Strategic Organizational Diagnosis and Design

On Saturday, January 30, 1993, the Herald Sun, the local newspaper in Durham, North Carolina, reported that IBM was facing problems. IBM had in the previous week announced a cut in dividends and planned to replace its chairman, John Akers. IBM’s profit went from a $6 billion profit in 1990 to $2.8 billion and $4.9 billion losses in 1991 and 1992 respectively. Peter Lieu, a computer analyst at Furman Selz, was quoted as saying that “John Akers inherited a mess and the mess is a highly centralized organization with virtually no delegation of responsibility.” The problems facing IBM were compared to the situation at AT&T, which after losing $1.23 billion in 1988, turned profitable in 1990 with a reported 1992 fourth-quarter profit of $1 billion. The success of AT&T was attributed to a decentralized management style introduced by the late James Olson and continued under the new leadership by Robert Allen. Allen cut staff by 5 percent and wrote off $6.7 billion in old analog tecnology. He diversified and brought in a new management. Meanwhile, IBM was struggling with its old management style and was accused of “failing to ‘obsolete’ its own products quickly enough.” IBM’s problems had arisen because of a new competitive situation in all of its markets-a change away from the use of mainframe computers and toward workstations and networks. Additionally, competition in the personal computer market had changed with declining growth and confusion about which operating system would take the lead. Further, IBM also “had some bad luck in the form of the global recession, which cut into international profits.” This story points to a key issue important for business success. Situations changed in the past and they will change in the future. Competition, technology, and economic conditions change over time, and firms have to adjust to these changes. Adjustments depend on the management and its style, which is the basis for selecting a strategythat will lead the firm to success in its new conditions. Finally, the firm needs an organization and an organizational structure that will enable it to carry out its selected strategy. The proper fit among the firm’s strategic factors: leadership style, climate, size, environment, technology, strategy, and the firm’s structure is a necessary condition for a business success. However, it is not sufficient nor a guarantee for success.

When you examine the design of an organization for evaluating its efficiency and effectiveness, you can look at it in a number of ways. You may gather information about what the organization actually does - the goods and services it provides. You may be told who the boss is and who makes the decisions. You may be shown an organizational chart. Many companies also have explicitly stated objectives that drive their strategy. This information tells you about the design of the organization, the way the organization is put together, who does what, and who talks with whom.

The Institute of Applied Computer Science, in Odense, Denmark, is a small research-oriented organization located at Science Park. Its main activities are related to high technology applications of computer science in various organizations and projects. It has been involved in technology transfer projects for a number of European companies. The basic idea is that Applied Computer Science will transfer ideas from research laboratories that can be used in practice. It has particularly targeted companies with a relatively low research and development budget that do not have staff that can make the transfer. For these companies, a technology transfer project is a rare event. The activities are typically done in the framework of national research programs and European Union (EU) R&D programs such as ESPRIT, BRITE/EURAM, SPRINT, and COMETT. The Institute of Applied Computer Science is a small organization currently employing seventeen highly skilled employees. It was established in 1986 at the request of the local industry, which needed to better organize the transfer of knowledge from Odense University (now University of Southern Denmark) and a technical college. A group of local business people and representatives from Odense University and the technical college formed the company, raised a small amount of capital, and hired a teacher, Benny Mortensen, at the technical college to run the company. Benny Mortensen had good contacts both at the University and in local businesses and quickly linked the company to EU grants. His knowledge and enthusiasm have contributed significantly to the success of the company. In particular, he has established cooperation with ten European partners.

“Navy retirees recruited by tech firms fit discipline, flexibility to new tasks.” This was one of the headlines in the San Jose Mercury News, Sunday, February 15, 1998. The story tells how Silicon Valley corporations have started hiring retired and former military personnel. The story focuses on the similarities and differences in working in the military with its chain-of-command hierarchy and being in a seemingly less structured environment. “Military personnel are veterans of the teamwork that is regarded as an essential part of valley life. But the military requires clarity at every level about the task at hand to be critical for effective performance. What these newcomers to high tech often see are missed opportunities for nurturing a common sense of mission.” “There’s more freedom, more latitude to make things happen in the high tech companies,” says Jack Gale a former Navy commander, but like in the Navy it is all about performance. The story not only stresses the problems and transitions the former military personnel had to go through to fit to their new positions but also what new ways of looking at things they bring in.

The Institute of Applied Computer Science (introduced in Chapter 3) was negotiating a contract with a European Union research agency. This contract would be the single largest contract in the history of the company. The contract required Applied Computer Science to employ about forty people and to be the coordinating unit for a number of research teams located in other European countries. Benny Mortensen was not worried about the scientific and technological aspects of the new project but expressed concerns about running a company that would be twice its current size. He realized that he no longer would be as heavily involved in every project and that more traveling and time spent on recruiting would leave him less time to have detailed knowledge of how projects were doing. To a large extent, the success of the company depended on his ability to utilize resources efficiently, thus cutting cost and time, by using knowledge from one project to improve another project.

On Monday, January 13, 1992, the Danish business newspaper Børsen published a story about Samsonite’s new distribution system for its European market. Samsonite produces luggage in Belgium for the European market. In each European country it had sold its products through a national company that had exclusive rights to import Samsonite’s products. The national company then sold Samsonite products to stores. In Denmark, the firm Bon Goût had held the contract with Samsonite for twenty-three years, but Samsonite canceled the contract to sell directly to stores from its headquarters in Belgium. It developed an on-line order system that enabled it to sell to all countries in the European Union from Belgium, and allowed it to take advantage of changes within the new EU single market. Samsonite would also in a more direct way operate in different countries with different national cultures.

Med Electronic, Inc. is a medium-size company that specializes in electronic apparatus that is used in the treatment of pain and in other electronic devices used by hospitals. The machines have been custom made to the particular needs of the user department or physician. Some basic components are used in all its devices, but no two machines are similar. This has caused problems when machines come in for repair because documentation and specifications for a particular machine may be difficult to find. Med Electronics’ performance has been stable for some time, and the owners have been pleased with its performance. The employees are either engineers or highly trained technicians. Med Electronic has had a stable share of the world market for its particular products.

When Bon Goût faced its problem with Samsonite, described in Chapter 6, it had a number of ways to deal with the situation. It could fight the decision made by Samsonite, or it could decide to stay in its normal business and find a new supplier to replace Samsonite. One of its major competitive strengths - its ability to deal with manufacturers and retailers - could help it find new products to import and market. Since its problems arose when the single European market was established, Bon Goût could decide to play the European game and import products from East Asia to be sold in the European market. It needed a strategy. Strategy is both means and ends; it includes the definition of the overall end goals, and the means of action needed to obtain these stated goals. Bon Goût must decide what business it wants to be in, and then it has to develop a process to realize what it wants. Environment is important for this choice. The process to obtain certain goals may require a particular organizational structure. For example, if Bon Goût decides that it wants to play the European game in the high-end fashion industry, it will need an organization that can operate in several countries. This will relate to both distribution and service to stores as well as to the ability to read fashion trends in various countries. Additionally, it needs an organizational structure that can deal with suppliers.

Strategic diagnosis is an assessment of the organization’s strategic factors, structure and performance. Diagnosis identifies misfits - situations which yield diminished performance; design is devising structures that fit the strategic situation and result in good performance. Strategic organizational diagnosis is the assessment within the multi-contingency model presented in Figure 1.3 of the strategic factors of the organization, the contingency relations, and its configuration and properties.

The objective of strategic organizational design is to obtain total design fit: strategic fit, contingency fit, and design parameter fit. These criteria were developed in Chapter 1. Briefly, strategic fit is fit among the input factors: leadership style, climate, size, environment, technology, and strategy. Contingency fit ensures that the contingency relations -if-then statements - have been followed and are compatible with each other. These relationships have been developed in Chapters 3–8. Design parameter fit considers the compatibility of the design recommendations on configuration, formalization, centralization, and so on. Total design fit is a consideration of all three fit criteria simultaneously. To illustrate we examine the case, Charles Jones.

Growth at Applied Computer Science, Inc., created a conflict for the design of the organization. As a small organization, a simple configuration would be appropriate. However, management’s preference for delegation, low uncertainty avoidance, and a producer leadership style suggested more decentralization. Further, the company’s increased size indicated the organization needed more specialization and decentralization. Generally, for a decision on a suitable organizational structure. Applied Computer Science had to assess the effect of all contingency factors.