Detrimental to bear. Chandler, therefore, proposed the following as the sequence of what occurs : 1. New strategy is created. 2.

New administrative problem emerge. 3. Economic pereformance declines. 4. New approporiate structure is invented. 5. Profit returns to its previous level. Chandler found that in their early years, corporations such as DuPont tend to have a centralized functional organizational structure that is well suited to producing and selling a limited range of products. As they add new product lines, purchase their own sources of supply, and create their own distribution network..become too complex for highly centralized structures. To remain succesfull, this type of organization needs to shift to a decentralized structure with several semiautonomous division ( refered to in Chapter 5 as divional structure). Alfred P. Sloan past CEO of General Motors, detailed how GM conducted such structural changes in the 1920. he sw decentralization of structure as centralized policy determination coupled with decentralized operating management. After top management had developed a strategy for the total corporation, the individual divisions ( Chevrolet, Buick, and so on ) were free to choose how to implement that strategy. Patterned after DuPont, GM found the decentralized multidivisional structure to be extremely effective in allowing thye maximum amount of freedom product development. Return on investment (ROI) was used as afinancial control. ( ROI is discussed in more detail in chapter 11 ) Research generally supports Chandlers proposition that structure follows strategy ( as well as the reserve proposition that structure influences strategy ). As mentioned earlier, change in the invironment tend to be reflected in changes in a corporations strategy.. leading to changes in corporation structure. Strategy, structure, and the invironment need to be closely aligned; otherwise, organizational performance will like suffer. For example, a business unit following a differentiation strategy needs more freedom from headquarters to be successful than does another unit following a low-cost strategy. Although it is agreed that organizational structure must vary with different environmental conditions, which, in turn affect an organizations strategy, there is no agreement about an optimal organizational design. What was appropriate for DuPont and General Motors in the 1920 might not be appropriate today. Firms in the same industry do, however, tend to organize themselves similarly to one another. For example automobile manufacturers tend to emulate General Motors divional concept, whereas consumer-goods producers tend to emulate the brand-management concept ( a type of matrix structure ) pioneered by procter & Gamble Company. The general conclusion seems to be that firms following similar strategies in similar industries tend to adopt similar structures.

Stages of Corporate Development

Succesful corporations tend to follow a pattern of structural development as they grow and expand. Beginning with the simple structure of the entrepreneurial firm ( in

which everybody does everything ), successful corporations usually get larger and organize along functional lines, with marketing, production, and finance departments. With continuig success, the company adds new product lines in different industries and organizes it self into interconnected divions. The differences among these three structural stages of corporate development in terms of typical problems, objectives, strategies, reward systems, and other characteristics are specified in detail in Table 9-1 function Stage I Sizing up: Major Survival and problems growth dealing with short-term operating problems. Stage II Growth, nationalizations, and expansions of resources, providing for adequate attentions to product problems. Stage III Trusteeship in management and investment and control of large, increasing, and diversified resources. Also, important to diagnose and take actions on problems at division level. Profits and meeting ROI, profits, functionally oriented earnings per share. budgets and performance targets. Functionally oriented Growth and product moves restricted to diversification; one product scope; exploitations of explotations of one general business basic product or opportunities. service field. One unit, functionally Multiunit general specialized group. staff office and decentralized operating divisions. Control grows beyond one persons; assessment of functional operations necessary; structured control systems evolve. Complex formal systems geared to comparative assessment of performance measures indicating problems and opportunities and assessing management ability of division managers.

Objectives

Personal subjective.

and

Strategy

Organization: Major characteristics structure

Implicif and personal; exploitation of immediate opportunities seen by owner-manager. One unit,one-man show. of

a. Measureme Personal, subjective nt and control based on control simple accounting system and daily communication and observation.

b. Key performanc e indicators

Personal criteria, relationships with owner, operating efficienty, ability to solve operating problems.

Functional and internal criteria such as sales, performance compared to budget, size of empire, status in group, personal, relationships,etc

Rewardpunishment system

Informal, personal, subjective; used to maintain control and divide small pool of resources for key performers to provide personal incentives.

More structured; ussualy based to a greater extend on agreed policies a opposed to personal opinion and relationship.

More impersonal application of comparisons such as profits, ROI, P/E ratio, sales, market share, productivity, product leadership, personal development, employee attitudes, public responsibility. Allotment bydue process of a wide variety of different rewards and punishment on a formal and systematic basis. Companywide policies ussualy apply to many different classes of managers and workers with few major exceptions for individual cases.

Stage I: Simple structure Stage I is typified by the entrepreneur, who founds a company to promote an idea ( a product or service ). The entrepreneur tends to make all the important decisions personally and is involved in every detail and phase of the organizatioan. The stage I company has little formal structure, which allows the entrepreneur to directly supervise the activities of every employee ( see figure 5-4 for an illustration of the simple, functional, and divisional structures ). Planning is ussualy short range or reactive. The typical managerial function of planning, organizing, directing, staffing, and controlling are usually performed to a very limited degree if it all. The greatest strength of a stage I corporations are its struggle for growth. Its greatest wekness is its extreme reliance on the entrepreneur to decide general strategies as well as detailed procedures. If the entrepreneur falters, the company usually flounders. This is labeled by Griener as a crisis of ledership. Stage I describes Oracle Corporations, the computer software firm, under the management of its co-founder and CEO Lawrence Ellison. The company adopted a pioneering approach to retrieving data called Structured Query Language ( SQL ). When IBM made SQL its standard. Oracles success was assured. Unfortunatelly, Ellisons technical wizardry was not sufficient to manage the company. Often working at home, he

lost sight of details outside his technical interest. Although the companys sales were rapidly increasing, its financial controls were so weak that management had to restate an entire years result to rectify irregularities. After the compay recorded its first loss Ellison hird a set of functional managers to run the company while he retreated to focus on new product development. Stage II: Functional Structure Stage II is the point when the entrepreneur is replaced by a team of managers who have functional specializations. The transition to this stage requires a substansial managerial style change for the chief officer of the company, especially if he or she was the satge I entrepreneur. He or she must learn to delegate; otherwise, having additionalstaff members yields no benefits to the organization. The previous example of Ellisons retreat from top management at Oracle Corporation to new product development manager is one way tht technically brilliant founders are able to get out of the newly empowered functional managers. In satge II, the corporate strategy favors protectionism through dominance of the industry, often through vertical and horizontal growth. The great strength of stage II corporation lies in its concentration and specialization in one industry. Its great weakness is that all its eggs are in one basket. By concentrating on one industry while that industry remains attractive, a stage II company, such as Oracle Corporation in computer software, can be very successful. Once a functionally structured firm disersifies into other products in different industries, however the advantages of the functional structure break down. A crisis of autonomy can now develop, in which people managing diversified product lines need more decisionsmaking freedom than top management is willing to delegate to them. The company needs to move to a different structure. Stage III: Divisional Structure Stage III is typified by the corporations managing diverse product lines in numerous industries; it decentralizes the decision-making authority. Satge III organizations grow by diversifying their product lines and expanding to cover wier geographical areas. They move to a divisional structure with a central headquarters and decentralized operating divisions with each division or business unit a functionally organized Stage II company. They may also use a conglomerate structure if top management chooses to keep its collection of stage II subsidiaries operating autonomously. A crisis of control can now develop, I which the various units act to optimize their own sales and profits without regard to overall corporation whose headquarters seems far away and almost irrelevant. Recently divisions have been evolving into SBUs to better reflect product-market considerations. Headquarters attempts to coordinate the activities of its operating divisions or SBUs through performance-and results- oriented control and reporting systems and by stressing corporate planning techniques. The units are not tightly controlled but are held responsible for their own performance results. Therefore, to be effective, the company has to have a decentralized decision process. The greatest strength of stage III corporations is its almost unlimited resources. Its most significant weakness is that it is usually so large and complex that it tends to become relatively inflexible. General motors are examples of stage III corporations.

Stage IV: Beyond SBUs Even with its evolutions into SBUs during the 1970 and 1980, the divisional structure is not the last word in organization structure. The use of SBUs may result in a red tape crisis in which the corporation has grown too large and complex to b managed through formal programs and rigid systems, and procedures take precedence over problem solving. Undr conditions of (1) increasing environmental uncertainty(2)greater use of sophisticated technological production methods and informations systems,(3)the increasing size and scope of worldwide business corporations,(4)a greater emphasis on multy-industry competitive strategy, and (5)a more educated cadre of managers and employees, new advanced forms of organizational structure are emerging. These structures emphasize collaboration over competitions in the managing of an organizations multiple overlapping projects and developing businesses. The matrix and the network are two possible candidates for a fourth stage in corporate development-a stage that not only emphasize horizontal over vertical connections between people and groups but also organizes work around temporary projects in which sophisticated informations systems support collaborative activities. According to Greiner, it is likely that this stage of development will have its own crisis as well-a sort of pressure-cooker crisis. He predict that employees in these collaborative organizations will eventually grow emotionally and physically exhausted from the intensity of teamwork and the heavy pressure for innovative solutions. Block to Changing Stages Corporations often find themselves in difficullty because they are blocked from moving into next logical stage of development. Blocks to development may be internal (such as lack of resources, lack of ability, or refusal of top management to delegate of decision making to others) or external (such as economic conditions, labor shortages, and lack of market growth ). For example, Chandler noted on his study that the successful founder/ CEO in one stage was rarely the person who created the new structure to fit the new strategy, and as a result, the transition from one stage to another was ofte painful. This was true of General Motors Corporation under the management of William Durant, Ford Motor Company under Henry Ford I, Polaroid Corporation under Edwin Land, Apple Computer under Steven Jobs, and Hayes Microcomputer Product under Dennis Hayes. Entrepreneurs who start businesses generally have four tendencies that work very well for small new ventures but become Achilles heels for these same individuals when they try to manage a larger firm with diverse needs, departments, priorities, and constituencies: Loyalty to comrades: This is good at the beginning but soon becomes a liability as favoritism. Task oriented: Focusing on the job is critical at first but then becomes excessive attention to detail. Single-mindedness: A grand vision is neede to introduce a new product but can become tunnel vision as the company grows into more markets and products.

Working in isolation: This is good for a brilliant scientist but disastrous for a CEO with multiple constituencies.

This difficulty in moving to a new stage is compounded by the founders tendency to maneuver around the need to delegate by carefully hiring, training, and grooming his or her own team of managers. The team tends to maintain the founders influence throughout the organization long after the founder is gone. This is what happened at Walt Disney Productions when the family continued to emphasize Walts policies and plans long after he was dead. Although this may often be an organization strength, it may also be a weakness to the extent that the culture supports the status quo and blocks needed change. STRATEGY HIGHLIGHT Would there be an Internet without the modem ? Although most large organization now rent digital TI lines for fast Internet access, many individuals and small business owners still access the World Wide Web through the same type of modem and command set invented by Dennis Hayes. Dennis Hayes is legendary not only for inventing the personal computer modem but also for driving his company into bankruptcy not once but twice. Hayes and retired partner Dale Heatherington founded Hayes Microcomputer Product 20 years ago, when they invented a device called the Hayes smartmodem that allowed personal computer to communicate with each other through telephone lines via the Hayes Standart AT Command Set. The modem was needed to convert voice analog data into the digital data needed by computers. Modem sales boomed from $4.8 milion in 1981 to $150 milion in 1985. when the competitors developed low-cost modem, Hayes delayed until early 1990 to respond with its own low-priced version. Sales and profits plummeted. Hayes lost its dominant position to U.S. Robotics. Management problems mounted. Creditors and potential investors looking into the companys books and operations found them a shambles. According to one investment banker, The factory was in complete disarray. The company reported its first loss in 1994, by which time the company had nearly $70 million in debt. In November 1994, Hayes applied for protection from creditors under chapter 11 of the U.S. Bankruptcy Code. Still under the leadership of its founder, the company underwent a tournaround during 1995. Still in second place with a 9.3% market share of modem sales in North America, Dennis Hayes put his company up for sale. He turned down a bid of $140 million from rival Diamond Multimedia Systems and instead accepted only $30 million for 49% of the company from Asian investors. Although the offer required Mr. Hayes to relinguish the title of CEO. Hayes would still be Chairman of the Board. He explained his decision as deriving from his unwillingness to completely let go of his baby.Ill be able to have input through the board and as chairman, that will best use my abilities. What I was concerned about was that someone would come in and slash a part of the company without understanding how it fit in. The company, renamed Hayes Corporation, continued to suffer losses. On October 9, 1998, the company declared Chapter 11 bankruptcy for the last time. Unable to fine further financing to turn things around, the company was forced to sell its brands, manufacturing facilities, and distribution offices to the Canadian firm Zoom

Technologies (www.zoom.com), for $5.3 million. Its sold its web site domain name, Hayes.com, its service center and its spare parts inventories to Modem Express (www.modemexpress.com), a seller of refurbished orphan products. The company founded by Dennis Hayes now exists only as a division of another company. Organizational Life Cycle Instead of considering stages of development in terms of structure, the organizational life cycle approach places the primary emphasis on the dominant issue facing the corporation. Organizational structure is only a secondary concern. The organizational life cycle describes how organizations grow, develop, and eventually decline. It is the organizational equivalent of the product life cycle in marketing. These stages are Birth (stage I), Growth (stage II), Maturity (stageIII), Decline (stage IV), and Death (stage V). The impact of these stages on corporate strategy and structure is summarized in Table 9-2. Note that the first three stages of the organizational life cycle are similar to the three commonly accepted stages of corporate development mentioned previously. The only significant difference is the addition of the decline and death stages to complete the cycle. Even though a companys strategy may still be sound, its aging structure, culture, and processes may be such that they prevent the strategy from being executed properly. Its core competencies be come core ridgities that are no longer able to adapt to changing conditions thus the company moves into Decline. Stage I Stage II Stage III Stage IV Stage V Dominan Birth Growth Maturity Decline Death t issue Popular Concentratio Horizontal Concentric and Profit Liquidation or strategies n in a niche and vertical conglomerate strategy bankruptcy growth diversification followed by retrenchme nt Likely Entrepreneur Functional Decentralizatio Structural Dismemberme Structure dominated managemen n into profit or surgery nt of structure t investment emphasized centers Movement from growth to maturity to decline and finally to death is not, however, inevitable. A Revival phase may occur sometime during the maturity or decline stages. The corporations life cycle can be extended by managerial and product innovations. This often occurs during the implementation of a turnaround strategy. This is what happened at Lionel, the maker of toy electric trains. Founded by Joshua Lionel Cowen in 1990 to make electrical devices, Lionel came to define the toy electric train. In 1953, Lionel sold three million engines and freight cars, making it biggest toy manufacturer in the world. By the mid 1960, the company was in decline. Electric trains were becoming a historical curiosity. Slot cars and space toys were in demand. Train hobbyists preferred the smaller HO gauge electric train over Lionels larger train because HO gauge trains were more realistic and used less space. The company barely managed to remain in business over the next three decades. In 1999, Lionels new owners hired Richard Maddox, a lifelong train enthusiast and an executive close to retirement at toy

company Bachmann Industries. Maddox and his executive team worked to update Lionels trains with new model and the lastest technology. He improved the catalog and established dozens of licensing agreements. Were trying to excel in things whimsical, clever. Says Maddox. The unofficial Lionel historian, Todd Wagner, discovered long forgotten blueprints of trains from the 1920 and 1930 that were gathering dust in old Lionel storerooms. The company decided to use those plans to build more authentic historical models. The reinvigorated company soon saw increased sales and profits. Unless a company is able to resolve the critical issues facing it in the Decline stage, it is likely to move into Stage V, Death also known as bankcruptcy. This is what happened to Montgomery Ward, Pan American Airlines, Macys Department Stores, Baldwin-United, Eastern Airlines, Colts Manufacturing , Orion Pictures, and WheelingPittsburgh Steel, as well as many other firms. So many Internet ventures went bankrupt during 2000 that Fortune magazine listed 135 Internet Companies on its Dot-Com Deathwatch. As in the cases of Johns-Manville, International Harvester, Macys and Kmart all of which went bankrupt a corporation can rise like a phoenix from its own ashes and lives again under the same or a different name. the company may be reorganized or liquidated, depending on individual circumstances. For example, Kmart emerged from Chapter 11 bankruptcy in 2003 with a new CEO and a plan to sell a number of its stores to Home Depot and Sears. These sales earned the company close to $1 billion. Although store sales continued to erode, Kmart had sufficient cash reserves to continued with its turnaround. It used that money to acquire Sears in 2005. Unfortunately, however, fewer than 20% of firms entering Chapter 11 bankruptcy in the United States emerge as going concerns, the rest are forced into liquidation. Few corporations move through these five stages in order. Some corporations, for example, might never move past Stage II. Others, like General Motors, might go directly from Stage I to Stage III. A large number of entrepreneurial ventures jump from Stage I or II directly into Stage IV or V. Hayes Microcomputer Products, for example, went from the Growth(Stage II) to Decline stage (Stage IV) under its founder Dennis Hayes. The key is to be able to identify indications that a firm is in the process of changing stages and to make the appropriate strategic and structural adjustment to ensure that corporate performance is maintained or even improved. This is what the successful Internet auction firm eBay did when it hired Meg Whitman from Hasbro as CEO to professionalize its management and to improve its marketing. Advanced Types of Organizational Structures The basic structures (simple, functional, divisional, and conglomerate) are discussed in Chapter 5 and summarized under the first three stages of corporate development in this chapter. A new strategy may require more flexible characteristics than the traditional functional or divisional structure can offer. Todays business organizations are becoming less centralized, with a greater use of cross-functional work teams. Table 9-3 depicts some of the changing structural characteristics of modern corporations. Although many variations and hybrid structures contain these characteristics, two forms stand out : the matrix structure and the network structure. Matrix Structure

Most organization find that organizing around either functions (in the functional structure) or products and geography (in the divisional structure) provides an appropriate organizational structure. The matrix structure, in contrast, may be very appropriate when organizations conclude that neither functional nor divisional forms, event when combined with horizontal linking mechanisms such as SBUs, are right for their situations. In matrix structure,functional and product forms are combined simultaneously at the same level of the organization. (see figure 9-2.) Employees have two superiors, a product or project manager, and a functional manager. The home department that is, engineering, manufacturing, or sales is usually functional and is reasonably permanent. People from these functional unit are often assigned temporarily to one or more products unit or projects. The product units or projects are usually temporary and act like divisions in that they are differentiated on a product-market basis. Old organization Design One large corporation New Organization Design Minibusiness units and cooperative relationship Vertical communication Horizontal communication Centralized, top-down decision making Decentralized participative decision making Vertical integration Outsourcing and virtual organizations Work/quality teams Autonomous work teams Functional work teams Cross-functional work teams Minimal training Extensive training Specialized job design focused on Value-chain team focused job design individuals

Matrix Structure Top management

manufacturing Manager project A Manager project A Manager project A Manager project A Manufacturing units Manufacturing units

sales

finance Finance unit Finance unit Finance unit Finance unit

personnel Personnel unit Personnel unit Personnel unit Personnel unit

Sales unit

Sales unit

Manufacturing units Manufacturing units

Sales unit

Sales unit

NETWORK STRUCTURE Packagers Designers Suppliers

Manufacturers

Corporate headquarters

Distribution

Packagers

Pioneered in the aerospace industry, the matrix structure was developed to combine the stability of the functional structure with the flexibility of the product form. The matrix structure is very useful when the external environment (especially its technological and market aspects) is very complex and changeable. It does however, produce conflicts revolving around duties, authority, and resource allocation. To the

extent that the goals to be achieved are vague and the technology used is poorly understood, a continuous battle for power