External Environments and Industries Identify contemporary external forces pressuring organizations. Industry and organizational leaders monitor environments to identify, predict, and manage trends, issues, and opportunities that their organizations and industries face. Some corporations, such as Amazon, anticipate and even create trends in their environments. Most, however, must adapt. External environments, as identified in the previous section, can be understood by identifying the uncertainty of the environmental forces. illustrates a classic and relevant depiction of how scholars portray environment-industry-organization “fit,” that is, how well industries and organizations align with and perform in different types of environments. Company Industry Fit Adapted from: Duncan, R. (1972). Characteristics of organizational environments of uncertainty . American Science Quarterly, 17 (September), 313-327; Daft, R . Organizational Theory and Design, 12 th edition, p. 151, Mason, OH, Cengage Learning . The two dimensions of this figure represent “environmental complexity” (i.e., the number of elements in the environment, such a competitors, suppliers, and customers), which is characterized as either simple or complex, and “environmental change,” described as stable or unstable. How available monetary and financial resources are to support an organization’s growth is also an important element in this framework. Felice De Toni, A. and G. De Zan. (2016), The complexity dilemma, Three tips for dealing with complexity in organizations, Practitioner , Dec. 31, https://journal.emergentpublications.com/article/the-complexity-dilemma/ Certain industries—soft drink bottlers, beer distributors, food processors, and container manufacturers—would, hypothetically, fit and align more effectively in a stable (i.e., relative unchanging), simple, and low-uncertainty (i.e., has mostly similar elements) external environment—cell 1 in . This is referred to when organizations are in a simple-stable environment . Of course unpredicted conditions, such as global and international turmoil, economic downturns, and so on, could affect these industries, but generally, these alignments have served as an ideal type and starting point for understanding the “fit” between environment and industries. In a stable but complex, low- to moderate-uncertainty environment, cell 2 in , universities, appliance manufacturers, chemical companies, and insurances companies would generally prosper. This is referred to when organizations are in a complex-stable environment . When the external environment has simple but high to moderate uncertainty, cell 3 of , e-commerce, music, and fashion clothing industries would operate effectively. This is referred to when organizations are in a simple-unstable environment . Whereas in cell 4 of , an environment characterized by a high degree of uncertainty with complex and unstable elements, industries and firms such as computer, aerospace, airlines, and telecommunications firms would operate more effectively. This is referred to when organizations are in a complex-unstable environment . is a starting point for diagnosing the “fit” between types of external environments and industries. As conditions change, industries and organizations must adapt or face consequences. For example, educational institutions that traditionally have been seen to operate best in low- to moderate-uncertainty environments, cell 2 of , have during this past decade experienced more high to moderate uncertainty (cell 3)—and even high uncertainty (cell 4). For example, for-profit educational institutions such the University of Phoenix and others—as compared to not-for-profit universities and colleges, such as public state institutions, community colleges, and private nonprofit ones—have undergone more unstable and complex forces in the external environment over the past decade. Under the Obama administration, for-profit universities faced greater scrutiny regarding questionable advertising, graduation rates, and accreditation issues; lawsuits and claims against several of these institutions went forward, and a few of the colleges had to close. The Trump administration showed signs of alleviating aggressive governmental control and monitoring in this sector. Still, higher educational institutions in general currently face increasingly complex and unstable environments given higher tuition rates, increased competition from less-expensive and online programs, fewer student enrollments, and an overabundance of such institutions. Several private, not-for-profit higher educational institutions have merged and also ceased to exist. Adapting to increasingly rapid external change has become a rallying call for most industries and organizations as the 21st century evolves. Organizational Complexity It is important to point out here that external (and internal) organizational complexity is not often as simple as it may seem. It has been defined as “…the amount of complexity derived from the environment where the organisation operates, such as the country, the markets, suppliers, customers and stakeholders; while internal complexity is the amount of complexity that is internal to the organisation itself, i.e. products, technologies, human resources, processes and organisational structure. Therefore, different aspects compose internal and external complexities.” Eisenhardt, K. M., & Sull, D. N. (2001). “Strategy as simple rules”, Harvard Business Review , 79(1): 106-119 The dilemma that organizational leaders and managers sometimes face is how to deal with external, and internal, complexity? Do you grow and nurture it or reduce it? Some strategies call for reducing and managing it at the local level while nurturing it at the global level—depending on the organization’s size, business model, and the nature of the environments. Without going into complicated detail, it is fair to say at the beginning of the chapter that you may want to read through the chapter first, then return here afterward. In the meantime, here are some simple rules from organizational practitioners De Toni and De Zan to keep in mind for managing high levels of complexity from the external environment, internally, after you have diagnosed the nature of the external complexity—as we discuss throughout in this chapter: first, assemble “…a set of self-managing teams or autonomous business units,[known as modularized units] with an entrepreneurial responsibility to the larger organization.” These focused self-organizing teams use creative methods to deal with the diversity to the advantage of the organization. A second method when facing high external environmental complexity when you want to gain value from it is to find and develop “…simple rules to drive out creativity and innovation … to keep the infrastructure and processes simple, while permitting complex outputs and behaviours.” An example offered is found in the rules of the Legos company: “(1) does the proposed product have the Lego look? (2) Will children learn while having fun? (3) Will parents approve? (4) Does the product maintain high quality standards? (5) Does it stimulate creativity?” Ibid. A third strategy for dealing with external complexity involves companies’ building on their own capabilities. If companies attempt to manage too much complexity it would lead to chaos. Some strategies to combat external complexity and improve a company’s capabilities include: (1) creating open networks internal and outside the organization to promote cooperation and integration, and (2) to develop and advance their brand and reputation. Some of those strategies include creating open networks internal and outside the organization to promote cooperation and integration and to develop brand and reputation. Also, sharing “…values, vision, strategy, organizational processes and knowledge, through the development of trust and incorporation and promotion of leaders at all levels” can help internal teams exploit external complexity to the organization’s advantage. Keep these ideas in mind as you read through the chapter and think about how leaders, managers, employees, and you can learn to read external environmental clues that organizations can use to creatively and proactively use organizational resources to be more competitive, effective, and successful. What factors within the economic environment affect businesses? Why do change and shifts and technological developments create both challenges and new opportunities for business? Identify contemporary external forces pressuring organizations An understanding of the various industries and organizations ‘fit’ with different types of environment in crucial. There are small and large organizations that face environments that are either stable of unstable and managing the organization by recognizing their environment is a crucial skill. Simple-Stable environments Environments that have a small number of external elements, and elements are similar, and the elements remain the same or change slowly. Simple-Unstable environments Environments that have a small number of external elements, and elements are similar and where elements change frequently and unpredictably. Complex-Stable environments Environments that have a large number of external elements, and elements are dissimilar and where elements remain the same or change slowly. Complex-Unstable environments Environments that have a large number of external elements, and elements are dissimilar and where elements change frequently and unpredictably

Business


Organizational Designs and Structures Identify different types of organizational structures and their strengths and weaknesses. A 2017 Deloitte source asked, before answering, “Why has organizational design zoomed to the top of the list as the most important trend in the Global Human Capital Trends survey for two years in a row ?” Bersin, Josh, et al, “2017 Global Human Capital trends”, Deloitte Insights , February 28, 2017. https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2017/organization-of-the-future.html The source continued, “The answer is simple: The way high-performing organizations operate today is radically different from how they operated 10 years ago. Yet many other organizations continue to operate according to industrial-age models that are 100 years old or more.” Ibid. Mechanistic and Organic Organizations (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Early organizational theorists broadly categorized organizational structures and systems as either mechanistic or organic. Burns, T. & Stalker, G. M. (1961), The Management of Innovation, Tavistock, London; Mintzberg, H. 1979. The structuring of organizations. Englewood Cliffs, NJ: Prentice-Hall ; Emery, Fred E. and Eric L. Trist, (1965), "The Causal Texture of Organizational Environments", pp 21-32 in Human Relations , February 1965 This broad, generalized characterization of organizations remains relevant. Mechanistic organizational structures ( ) are best suited for environments that range from stable and simple to low-moderate uncertainty ( ) and are characterized by top-down hierarchies of control that are rule-based. The chain of command is highly centralized and uses formal authority; tasks are clearly defined and differentiated to be executed by specific specialized experts. Bosses and supervisors have fewer people working directly under them (i.e., a narrow span of control), and the organization is governed by rigid departmentalization (i.e., an organization is divided into different departments that perform specialized tasks according to the departments’ expertise). This form of organization represents a traditional type of structure that evolved in environments that were, as noted above, stable with low complexity. Historically, the U.S. Postal Service and other manufacturing types of industries ( ) were mechanistic. Again, this type of organizational design may still be relevant, as suggests, in simple, stable, low-uncertainty environments. Organic organizational structures and systems, however, have opposite characteristics from mechanistic ones. As shows, these organizational forms work best in unstable, complex, changing environments. Their structures are flatter, with participatory communication and decision-making flowing in different directions. There is more fluidity and less-rigid ways of performing tasks; there may also be fewer rules. Tasks are more generalized and shared; there is a wider span of control (i.e., more people reporting to managers). offers examples of organically structured industries, such as high tech, computer, aerospace, and telecommunications industries, that must deal with change and uncertainty. Contemporary corporations and firms engaged in fast-paced, highly competitive, rapidly changing, and turbulent environments are becoming more organic in different ways, as we will discuss in this chapter. However, not every organization or every part of most organizations may require an organic type of structure. Understanding different organizational designs and structures is important to discern when, where, and under what circumstances a type of mechanistic system or part of an organization would be needed. The following section discusses five types of structures with variations. Types of Organizational Structures Within the context of mechanistic versus organic structures, specific types of organizational structures in the United States historically evolved over at least three eras, as we discuss here before explaining types of organizational designs. During the first era, the mid-1800s to the late 1970s, organizations were mechanistic self-contained, top-down pyramids. Anand, N. and R. Daft. (2007). What is the Right Organization Design? Organizational Dynamics , Vol. 36, No. 4, pp. 329–344. Emphasis was placed on internal organizational processes of taking in raw materials, transforming those into products, and turning them out to customers. Early organizational structures were focused on internal hierarchical control and separate functional specializations in order to adapt to external environments. Structures during this era grouped people into functions or departments, specified reporting relationships among those people and departments, and developed systems to coordinate and integrate work horizontally and vertically. As will be explained, the functional structure evolved first, followed by the divisional structure and then the matrix structured. The second era started in the 1980s and extended through the mid-1990s. More-complex environments, markets, and technologies strained mechanistic organizational structures. Competition from Japan in the auto industry and complex transactions in the banking, insurance, and other industries that emphasized customer value, demand and faster interactions, quality, and results issued the need for more organic organizational designs and structures. Communication and coordination between and among internal organizational units and external customers, suppliers, and other stakeholders required higher levels of integration and speed of informational processing. Personal computers and networks had also entered the scene. In effect, the so-called “horizontal organization” was born, which emphasized “reengineering along workflow processes that link organizational capabilities to customers and suppliers.” Ibid. Ford, Xerox Corp., Lexmark, and Eastman Kodak Company are examples of early adopters of the horizontal organizational design , which, unlike the top-down pyramid structures in the first era, brought flattened hierarchical, hybrid structures and cross-functional teams. The third era started in the mid-1990s and extends to the present. Several factors contributed to the rise of this era: the Internet; global competition—particularly from China and India with low-cost labor; automation of supply chains; and outsourcing of expertise to speed up production and delivery of products and services. The so-called silos and walls of organizations opened up; everything could not be or did not have to be produced within the confines of an organization, especially if corporations were cutting costs and outsourcing different functions of products to save costs. During this period, further extensions of the horizontal and organic types of structures evolved: the divisional, matrix, global geographic, modular, team-based, and virtual structures were created. In the following discussion, we identify major types of structures mentioned above and discuss the advantages and disadvantages of each, referenced in . Note that in many larger national and international corporations, there is a mix and match among different structures used. There are also advantages and disadvantages of each structure. Again, organizational structures are designed to fit with external environments. Depending on the type of environments from our earlier discussion in which a company operates, the structure should facilitate that organization’s capability to achieve its vision, mission, and goals. offers a profile of different structures that evolved in our discussion above. Evolution of Organizational Structure Adapted from: Daft, R., 2016, Organization Theory and Design, 12 th edition, Cengage learning, Chapter 3; Warren, N., “Hitting the Sweet Spot Between Specialization and Integration in Organizational Design”, People and Strategy, 34, No. 1, 2012, pp. 24-30. Note the continuum in , showing the earliest form of organizational structure, functional, evolving with more complex environments to divisional, matrix, team-based, and then virtual. This evolution, as discussed above, is presented as a continuum from mechanistic to organic structures—moving from more simple, stable environments to complex, changing ones, as illustrated in . The six types of organizational structures discussed here include functional, divisional, geographic, matrix, networked/team, and virtual. This section draws on a number of scholarly and practitioner sources, including the following: R. Daft. (2016). Organization Theory & Design, 12th ed. Cengage Learning , Boston, MA; https://blog.hubspot.com/marketing/team-structure-diagrams; Burton and Obel. (2018). Journal of Organization Design Vol. 7, Issue 5, Devaney, Erik, “7 types of organizational Structure & Whom They’re Suited For [Diagrams], Hubspot , accessed November 18, 2018. https://doi.org/10.1186/s41469-018-0029-2; “Matrix Teams”, Global Integration , accessed November 18, 2018. http://www.global-integration.com/glossary/matrix-teams/; and Bersin, josh, “The organization of the Future: Arriving Now’, 2017 Global Human Capital Trends, Deloitte Insights , February 28, 2017. https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2017/organization-of-the-future.html The functional structure, shown in , is among the earliest and most used organizational designs. This structure is organized by departments and expertise areas, such as R&D (research & development), production, accounting, and human resources. Functional organizations are referred to as pyramid structures since they are governed as a hierarchical, top-down control system. Functional Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Small companies, start-ups, and organizations working in simple, stable environments use this structure, as do many large government organizations and divisions of large companies for certain tasks. The functional structure excels in providing for a high degree of specialization and a simple and straightforward reporting system within departments, offers economies of scale, and is not difficult to scale if and when the organization grows. Disadvantages of this structure include isolation of departments from each other since they tend to form “silos,” which are characterized by closed mindsets that are not open to communicating across departments, lack of quick decision-making and coordination of tasks across departments, and competition for power and resources. Divisional structures , see , are, in effect, many functional departments grouped under a division head. Each functional group in a division has its own marketing, sales, accounting, manufacturing, and production team. This structure resembles a product structure that also has profit centers. These smaller functional areas or departments can also be grouped by different markets, geographies, products, services, or other whatever is required by the company’s business. The market-based structure is ideal for an organization that has products or services that are unique to specific market segments and is particularly effective if that organization has advanced knowledge of those segments. Divisional Organization Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) The advantages of a divisional structure include the following: each specialty area can be more focused on the business segment and budget that it manages; everyone can more easily know their responsibilities and accountability expectations; customer contact and service can be quicker; and coordination within a divisional grouping is easier, since all the functions are accessible. The divisional structure is also helpful for large companies since decentralized decision-making means that headquarters does not have to micromanage all the divisions. The disadvantages of this structure from a headquarters perspective are that divisions can easily become isolated and insular from one another and that different systems, such as accounting, finance, sales, and so on, may suffer from poor and infrequent communication and coordination of enterprise mission, direction, and values. Moreover, incompatibility of systems (technology, accounting, advertising, budgets) can occur, which creates a strain on company strategic goals and objectives. A geographic structure , , is another option aimed at moving from a mechanistic to more organic design to serve customers faster and with relevant products and services; as such, this structure is organized by locations of customers that a company serves. This structure evolved as companies became more national, international, and global. Geographic structures resemble and are extensions of the divisional structure. Geographic Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Organizing geographically enables each geographic organizational unit (like a division) the ability to understand, research, and design products and/or services with the knowledge of customer needs, tastes, and cultural differences. The advantages and disadvantages of the geographic structure are similar to those of the divisional structure. Headquarters must ensure effective coordination and control over each somewhat autonomous geographically self-contained structure. The main downside of a geographical organizational structure is that it can be easy for decision-making to become decentralized, as geographic divisions (which can be hundreds if not thousands of miles away from corporate headquarters) often have a great deal of autonomy. IBM China IBM has chosen a geographic structure which is aimed at moving from a mechanistic to more organic design to serve customers faster and with relevant products and services; as such, this structure is organized by locations of customers that a company serves. This structure evolved as companies became more national, international, and global. Geographic structures resemble and are extensions of the divisional structure. (Credit: Cory Denton/ Flickr/ Attribution 2.0 Generic (CC BY 2.0)) Matrix structures , illustrated in and depicted in , move closer to organic systems in an attempt to respond to environmental uncertainty, complexity, and instability. The matrix structure actually originated at a time in the 1960s when U.S. aerospace firms contracted with the government. Aerospace firms were required to “develop charts showing the structure of the project management team that would be executing the contract and how this team was related to the overall management structure of the organization.” As such, employees would be required to have dual reporting relationships—with the government and the aerospace company. Brent Durbin. Matrix organization, Encyclopedia Britannica , https://www.britannica.com/topic/matrix-organization Since that time, this structure has been imitated and used by other industries and companies since it provides flexibility and helps integrate decision-making in functionally organized companies. Matrix Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Matrix designs use teams to combine vertical with horizontal structures. The traditional functional or vertical structure and chain of command maintains control over employees who work on teams that cut across functional areas, creating horizontal coordination that focuses projects that have deadlines and goals to meet within and often times in addition to those of departments. In effect, matrix structures initiated horizontal team-based structures that provided faster information sharing, coordination, and integration between the formal organization and profit-oriented projects and programs. As illustrates, this structure has lines of formal authority along two dimensions: employees report to a functional, departmental boss and simultaneously to a product or project team boss. One of the weaknesses of matrix structures is the confusion and conflicts employees experience in reporting to two bosses. To work effectively, employees (including their bosses and project leaders) who work in dual-authority matrix structures require good interpersonal communication, conflict management, and political skills to manage up and down the organization. Different types of matrix structures, some resembling virtual team designs, are used in more complex environments. “Matrix Teams”, Global Integration , accessed November 18, 2018. http://www.global-integration.com/glossary/matrix-teams/ For example, there are cross-functional matrix teams in which team members from other organizational departments report to an “activity leader” who is not their formal supervisor or boss. There are also functional matrix teams where employees from the same department coordinate across another internal matrix team consisting of, for example, HR or other functional area specialists, who come together to develop a limited but focused common short-term goal. There are also global matrix teams consisting of employees from different regions, countries, time zones, and cultures who are assembled to achieve a short-term project goal of a particular customer. Matrix team members have been and are a growing part of horizontal organizations that cut across geographies, time zones, skills, and traditional authority structures to solve customer and even enterprise organizational needs and demands. As part of the next discussed organizational type of structure, networked teams, organizational members in matrix structures must “learn how to collaborate with colleagues across distance, cultures and other barriers. Matrix team members often suffer from the problem of divided loyalties where they have both team and functional goals that compete for their time and attention, they have multiple bosses and often work on multiple teams at the same time. For some matrix team members this may be the first time they have been given accountability for results that are broader than delivery of their functional goals. Some individuals relish the breath and development that the matrix team offers and others feel exposed and out of control.” To succeed in these types of horizontal organizational structures, organizational members “should focus less on the structure and more on behaviors.” ibid. Networked team structures are another form of the horizontal organization. Moving beyond the matrix structure, networked teams are more informal and flexible. “[N]etworks have two salient characteristics: clustering and path length. Clustering refers to the degree to which a network is made up of tightly knit groups while path lengths is a measure of distance—the average number of links separating any two nodes in the network.” G. Satell. (June 8, 2015). What Makes an Organization “Networked”, Harvard Business Review , https://hbr.org/2015/06/what-makes-an-organization-networked A more technical explanation can be found in this footnote source. Satell, Greg, “The Story of Networks”, Digital Tonto , September 26, 2010. https://www.digitaltonto.com/2010/the-story-of-networks/; and “Networked Organizations”, Global Integration , accessed November 18, 2018. http://www.global-integration.com/glossary/matrix-teams/ http://www.global-integration.com/glossary/networked-organization/ For our purposes here, a networked organizational structure is one that naturally forms after being initially assigned. Based on the vision, mission, and needs of a problem or opportunity, team members will find others who can help—if the larger organization and leaders do not prevent or obstruct that process. There is not one classical depiction of this structure, since different companies initially design teams to solve problems, find opportunities, and discover resources to do so. Stated another way, “The networked organization is one that is connected together by informal networks and the demands of the task, rather than a formal organizational structure. The network organization prioritizes its ‘soft structure’ of relationships, networks, teams, groups and communities rather than reporting lines.” J. Bersin, T. McDowell, A. Rahnema, and Yves Van Durme. (February 28, 2017), “The organization of the future: Arriving now, 2017” Global Human Capital Trends, Deloitte . https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2017/organization-of-the-future.html is a suggested illustration of this structure. Networked Team Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) A Deloitte source based on the 2017 Global Human Capital Trend study stated that as organizations continue to transition from vertical structures to more organic ones, networked global designs are being adapted to larger companies that require more reach and scope and quicker response time with customers: “Research shows that we spend two orders of magnitude more time with people near our desk than with those more than 50 meters away. Whatever a hierarchical organization chart says, real, day-to-day work gets done in networks. This is why the organization of the future is a ‘network of teams.’” Lister, Jonathan, “The Disadvantages of Network-based organizational Structure”, Chron , accessed November 18, 2018. http://smallbusiness.chron.com/disadvantages-networkbased-organization-structure-35988.html Advantages of networked organizations are similar to those stated earlier with regard to organic, horizontal, and matrix structures. Weaknesses of the networked structure include the following: (1) Establishing clear lines of communication to produce project assignments and due dates to employees is needed. (2) Dependence on technology—Internet connections and phone lines in particular—is necessary. Delays in communication result from computer crashes, network traffic errors and problems; electronic information sharing across country borders can also be difficult. (3) Not having a central physical location where all employees work, or can assemble occasionally to have face-to-face meetings and check results, can result in errors, strained relationships, and lack of on-time project deliverables. Sources in this section include the following: C. Handy. (May–June 1995). Trust and the Virtual Organization, Harvard Business Review , https://hbr.org/1995/05/trust-and-the-virtual-organization; M. Ahuja and K. Carley. (1999), Network Structure in Virtual Organizations, Organization Science , Volume 10, Issue 6, June, pp. 741 – 757; http://www.yourarticlelibrary.com/organization/what-is-virtual-organisation-definition-characteristics-and-types/35533 Virtual structures and organizations emerged in the 1990s as a response to requiring more flexibility, solution-based tasks on demand, fewer geographical constraints, and accessibility to dispersed expertise. D. Onley. (Apr 29, 2015), Environment , https://www.shrm.org/ResourcesAndTools/hr-topics/technology/Pages/How-Telecommuting-Helps-the-Environment.aspx Virtual structures are depicted in . Related to so-called modular and digital organizations, virtual structures are dependent on information communication technologies (ICTs). Virtual Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) These organizations move beyond network team structures in that the headquarters or home base may be the only or part of part of a stable organizational base. Otherwise, this is a “boundaryless organization.” Examples of organizations that use virtual teams are Uber, Airbnb, Amazon, Reebok, Nike, Puma, and Dell. Increasingly, organizations are using different variations of virtual structures with call centers and other outsourced tasks, positions, and even projects. Using Technological Disruption Information technologies and social media powered by the internet and used by sharing economy companies such as Airbnb and Uber have democratized and increased, if not leveled, competition across several industries such taxis, real estate rentals, and hospitality services. (Credit: Grid Engine/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) Advantages of virtual teams and organizations include cost savings, decreased response time to customers, greater access to a diverse labor force not encumbered by 8-hour workdays, and less harmful effects on the environment. “The telecommuting policies of Dell, Aetna, and Xerox cumulatively saved 95,294 metric tons of greenhouse gas emissions last year, which is the equivalent of taking 20,000 passenger vehicles off of the road.” I. McCarthy, T. Lawrence, B. Wixted, and B. Gordon. (2010). A Multidimensional Conceptualization of Environmental Velocity, Academy of Management Review 34, no. 4, pp. 604-626 Disadvantages are social isolation of employees who work virtually, potential for lack of trust among employees and between the company and employees when communication is limited, and reduced collaboration among separated employees and the organization’s officers due to lack of social interaction. In the following section, we turn to internal organizational dimensions that complement structure and are affected by and affect external environments. Why does the matrix structure have a dual chain of command? How does a matrix structure increase power struggles or reduce accountability? What are the advantages of committees? Identify different types of organizational structures, and their strengths and weaknesses An understanding of Mechanistic vs Organic Structures and Systems and how they differ and how these major concepts help classify different organizational structures is crucial to recognizing organizational structures. Finally, the issue of organizational complexity and its impact on organizational structure needs to be understood. You should be able to discuss the evolution of different types of Organizational Structures. You should understand and identify the six types of organizational structures, and the advantages and disadvantages of each: Functional, Divisional, Matrix, Geographic, Networked Team, and Virtual. Organizational structures A broad term that covers both mechanistic and organic organizational structures. Mechanistic organizational structures Best suited for environments that range from stable and simple to low-moderate uncertainty and have a formal “pyramid’ structure. Horizontal organizational structures A “flatter” organizational structure often found in matrix organizations where individuals relish the breath and development that their team offers. Organic organizational structures The opposite of a functional organizational form that works best in unstable, complex changing environments. Functional structure The earliest and most used organizational designs. Divisional structure An organizational structure characterized by functional departments grouped under a division head. Matrix structure An organizational structure close in approach to organic systems that attempt to respond to environmental uncertainty, complexity, and instability. Geographic structure An Organizational option aimed at moving from a mechanistic to more organic design to serve customers faster and with relevant products and services; as such, this structure is organized by locations of customers that a company serves. Networked-team structure A form of the horizontal organization. Virtual structure A recent organizational structure that has emerged in the 1990’s and early 2000’s as a response to requiring more flexibility, solution based tasks on demand, less geographical constraints, and accessibility to dispersed expertise.

Business


The Internal Organization and External Environments Explain how organizations organize to meet external market threats and opportunities. At a basic level of understanding how internal organizations respond to environments, consider the theory of Open Systems, which the organizational theorists Katz and Kahn Katz, D. & Kahn R. L. (1966). The social psychology of organizations, John Wiley , New York, N.Y. and Bertalanffy introduced. Bertalanffy, L. (1968). General System Theory, George Braziller , publisher, New York. illustrates this theory’s view of organizations as open systems that take in resources and raw materials at the “input” phase from the environment in a number of forms, depending on the nature of the organization, industry, and its business. Whatever the input resource, (information, raw materials, students entering a university), those resources will be transformed by the internal processes of the organization. The internal organizational systems then process and transform the input material, which is called “through-put” phase, and move the changed material (resources) to the “outputs” and back into the environment as products, services, graduates, etc. Open System Model of an Organization (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) The open systems model serves as a feedback loop continually taking in resources from the environment, processing and transforming them into outputs that are returned to the environment. This model explains organizational survival that emphasizes long-term goals. Organizations according to this theory are considered as either Open or Closed systems, (or relatively opened or closed) depending on the organization’s sensitivity to the environment. Closed systems are less sensitive to environmental resources and possibilities, and open systems are more responsive and adaptive to environmental changes. For example, during the 1980’s the then Big 3 U.S. auto manufacturers (Ford, General Motors and Chrysler) were pressured by Japanese auto manufacturers’ successful 4-cylinder car sales that hit the U.S. like a shock wave. The Detroit producers experienced slumping sales, plant closures, and employee lay-offs in response to the Japanese wave of competition. It seemed that the U.S. auto makers had become closed or at least insensitive to changing trends in cars during that time and were unwilling to change manufacturing processes. Similarly, Amazon’s business model, discussed earlier, has and continues to pressure retailers to innovate and change processes and practices to compete in this digital era. Organizations respond to external environments not only through their structures, but also by the domains they choose and the internal dimensions and capabilities they select. An organization defines itself and its niche in an environment by the choice of its domain , i.e., what sector or field of the environment it will use its technology, products, and services to compete in and serve. Some of the major sectors of a task environment include marketing, technology, government, financial resources, and human resources. Presently, several environmental domains that once were considered stable have become more complex and unstable—e.g., toys, public utilities, the U.S. Postal Service, and higher education. And even domains are changing. For example, as referred to earlier, the traditionally stable and somewhat unchanging domain of higher education has become more complex with the entry of for-profit educational institutions, MOOCs (massive open online courses), internal company “universities,” and other certification and degree programs outside traditional private institutions. Sharing-economy companies such as Uber and Airbnb have redefined the transportation domain in which taxis operate and the hospitality domain in which hotels and bed and breakfasts serve. New business models that use mobile phones, ICTs (information communication technologies), and apps remove middle management layers in traditional organizations and structures. With a chosen domain in which to operate, owners and leaders must organize internal dimensions to compete in and serve their markets. For example, hierarchies of authority and chain of command are used by owners and top-level leaders to develop and implement strategic and enterprise decisions; managers are required to provide technologies, training, accounting, legal, and other infrastructure resources; and cultures still count to establish and maintain norms, relationships, legal and ethical practices, and the reputation of organizations. Internal Organization (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) shows internal organizational dimensions. These dimensions and systems include leadership, strategy, culture, management, goals, marketing, operations, and structure. Relationships, norms, and politics are also included in the informal organization. There are other internal functions not listed here, such as research and development, accounting and finance, production, and human resources. Another popular depiction of internal organizational dimensions is the McKinsey 7-S model , shown in . Similarly, strategy, structure, systems, skills, staff , and style all revolve around and are interconnected with shared values (or culture) in an organization. The McKinsey 7-S Model (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) A unifying framework shown in , developed by Arie Lewin and Carroll Stephens, Adapted from Arie Y. Lewin and Carroll U. Stephens, “CEO Attributes as Determinants of Organization Design: An integrated Model,” Organization Studies 15, no. 2 (1994): 183-212 illustrates the integration of internal organizational dimensions and how these work in practice to align with the external environment. Note that it is the CEO and other top-level leaders who scan the external environment to identify uncertainties and resources before using a SWOT analysis (identifying strengths, weaknesses, opportunities, and threats) to confirm and update the domain of an organization and then to define the vision, mission, goals, and strategies. Once the enterprise goals and strategies are developed, the organizational culture, structure, and other systems and policies can be established (human resources, technologies, accounting and finance, and so on). The Internal Organization and External Environment (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) As shows, after a CEO and the top-level team identify opportunities and threats in the environment, they then determine the domain and purpose of the organization from which strategies, organizational capabilities, resources, and management systems must be mobilized to support the enterprise’s purpose. J. Trevor and B. Varcoe. (2017). How Aligned Is Your Organization? Harvard Business Review, February, https://hbr.org/2017/02/how-aligned-is-your-organization The company McDonald’s has, for example, successfully aligned its enterprise with the global environments it serves, which is “1% of the world’s population—more than 70 million customers—every day and in virtually every country across the world.” The major operating goal of the firm driving its internal alignment is a “fanatical attention to the design and management of scalable processes, routines, and a working culture by which simple, stand-alone, and standardized products are sold globally at a predictable, and therefore manageable, volume, quality, and cost.” Dalavagas, Iason, “McDonald’s Corp: A Short SWOT Analysis, Value line , May 11, 2015. http://www.valueline.com/Stocks/Highlights/McDonalds_Corp___A_Short_SWOT_Analysis.aspx#.WyqOj1VKiig A more detailed SWOT analysis of McDonald’s operations can be found in endnote. McDonald’s Processes McDonalds, major operating goal of the firm driving its internal alignment is a “Fanatical attention to the design and management of scalable processes, routines, and a working culture by which simple, stand-alone, and standardized products are sold globally at a predictable, and therefore manageable, volume, quality, and cost.” Here employees are reminded of the time that the ingredients should stay on a secondary shelf. (Credit: Walter Lim/ flickr/ Attribution 2.0 Generic (CC BY 2.0)) In practice, no internal organizational alignment with its external environment is perfect or permanent. Quite the opposite. Companies and organizations change leadership and strategies and make structural and systems changes to meet changing competition, market forces, and customers and end users’ needs and demands. Even Amazon continues to develop, expand, and change. With a mission statement as bold and broad as Amazon’s, change is a constant: “Our vision is to be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online” (Amazon.com, Apr 15, 2018). Amazon has a functional organizational structure that focuses on business functions for determining the interactions among the different parts of the company. Amazon’s corporate structure is best characterized as global function-based groups (most significant feature), a global hierarchy, and geographic divisions, as shows. This structure seems to fit with the size of Amazon’s business—43% of 2016 retail sales were in the United States. “Amazon accounts for 43% of US online retail sales” Business Insider , February 3, 2017. http://www.businessinsider.com/amazon-accounts-for-43-of-us-online-retail-sales-2017-2 Seven segments, including information technology, human resources and legal operations, and heads of segments, report to Amazon’s CEO. “Senior management team include two CEOs, three Senior Vice Presidents and one Worldwide Controller, who are responsible for various vital aspects of the business reporting directly to Amazon CEO Jeff Bezos.” Dudovskiy, John, “Amazon Organizational Structure”, Research Methodology , August 1, 2018 https://research-methodology.net/amazon-organizational-structure-2/ The strategic goal underlying this structure is to facilitate Amazon.com to successfully implement e-commerce operations management throughout the entire organization. Meyer, Pauline, “Amazon.com Inc.’s Organizational Structure Characteristics (An Analysis)”, Panmore Institute , September 8, 2018 http://panmore.com/amazon-com-inc-organizational-structure-characteristics-analysis Amazon’s Corporate Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license) Despite the company’s exponential growth and success to date, as noted earlier in the section on organizational structures, a disadvantage of structures such as Amazon’s, and in this case Amazon’s, is that it has limited flexibility and responsiveness even with its current growth. “The dominance of the global function-based groups and global hierarchy characteristics reduces the capacity of Amazon to rapidly respond to new issues and problems encountered in the e-commerce business.” Ibid. Still, Amazon’s most outstanding success factor remains its CEO, Jeff Bezos—his ingenuity, vision and foresight, and ability to sustain and even extend the company’s competitive advantages. Amazon customers value these factors—customer purchase criteria (CPC) that include price, fast delivery, and reliable service. “Consumers choose Amazon because it does better than its competition on these CPC.” Cohan, Peter, “3 Reasons Amazon Is the World’s Best Business”, Forbes , February 2, 2018. https://www.forbes.com/sites/petercohan/2018/02/02/3-reasons-amazon-is-the-worlds-best- business/#563e86e63565 Identify the six major organizational structures. Explain the McKinsey 7-S model. Explain how organizations organize to meet external market threats and opportunities You should understand and identify the six types of organizational structures, and the advantages and disadvantages of each structure: Functional Divisional Matrix Geographic Networked Team Virtual You should also understand why the internal dimensions of an organization matter with regard to how it fits with its external environment. Domain The purpose of the organization from which its strategies, organizational capabilities, resources, and management systems are mobilized to support the enterprise’s purpose. McKinsey 7-S model A popular depiction of internal organizational dimensions.

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Corporate Cultures Identify the fit between organizational cultures and the external environment Organizational culture is considered one of the most important internal dimensions of an organization ’s effectiveness criteria. Peter Drucker, an influential management guru, once stated, “Culture eats strategy for breakfast.” Hyken, Shep, “Drucker said Culture Eats Strategy for Breakfast”, Forbes , December 5, 2015. https://www.forbes.com/sites/shephyken/2015/12/05/drucker-said-culture-eats-strategy-for-breakfast-and-enterprise-rent-a-car-proves-it/#7a7572822749 He meant that corporate culture is more influential than strategy in terms of motivating employees’ beliefs, behaviors, relationships, and ways they work since culture is based on values. Strategy and other internal dimensions of organization are also very important, but organizational culture serves two crucial purposes: first, culture helps an organization adapt to and integrate with its external environment by adopting the right values to respond to external threats and opportunities; and secondly, culture creates internal unity by bringing members together so they work more cohesively to achieve common goals. Ed Schein. (2010). Organizational Culture and Leadership, 4th ed., San Francisco, CA: Jossey-Bass ; J.W. Weiss. (2014). An Introduction to Leadership, 2nd ed., Bridgepoint Education, Inc. Culture is both the personality and glue that binds an organization. It is also important to note that organizational cultures are generally framed and influenced by the top-level leader or founder. This individual’s vision, values, and mission set the “tone at the top,” which influences both the ethics and legal foundations, modeling how other officers and employees work and behave. A framework used to study how an organization and its culture fit with the environment is offered in the Competing Values Framework. The Competing Values Framework (CVF) is one of the most cited and tested models for diagnosing an organization’s cultural effectiveness and examining its fit with its environment. The CVF, shown in , has been tested for over 30 years; the effectiveness criteria offered in the framework were discovered to have made a difference in identifying organizational cultures that fit with particular characteristics of external environments. This discussion of the CVF is based on these sources: K. Cameron, R. Quinn, J. Degraff, and A. Thakor, (2014). Competing Values Leadership, 2nd ed., New Horizons in Management , Northampton, MA; K. Cameron and R. Quinn (2006). Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework, San Francisco, CA: Jossey-Bass ; and https://www.ocai-online.com/blog/2016/09/Organizational-culture-Create-Collaborate-Control-Compete The Competing Values Framework Source: Adapted from K. Cameron and R. Quinn, 1999. Diagnosing and Changing Organizational Culture, Addison-Wesley, p. 32. The two axes in the framework, external focus versus internal focus, indicate whether or not the organization’s culture is externally or internally oriented. The other two axes, flexibility versus stability and control, determine whether a culture functions better in a stable, controlled environment or a flexible, fast-paced environment. Combining the axes offers four cultural types: (1) the dynamic, entrepreneurial Adhocracy Culture —an external focus with a flexibility orientation; (2) the people-oriented, friendly Clan Culture —an internal focus with a flexibility orientation; (3) the process-oriented, structured Hierarchy Culture —an internal focus with a stability/control orientation; and (4) the results-oriented, competitive Market Culture —an external focus with a stability/control orientation. The orientation of each of these cultural types is summarized as follows. The Adhocracy Culture profile of an organization emphasizes creating, innovating, visioning the future, managing change, risk-taking, rule-breaking, experimentation, entrepreneurship, and uncertainty. This profile culture is often found in such fast-paced industries as filming, consulting, space flight, and software development. Facebook and Google’s cultures also match these characteristics. T. Yu and N. Wu. (2009). “A Review of Study on the Competing Values Framework”, International Journal of Business Management , Vol.4, No. 7, July, pp. 47-42. It should be noted, however, that larger organizations may have different cultures for different groupings of professionals, even though the larger culture is still dominant. For example, a different subculture may evolve for hourly workers as compared to PhD research scientists in an organization. The Clan Culture type focuses on relationships, team building, commitment, empowering human development, engagement, mentoring, and coaching. Organizations that focus on human development, human resources, team building, and mentoring would fit this profile. This type of culture fits Tom’s of Maine, which has strived to form respectful relationships with employees, customers, suppliers, and the physical environment. The Hierarchy Culture emphasizes efficiency, process and cost control, organizational improvement, technical expertise, precision, problem solving, elimination of errors, logical, cautious and conservative, management and operational analysis, and careful decision-making. This profile would suit a company that is bureaucratic and structured, such as the U.S. Postal Service, the military, and other similar types of government agencies. The Market Culture focuses on delivering value, competing, delivering shareholder value, goal achievement, driving and delivering results, speedy decisions, hard driving through barriers, directive, commanding, and getting things done. This profile suits a marketing-and-sales-oriented company that works on planning and forecasting but also getting products and services to market and sold. Oracle under the dominating, hard-charging executive chairman Larry Ellison characterized this cultural fit. Amazon illustrates a company that can have a mix of cultures and be effective. For example, Amazon blends a high-performance Adhocracy Culture with regard to its external expansion and Bezos’s leadership style; at the same time, Amazon resembles a Hierarchy Culture internally with regard to its tight control over employees at lower levels. The company propelled its domain from an “online bookstore” “to selling everything online to being the pioneering in adopting cloud computing with AWS . . . to adopting the latest robotics in its warehouses to improve productivity . . . to thinking and testing disruptive technologies like drones and so on.” Nocera, Joe, “Jeff Bezos and The Amazon way”, The New York Times , August 21, 2015. https://www.nytimes.com/2015/08/22/opinion/joe-nocera-jeff-bezos-and-the-amazon-way.html It has been criticized, at the same time, for its “toxic cut-throat work environment,” asserting that Jeff Bezos is overly demanding and sets very high standards for Amazon employees, as well as for himself. This type of culture extends down to the warehouse employees. Amazon employees have complained that “Work came first, life came second, and trying to find the balance came last.” This criticism peaked with an alleged suicide attempt in 2017 of a disgruntled employee who requested a transfer to a different department within in the company but was placed on an employee improvement plan—“a step that could result in his termination from Amazon if his performance didn’t improve.” Farber, Madeline, “Amazon Employee Attempts Suicide After Sending Email to Colleagues”, Fortune , November 29, 2016. http://fortune.com/2016/11/29/amazon-employee-suicide-attempt/ Amazon has since changed many of its working rules and regulations for warehouse employees. How can employee diversity give a company a competitive advantage? Explain the concept of hiring for fit as it relates to corporate culture. What are some organizational issues that must be addressed when two large firms merge or grow rapidly like Amazon? Identify the fit between organizational cultures and the external environment You should be able to identify and differentiate between the four types of organizational cultures and the fit of each with the external environment and describe the CVF framework. Finally, you can identify the internal dimensions of organizations, the interconnection among the dimensions, and how these affect the ‘fit’ with external environments. Corporate culture Defines how motivating employees’ beliefs, behaviors, relationships, and ways they work creates a culture that is based on the values the organization believes in. Adhocracy culture Creates an environment of innovating, visioning the future, accepting of managing change, and risk taking, rule-breaking, experimentation, entrepreneurship, and uncertainty. Market culture Focuses on delivering value, competing, delivering shareholder value, goal achievement, driving and delivering results, speedy decisions, hard driving through barriers, directive, commanding, competing and getting things done. Hierarchy culture Emphasizes efficiency, process and cost control, organizational improvement, technical expertise, precision, problem solving, elimination of errors, logical, cautious and conservative, management and operational analysis, careful decision making. Clan culture Focuses on relationships, team building, commitment, empowering human development, engagement, mentoring, and coaching. Internal dimensions of organizations How an organization’s culture affects and influences its strategy. Competing Values Framework Developed by Kim Cameron and Robert Quinn this model is used for diagnosing an organization’s cultural effectiveness and examining its fit with its environment.

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Organizing for Change in the 21st Century Identify environmental trends, demands, and opportunities facing organizations. The 2018 annual Global Risks Perception Survey (GRPS) predicts the following trends in the external environment: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers, and (4) cyber vulnerabilities. With this context, authors in this report suggest that complex organizations approach their futures with the “nine resilience lens”—i.e., the capacity of a company or other organization to adapt and prosper in the face of high-impact, low-probability risks. The Global Economic Report, 13th Edition, World Economic Forum , 2018. http://www3.weforum.org/docs/WEF_GRR18_Report.pdf, p. 8 and pp. 54-57. The nine lenses are grouped into three categories. First, structural resilience considers the systemic dynamics within the organization itself. The author calls for “system modularity,” i.e., structures and designs that are “loosely coupled,” which is another way of saying that rigid, mechanistic hierarchies will not function as well in these high-impact environments. Secondly, integrative resilience underlines complex interconnections with the external context. Here the author suggests that organizations must be part of and aware of their contexts: geographically and the health of “individuals, families, neighborhoods, cities, provinces, and countries” that are affected. Relatedly, the author notes that organizations must rely on their social cohesion—such as the social capital an organization has to fall back on in times of crisis—which is a strong source of resilience. Third, transformative resilience requires that mitigating some risks requires transformation. Important to organizations here is the need “to proactively change or it will end up being changed by external circumstances.” This process requires organizational foresight, not forecasting. Organizations need to apply different search, environmental scanning, and new discovery techniques “to engage with the uncertainty of multiple futures.” They do this through innovation and experimentation. In practice, Google, Amazon, Facebook, SpaceX, Tesla, Airbnb, Uber, and the resilience of other industry and organizational pioneering will be required. Another trend on the horizon is that “[o]rganizations are no longer judged only for their financial performance, or even the quality of their products or services. Rather, they are being evaluated on the basis of their impact on society at large—transforming them from business enterprises into social enterprises.” Agarwal, Dimple, “Introduction: The Rise of the Social Enterprise”, Deloitte Insights , March 28, 2018.? https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2018/introduction.html A recent survey showed that 65 percent of CEOs rated “inclusive growth” as a “top-three strategic concern, more than three times greater than the proportion citing ‘shareholder value.’” Ibid. Deloitte researchers noted that “[a] social enterprise is an organization whose mission combines revenue growth and profit-making with the need to respect and support its environment and stakeholder network. This includes listening to, investing in, and actively managing the trends that are shaping today’s world. It is an organization that shoulders its responsibility to be a good citizen (both inside and outside the organization), serving as a role model for its peers and promoting a high degree of collaboration at every level of the organization.” Ibid. Identify environmental trends, demands, and opportunities facing organizations. Among the trends in the external environment: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers, and (4) cyber vulnerabilities. Another trend is that organizations will no longer solely be judged only for their financial performance, or even the quality of their products or services. Rather, they will be evaluated on the basis of their impact on society at large—transforming them from business enterprises into social enterprises. Chapter Review Questions Explain how several current environmental forces are affecting and will affect organizations and organizational structures’ effectiveness and efficiency in the near future? What are ways to classify and describe how industries and organizations fit and do not fit with their external environments? What are a few industries and/or organizations that are fitting well with their current environments? What are a few that are not? Why? What are some major differences between organic and mechanistic organizational structures and systems? Which organization would you work best in, an organically or mechanistically structured one, and why? What are some advantages and disadvantages of functional structures? Do you think it’s true that every organization has a hidden functional structure in it? Explain your answer. Why have functional structures been criticized for not accommodating new changes in the environment? What are some advantages and disadvantages of divisional structures? How is a product structure one type of a divisional structure? Explain. What are some disadvantages in working in a matrix structure and why? What advantages do matrix structures have compared to functional structures? What advantages do geographic structures have compared to a functional structure? What are issues that working in a networked team structure present? In what ways is a virtual organization and structure different from the other ones discussed in the chapter? What major trends discussed at the end of this chapter are different from previous external environments and the ways organizations were organized? What purposes does an organization’s culture serve when considering the external environment? How does facilitate an understanding of how the internal organization functions with external environments? Management Skills Application Exercises You have just been assigned to lead a functionally structured organization. Explain what types of skills you would need to best perform this function. What types of problems would you expect to have managing a divisionally structured organization? What skills would you need to excel in this undertaking? If you were assigned to work in a matrix team structure, explain the issues and benefits you might expect to experience and why. What skills would help you in this function? .You have just been assigned to work with a strategy team in an organization to predict issues and opportunities that might be expected for the next 2 years. Using this chapter, explain what information you would provide to this team? Use , “The Competing Values Framework,” to identify the type of organizational culture at IKEA, Home Depot, and Best Buy. Managerial Decision Exercises You are a manager working in a functionally structured organization. A disgruntled employee is complaining about problems she is having in that structure. Outline a way you would find out more about her complaints with regard to her being in this type of structure and some ways to assist her. You are a manager working in a networked team structured organization. A disgruntled employee is complaining about problems he is having in that structure. Outline a way you would find out more about his complaints with regard to his being in this type of structure and some ways to assist him. You have been selected to lead a team to decide on a different type of structure in your organization to better serve customers who are complaining about poor service that is slow, impersonal, and not meeting their needs to be heard. Presently, the functional structure isn’t working well. Outline some information from your knowledge using this chapter that would help the team in its assignment. You witness a senior executive at your firm engaging in overly aggressive methods of pressuring employees to increase their sales quotas beyond reasonable means. You are in a networked team structure that is partly a matrix. You are uncertain about whom to discuss this issue with. What would you do? As a new graduate, you have been hired to help a medium-sized company come into the 21st century. Products need revamping, people aren’t sharing information, and customers are gradually leaving. The firm has a traditional top-down managed, vertical hierarchy. It is believed that the firm has very good potential to sell its products, but new markets may be needed. Outline an agenda you would work on to research and make suggestions with regard to this chapter’s focus and content. Critical Thinking Case Wells Fargo, Crisis and Scandal The recent widespread scandal at Wells Fargo jolted and shocked the corporate world. How could such internal corrupt and outrageously illegal and unethical activities by professionals have occurred? Wells Fargo is “an American multinational financial services company headquartered in San Francisco, California” with offices nationwide and “the world’s second-largest bank by market capitalization and the third largest bank in the U.S. by total assets.” In September 2016 it was discovered that the company was continuing to create fake customer accounts to show positive financial activity and gains. 5,000 salespeople had created 2 million fake customer accounts to meet high-pressure internal sales goals, including a monthly report called the “Motivator.” The out-of-control sales leadership pressured sales employees to meet unrealistic, outrageous sales targets. Dramatically unrealistic sales goals propelled by continuous pressure from management coerced employees to open accounts for customers who didn't want or need them. “Some Wells Fargo bankers impersonated their customers and used false email addresses like noname@wellsfargo.com, according to a 2015 lawsuit filed by the city of Los Angeles.” The “abusive sales practices claimed in a lawsuit that Wells Fargo employees probably created 3.5 million bogus accounts” starting in May 2002. Wells Fargo is awaiting final approval to settle that case for $142 million. However, regulators and investigations found that the misconduct was far more “pervasive and persistent” than had been realized. “The bank’s culture of misconduct extended well beyond the original revelations.” For example, regulators found that the company was (1) “overcharging small businesses for credit card transactions by using a ‘deceptive’ 63-page contract to confuse them.” (2) The company also charged at least 570,000 customers for auto insurance they did not need. (3)The firm admitted that it found 20,000 customers who could have defaulted on their car loans from these bogus actions; (4) The company also had created over 3.5 million fake accounts attributed to customers who had no knowledge of such accounts. Wells Fargo has had to testify before Congress over these charges, which have amounted to $185 million dollars, and more recently the company has been ordered by regulators to return $3.4 million to brokerage customers who were defrauded. The CEO and management team have been fired and had millions of dollars withheld from their pay. In the aftermath of the scandal, even though Wells Fargo executives were not imprisoned for the extensive consumer abuses committed by the company, the CFPB (Consumer Financial Protection Bureau) and Office of the Comptroller of the Currency (OCC) imposed a $1 billion fine on Wells Fargo for consumer-related abuses regarding auto loan and mortgage products. The OCC also forced the company to allow regulators the authority to enforce several actions to prevent future abuses, such as and including “imposing business restrictions and making changes to executive officers or members of the bank’s board of directors.” The new president of the company, Tim Sloan, stated, “What we’re trying to do, as we make change in the company and make improvements, is not just fix a problem, but build a better bank, transform the bank for the future.” Critical Thinking Questions What happened at Wells Fargo with regard to past activities that led to this major scandal? What internal dimensions of the company were part of the problems that occurred? How might the organizational structure of the company have been part of the problems that occurred? . Identify and use relevant concepts from this chapter as well as your own thoughts and analysis to diagnose the scandal at Wells Fargo. How could such a scandal have occurred in the first place? Who and what was at fault? Suggest some solution paths the company might consider, using knowledge from this chapter and your own thoughts/research, to avoid such a scandal from reoccurring. Sources: https://en.wikipedia.org/wiki/Wells_Fargo; Pasick, Adam, “Warren Buffett Explains the Wells Fargo Scandal,” Quartz , May 6, 2017. https://qz.com/977778/warren-buffett-explains-the-wells-fargo-scandal/https://qz.com/977778/warren-buffett-explains-the-wells-fargo-scandal/; Bloomberg, “The Wells Fargo Fake Accounts Scandal Just Got a Lot Worse,” Fortune , August 21, 2017. http://fortune.com/2017/08/31/wells-fargo-increases-fake-account-estimate/; Horowitz, Julia, “‘huge, huge, huge error’ in Wells Fargo Handling of Ethics Line Calls, CNN , May, 6, 2017. https://money.cnn.com/2017/05/06/investing/buffett-wells-fargo-berkshire-annual-meeting/index.html; http://money.cnn.com/2018/02/05/news/companies/wells-fargo-timeline/index.html; Wattles, Jackie, Grier, Ben, and Egan, Matt, “Wells Fargo’s 17 Month Nightmare,” CNN Business , February 5, 2018. https://money.cnn.com/2018/02/05/news/companies/wells-fargo-timeline/index.html. Hudson, Caroline, “Wells Fargo Stocks Still Struggling in Wake of Scandal,” Charlotte Business Journal , April 2, 2018. https://www.bizjournals.com/charlotte/news/2018/04/02/wells-fargo-stocks-still-struggling-in-wake-of.html

Business


Introduction (Credit: GLady/ Pixabay/ (CC BY 0)) Learning Outcomes After reading this chapter, you should be able to answer these questions: What are mechanistic versus organic organizational structures? What are the fundamental dimensions of change? How do managers deal with change? Jackie Smith, CareSource University Jackie Smith is a human resources, training and organizational development professional with more than 20 years of experience. She has worked in a variety of organizations and industries in both the for-profit and not-for-profit sectors. Jackie is vice president of CareSource University at CareSource, a Medicaid managed care organization. She oversees CareSource University as well as the company’s performance management, succession, and goal-setting processes. In 2017 CSU delivered more than 240,000 learning hours, coached 300 leaders, and onboarded 1,100 new hires. CareSource University has been nationally recognized for seven years as one of Training magazine’s Top 125 training organizations, ranking in the top 19 for six years. In 2017, CSU was named to the global Learning Elite, ranking 18th among worldwide organizations. Prior to CareSource, Jackie was president of Reflections on Learning, a performance-consulting firm, and worked as a senior organizational development consultant, regional human resources manager, training specialist, and manager in the financial services, retail, and transportation industries. Jackie’s instructional focus has been in the area of leadership development, designing programs including: Developing Your Leadership Vision Leading through Extraordinary Change Transforming Team Performance through Dialogue Building Sustainable Strategy with Appreciative Inquiry Her educational background includes a BS in education from Miami University, Ohio and Luxembourg and an MS in organizational development and leadership from St. Joseph’s University in Philadelphia. In addition, she has served as an adjunct faculty member at Antioch McGregor University and is a certified facilitator in a variety of training and development programs, organizational assessments, and Myers-Briggs profiling. She also serves as a team leader facilitating business strategy sessions in countries around the world including Ecuador, Jordan, Guinea, and Senegal. This chapter will cover several concepts that deal with how leaders develop and shape organizations. An understanding of the concepts in this chapter is essential for leaders who need to pull people together to accomplish the essential work of a business in a consistent process over time. We will address the essential ideas.

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