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Teaching Note 9

Organizational Issues in Strategy

This Teaching Note addresses the following objectives:

1) Understand key elements of organizational design.

2) Identify major organizational forms and explain why organizations take on characteristic forms.

3) Explain how leadership and culture create organizational change.

The Harvard business historian Alfred Chandler observed that in the evolution of great American businesses, firms have created organizational forms appropriate to new strategies, thus Chandler’s dictum: “Structure follows strategy.” Organizational structure is important because managers coordinate and organize to implement strategies. The form of organization influences how labor, knowledge, and skills are allocated to tasks; establishes how information will be channeled; and, affects the efficiency and sentiment with which individuals perform.

The way we have viewed organizations historically is that they are social structure or architectural forms that are characterized by tasks, specialization, hierarchy, power, and endurance. Current organizational theory, however, has focused on other attributes, such as culture and social learning. As you should expect, practitioners draw upon traditional and current theory to help understand how to best organize people to realize strategies. The importance of architectural form is that knowing what structure fits the tasks to be performed provides a design model for development of an organization by management. Social learning and culture theories provide the practitioner with insight as to how change can be accomplished and the processes that need to be cultivated for changes to take hold and for development to continue.

Organizational Design

We tend to view organizing a matter of decision-making: we decide to arrange the people, jobs, and positions that we have available to meet management’s needs. But, there are real constraints on the forms of organization available to us. Hospitals tend not to be structured like fast food restaurants, and banks are not organized like a manufacturing plant. The task (or type of work to be done), the technology (the way we know how to do something), and our knowledge of what has worked and what does not work influence and limit our choice of organizational design.

The classic theorists, Taylor, Fayol, and Weber contributed to the architectural perspective on organizations by focusing on their structural attributes:

Size - Number of personnel, outputs (customers, sales), resources (wealth), or capacity provide measures of an organization’s size. But, organizations grow and the structure changes with increases in size. As organization’s grow there is a greater need to regain the coordination that could be accomplished informally in a small group, and there is a tendency for division of labor with more and more specialists and departments.

To achieve greater coordination, layers of management may be added to create hierarchy. As hierarchy increases power becomes difficult to concentrate at the top and there can be a distribution of power to lower managers. Decentralization can occur as lower level managers assume decision-making, but to retain some degree of standard operational procedures, the organization increasing relies on written policies and procedures. This formalization of organizational rules helps to maintain order across the growing organization and ensures conformity and continuity in practices.

Also, with growth organizations begin to divide the work into ordered units that perform specialized work. Increased specialization of work into departments is termed differentiation. The extent to which an organization is departmentalized, divisionalized, and hierarchically layered characterizes the organization’s complexity.

Increased organizational size has important implications for management: it can limit the flexibility of individual work, affect how much authority can be delegated, and lead to an emphasis on results rather than how the work is actually performed (because results are easier to monitor).

Span of Control – “How many employees can or should a manager oversee?” That is the issue of span of control. Span of control has interesting implications for work, how work is performed, and the organizational structure. A narrow span of control describes a low number of workers under a manager. The structure that is created is tall, or mechanistic. The tall pyramid structure is created by the hierarchical layering required to maintain a low manager-to-employee ratio. The tight supervision inherent in the mechanistic structure is characteristic of bureaucracy. Work is performed under tight controls, little variability of tasks is permitted, and there is high specialization or departmentalization.

When a manager oversees a large number of employees, the high span of control produces a flat organization, called organic structure. The flat pyramid is characteristic of organizations with low hierarchy. Less hierarchy with a larger number of employees per manager means that workers have more autonomy or freedom to perform their tasks. Control is sacrificed for creativity.

Technology/Task – The knowledge or technology of how work is to be performed affects how we organize. Consider: If the work requires tight controls and can tolerate few mistakes, such as the processing of checks at a bank, the repetitive and mechanical work requires high formalization, specialization, and division of labor. If the work is creative, such as Research and Development, creativity is required and the organization is not formalized, division of labor is not clear, and decision-making is highly decentralized.

Joan Woodward in the 1950’s first demonstrated that organizational structure is associated with the type of technology employed. Woodward’s classified technology as:

Custom, mass production, and process technologies are in Woodward’s work “ideal” types, but are typical of certain industries. Successful firms, she found, matched their technology base with the structural type illustrated at the right. Other researchers have found similar results to conclude that there is an inverted U relationship between use of technology and structural complexity. Low level technology (Custom) requires an organic structure; mass production that combines labor resources with machines requires mechanistic structures; and, high level technology (production is dependent upon machines) is matched with an organic structure.

Strategy – For most of America’s business history firm’s produced a single product for a local market. The organizational structure to support this business strategy is the functional form. This simple form is organized around a division of labor into specialized functions (or departments) that interrelate to create, deliver and manage a product. This form is often characterized as organizing inputs for transformation into a single output.

By the turn of the century a new organizational form had begun to emerge. As businesses expanded into new markets and new products, the functional form failed to be efficient for managing a diversification strategy. By the 1950’s nearly all of the diversified firms listed in the Fortune 500 organized using the Multi-Divisional form (MDF). The MDF structure organized businesses under a headquarters that functions as banker, strategist, and coordinator for multiple business units (sometime termed “strategic business units” or SBU’s). This form is often characterized as organizing by outputs (products).

The theoretical (if not practical) problem with MDF is that once functional resources are decentralized to strategic business units, they are controlled and managed by division managers, not by corporate headquarters. Therefore, a diversified corporation may manage businesses as decentralized under the MDF organization. To retain direct control of each business unit’s functions (human resources, finance, and production), the matrix form has been suggested by some theorists and has been embraced by a few corporations. It will be apparent (from the picture to the right) that there is a problem with the matrix: a manager located within a division has two lines of reporting, two bosses. A first line manager reports to the corporate product (market) manager and to the corporate functional manager. Consider: how would you as a human resources manager like to report both to the Vice President in charge of your product and to a Vice President in change of corporate-wide human resources? Suppose each had different ideas about policies, which boss would you follow? In theory, the Product and Functional managers reach agreement on conflictive policies at headquarters, but this does not always happen. Research has shown that it take about five years for a first-line manager to learn how to work under the matrix. Most firms are not willing to invest this kind of time in training, and the matrix is not often adopted by businesses. The exception is international businesses. For a global firm the ability to organize around geographical markets and also around products is an advantage. The matrix form serves companies like Nestle quite well. Nestle has a manager in charge of a product line, but each product line is also coordinated with a manager in charge of a specific geographical area

Environment – The environment represents factors outside the organization to which management reacts, rather than “manage”. In the early 1960’s the Scottish researchers Burns and Stalker showed that there is a simple correlation between environments and structure: organic structures are found in changing or dynamic environments; mechanistic structures are found in static or stable environments. The interpretation of this relationship is that in dynamic environments, such as in the software development industry, organizations needs to promote creativity and interpersonal communications for problem solving. Industries, such as textile manufacturing, have static environments, not much innovation and not many changes to the way the product is made, and have mechanistic structures. Tall, hierarchical structures afford the controls necessary to manufacture a product that is well understood.

The mechanism that connects the organization to its environment is important as it helps us understand why and how organizational structures change as external forces change. The environment – structure linkage is modeled by different theories:

Natural Selection or Ecology Theory. – Ecology theories draw on Darwin’s theory of natural selection to explain the persistence of certain organizational forms. Organizations whose structures are not fitted to the environment will not perform well and will die-out. Indeed, most new organizations fail within the first few years. Successful organizations provide models to other organizations as to what a survival form looks like. Therefore, successful forms are imitated and become the dominant structural type. Structures, then, are hard to change. There is a structural inertia to change that maintains the existence of structural types and limits the successful adaptation of a new form.

Resource Dependency Theory.- A problem with the ecology theory is that it may explain why existing firms tend to all look like one another – they imitate the form of successful firms – but, it offers little insight as to how a successful structure arises. The resource dependency view is that organizations adapt to environmental resources. Organizations develop a capability or competency to do something: 3-M makes innovative uses of adhesives and Disney is a top entertainment firm. To develop a competency the organization not only must develop internal resources, but it is dependent upon external resources. These include labor markets, customers, suppliers, financial markets, and other stakeholders and economic factors. This dependency has implications for how organizational structure. Most resource dependency theorists link structure to environmental factors. For example, under conditions of scarcity, organizations try to conserve resources by implementing greater controls through hierarchy, centralization, and formalization. These controls are relaxed in a prosperous environment. Mintzberg has developed an alternative resource dependency theory based on power distributions of stakeholders. In this scheme the organizational form is the product of competing political claimants. Organizations change as the political environment changes.

Contingency Theory.- The contribution of contingency theory on our understanding how structure relates to environment is that structure is dependent upon environmental influences, and that there is no one way to organize a business. Structure should, however, match the environment in which it is situated. Understanding which structures fit which environments become the research objective. Burns and Stalker’s association of organic structures with dynamic environments, and mechanistic structures with stable environments falls into this kind of approach.

Institutional Theory.- In the research literature this approach is now in vogue. In many ways the institutional approach accommodates the other process theories with current interest in culture and “ideational” systems (the way we think about and understand the outside world). Organizations are social inventions – we make them up. The models available for this are based on our experience and what we teach and write about organizations. Banks look the way they do because there is a dominant, accepted view of what a “bank” ought” to look like. Although higher learning could be configured in alternative forms, universities have historically come to pretty much look like one another – we have a cultural and institutional agreement on what they ought to look like. And, if I saw Sam’s University operating from an e-mail address and website, I would know that this is not a “real” university - maybe some form of distance learning, which today is 06/14/01 not as valued culturally as a higher education. Institutions do change. An entrepreneur or innovator tries some new form. The new form competes with old forms for acceptance. Usually with success, and sometimes simply through perseverance, novel forms of organization do become institutionalized. Consider the way we organize to deliver movies: the historical institution is derived from traditional theater; but, in the 1950’s people would see movies seated in their cars at a drive-in movie. Today, movies are delivered to homes via pay-per-view. The institutional perspective suggests that there may be many ways to organize but some forms are accepted, others are not. Why forms are rejected and others are accepted can be explained by social values and by the economics of organizational forms. I suspect that we see few drive-ins today because movies are made to exploit the technologies available through the theater experience (which we value) and because it is simply more efficient (less costly) to show multiple screenings in small rooms than to bear the costs of land to construct a large drive-in a city. People stopped going to drive-ins, business stopped building drive-ins, and the dominant way to “correctly” organize a movie today is the theater. The same logic applies to other forms of institutions and organizations.

Organizational Change and the Learning Organization

Organization theory provides insight into the importance of design considerations and the factors that affect structure. Practitioners rarely have the opportunity to redesign whole organizations or create new structures, we are more often interested in making the organization or organizational unit that we have inherited work more effectively or reorder organizational resources (within the larger organizational models available) to implement strategies. Changing organizations in this context is organizational development or OD. OD is the purposeful and systematic application of what we know about organizations and people to facilitate management. The theory in this area of management is less well developed into accepted systems of thought and language, but for us (as practitioners) OD is of most interest.


Because OD can be eclectic in content, there are a variety of academic and commercial approaches available that focus on diverse management issues including leadership development, team building, sensitivity training (diversity issues), specialty training, career development, and conflict management. Most approaches build on the early work of Kurt Lewin, and the currently popular approach among practitioners is the learning organization. This approach to organizational development has been popularized by Peter M. Senge, Director of the Center for Organizational Learning at MIT's Sloan School of Management and author of The Fifth Discipline: The Art and Practice of the Learning Organization. This approach views the organization as interrelated systems of people and directs our attention to the possibilities of improvement through a commitment to shared learning as a process, rather than a engineering or design approach.


The roots of the learning organization approach are in Kurt Lewin’s early work in organizational change, called force field theory. Lewis viewed the organization as a system of interrelated parts and competing forces or opposing transient groups. System change engages forces resistant to and in favor of change. The change process has three distinct stages:

Unfreezing, at this stage a sense that change is needed must be developed
Changing, organizational change is implemented
Re-freezing, the new order is institutionalized, presenting the new equilibrium

Lewin’s framework is helpful in that it allows us to think about a staged approach to changing things. There is a stable starting point that requires change, change is executed, and a new stable order emerges. The limitation of Lewin’s work is that organizations may always be undergoing some change and period of stability are hard to identify. Certainly an organization in serious trouble is already “unfrozen”. A few organizations may even to be out of equilibrium for an extended period of time-- for example, a business in search of a new strategy. Lewin recognized that even when we attempt a change, the outcome may not coincide with our intent. Organizational change depends upon the ability for organizational members to accept and make a change that is beneficial to the organization, the individual and the collective membership.

This is where organizational learning begins to contribute to our understanding of OD. The key elements of Senge’s theory are:

In organizational learning the closest concept to OD is “metanoia”, meaning a shift of the collective mindset. Both “learning” and “metanoia” (a Greek work meaning “above or beyond the mind”) emphasize the cognitive basis of the theory. At the root of organization is the fact that we act individually and together on the basis of what we know. And, this is the rub. We don’t always have a good understanding of the problem, much less the solution. A learning organization is one that creates an environment conducive to learning and problem-solving.

Our understanding of organizational events is framed by our culture. Culture is defined as shared beliefs, values and norms. Culture provides the cognitive scheme by which we assign meaning, order, and value to our experiences. Culture orders our perceptions and provides prescriptions about what to do when things happen , how to behave under certain circumstances, and what to value. Culture is reinforced by the stories we tell, by myths, symbols, rituals, and heroes. As we share a larger culture, we convey similar meanings to events, for example, how markets ought to work, how management ought to behave, and what products are valued. This is not to say that culture can be disjoint with reality, rather culture, our shared understanding of things, in a sense, creates “reality”-- by providing an interpretation of what we see or experience.

Culture affects organizations at several levels. The larger culture values business, provides its legal context, and, importantly, provides the broad meanings by which we interpret business events. Although we share this larger culture, we also belong to socially defined groups that have common experiences that further filter our interpretation of events. These groups include ethnic, racial, religious, political, geographical, occupational, age, and gender groupings. The prevalence of multiple groups (multiple individual identities) provides diversity to values and understanding. American organizations will have certain characteristics that are drawn from the larger American culture, but also take on the characteristics of its unique membership.

Organizations have their own culture. Organizational culture is maintained in a fashion similar to the larger culture. At Hampton University we have a culture that is reinforced by myths, stories, and symbols: the “Hampton way“ is loosely linked to “freedom tree”, the founding story rooted in Reconstruction, “Don’t walk on the grass in front of Ogden Hall until you graduate!”, the story of Booker T. Washington’s education and his statute, the art of Biggers and Tanner, “Wigwam”, and “head, heart and hands”. Within the institutional culture at Hampton we can identify sub-culture groups of students, even faculty and administration – transient cliques that bring opposing values and interpretations to events.

The creation of a learning organization is the creation of an organizational culture that is open to possibilities of what the organization can be – uniquely identified by its history, but continually reinvigorating itself to the needs of the time. It is creating as a way of thinking and opening up the organization to an on-going discussion about change.

In this process of creating a learning organization the idea of leader or manager is different from that typically conceived. The traditional view of leader as director, someone who knows what to do and leads others in the right direction, is antithetical to the learning organization. Leaders are “designers, stewards, and teachers” responsible for building the learning organization. Building the organization involves creating a common mindset based on traditional structural characteristics of decentralization and a lack of hierarchy; it also requires a culture that supports the well-being and growth of members, as well as organizational success. The learning organization acknowledges that “we are in all in this together and we need to work together” to find and invent our destiny. There may be no definitive textbook solutions, only us struggling together.