STRATEGIC ORGANIZATIONAL DIAGNOSIS AND DESIGN

The Dynamics of Fit

Third Edition

STRATEGIC ORGANIZATIONAL DIAGNOSIS AND DESIGN

The Dynamics of Fit

Third Edition

Richard M. Burton The Fuqua School of Business

Duke University Durham, North Carolina

Borge Obel

Department of Management

Odense University

Odense, Denmark

I f Springer Science+Business Media, LLC

Library of Congress Cataloging-in-Publication Data

A C L P . Catalogue record for this book is available from the Library of Congress.

STRATEGIC ORGANIZATIONAL DIAGNOSIS AND DESIGN: The Dynamics of Fit, Third Edition, by Richard M. Burton and B0rge Obel.

Additional material to this book can be downloaded from http://extras.springer.com.

ISBN 978-1-4020-7685-5 ISBN 978-1-4419-9114-0 (eBook) DOI 10.1007/978-1-4419-9114-0

Copyright © 2004 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 2004 Softcover reprint of the hardcover 1st edition 2004

A l l rights reserved. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording, or otherwise, without the written permission from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work.

Permission for books published in Europe: permissions@wkap.nl Permissions for books published in the United States of America: permissions @ wkapxom

To Helmy H. BAUGHTeacher and Friend

R.M.B.B.a.

TABLE OF CONTENTS

CHAPTER 1 Diagnosis and Design 1Introduction 1What is an Organization? 2An Information-Processing View of Organizations 5

Neo-Information Processing as a Basis for OrganizationalDiagnosis and Design 9

Strategic Organizational Design 13The MUlti-contingency Diagnosis and Design Model 16

Fit Criteria for Designing the Knowledge Base 18Contingency Fit 20Strategic Fit. 21Design Fit. 23Total Fit 24

Synthesis of Knowledge Bases 25Composing the Knowledge Base 30

The OrgCon 38Validating the OrgCon 40Summary 41

CHAPTER 2 What is an Organizational Design? 43Introduction 43Organizational Configurations 46

Simple Configuration 47Functional Configuration 48

A Functional Organization 50Divisional Configuration 54

A Divisional Organization 56Matrix Configuration 60

A Matrix Organization 62Ad Hoc Configuration 66Bureaucracies 67Virtual Network 69International Configurations 70

Organizational Complexity 73Horizontal Differentiation 74Vertical Differentiation 75Spatial Differentiation 77

Formalization 78

viii Table ofContents

Centralization 80Incentives 81Coordination and Control 83Summary 85

CHAPTER 3 Leadership and Management Style 87Introduct ion 87Leadership and Organization 91Literature Review on Leadersh ip 93Dimens ions and Typolog ies 99Measur ing Leadership Style 103Leadership Style as a Contingency 107

Describing a Leader 109A Leader's Effect on Structure 110Describing a Producer 113A Producer's Effect on Structure 114Descr ibing an Entrepreneur. 116An Entrepreneur's Effect on Structure 117Descr ibing a Manager 119A Manager's Effect on Structure 121Interaction effects of Size and Leadership Style 124

Managing the Leader 125Summary 126

CHAPTER 4 Organizational Climate 127Introduct ion 127Climate and Culture 131Literature Review on Climate 137Measuring and Categorizing Climate 141Climate as a Contingency 145

Describing a Group Climate 146The Group Climate Effects on Structure 148Describing the Developmental Climate 150Developmental Climate Effect on Structure 151Describing the Internal Process Climate 153Internal Process Climate Effects on Structure 155Describing the Rational Goal Climate 157Rational Goal Climate Effects on Structure 158

Manag ing the Climate 160Summary 160

Table ojContents ix

CHAPTER 5 Size and Skill Capabilities 163Introduction 163Literature Review on Size 165

The Measurement of Size 166Size as Imperative 168

An Information-Processing Perspective on Size 168Measuring Size and Skill Capability for Design Purposes 171Size as a Contingency 174

Size Effects on Complexity 175Size Effects on Centralization 176Size Effects on Formalization 178Size Effects on Configuration 179Size Effects on Incentives and Coordination and Control 180

Managing Size and Skill. 181Summary 183

CHAPTER 6 The Environment.. 185

Introduction 185Literature Review on Environment.. 189

Measures of the Environment... 189The Environment-Structure Relationship 195

Describing the Environment 198Environment as a Contingency 205

Environmental Effects on Formalization, Centralizationand Complexity 206Environmental Effects on Configuration, Coordination,Media Richness and Incentives 215

Operationalizations of the Environmental Measures 224National culture 227Managing the Environment 231Summary 233

Chapter 7 Technology 237Introduction 237Literature Review on Technology 240Measuring Technology 249Technology as a Contingency 254

Technology Effects on Formalization 254Technology Effects on Central ization 256Technology Effects on Organizational Complexity 257

x Table ojContents

Technology Effects on Configuration 259Technology Effects on Coordination and Control. 260Information Technology 262

Managing Technology 267Summary 270

CHAPTER 8 Strategy 271Introduction 271Literature Review on Strategy 276

Structure Follows Strategy 276The Counter Proposition: Strategy Follows Structure 278Strategy and Structure; Fit. 279

Measuring and Categorizing Strategy 284Strategy as a Contingency 291

Describing a Prospector 294Prospector Effects on Structure 296Describing a Defender 297Defender Effects on Structure 299Describing an Analyzer without Innovation 300Analyzer without Innovation Effects on Structure 302Describing an Analyzer with Innovation 304Analyzer with Innovation Effects on Structure 305Reactor Strategy 307

International Dimensions 308Choosing the Right Strategy 309Summary 310

Chapter 9 Diagnosis and Misfits 311Introduction 311Literature Review on Misfits 312Strategic Misf its 314

Environment-Strategy 315Technology-Environment. 317Climate-Environment 317Climate-Strategy 319Technology-Strategy 320Climate -Technology 320Technology-Leadership Style 321Climate - Leadership Style 322Leadership Style - Environment 323Leadership Style - Size Skill 323

Table of Contents xi

Contingency Misfits 324Environment Misfits 324Strategy Misfits 326Technology Misfits 328Size Skill Misfits 329Climate Misfits 330Leadership Style Misfits 331

More Specific Misfits 333Environment - Strategy Misfits 333Technology - Environment Misfits 335Climate - Environment Misfits 336Climate - Strategy Misfits 337Strategy - Technology Misfits 337Climate - Technology Misfits 338Technology - Size Skill Misfits 339Climate· Leadersh ip Style Misfits 340Leadership Style - Environment - Size Misfits 340Leadersh ip Style - Strategy Misfits 341Environment Misfits 342Strategy Misfits 343Climate Misfits 344Leadership Style Misfits 344

Summary 345

CHAPTER 10 Organizational Design Fit... 347Introduction 347Design Parameter Fit 354Design Synthes is 358

The Simple Configuration 359The Functiona l Configuration 360Divisiona l Configurat ion 362Matrix Configuration 363Ad Hoc Configuration 365Virtual Network 366The Professional Bureaucracy 367The Machine Bureaucracy 368Organizational Complex ity 369Formalization 373Centralization 376Coordination and Control 380Media Richness and Incentives 381

Summary 382

xii Table of Contents

CHAPTER 11 The Dynamics of the Change Process 385Introduction 385Diagnosis and Design 386Lifecycle Management: Diagnosis and Design 388The Dynamics of Diagnosis and Design 393

Misfits: Where Do They Come From? 394External Changes: Evolutionary and Revolutionary 396Internal Changes: Intended Misfit Creation 397

The Mechanisms of Misfits 399How to Fix Misfits 403How Fast is Fast Enough .407Design is Exploration and Exploitation .411Design is Learning 415Summary 418

References 421Subject Index 435

CD: Teaching Material and OrgConCases:

Oticon (Oorthe O"jbak and Mikael S"ndergaard)

The Top Management Group that got Fired ... by ItselfThe Spaghetti that became RevolutionaryWhat Happens if the Spaghetti gets Cold?Scouts are More Attractive

ABB Electromechanical Meters [Dav id R. Thomason)

Duke University Press (Kathy Brodeur)

GTE (Louis Grilli)

Bluestone Group. Inc. (Hyun-Chan Cho, Hajime Kitamur and Ting-Hsuan Wu)

Joy Builders [Dorthe O"jbak)

Meki (Oorthe O"jbak)

Dandairy Ltd. (Jens Krag)

Seeds Control, Ltd. (Jens Kragh)

OrgCon and Training Course Installation Files

Preface to the Third Edition

In this third edition. we have made a number of updates andchanges - both in the text and in the OrgCon software.

First to the reader. we repeat a note from the preface in the sec­ond edition as it is even more relevant here:

There are two very contrasting approaches to reading this bookand learning about organizational design. The more traditional ap­proach is to read the book. and then use the OrgCon on cases andapplications. The second approach is to begin with the OrgCon soft­ware and only examine the book as you find it helpful. Which ap­proach is better? It is your choice. not ours. In our experience, stu­dents in organizational design prefer to start with the OrgCon and acase, rather than with the book itself. Readers who have more back­ground in organization theory and design usually examine the bookfirst. We have tried to write the book so that it can serve both as areference and an integrated presentation.

There are numerous changes in the third edition. The literaturereview in each chapter has been updated. The information process­ing approach is strengthened and applied more comprehensively asthe theoretical underpinnings. Throughout we have rewritten thetext beyond normal editing in an attempt to make the presentationclearer and easier to read. In addition, we have made the followingsubstantive changes:

• Introduced virtual network configurations in Chapter 2 andthen used it throughout.

• Enhanced the discussion of incentives throughout.• Leadership style in Chapter 3 is now a two dimensional con­

struct: delegation and uncertainty avoidance.• National culture is included as part of the organization's envi­

ronment in Chapter 6.• Diagnosis and misfit management in a new Chapter 9 are de­

veloped in greater depth and based more firmly upon empiri­cal studies and the literature.

• Design and contingency fit are revised discussions in Chapter10.

• Change management and the dynamics of design is a newChapter 11.

xiu Preface to the Third Edition

• OrgCon has been revised to include all of these changes andto include new insights from the literature and our ongoingvalidation.

• OrgCon now includes a "Trainer" for the first time user.• OrgCon has a comprehensive HELP which gives defmitions

and illustrations for every question and concept.• And, many new cases have been added and included on the

CD along with the OrgCon.

We made these changes for both types of readers mentioned above.As with previous editions, we are very fortunate to have the sup­

port of many friends and colleagues who have contributed in innu­merable ways to make this revision possible. Pernille DissingSerensen developed the "Trainer" module in the OrgCon. ApamaVenkatraman read, ciritized, suggested changes on numerous drafts.Peter Obel is an expert programmer and makes the OrgCon tech­nically sophtisticated and user friendly. Nadine Burton further de­veloped the HELP version for the OrgCon. Mike Roach has been ourtechnical consultant and in-class assistant. Mona Andersen is ourtechnical editor for the text; she has been tireless in her insistenceon getting it right. For many years, Thorkild .Jergensen of AarhusUniversity has offered a critique and many suggestions from his useof the text and OrgCon with his students. Ray Levitt of StanfordUniversity and his students have offered very helpful suggestions.Perhaps, the most fundamental critique is that of Carl R. Jones ofthe Naval Postgraduate School; he always asks tough questions.

We would like to thank Dorthe Dejbak Hakonsson and Jens Kragfor their permission to include the new cases on the CD. These caseshave been translated from Danish to English by Axel Moos.

We also want to thank our colleagues at Duke University andUniversity of Southern Denmark for discussions and comments. Allhave made this revision better and we are very appreciative.

Our home institutions - The Fuqua School of Business, DukeUniversity and the University of Southern Denmark - have been verysupportive. At Kluwer, Gary Folven is a most supportive editor so wecan concentrate on the book itself.

Again, Helmy Baligh reminds of what is important.

Rich Burton and Borge Obel

Preface to the Second Edition

We will not repeat our preface discussion from the first edition. Herewe only add some new comments:

• a note to the reader and user,• changes in the book and the Organizational Consultant

(OrgCon),and,• our thanks to the many individuals who have contributed

critically to this venture, read and reviewed the book, con­tributed chapters and cases, and similarly used and critiquedthe OrgCon.

For the reader, there are two very contrasting approaches to readingthis book and learning about organizational design. The more tradi­tional approach is to read the book, and then use the OrgCon oncases and applications. The second approach is to begin with theOrgCon software and only examine the book as you find it helpful.Which approach is better? It is your choice, not ours. In our experi­ence, students in organizational design prefer to start with theOrgCon and a case, rather than with the book itself. Readers whohave more background in organization theory and design usuallyexamine the book first. We have tried to write the book so that it canserve both as a reference and an integrated presentation.

We made a number of changes in this edition. We have revisedthe OrgCon and put it in a Windows frame. It is much friendlier andyou can spend your time focusing on the cases and learning aboutorganizational design. The OrgCon is contained on the accompanyingCD-ROM - here you will also find a number of data input files forcases.

In the book itself. we have kept the main ideas and the basic ap­proach. But, there are significant changes. We have added a newchapter on climate and incorporated climate into the multidimen­sional contingency theory. Climate helps determine what the organi­zation should be , and how it should be designed. The addition ofclimate to the model makes it more nearly complete and adds con­siderably to our understanding of the organization and its design.

xvi Preface to the Second Edition

The synthesis Chapter 8 on diagnosis and design in the first editionhas been totally rewritten as Chapter 9 here. We have eliminated agood deal of the earlier redundancy and spelled out more clearlywhat we mean by design. It is not an easy concept. Design is both aproduct and a process. Design is organizational lifecycle manage­ment and dynamic. Design can be viewed as March's concepts ofexploration and exploitation. And finally. design is organizationallearning: it is a never ending process of experience. error and refine­ment.

We have added capsules on new organizational forms and anumber of other topics. They are snippets which are related andrelevant. but may not fit the flow and the order of the book. NormanDavies. in his EUROPE: A HISTORY. 1996. called them "capsules."His capsules: cross the boundaries of the chapters. illustrate curiosi­ties. whimsies. and inconsequential side-streams. glimpses of "newmethods. new disciplines. and new fields" of recent research. Ourcapsules are similar in spirit: the research support is weak. most ofsupport is conjectural or assertive; a popular new word as delayeringor concept as hypercompetition; or small case stories. We hope thereader will find them interesting.

The Windows 95 version of OrgCon has been a multi-person.multi-location project. In Odense, Jan Mikkelsen has been our fun­damental programmer. Roxanne Zolin, Stanford University. plannedand managed the project as well as adding critical programming ele­ments. In Omaha. Miriam Zolin developed the help-part. Peter Obelhas been our expert for all the things that go beep in the night aswell as fixing problems when others gave up. The computer team.Bjarne Nielsen and Jan Pedersen at Odense have as usual providedinvaluable 24 hours a day support.

Our friends have made this venture fun; even when we could notlaugh. they did for us. We have been very fortunate to have theirsupport and help. Starling D. Hunter III. Mikael Sendergaard. andDorthe Dejbak permitted us to include research chapters; we arevery pleased. Starling in Chapter 11 demonstrates how to use pub­licly available information to create the input data for an OrgConanalysis. and then the implication of the results. Mikael and Dorthein Chapter 12 developed a very interesting case: Oticon, the spa­ghetti organization. This book is a research book. It is not an easyread. Yet. a few colleagues have used it as a textbook and providedvery valuable feedback. We would like to thank Ray Levitt. Thorkild

Preface to the Second Edition xvii

.Jergensen. Gerry DeSanctis, Bo Eriksen, Carl Jones, and HenrikBendix. Several individuals have read and critiqued our effort: PatKeith, Stan Rifkin, Ray Levitt, Jan Thomsen, Starling Hunter, DortheDejbak, Torbjern Knudsen, and Jeanette Larsen. Arie Lewin, DukeUniversity, is our special critic; he has the ability to coach and makethe end result better. We are very grateful.

The Fuqua School of Business, Duke University and The Schoolof Business and Economics, Odense University, our home institu­tions, have provided much support. Part of the revision was writtenat Stanford University, where Obel was a Research Scholar at Clfeand Scancor, Stanford University. Ray Levitt has been a most gra­cious host. We also like to thank Jim March and the many research­ers at Scancor for the many question they asked, which forced us torethink and sharpen our arguments. We express our thanks to Stan­ford University. Our work has been generously supported by TheDanish Social Science Research Council.

At Odense University, Mona Andersen made disarray into won­derful text. She made the impossible seem normal for this edition asshe did for the first one.

At Kluwer, Zack Rolnick has made it all possible. The Kluwerteam has responded at critical times to make it happen.As ever. Helmy Baligh is our anchor who keeps us focused on what isimportant.

We would like to thank them all.

Rich Burton and Berge Obel

Preface to the First Edition

Organizational design is a normative science with the goal of pre­scribing how an organization should be structured in order to func­tion effectively and efficiently. Organizational theory is a positive sci­ence that states our understanding about how the world operatesand contrasts that understanding with a view of how the world couldpossibly operate. It provides the theoretical underpinnings for organ­izational design. In this book, we attempt to construct an approachfor diagnosing and designing organizations built on a knowledge baseof organizational theory.

Organizational design is a young field that incorporates manyconcepts and approaches. In organizational design literature to date.there seems to have been only two ways of doing things in this field ­either to be so general and so simple that the various interpretationsdo not yield practical design implications, or to be so detailed andspecific that generalization to other situations is almost impossible.We attempt here to strike a balance - and offer an approach that isapplicable to a broad range of situations.

In our view, organizational theory exists as a large body of relatedlanguages, definitions. hypotheses, analyses. and conclusions. Ourknowledge is vast. diverse. somewhat inconsistent, and generallyunconnected. Yet there is an underlying core of knowledge that canbe used for analytical purposes. Creating this balanced approachrequires that the knowledge be distilled and augmented to produce aset of clear and consistent design rules that can be used to recom­mend what the organization's design should be.

In organizational theory we have attempted to find simplicity. Thesearch for a dominant contingency or imperative has led to a paradeof paradigms which examine elements of technology. size. environ­mental. and strategy paradigms. Moreover. little effort has beenmade to remove the simplicity of these paradigms and put the vari­ous pieces together in a reasonable fashion. Schoonhoven (1981)lists a number of problems with the contingency view of organiza­tional design, including lack of clarity, lack of understanding aboutinteractions. and a lack of acknowledgment of the functional forms ofthe interactions. Others (Donaldson. 1982, 1987; Schreyogg. 1980;Pennings. 1987) have debated whether a contingency view was ap­propriate or not. The difficulties come from many sources. In manystudies the distinction between description and prescription is not at

Preface to the First Edition xix

all clear. In many cases a silent shift is made from the description tothe prescription. Indeed, we must incorporate knowledge that comesfrom descriptive studies. But we want to prescribe. We want to rec­ommend what the organizational design should be .

Designing an organization is no simple task. From Mintzberg'sfive classes of structure. Mintzberg (1979). one can generate over amillion design alternatives. How does one search such a designspace? To illustrate, let us assume that an organizational structurecan be defined as functional , divisional, or matrix and as centralizedor not and formalized or not. There are then 3x2x2 = 12 possibledesigns from which to choose. The number of choices grows nonline­arly as the number of organizational dimensions approaches usefulrealistic proportions. Let us add the choice that the organizationcould have high specialization or not. The number of choices is now2x12 = 24. In a contingency theory of organization, these design al­ternatives would need to be evaluated for all possible conditions. Inthe simple case of ten contingency dimensions and only two valuesallowed for each. we would have to evaluate twenty four classes ofstructures under 1,024 different conditions. When the dimensionsand number of variables approaches a useful size for analytical pur­poses, the choice and evaluation of organizational design alternativesbecomes an enormous problem. There is no way students, teachers,consultants, and managers can handle such a complex choice situa­tion without some order and systematic approach.

This book is accompanied by Organizational Consultant-a com­puter based expert system that operationalizes the theoretical propo­sitions developed in this book. Organizational Consultant is a pro­gram that applies the underlying theory to deal with millions of de­sign possibilities in a systematic and comprehensive manner to diag­nose an organization and offer recommendations for its design, con­figuration, complexity, formalization. centralization, media richness,committees, meetings, and liaison relations.

The book is divided into two parts. Part 1 consisting of the first 8chapters is the theory part. where the multiple contingency model isdeveloped. One special feature of Part 1 is its detailed analysis ofScandinavian Airlines Systems (SAS) from 1950 to today. SAS hasundergone a number of changes in its situation and design duringthis period. and we analyze those changes to provide insight intoorganizational design. Other business cases are included to illustratevarious concepts and to relate the theory to practice.

xx Preface to the First Edition

Part 2 is a manual/case part consisting of Chapters 9-13. Part 2describes how the Organizational Consultant operates and how itcan be used to analyze cases.

This part also contains seven cases specifically developed to beused with Organizational Consultant. For Part 2, Nancy Keeshan is acoauthor.

Although Part 1, Part 2, and Organizational Consultant can beconsidered as a unit, each is self-contained. For instance, Organiza­tional Consultant can also be used with other textbooks in organiza­tional theory such as Robbins (1990), Daft, (1992), and Mintzberg,(1984).

Organizational Consultant is a teaching tool in itself. Explanationand help functions contain many parts of the theory. Extensive useof Organizational Consultant can teach the student many issues ofthe theory.

The book and software have been developed over some years. Wehave used both the book and software in many courses both at TheFuqua School of Business and Odense University. We would like tothank our students for valuable comments and critique. Many stu­dents developed cases from their own organization as part of thecourses and we were allowed to include some of these cases in Part 2of this book. We would like to thank Steve Hulme, Louis Grilli, DavidThomason, Kathy Brodeur, Barbara Johnson, and Kelly Leovic. RayLevitt at Stanford also used both the book and Organizational Con­sultant in his course. Ray's many comments helped improve the finalversion. Additionally, he convinced his students Hyun-Chan Cho,Hajime Kitamura, and Tln-Hsuan Wu to prepare a case for Part 2.We are very grateful for his effort. Many individuals have workedwith us as teaching assistants, programmers, and research assis­tants. We would like to thank Berit Jensen, Claus Bo .Jergensen,Mogens Kjrer Harregaard, Kim Madsen, Mads Haugard, Bo Hegedaland Seren Hjortkjrer. Our colleagues Caroll Stephens, Arie Lewin,Tom Naylor, Mikael Sendergaard. Bjarne Nielsen, and Henrik Bendixoffered comments, critique, and help in various ways. A number ofexecutives allowed us to test Organizational Consultant in their or­ganization. We are grateful to Don Namm, Glenn Welngarth, DonMelick, Benny Mortensen, Hans .Jergen Hansen, .Jern Henrik Peter­sen, Sven-Erik Petersen, and Arne Fredens. We would also like tothank the reviewers and staff from Kluwer. Their comments and helpis highly appreciated. Mona Andersen has worked with us in all

Preface to the First Edition xxi

these years. She has typed and organized several versions as well asprepared this final one . It has been a pleasure to work with Mona .

We would to thank the Danish Social Science Research Council.Duke University. and Odense University for the support they haveprovided to make this research possible.

And finally. and most importantly. Helmy H. Baligh has been ourfellow traveler on many ventures. He is coauthor on a number ofbase papers for this book and has been our most supportive andmost critical colleague- thus the dedication.

Richard Burton and Berge Obel