Company
created subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach
ensured that Ford would not be hurt by suppliers holding out for higher prices or providing
materials of inferior quality.
To ensure high quality, Ford relied heavily on backward vertical integration in the early days of the automobile
Although backward vertical integration is usually discussed within the context of manufacturing businesses,
such as steelmaking and the auto industry, this strategy is also available to firms such as Disney
that compete within the entertainment sector. ESPN is a key element of Disney’s operations within the
television business. Rather than depend on outside production companies to provide talk shows and
movies centered on sports, ESPN created its own production company. ESPN Films is a subsidiary of
ESPN that was created in 2001. ESPN Films has created many of ESPN’s best-known programs, including
Around the Horn and Pardon the Interruption. By owning its own production company, ESPN can
ensure that it has a steady flow of programs that meet its needs.
2.2 Forward Vertical Integration
A forward vertical integration strategy involves a firm moving further down the value chain to
enter a buyer’s business. Disney has pursued forward vertical integration by operating more than three
hundred retail stores that sell merchandise based on Disney’s characters and movies. This allows Disney
to capture profits that would otherwise be enjoyed by another store. Each time a Hannah Montana
book bag is sold through a Disney store, the firm makes a little more profit than it would if the same
book bag were sold by a retailer such as Target.
Forward vertical integration also can be useful for neutralizing the effect of powerful buyers. Rental
car agencies are able to insist on low prices for the vehicles they buy from automakers because they
purchase thousands of cars. If one automaker stubbornly tries to charge high prices, a rental car agency
can simply buy cars from a more accommodating automaker. It is perhaps not surprising that Ford
purchased Hertz Corporation, the world’s biggest rental car agency, in 1994. This ensured that Hertz
would not drive too hard of a bargain when buying Ford vehicles. By 2005, selling vehicles to rental car
companies had become less important to Ford and Ford was struggling financially. The firm then reversed
its forward vertical integration strategy by selling Hertz.
The massive number of cars purchased by
rental car agencies makes forward vertical
integration a tempting strategy for
diversification strategies
Involve a firm entering
entirely new industries.
eBay’s purchase of PayPal and Apple’s creation of Apple Stores are two recent examples
of forward vertical integration. Despite its enormous success, one concern for eBay is
that many individuals avoid eBay because they are nervous about buying and selling
goods online with strangers. PayPal addressed this problem by serving, in exchange for
a fee, as an intermediary between online buyers and sellers. eBay’s acquisition of PayPal
signaled to potential customers that their online transactions were completely
safe—eBay was now not only the place where business took place but eBay also protected
buyers and sellers from being ripped off.
Apple’s ownership of its own branded stores set the firm apart from computer
makers such as Hewlett-Packard, Acer, and Gateway that only distribute their products
through retailers like Best Buy and Office Depot. Employees at Best Buy and Office Depot
are likely to know just a little bit about each of the various brands their store carries.
In contrast, Apple’s stores are popular in part because store employees are experts
about Apple products. They can therefore provide customers with accurate and insightful
advice about purchases and repairs. This is an important advantage that has been
created through forward vertical integration.
< Vertical integration occurs when a firm gets involved in new portions of the value chain. By entering the
domain of a supplier (backward vertical integration) or a buyer (forward vertical integration), executives
can reduce or eliminate the leverage that the supplier or buyer has over the firm.
1. Identify a well-known company that does not use backward or forward vertical integration. Why do you
believe that the firm’s executives have avoided these strategies?
2. Some universities have used vertical integration by creating their own publishing companies. The Harvard
Business Press is perhaps the best-known example. Are there other ways that a university might vertical
integrate? If so, what benefits might this create?
1. Explain the concept of diversification.
2. Be able to apply the three tests for diversification.
3. Distinguish related and unrelated diversification.
Firms using diversification strategies enter entirely new industries. While vertical integration involves
a firm moving into a new part of a value chain that it is already is within, diversification requires
moving into new value chains. Many firms accomplish this through a merger or an acquisition, while
others expand into new industries without the involvement of another firm.
3.1 Three Tests for Diversification
A proposed diversification move should pass three tests or it should be rejected.[7]
1. How attractive is the industry that a firm is considering entering? Unless the industry has strong
profit potential, entering it may be very risky.
2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup
the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late
1970s, it paid four times what 7Up was actually worth. Making up these costs proved to be
impossible and 7Up was sold in 1986.
3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive
advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example,
neither side benefited significantly from joining together.
3.2 Related Diversification
FIGURE 8.4 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire
related diversification
When a firm moves into a
new industry that has
important similarities with
the firm’s existing industry or
core competency
A skill set that is difficult for
competitors to imitate, can
be leveraged in different
businesses, and contributes
to the benefits enjoyed by
customers within each
Honda’s related
diversification strategy has
taken the firm into several
businesses, including boat
Related diversification occurs when a firm moves into a new industry that has important similarities
with the firm’s existing industry or industries (Figure 8.4). Because films and television are both aspects
of entertainment, Disney’s purchase of ABC is an example of related diversification. Some firms that
engage in related diversification aim to develop and exploit a core competency to become more successful.
A core competency is a skill set that is difficult for competitors to imitate, can be leveraged in
different businesses, and contributes to the benefits enjoyed by customers within each business.[8] For
example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them into
their three business groups: (1) home and family, (2) office products, and (3) tools, hardware, and
commercial products.
Honda Motor Company provides a good example of leveraging a core competency through related
diversification. Although Honda is best known for its cars and trucks, the company actually started out
in the motorcycle business. Through competing in this business, Honda developed a unique ability to
build small and reliable engines. When executives decided to diversify into the automobile industry,
Honda was successful in part because it leveraged this ability within its new business. Honda also applied
its engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries.
Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both
soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers
to buy these products through marketing activities such as branding and advertising. Thus, on
the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to
take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits
to 7Up never materialized.
unrelated diversification
When a firm enters an
industry that lacks any
important similarities with
the firm’s existing industry or
3.3 Unrelated Diversification
FIGURE 8.5 Unrelated Diversification at Berkshire Hathaway
Why would a soft-drink company buy a movie studio? It’s hard to imagine the logic behind such a
move, but Coca-Cola did just this when it purchased Columbia Pictures in 1982 for $750 million. This
is a good example of unrelated diversification, which occurs when a firm enters an industry that
lacks any important similarities with the firm’s existing industry or industries (Figure 8.5). Luckily for
Coca-Cola, its investment paid off—Columbia was sold to Sony for $3.4 billion just seven years later.
Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for
example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering
Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks
both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water
and furniture businesses.
Lighter firm Zippo is currently trying to avoid this scenario. According to CEO Geoffrey Booth,
the Zippo is viewed by consumers as a “rugged, durable, made in America, iconic” brand.[9] This brand
The durability of Zippo’s
products is illustrated by this
lighter, which still works
despite being made in 1968.
has fueled eighty years of success for the firm. But the future of the lighter business is bleak. Zippo executives
expect to sell about 12 million lighters this year, which is a 50 percent decline from Zippo’s
sales levels in the 1990s. This downward trend is likely to continue as smoking becomes less and less attractive
in many countries. To save their company, Zippo executives want to diversify.
In particular, Zippo wants to follow a path blazed by Eddie Bauer and Victorinox Swiss Army Brands
Inc. The rugged outdoors image of Eddie Bauer’s clothing brand has been used effectively to sell sport
utility vehicles made by Ford. The high-quality image of Swiss Army knives has been used to sell Swiss
Army–branded luggage and watches. As of March 2011, Zippo was examining a wide variety of markets
where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor
hand warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification
options would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would
be losers, such as Harley-branded bottled water, was a key challenge facing Zippo executives.
Strategy at the Movies
In Good Company
What do Techline cell phones, Sports America magazine, and Crispity Crunch cereals have in common? Not
much, but that did not stop Globodyne from buying each of these companies in its quest for synergy in the
2004 movie In Good Company. Executive Carter Duryea was excited when his employer Globodyne purchased
Waterman Publishing, the owner of Sports America magazine. The acquisition landed him a big promotion and
increased his salary to “Porsche-leasing” size.
Synergy is created when two or more businesses produce benefits together that could not be produced separately.
While Duryea was confident that a cross-promotional strategy between his advertising division and
the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little
congruence between advertisements in Sports America on the one hand and cell phones and breakfast cereals
on the other. Despite his considerable efforts, Duryea was unable to increase ad pages in Sports America because
the unrelated nature of Globodyne’s other business units inhibited his strategy of creating synergy. Seeing
little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate.
After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing,
including Duryea, were fired.
Globodyne’s inability to successfully manage Waterman Publishing illustrates the difficulties associated with
unrelated diversification. While buying companies outside a parent company’s core competencies can increase
the size of the company and in turn its executives’ bank accounts, managing firms unfamiliar to management
is generally a risky and losing proposition. Decades of research on strategic management suggest
that when firms diversify, it is best to “stick to the knitting.” That is, stay with businesses executives are familiar
with and avoid moving into ventures where little expertise exists.
In Good Company starred Topher Grace as ill-fated junior executive Carter Duryea.
Reducing the size of part of a
firm’s operations, often
though laying off employees.
< Diversification strategies involve firmly stepping beyond its existing industries and entering a new value
chain. Generally, related diversification (entering a new industry that has important similarities with a firm’s
existing industries) is wiser than unrelated diversification (entering a new industry that lacks such
1. Studies have shown that executives’ pay increases when their firms gets larger. What role, if any, do you
think executive pay plays in diversification decisions?
2. Identify a firm that has recently engaged in diversification. Search the firm’s website to identify executives’
rationale for diversifying. Do you find the reasoning to be convincing? Why or why not?
1. Understand why a firm would want to shrink or exit from a business.
2. Be able to distinguish retrenchment and restructuring.
“In what industry or industries should our firm compete?” is the central question addressed by
corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or
more industries.
4.1 Retrenchment
In the early twentieth century, many military battles were fought in series of parallel trenches. If an attacking
army advanced enough to force a defending army to abandon a trench, the defenders would
move back to the next trench and try to refortify their position. This small retreat was preferable to losing
the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a retrenchment
strategy shrink one or more of their business units. Much like an army under attack, firms
using this strategy hope to make just a small retreat rather than losing a battle for survival.
Retrenchment is often accomplished through laying off employees. In July 2011, for example,
South African grocery store chain Pick n Pay announced plans to release more than 3,000 of its estimated
36,000 workers. Just over a month earlier, South African officials had approved Walmart’s acquisition
of a leading local retailer called Massmart. Rivalry in the South African grocery business seemed
likely to become fiercer, and Pick n Pay executives needed to cut costs for their firm to remain
A Pick n Pay executive explained the layoffs by noting that “the decision was not taken lightly but
was required to ensure the viability of the retail business and its employees into the future.”[10] This is a
common rationale for retrenchment—by shrinking the size of a firm, executives hope that the firm can
survive as a profitable enterprise. Without becoming smaller and more cost effective, Pick n Pay and
other firms that use retrenchment can risk total failure.
The term retrenchment has its origins in trench warfare, which is shown in this World War I photo taken in France.
4.2 Restructuring
FIGURE 8.6 Spin Offs
Selling off part of a firm’s
spin off
Creating a new company
whose stock is owned by
investors out of a piece of a
bigger company.
diversification discount
The tendency of investors to
undervalue the shares of a
diversified firm.
spin off
Creating a new company
whose stock is owned by
investors out of a piece of a
bigger company.
Shutting down portions of a
firm’s operations, often at a
tremendous financial loss.
Executives sometimes decide that bolder moves than retrenchment are needed for their firms to be successful
in the future. Divestment refers to selling off part of a firm’s operations. In some cases, divestment
reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can
also be used to reverse backward vertical integration. General Motors (GM), for example, turned a
parts supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent
firm. This was done via a spin-off, which involves creating a new company whose stock is owned
by investors (Figure 8.6). GM stockholders received 0.69893 shares of Delphi for every share of stock
they owned in GM. A stockholder who owned 100 shares of GM received 69 shares of the new company
plus a small cash payment in lieu of a fractional share.
Divestment also serves as a means to undo diversification strategies. Divestment can be especially
appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often
struggle to understand the complexity of diversified firms, and this can result in relatively poor performance
by the stocks of such firms. This is known as a diversification discount. Executives sometimes
attempt to unlock hidden shareholder value by breaking up diversified companies.
Fortune Brands provides a good example. Surprisingly, this company does not own Fortune
magazine, but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three
businesses: spirits (including Jim Beam and Maker’s Mark), household goods (including Masterlock
and Moen Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In
December 2010, Fortune Brand’s CEO announced a plan to separate the three businesses to “maximize
long-term value for our shareholders and to create exciting opportunities within our businesses.”[11]
Fortune Brands took the first step toward overcoming the diversification discount in May 2011 when it
reached an agreement to sell its gold business to Fila. In June 2011, plans to spin off the home
products business were announced.
Fortune Brands hopes to unlock hidden shareholder value by divesting unrelated brands such as Masterlock.
Executives are sometimes forced to admit that the operations that they want to abandon have no value.
If selling off part of a business is not possible, the best option may be liquidation. This involves simply
shutting down portions of a firm’s operations, often at a tremendous financial loss. GM has done this
by scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by
shutting down its Mercury brand. Such moves are painful because massive investments are written off,
but becoming “leaner and meaner” may save a company from total ruin.
< Executives sometimes need to reduce the size of their firms to maximize the chances of success. This can
involve fairly modest steps such as retrenchment or more profound restructuring strategies.
portfolio planning
A process that helps
executives make decisions
involving their firms’ various
1. Should Disney consider using retrenchment or restructuring? Why or why not?
2. Given how much information is readily available about companies, why do you think investors still
struggle to analyze diversified companies?
1. Understand why a firm would want to use portfolio planning.
2. Be able to explain the limitations of portfolio planning.
Executives in charge of firms involved in many different businesses must figure out how to manage
such portfolios. General Electric (GE), for example, competes in a very wide variety of industries, including
financial services, insurance, television, theme parks, electricity generation, lightbulbs, robotics,
medical equipment, railroad locomotives, and aircraft jet engines. When leading a company such as
GE, executives must decide which units to grow, which ones to shrink, and which ones to abandon.
Portfolio planning can be a useful tool. Portfolio planning is a process that helps executives assess
their firms’ prospects for success within each of its industries, offers suggestions about what to do
within each industry, and provides ideas for how to allocate resources across industries. Portfolio planning
first gained widespread attention in the 1970s, and it remains a popular tool among executives
5.1 The Boston Consulting Group (BCG) Matrix
FIGURE 8.7 The Boston Consulting Group (BCG) Matrix
cash cows
High market share units
within slow-growing
Low market share units
within slow-growing
High market share units
within fast-growing
question marks
Low market share units
within fast-growing
Owning a puppy is fun, but
companies may want to
avoid owning units that are
considered to be dogs.
Source: Photo courtesy of D. Ketchen.
The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning (Figure
8.7). Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions:
its share of the market and the growth rate of its industry. High market share units within slowgrowing
industries are called cash cows. Because their industries have bleak prospects, profits from
cash cows should not be invested back into cash cows but rather diverted to more promising businesses.
Low market share units within slow-growing industries are called dogs. These units are good
candidates for divestment. High market share units within fast-growing industries are called stars.
These units have bright prospects and thus are good candidates for growth. Finally, low-market-share
units within fast-growing industries are called question marks. Executives must decide whether to
build these units into stars or to divest them.
The BCG matrix is just one portfolio planning technique. With the help of a leading consulting firm,
GE developed the attractiveness-strength matrix to examine its diverse activities. This planning approach
involves rating each of a firm’s businesses in terms of the attractiveness of the industry and the
firm’s strength within the industry. Each dimension is divided into three categories, resulting in nine
boxes. Each of these boxes has a set of recommendations associated with it.
5.2 Limitations to Portfolio Planning
Although portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning
oversimplifies the reality of competition by focusing on just two dimensions when analyzing a
company’s operations within an industry. Many dimensions are important to consider when making
strategic decisions, not just two. Second, portfolio planning can create motivational problems among
employees. For example, if workers know that their firm’s executives believe in the BCG matrix and
that their subsidiary is classified as a dog, then they may give up any hope for the future. Similarly,
workers within cash cow units could become dismayed once they realize that the profits that they help
create will be diverted to boost other areas of the firm. Third, portfolio planning does not help identify
new opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries
a firm should consider entering.
< Portfolio planning is a useful tool for analyzing a firm’s operations, but this tool has limitations. The BCG
matrix is one of the most widely used approaches to portfolio planning.
1. Is market share a good dimension to use when analyzing the prospects of a business? Why or why not?
2. What might executives do to keep employees within dog units motivated and focused on their jobs?
This chapter explains corporate-level strategy. Executives grappling with corporate-level strategy must
decide in what industry or industries their firms will compete. Many of the possible answers to this
question involve growth. Concentration strategies involve competing within existing domains to expand
within those domains. This can take the form of market penetration, market development, or
product development. Integration involves expanding into new stages of the value chain. Backward integration
occurs when a firm enters a supplier’s business while forward vertical integration occurs
when a firm enters a customer’s business. Diversification involves entering entirely new industries; this
can be an industry that is related or unrelated to a firm’s existing activities. Sometimes being smart
about corporate-level strategy requires shrinking the firm through retrenchment or restructuring. Finally,
portfolio planning can be useful for analyzing firms that participate in a wide variety of industries.
1. Divide your class into four or eight groups, depending on the size of the class. Each group should create a
new portfolio planning technique by selecting two dimensions along which companies can be analyzed.
Allow each group three to five minutes to present its approach to the class. Discuss which portfolio
planning technique seems to offer the best insights.
2. This chapter discussed Disney. Imagine that you were hired as a consultant by General Electric (GE), a firm
that competes with Disney in the movie, television, and theme park industries. What actions would you
recommend that GE take in these three industries to gain advantages over Disney?
Standard & Poor’s stock report on The Walt Disney Company.
Stewart, J. B. 2011, June 1. A collision of creativity and cash. New York Times. Retrieved
Ansoff, H. I. 1957. Strategies for diversification. Harvard Business Review, 35(5),
Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward
global domination. Retrieved from
Henry, D. 2002, October 14. Mergers: Why most big deals don’t pay off. Business Week,
Hitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating
value for stakeholders. New York, NY: Oxford University Press.
Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business
Review, 65(3), 102–121.
Prahalad, C. K., & Hamel, G. 1990. The core competencies of the corporation. Harvard
Business Review, 86(1), 79–91.
zippos_burning_ambition_lies_in_ retail_expansion.
Chilwane, L. 2011, July 7. Pick n Pay to retrench. The New Age. Retrieved from
Sauerhaft, R. 2011, May 20. Fortune Brands to sell Titleist and FootJoy to Fila Korea. Retrieved from
Executing Strategy through
Organizational Design
After reading this chapter, you should be able to understand and articulate answers to the following
1. What are the basic building blocks of organizational structure?
2. What types of structures exist, and what are advantages and disadvantages of each?
3. What is control and why is it important?
4. What are the different forms of control and when should they be used?
5. What are the key legal forms of business, and what implications does the choice of a business
form have for organizational structure?
Can Oil Well Services Fuel Success for GE?
General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to
become the sixth largest in the United States.
Source: Image courtesy of The General Electric Company,
In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of John
Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides services to oil
wells in only five months. In October 2010, GE added the deepwater exploration capabilities of Wellstream
Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was acquired for $3
billion. By spending more than $7 billion on these acquisitions, GE executives made it clear that they had big
plans within the oil well services business.
While many executives would struggle to integrate three new companies into their firms, experts
expected GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group
PLC, for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE.”[1] In other words, this
analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The way
that GE was organized fueled this belief.
GE’s organizational structure includes six divisions, each devoted to specific product categories: (1) Energy
(the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions, (4) Healthcare, (5)
Aviation, and (6) Transportation. Within the Energy division, there are three subdivisions: (1) Oil & Gas, (2)
Power & Water, and (3) Energy Services. Rather than having the entire organization involved with integrating
John Wood Group PLC, Wellstream Holdings PLC, and Dresser into GE, these three newly acquired companies
would simply be added to the Oil & Gas subdivisions within the Energy division.
In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations.
This division was responsible for all sales of GE products and services outside the United States. The Global
Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt expected that
countries other than the United States will account for 60 percent of GE’s sales in the future, up from 53
percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth & Operations was
further divided into twelve geographic regions: China, India, Southeast Asia, Latin/South America, Russia,
Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan.[2]
Finally, like many large companies, GE also provided some centralized services to support all its units.
These support areas included public relations, business development, legal, global research, human resources,
and finance. By having entire units of the organization devoted to these functional areas, GE hoped not only to
minimize expenses but also to create consistency across divisions.
Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well
services operations would need the help of GE’s public relations and legal departments in the future. Other
important questions about GE’s acquisitions remained open as well. In particular, would the organizational
cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the culture of GE? Most
acquisitions in the business world fail to deliver the results that executives expect, and the incompatibility of
organizational cultures is one reason why.
GE fits a dizzying array of businesses into a relatively simple organizational chart.
Source: Adapted from company document posted at
The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly
intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless
professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay was
asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in favor of
In the context of business, execution refers to how well a firm such as GE implements the strategies that
executives create for it. This involves the creation and operation of both an appropriate organizational
structure and an appropriate organizational control processes. Executives who skillfully orchestrate structure
and control are likely to lead their firms to greater levels of success. In contrast, those executives who fail to do
so are likely to be viewed by stakeholders such as employees and owners in much the same way Coach McKay
viewed his offense: as worthy of execution.
1. Understand what division of labor is and why it is beneficial.
2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in
an organizational structure.
FIGURE 9.1 The Building Blocks of Organizational Structure
division of labor
A process of splitting up a
task into a series of smaller
tasks, each of which is
performed by a specialist.
1.1 Division of Labor
General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines,
and loans. One way that GE could produce its lightbulbs would be to have individual employees work
on one lightbulb at a time from start to finish. This would be very inefficient, however, so GE and most
other organizations avoid this approach. Instead, organizations rely on division of labor when creating
their products (Figure 9.1). Division of labor is a process of splitting up a task (such as the creation
of lightbulbs) into a series of smaller tasks, each of which is performed by a specialist.
FIGURE 9.2 Hierarchy of Authority
The leaders at the top of organizations have long known that division of labor can improve efficiency.
Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating responsibility
to other judges offered perhaps the earliest known example (Figure 9.2). In the eighteenth
century, Adam Smith’s book The Wealth of Nations quantified the tremendous advantages that division
of labor offered for a pin factory. If a worker performed all the various steps involved in making
pins himself, he could make about twenty pins per day. By breaking the process into multiple steps,
however, ten workers could make forty-eight thousand pins a day. In other words, the pin factory was a
staggering 240 times more productive than it would have been without relying on division of labor. In
the early twentieth century, Smith’s ideas strongly influenced Henry Ford and other industrial pioneers
who sought to create efficient organizations.
organizational structure
How tasks are assigned and
grouped together with
formal reporting
Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.
Source: Image courtesy of Short, J. C., Bauer, T., Ketchen, D. J., & Simon, L. 2011. Atlas Black: The Complete Adventure. Irvington, NY: Flat World
While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate
different tasks and the people who perform them. The solution is organizational structure, which is
defined as how tasks are assigned and grouped together with formal reporting relationships. Creating a
structure that effectively coordinates a firm’s activities increases the firm’s likelihood of success. Meanwhile,
a structure that does not match well with a firm’s needs undermines the firm’s chances of
Division of labor was central to Henry Ford’s development of assembly lines in his automobile factory. Ford noted,
“Nothing is particularly hard if you divide it into small jobs.”
Source: Image courtesy of the Ford Company,
organizational chart
A diagram that depicts how
firms’ structures are built
using two basic building
blocks: vertical linkages and
horizontal linkages.
vertical linkages
Relationships within an
organizational structure that
show the lines of
responsibility through which
a supervisor delegates
authority to subordinates,
oversees their activities,
evaluates their performance,
and guides them toward
improvement when
unity of command
The principle that each
person within an
organization should only
report directly to one
horizontal linkages
Relationships between equals
in an organization.
Committee meetings can be
boring, but they are often
vital for coordinating efforts
across departments.
© Thinkstock
informal linkages
Unofficial relationships such
as personal friendships,
rivalries, and politics.
1.2 Vertical and Horizontal Linkages
Most organizations use a diagram called an organizational chart to depict their structure. These organizational
charts show how firms’ structures are built using two basic building blocks: vertical linkages
and horizontal linkages. Vertical linkages tie supervisors and subordinates together. These linkages
show the lines of responsibility through which a supervisor delegates authority to subordinates,
oversees their activities, evaluates their performance, and guides them toward improvement when necessary.
Every supervisor except for the person at the very top of the organization chart also serves as a
subordinate to someone else. In the typical business school, for example, a department chair supervises
a set of professors. The department chair in turn is a subordinate of the dean.
Most executives rely on the unity of command principle when mapping out the vertical linkages
in an organizational structure. This principle states that each person should only report directly to one
supervisor. If employees have multiple bosses, they may receive conflicting guidance about how to do
their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of
General Electric, for example, the head of the Energy division reports only to the chief executive officer.
If problems were to arise with executing the strategic move discussed in this chapter’s opening vignette—joining
the John Wood Group PLC with GE’s Energy division—the head of the Energy division
reports would look to the chief executive officer for guidance.
Horizontal linkages are relationships between equals in an organization. Often these linkages
are called committees, task forces, or teams. Horizontal linkages are important when close coordination
is needed across different segments of an organization. For example, most business schools revise
their undergraduate curriculum every five or so years to ensure that students are receiving an education
that matches the needs of current business conditions. Typically, a committee consisting of at least
one professor from every academic area (such as management, marketing, accounting, and finance)
will be appointed to perform this task. This approach helps ensure that all aspects of business are represented
appropriately in the new curriculum.
Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages.
As noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal
groupings to maximize familiarity and trust. We organize our stores and company into a variety of interlocking
teams. Most teams have between 6 and 100 Team Members and the larger teams are divided
further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership
Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking
team structure continues all the way upwards to the Executive Team at the highest level of the company.”[3]
This emphasis on teams is intended to develop trust throughout the organization, as well as to
make full use of the talents and creativity possessed by every employee.
1.3 Informal Linkages
Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics.
In the long-running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—employee
at a nuclear power plant. In one episode, Homer gains power and influence with
the plant’s owner, Montgomery Burns, which far exceeds Homer’s meager position in the organization
chart, because Mr. Burns desperately wants to be a member of the bowling team that Homer captains.
Homer tries to use his newfound influence for his own personal gain and naturally the organization as
a whole suffers. Informal linkages such as this one do not appear in organizational charts, but they nevertheless
can have (and often do have) a significant influence on how firms operate.
< The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of the
study of organizational structure. Understanding vertical, horizontal, and informal linkages helps managers
to organize better the different individuals and job functions within a firm.
1. How is division of labor used when training college or university football teams? Do you think you could
use a different division of labor and achieve more efficiency?
2. What are some formal and informal linkages that you have encountered at your college or university?
What informal linkages have you observed in the workplace?
FIGURE 9.3 Common Organizational Structures
1. Know and be able to differentiate among the four types of organizational structure.
2. Understand why a change in structure may be needed.
Within most firms, executives rely on vertical and horizontal linkages to create a structure that they
hope will match the needs of their firm’s strategy. Four types of structures are available to executives:
(1) simple, (2) functional, (3) multidivisional, and (4) matrix (Figure 9.3). Like snowflakes, however, no
two organizational structures are exactly alike. When creating a structure for their firm, executives will
take one of these types and adapt it to fit the firm’s unique circumstances. As they do this, executives
must realize that the choice of structure will influences their firm’s strategy in the future. Once a structure
is created, it constrains future strategic moves. If a firm’s structure is designed to maximize effi-
ciency, for example, the firm may lack the flexibility needed to react quickly to exploit new
simple structure
An arrangement that does
not rely on formal systems of
division of labor, often
because one person performs
all the tasks that the
organization needs to
2.1 Simple Structure
FIGURE 9.4 Simple Structure
Many organizations start out with a simple structure. In this type of structure, an organizational
chart is usually not needed. Simple structures do not rely on formal systems of division of labor (Figure
9.4). If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish.
For example, on the TV series The Simpsons, both bar owner Moe Szyslak and the Comic
Book Guy are shown handling all aspects of their respective businesses.
There is a good reason most sole proprietors do not bother creating formal organizational charts.
© Thinkstock
If the firm consists of more than one person, tasks tend to be distributed among them in an informal
manner rather than each person developing a narrow area of specialization. In a family-run restaurant
or bed and breakfast, for example, each person must contribute as needed to tasks, such as cleaning restrooms,
food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic decision
making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm
makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure,
organizations that use this type of structure tend to have very few rules and regulations. The process
of evaluating and rewarding employees’ performance also tends to be informal.
The informality of simple structures creates both advantages and disadvantages. On the plus side,
the flexibility offered by simple structures encourages employees’ creativity and individualism. Informality
has potential negative aspects, too. Important tasks may be ignored if no one person is specifically
assigned accountability for them. A lack of clear guidance from the top of the organization can create
confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus
when relying on a simple structure, the owner of a firm must be sure to communicate often and openly
with employees.
functional structure
An organizational
arrangement whereby
employees are divided into
departments that each
handle activities related to an
area of the business, such as
marketing, production,
human resources,
information technology, and
customer service.
2.2 Functional Structure
FIGURE 9.5 Functional Structure
As a small organization grows, the person in charge of it often finds that a simple structure is no longer
adequate to meet the organization’s needs. Organizations become more complex as they grow, and this
can require more formal division of labor and a strong emphasis on hierarchy and vertical links. In
many cases, these firms evolve from using a simple structure to relying on a functional structure.
Within a functional structure, employees are divided into departments that each handle activities
related to a functional area of the business, such as marketing, production, human resources, information
technology, and customer service (Figure 9.5). Each of these five areas would be headed up by a
manager who coordinates all activities related to her functional area. Everyone in a company that
works on marketing the company’s products, for example, would report to the manager of the marketing
department. The marketing managers and the managers in charge of the other four areas in turn
would report to the chief executive officer.
An example of a functional structure
Source: Image courtesy of Flat World Knowledge,
Using a functional structure creates advantages and disadvantages. An important benefit of adopting a
functional structure is that each person tends to learn a great deal about his or her particular function.
By being placed in a department that consists entirely of marketing professionals, an individual has a
great opportunity to become an expert in marketing. Thus a functional structure tends to create highly
skilled specialists. Second, grouping everyone that serves a particular function into one department
tends to keep costs low and to create efficiency. Also, because all the people in a particular department
share the same background training, they tend to get along with one another. In other words, conflicts
within departments are relatively rare.
Using a functional structure also has a significant downside: executing strategic changes can be
very slow when compared with other structures. Suppose, for example, that a textbook publisher decides
to introduce a new form of textbook that includes “scratch and sniff” photos that let students
smell various products in addition to reading about them. If the publisher relies on a simple structure,
the leader of the firm can simply assign someone to shepherd this unique new product through all aspects
of the publication process.
If the publisher is organized using a functional structure, however, every department in the organization
will have to be intimately involved in the creation of the new textbooks. Because the new
product lies outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately
for the books’ authors, the publication process will be halted whenever a functional area
does not live up to its responsibilities in a timely manner. More generally, because functional structures
are slow to execute change, they tend to work best for organizations that offer narrow and stable
product lines.
The specific functional departments that appear in an organizational chart vary across organizations
that use functional structures. In the example offered earlier in this section, a firm was divided into
five functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology,
and (5) customer service. In the TV show The Office, a different approach to a functional structure
is used at the Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided
into six functional areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5)
human resources, and (6) accounting. A functional structure was a good fit for the branch at the time
because its product line was limited to just selling office paper.
multidivisional structure
An organizational
arrangement whereby
employees are divided into
departments based on
product areas and/or
geographic regions.
The Scranton branch of Dunder Mifflin may be a dysfunctional organization, but it relies on a functional structure.
Source: Image courtesy of Short, J. C., Bauer, T., Ketchen, D. J., & Simon, L. 2011. Atlas Black: The Complete Adventure. Irvington, NY: Flat World
2.3 Multidivisional Structure
Many organizations offer a wide variety of products and services. Some of these organizations sell their
offerings across an array of geographic regions. These approaches require firms to be very responsive to
customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many
firms abandon the use of a functional structure as their offerings expand. Often the new choice is a
multidivisional structure. In this type of structure, employees are divided into departments based
on product areas and/or geographic regions.
General Electric (GE) is an example of a company organized this way. As shown in the organization
chart that accompanies this chapter’s opening vignette, most of the company’s employees belong
to one of six product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation,
and Transportation) or to a division that is devoted to all GE’s operations outside the United States
(Global Growth & Operations).
A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE
makes a strategic move such as acquiring the well-support division of John Wood Group PLC, only the
Problems can be created when delegating lots
of authority to local divisions. McDonald’s top
executives were angered when an ad by their
French division suggested that children should
only eat at their restaurants once a week.
© Thinkstock
matrix structure
An organizational
arrangement that relies
heavily on cross-functional
teams that each work on a
different project.
relevant division (in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy.
In contrast, if GE was organized using a functional structure, the transition would be much
slower because all the divisions in the company would need to be involved. A multidivisional structure
also helps an organization to better serve customers’ needs. In the summer of 2011, for example, GE’s
Capital division started to make real-estate loans after exiting that market during the financial crisis of
the late 2000s.[4] Because one division of GE handles all the firm’s loans, the wisdom and skill needed to
decide when to reenter real-estate lending was easily accessible.
Of course, empowering divisions to act quickly can backfire if people in those divisions take actions
that do not fit with the company’s overall strategy. McDonald’s experienced this kind of situation
in 2002. In particular, the French division of McDonald’s ran a surprising advertisement in a magazine
called Femme Actuelle. The ad included a quote from a nutritionist that asserted children should not
eat at a McDonald’s more than once per week. Executives at McDonald’s headquarters in suburban
Chicago were concerned about the message sent to their customers, of course, and they made it clear
that they strongly disagreed with the nutritionist.
Another downside of multidivisional structures is that they tend to be more costly to
operate than functional structures. While a functional structure offers the opportunity
to gain efficiency by having just one department handle all activities in an area, such as
marketing, a firm using a multidivisional structure needs to have marketing units within
each of its divisions. In GE’s case, for example, each of its seven divisions must develop
marketing skills. Absorbing the extra expenses that are created reduces a firm’s
profit margin.
GE’s organizational chart highlights a way that firms can reduce some of these expenses:
the centralization of some functional services. As shown in the organizational
chart, departments devoted to important aspects of public relations, business development,
legal, global research, human resources, and finance are maintained centrally to
provide services to the six product divisions and the geographic division. By consolidating
some human resource activities in one location, for example, GE creates efficiency
and saves money.
An additional benefit of such moves is that consistency is created across divisions.
In 2011, for example, the Coca-Cola Company created an Office of Sustainability to coordinate
sustainability initiatives across the entire company. Bea Perez was named
Coca-Cola’s chief sustainability officer and was put in charge of the Office of Sustainability.
At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-Cola
had “made significant progress with our sustainability initiatives, but our current approach
needs focus and better integration.”[5] In other words, a department devoted to
creating consistency across Coca-Cola’s sustainability efforts was needed for Coca-Cola
to meet its sustainability goals.
2.4 Matrix Structure
Within functional and multidivisional structures, vertical linkages between bosses and subordinates are
the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships.[6] In particular,
these structures create cross-functional teams that each work on a different project. This offers
several benefits: maximizing the organization’s flexibility, enhancing communication across functional
lines, and creating a spirit of teamwork and collaboration. A matrix structure can also help develop
new managers. In particular, a person without managerial experience can be put in charge of a relatively
small project as a test to see whether the person has a talent for leading others.
Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates
the unity of command principle because each employee is assigned multiple bosses. Specifically,
any given individual reports to a functional area supervisor as well as one or more project supervisors.
This creates confusion for employees because they are left unsure about who should be giving them
direction. Violating the unity of command principle also creates opportunities for unsavory employees
to avoid responsibility by claiming to each supervisor that a different supervisor is currently depending
on their efforts.
The potential for conflicts arising between project managers within a matrix structure is another
concern. Chances are that you have had some classes with professors who are excellent speakers while
you have been forced to suffer through a semester of incomprehensible lectures in other classes. This
mix of experiences reflects a fundamental reality of management: in any organization, some workers
are more talented and motivated than others. Within a matrix structure, each project manager naturally
will want the best people in the company assigned to her project because their boss evaluates these
managers based on how well their projects perform. Because the best people are a scarce resource, in-
fighting and politics can easily flare up around which people are assigned to each project.
Given these problems, not every organization is a good candidate to use a matrix structure. Organizations
such as engineering and consulting firms that need to maximize their flexibility to service projects
of limited duration can benefit from the use of a matrix. Matrix structures are also used to organize
research and development departments within many large corporations. In each of these settings,
the benefits of organizing around teams are so great that they often outweigh the risks of doing so.
You won’t need to choose between a red pill and a blue pill within a matrix structure, but you will have multiple
Source: Image courtesy of Flat World Knowledge,
Strategy at the Movies
Office Space
How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an
employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero. Initech’s
use of a matrix structure meant that each employee had multiple bosses, each representing a different aspect
of Initech’s business. High-tech firms often use matrix to gain the flexibility needed to manage multiple projects
simultaneously. Successfully using a matrix structure requires excellent communication among various
managers—however, excellence that Initech could not reach. When Gibbons forgot to put the appropriate
cover sheet on his TPS report, each of his eight bosses—and a parade of his coworkers—admonished him.
This fiasco and others led to Gibbons to become cynical about his job.
Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant Chotchkie’s,
had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s manager had
an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to enliven their uniforms.
A series of mixed messages about the restaurant’s policy on flair led Joanna to emphatically proclaim—both
verbally and nonverbally—her disdain for the manager. She then quit her job and stormed out of
the restaurant.
Office Space illustrates the importance of organizational design decisions to an organization’s culture and to
employees’ motivation levels. A matrix structure can facilitate resource sharing and collaboration but may also
create complicated working relationships and impose excessive stress on employees. Chotchkie’s organizational
structure involved simpler working relationships, but these relationships were strained beyond the
breaking point by a manager’s eccentricities. In a more general sense, Office Space shows that all organizational
structures involve a series of trade-offs that must be carefully managed.
boundaryless organization
When the usual barriers
between parts of the
organization as well as
barriers between the
organization and others are
The boundaryless approach
to structure embraced by
W.L. Gore drives the kind of
creative thinking that led to
their most famous product,
Source: Image courtesy of adifansnet,
Within a poorly organized firm like Initech, simply keeping possession of a treasured stapler is a
© Thinkstock
2.5 Boundaryless Organizations
Most organizational charts show clear divisions and boundaries between different units. The value of a
much different approach was highlighted by former GE CEO Jack Welch when he created the term
boundaryless organization. A boundaryless organization is one that removes the usual barriers
between parts of the organization as well as barriers between the organization and others.[7] Eliminating
all internal and external barriers is not possible, of course, but making progress toward being
boundaryless can help an organization become more flexible and responsive. One example is W.L.
Gore, a maker of fabrics, medical implants, industrial sealants, filtration systems, and consumer
products. This firm avoids organizational charts, management layers, and supervisors despite having
approximately nine thousand employees across thirty countries. Rather than granting formal titles to
certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their
ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show
up, you’re a leader.”[8]
An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During
2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders
from the National Guard (who are controlled by state governments) and from active-duty military
units (who are controlled by federal authorities). According to one National Guard officer, “It was just
like a solid wall was between the two entities.”[9] Efforts were needlessly duplicated in some geographic
areas while attention to other areas was delayed or inadequate. For example, poor coordination caused
the evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day.
The results were immense human suffering and numerous fatalities.
In 2005, boundaries between organizations
hampered rescue efforts following Hurricane
Source: Image courtesy of Kyle Niemi,
Although it was created to emphasize the
need for unity among the American colonies,
this famous 1754 graphic by Ben Franklin also
illustrates a fundamental truth about structure:
If the parts that make up a firm do not work
together, the firm is likely to fail.
Source: Image courtesy of Wikipedia,
To avoid similar problems from arising in the future, barriers between the National
Guard and active-duty military units are being bridged by special military officers
called dual-status commanders. These individuals will be empowered to lead both types
of units during a disaster recovery effort, helping to ensure that all areas receive the attention
they need in a timely manner.
2.6 Reasons for Changing an Organization’s Structure
Creating an organizational structure is not a onetime activity. Executives must revisit
an organization’s structure over time and make changes to it if certain danger signs
arise. For example, a structure might need to be adjusted if decisions with the organization
are being made too slowly or if the organization is performing poorly. Both these
problems plagued Sears Holdings in 2008, leading executives to reorganize the
Sears’s new structure organized the firm around five types of divisions: (1) operating
businesses (such as clothing, appliances, and electronics), (2) support units (certain
functional areas such as marketing and finance), (3) brands (which focus on nurturing
the firm’s various brands such as Lands’ End, Joe Boxer, Craftsman, and Kenmore), (4)
online, and (5) real estate. At the time, Sears’s chairman Edward S. Lampert noted that
“by creating smaller focused teams that are clearly responsible for their units, we [will]
increase autonomy and accountability, create greater ownership and enable faster, better
decisions.”[10] Unfortunately, structural changes cannot cure all a company’s ills. As
of July 2011, Sears’s stock was worth just over half what it had been worth five years
Sometimes structures become too complex and need to be simplified. Many observers
believe that this description fits Cisco. The company’s CEO, John Chambers,
has moved Cisco away from a hierarchical emphasis toward a focus on horizontal linkages.
As of late 2009, Cisco had four types of such linkages. For any given project, a
small team of people reported to one of forty-seven boards. The boards averaged fourteen
members each. Forty-three of these boards each reported to one of twelve councils.
Each council also averaged fourteen members. The councils reported to an operating
committee consisting of Chambers and fifteen other top executives. Four of the fortyseven
boards bypassed the councils and reported directly to the operating committee.
These arrangements are so complex and time consuming that some top executives
spend 30 percent of their work hours serving on more than ten of the boards, councils,
and the operating committee.
Because it competes in fast-changing high-tech markets, Cisco needs to be able to
make competitive moves quickly. The firm’s complex structural arrangements are preventing
this. In late 2007, Hewlett-Packard (HP) started promoting a warranty service
that provides free support and upgrades within the computer network switches market.
Because Cisco’s response to this initiative had to work its way through multiple committees,
the firm did not take action until April 2009. During the delay, Cisco’s share of
the market dropped as customers embraced HP’s warranty. This problem and others
created by Cisco’s overly complex structure were so severe that one columnist
wondered aloud “has Cisco’s John Chambers lost his mind?”[11] In the summer of 2011,
Chambers reversed course and decided to return Cisco to a more traditional structure
while reducing the firm’s workforce by 9 percent. Time will tell whether these structural
changes will boost Cisco’s stock price, which remained flat between 2006 and
< Executives must select among the four types of structure (simple, functional, multidivisional, and matrix)
available to organize operations. Each structure has unique advantages, and the selection of structures
involves a series of trade-offs.
organizational control
Allow executives to track how
well the organization is
performing, identify areas of
concern, and then take action
to address the concerns.
1. What type of structure best describes the organization of your college or university? What led you to reach
your conclusion?
2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from
movies that provide examples or insights relevant to understanding organizational structure?
1. Understand the three types of control systems.
2. Know the strengths and weaknesses of common management fads.
In addition to creating an appropriate organizational structure, effectively executing strategy depends
on the skillful use of organizational control systems. Executives create strategies to try to achieve their
organization’s vision, mission, and goals. Organizational control systems allow executives to track
how well the organization is performing, identify areas of concern, and then take action to address the
concerns. Three basic types of control systems are available to executives: (1) output control, (2) behavioral
control, and (3) clan control. Different organizations emphasize different types of control, but
most organizations use a mix of all three types.
3.1 Output Control
FIGURE 9.6 Output Controls
output control
A focus on measurable results
within an organization.
Output control focuses on measurable results within an organization. Examples from the business
world include the number of hits a website receives per day, the number of microwave ovens an assembly
line produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6).
In each of these cases, executives must decide what level of performance is acceptable, communicate
expectations to the relevant employees, track whether performance meets expectations, and then make
any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida, were
once disappointed to learn that their paychecks had been lost—by the US Postal Service! The corrective
action was simple: they started receiving their pay via direct deposit rather than through the mail.
While most scholarships require a high GPA, comedian David Letterman created a scholarship for a “C” student at
Ball State University. Ball State later named a new communications and media building after its very famous
Source: Image courtesy of Kyle Flood,
Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as
part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent
of Delta’s flights had arrived on time during 2010. This performance led Delta to rank dead last
among the major US airlines and fifteenth out of eighteen total carriers.[12] In response, Delta took important
corrective steps. In particular, the airline added to its ability to service airplanes and provided
more customer service training for its employees. Because some delays are inevitable, Delta also announced
plans to staff a Twitter account called Delta Assist around the clock to help passengers whose
flights are delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a
$198 million profit, despite having to absorb a $1 billion increase in its fuel costs due to rising
Output control also plays a big part in the college experience. For example, test scores and grade
point averages are good examples of output measures. If you perform badly on a test, you might take
corrective action by studying harder or by studying in a group for the next test. At most colleges and
universities, a student is put on academic probation when his grade point average drops below a certain
level. If the student’s performance does not improve, he may be removed from his major and even dismissed.
On the positive side, output measures can trigger rewards too. A very high grade point average
can lead to placement on the dean’s list and graduating with honors.
3.2 Behavioral Control
FIGURE 9.7 Behavioral Controls
behavioral control
A focus on specifying the
actions that ultimately lead to
While output control focuses on results, behavioral control focuses on controlling the actions that
ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate
behavior (Figure 9.7). In most states, for example, signs are posted in restaurant bathrooms reminding
employees that they must wash their hands before returning to work. The dress codes that are
enforced within many organizations are another example of behavioral control. To try to prevent employee
theft, many firms have a rule that requires checks to be signed by two people. And in a somewhat
bizarre example, some automobile factories dictate to workers how many minutes they can spend
in restrooms during their work shift.
Behavioral control also plays a significant role in the college experience. An illustrative (although
perhaps unpleasant) example is penalizing students for not attending class. Professors grade attendance
to dictate students’ behavior; specifically, to force students to attend class. Meanwhile, if you were to
suggest that a rule should be created to force professors to update their lectures at least once every five
years, we would not disagree with you.
Outside the classroom, behavioral control is a major factor within college athletic programs. The
National Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules,
policies, and procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate
its rules at one time or another. In June 2011, for example, Penn State’s legendary Joe Paterno
simply stopped to watch a few of his players take part in voluntary summer workouts during his regular
walk on campus. This was a rules violation, even though the squeaky-clean “JoePa” did not speak
with his players.[14] This example and others like it have led many critics to suggest that the behavioral
controls instituted by the NCAA have reached an absurd level. Nevertheless, some degree of behavioral
control is needed within virtually all organizations.
Creating an effective reward structure is key to effectively managing behavior because people tend
to focus their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors
that seem positive on the surface but that can actually undermine organizational goals under
some circumstances. For example, restaurant servers are highly motivated to serve their tables quickly
because doing so can increase their tips. But if a server devotes all his or her attention to providing fast
service, other tasks that are vital to running a restaurant, such as communicating effectively with managers,
host staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and
strive to align rewards with behaviors. For example, waitstaff who consistently behave as team players
could be assigned to the most desirable and lucrative shifts, such as nights and weekends.
Although some behavioral controls are intended for employees and not customers, following them is beneficial to
Source: Image courtesy of Sterilgutassistentin,
3.3 Clan Control
FIGURE 9.8 Clan Controls
clan control
Relying on shared traditions,
expectations, values, and
norms to lead people to work
toward the good of their
As part of the team-building effort at Google,
new employees are known as Noogles and are
given a propeller hat to wear.
Source: Image courtesy of Tduk Alex Lozupone,
Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral control),
clan control is an informal type of control. Specifically, clan control relies on shared traditions, expectations,
values, and norms to lead people to work toward the good of their organization (Figure
9.8). Clan control is often used heavily in settings where creativity is vital, such as many high-tech businesses.
In these companies, output is tough to dictate, and many rules are not appropriate. The creativity
of a research scientist would be likely to be stifled, for example, if she were given a quota of patents
that she must meet each year (output control) or if a strict dress code were enforced (behavioral
Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20
percent of their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’
for employees to submit new ideas and to comment on others’ ideas. Google executives routinely make
themselves available two to three times per week for employees to visit with them to present their ideas.
These informal meetings have generated a number of innovations, including personalized home pages
and Google News, which might otherwise have never been adopted.
Some executives look to clan control to improve the performance of struggling organizations.
In 2005, Florida officials became fed up with complaints about surly clerks within
the state’s driver’s license offices. The solution was to look for help with training employees
from two companies that are well-known for friendly, engaged employees and
excellent customer service. The first was The Walt Disney Company, which offers
world-famous hospitality at its Orlando theme parks. The second was regional supermarket
chain Publix, a firm whose motto stressed that “shopping is a pleasure” in its
stores. The goal of the training was to build the sort of positive team spirit Disney and
Publix enjoy. The state’s highway safety director summarized the need for clan control
when noting that “we’ve just got to change a little culture out there.”[15]
Clan control is also important on many college campuses. Philanthropic and social
organizations such as clubs, fraternities, and sororities often revolve around shared values
and team spirit. More broadly, many campuses have treasured traditions that bind
alumni together across generations. Purdue University, for example, proudly owns the
world’s largest drum. The drum is beaten loudly before home football games to fire up
the crowd. After athletic victories, Auburn University students throw rolls of toilet paper
into campus oak trees. At Clark University, Rollins College, and Emory University,
time-honored traditions that involve spontaneously canceling classes surprise and delight
students. These examples and thousands of others spread across the country’s colleges
and universities help students feel like they belong to something special.
3.4 Management Fads: Out of Control?
FIGURE 9.9 Managing Management Fads
Don’t chase the latest management fads. The situation dictates which approach best accomplishes the
team’s mission.
– Colin Powell
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad
arises when some element of popular culture becomes enthusiastically embraced by a group of people.
Over the past few decades, for example, fashion fads have included leisure suits (1970s), “Members
Only” jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises
is also usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or
hairstyle creates “buzz” and publicity but also ensures that its appeal is only temporary.[16]
Fads also seem to be a predictable aspect of the business world (Figure 9.9). As with cultural fads,
many provocative business ideas go through a life cycle of creating buzz, captivating a group of enthusiastic
adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly endless supply
of popular management books whose premises range from the intriguing to the absurd. Within the
topic of leadership, for example, various books promise to reveal the “leadership secrets” of an eclectic
array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun, and Santa Claus.
Beyond the striking similarities between cultural and business fads, there are also important differences.
Most cultural fads are harmless, and they rarely create any long-term problems for those that
embrace them. In contrast, embracing business fads could lead executives to make bad decisions. As
our quote from Colin Powell suggests, relying on sound business practices is much more likely to help
executives to execute their organization’s strategy than are generic words of wisdom from Old St. Nick.
management by objectives
A process wherein managers
and employees work
together to create goals.
quality circle
A formal group of employees
that meet regularly to
brainstorm solutions to
organizational problems.
sensitivity-training groups
(or T-groups)
Groups of people that meet
to discuss emotions, feelings,
beliefs, and biases about
workplace issues to gain
greater understanding of
themselves and others.
organizational culture
Values and norms embraced
by an organization that
determine how people
interact with other
organizational members as
well as external stakeholders.
Many management fads have been closely tied to organizational control systems. For example, one
of the best-known fads was an attempt to use output control to improve performance. Management
by objectives (MBO) is a process wherein managers and employees work together to create goals.
These goals guide employees’ behaviors and serve as the benchmarks for assessing their performance.
Following the presentation of MBO in Peter Drucker’s 1954 book The Practice of Management, many
executives embraced the process as a cure-all for organizational problems and challenges.
Like many fads, however, MBO became a good idea run amok. Companies that attempted to create
an objective for every aspect of employees’ activities eventually discovered that this was unrealistic.
The creation of explicit goals can conflict with activities involving tacit knowledge about the organization.
Intangible notions such as “providing excellent customer service,” “treating people right,” and
“going the extra mile” are central to many organizations’ success, but these notions are difficult if not
impossible to quantify. Thus, in some cases, getting employees to embrace certain values and other aspects
of clan control is more effective than MBO.
Quality circles were a second fad that built on the notion of behavioral control. Quality circles
began in Japan in the 1960s and were first introduced in the United States in 1972. A quality circle is a
formal group of employees that meets regularly to brainstorm solutions to organizational problems. As
the name “quality circle” suggests, identifying behaviors that would improve the quality of products
and the operations management processes that create the products was the formal charge of many
quality circles.
While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent
that this perspective was too narrow. Instead, quality is just one of four critical dimensions of
the production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions
often results in a product that simply cannot satisfy customers’ needs. Many products with
perfect quality, for example, would be created too slowly and at too great a cost to compete in the market
effectively. Thus trade-offs among quality, speed, cost, and flexibility are inevitable.
Improving clan control was the aim of sensitivity-training groups (or T-groups) that were
used in many organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen
people openly discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark
contrast to the rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator.
These discussions were thought to lead individuals to greater understanding of themselves and others.
The anticipated results were more enlightened workers and a greater spirit of teamwork.
Research on social psychology has found that groups are often far crueler than individuals. Unfortunately,
this meant that the candid nature of T-group discussions could easily degenerate into accusations
and humiliation. Eventually, the T-group fad gave way to recognition that creating potentially
hurtful situations has no place within an organization. Hints of the softer side of T-groups can still be
observed in modern team-building fads, however. Perhaps the best known is the “trust game,” which
claims to build trust between employees by having individuals fall backward and depend on their
coworkers to catch them.
Improving clan control was the basis for the fascination with organizational culture that was all
the rage in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence:
Lessons from America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies
that they viewed as stellar performers and distilled eight similarities that were shared across the
companies. Most of the similarities, including staying “close to the customer” and “productivity
through people,” arose from powerful corporate cultures. The book quickly became an international
sensation; more than three million copies were sold in the first four years after its publication.
Soon it became clear that organizational culture’s importance was being exaggerated. Before long,
both the popular press and academic research revealed that many of Peters and Waterman’s “excellent”
companies quickly had fallen on hard times. Basic themes such as customer service and valuing one’s
company are quite useful, but these clan control elements often cannot take the place of holding employees
accountable for their performance.
Spirited games of kickball can help build an
organization’s culture, but such events should
not substitute for holding employees
accountable for delivering results.
© Thinkstock
The history of fads allows us to make certain predictions about today’s hot ideas, such
as empowerment, “good to great,” and viral marketing. Executives who distill and act
on basic lessons from these fads are likely to enjoy performance improvements. Empowerment,
for example, builds on important research findings regarding employees—many
workers have important insights to offer to their firms, and these workers
become more engaged in their jobs when executives take their insights seriously. Relying
too heavily on a fad, however, seldom turns out well.
Just as executives in the 1980s could not treat In Search of Excellence as a recipe for
success, today’s executives should avoid treating James Collins’s 2001 best-selling book
Good to Great: Why Some Companies Make the Leap…and Others Don’t as a detailed
blueprint for running their companies. Overall, executives should understand that
management fads usually contain a core truth that can help organizations improve but
that a balance of output, behavioral, and clan control is needed within most organizations.
As legendary author Jack Kerouac noted, “Great things are not accomplished by
those who yield to trends and fads and popular opinion.”
< Organizational control systems are a vital aspect of executing strategy because they track performance
and identify adjustments that need to be made. Output controls involve measurable results. Behavioral
controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values,
expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control
processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually
realize that an array of sound business practices is needed to create effective organizational controls.
1. What type of control do you think works most effectively with you and why?
2. What are some common business practices that you predict will be considered fads in the future?
3. How could you integrate each type of control intro a college classroom to maximize student learning?
1. Know the three basic legal forms of business.
2. Know the two specialized types of corporations.
FIGURE 9.10 Business Forms
sole proprietorship
A firm that is owned by one
A legal form of business
wherein two or more
partners share ownership of a
A legal form of ownership
wherein shares of ownership
are publicly traded in stock
markets, and management is
performed by professional
S corporation
A special type of corporation
wherein the firm’s profits and
losses are reported on
owners’ personal tax returns
in proportion with each
owner’s share of the firm.
limited liability company
A form of ownership that is
granted in state laws wherein
owners are not personally
responsible for debts that the
LLC accumulates (like in a
corporation) and the LLC can
be run in a flexible manner
(like in a partnership).
4.1 Choosing a Form of Business
The legal form a firm chooses to operate under is an important decision with implications for how a
firm structures its resources and assets. Several legal forms of business are available to executives. Each
involves a different approach to dealing with profits and losses (Figure 9.10).
There are three basic forms of business. A sole proprietorship is a firm that is owned by one person.
From a legal perspective, the firm and its owner are considered one and the same. On the plus
side, this means that all profits are the property of the owner (after taxes are paid, of course). On the
minus side, however, the owner is personally responsible for the firm’s losses and debts. This presents a
tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for example, the owner
could find his personal assets forfeited. Most sole proprietorships are small and many have no employees.
In most towns, for example, there are a number of self-employed repair people, plumbers, and
electricians who work alone on home repair jobs. Also, many sole proprietors run their businesses
from their homes to avoid expenses associated with operating an office.
In a partnership, two or more partners share ownership of a firm. A partnership is similar to a
sole proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also
responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise
complements the others. For example, an accountant who specializes in preparing individual tax returns
and another who has mastered business taxes might choose to join forces to offer customers a
more complete set of tax services than either could offer alone.
From a practical standpoint, a partnership allows a person to take time off without closing down
the business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee,
Florida. When Lawrence suffered a serious injury a few years ago, Sander was able to take over supervising
his projects and see them through to completion. Had Lawrence been a sole proprietor, his customers
would have suffered greatly. However, a person who chooses to be part of a partnership rather
than operating alone as a sole proprietor also takes on some risk; your partner could make bad decisions
that end up costing you a lot of money. Thus developing trust and confidence in one’s partner is
very important.
Most large firms, such as Southwest Airlines, are organized as corporations. A key difference
between a corporation on the one hand and a sole proprietorship and a partnership on the other is
that corporations involve the separation of ownership and management. Corporations sell shares of
ownership that are publicly traded in stock markets, and they are managed by professional executives.
These executives may own a significant portion of the corporation’s stock, but this is not a legal
Another unique feature of corporations is how they deal with profits and losses. Unlike in sole proprietorships
and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive profits
or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits and
losses tend to be reflected in whether the firm’s stock price rises or falls. When a shareholder sells her
stock, the firm’s performance while she has owned the stock will influence whether she makes a profit
relative to her stock purchase. Shareholders can also benefit from profits if a firm’s executives decide to
pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends
that these profits support are both taxed. This double taxation is a big disadvantage of
A specialized type of corporation called an S corporation avoids double taxation. Much like in a
partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion
with each owner’s share of the firm. Although this is an attractive feature, an S corporation would be
impractical for most large firms because the number of shareholders in an S corporation is capped,
usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For
smaller firms, such as many real-estate agencies, the S corporation is an attractive form of business.
A final form of business is very popular, yet it is not actually recognized by the federal government
as a form of business. Instead, the ability to create a limited liability company (LLC) is granted in
state laws. LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not
personally responsible for debts that the LLC accumulates (like in a corporation) and the LLC can be
run in a flexible manner (like in a partnership). When paying federal taxes, however, an LLC must
choose to be treated as a corporation, a partnership, or a sole proprietorship. Many home builders
(including Sander & Lawrence), architectural businesses, and consulting firms are LLCs.
< The three major forms of business in the United States are sole proprietorships, partnerships, and
corporations. Each form has implications for how individuals are taxed and resources are managed and
1. Why are so many small firms sole proprietorships?
2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this
form of business over others?
3. Why might different forms of business be more likely to rely on a different organizational structure?
This chapter explains elements of organizational design that are vital for executing strategy. Leaders of
firms, ranging from the smallest sole proprietorship to the largest global corporation, must make decisions
about the delegation of authority and responsibility when organizing activities within their
firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting
point for more complex decisions that lead to the creation of formal organizational charts. While small
businesses rarely create organization charts, firms that embrace functional, multidivisional, and matrix
structures often have reporting relationships with considerable complexity. To execute strategy effectively,
managers also depend on the skillful use of organizational control systems that involve output,
behavioral, and clan controls. Although introducing more efficient business practices to improve organizational
functioning is desirable, executives need to avoid letting their firms become “out of control”
by being skeptical of management fads. Finally, the legal form a business takes is an important decision
with implications for a firm’s organizational structure.
1. The following chart is an organizational chart for the US federal government. What type of the four
structures mentioned in this chapter best fits what you see in this chart?
2. How does this structure explain why the government seems to move at an incredibly slow pace?
3. What changes could be made to speed up the government? Would they be beneficial?
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