General Motors: Its Changing Organizations Design
The trials and tribulations of General Motors (GM) during the 1980s and 1990s mirror those of organizations in the United States and around the world. GM’s position of market leader in automobile production and sales began to falter in the early 1980s along with market leaders in other industries. Competitive forces throughout the world were forcing US firms to rethink their strategies and their organization designs. As more and more competitors from Asia and Europe challenged GM’s market supremacy and as technological developments in manufacturing and information processing challenged GM’s production advantages, GM’s management responded by implementing changes in its organization design that continue into the second half of the 90s.
The first signs of problems began to appear in 1981 when the company reported its first loss since 1921. This report coincided with the appointment of Roger Smith as CEO, the sixth GM CEO since Alfred P Sloan, Jr., who served from 1937 to 1956. Sloan created the modern version of GM through the development of the divisional organizational structure, which consisted of five independent divisions— Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac—and the competing product strategy. The competing product strategy encouraged each division to compete for customers by delegating complete authority to each division to design, produce, market, and sell its own particular line of cars. The only limitation placed on the division was the overall corporate strategy of encouraging car buyers to think of “trading up” as each year’s new models hit the show floors. Thus, the ‘Chevrolet Division produced the starter cars, relatively inexpensive and within the price range of the first-time car buyer. But with increases in income the car buyer would be encouraged through promotion and selling efforts to consider the more expensive Pontiac and Oldsmobile vehicles, and ultimately the Buick and Cadillac.
This traditional divisional design was in place throughout the post-World War II period when General Motors grew into the largest manufacturing organization in the world. But something happened along the way. The divisional structure as it evolved over time began to be identified as an impediment to progress and market response. One of the outgrowths of the structure was the development of a massive corporate support staff, which when created was supposed to provide expert advice and consultation to the divisions. But over time these staff members began to take over me decision making of the line units, and the decision making began to grind to a halt in endless discussions in endless committee meetings at corporate headquarters. As these corporate staff units increased their influence through the provision of valued information, they sought and received formal authority over many of the day-to-day decisions.
Thus, when Roger Smith took the reins in 1981, he began the process that continues even to this day: redesigning GM’s organizational structure with the specific purpose of pushing decision making down into the operating divisions and reducing the number of staff at corporate headquarters. In 1984, he announced his first move: the creation of two autonomous groups, BOC and CPC. BOC consisted of what had been the Buick, Oldsmobile, and ‘Cadillac divisions, and CPC consisted of what had been Chevrolet, Pontiac, and GM of Canada. Smith delegated complete authority to each of the groups to organize in whatever way the managers thought was necessary to get GM back on track—to regain its competitive, growing, and profitable status.
BOC decided to organize around four completely autonomous product groups—strategic business units (SBUs). Each product group would operate as Sloan had envisioned his divisional structure would operate, exercising complete authority to design, produce, and sell cars. By contrast, CPC organized around functional lines with centralized authority, but with a matrix overlay to facilitate communication across functional lines.
When 1993 rolled around, GM had replaced Robert Stempel, who had replaced Roger Smith, with Jack Smith. Stempel had been in office barely two years, yet the board of directors was unhappy with his deliberate management style. He simply was moving too slowly in carrying out the turnaround that Roger Smith had begun. The new CEO responded to the news that GM’s market share had dropped to its lowest point in 23 years, 29 percent, by creating a single operating division, North American Operations (NAO); paring corporate staff from 13,500 to 2,500; reducing the number of car models from 62 to 54; combining 27 different purchasing departments into one; and eliminating nearly 16,500 hourly jobs by offering early retirement. These seemingly harsh measures were necessary according to Jack Smith to assure GM’s very survival as an automaker.
The organizational design that GM now counts on to enable it to survive and compete identifies the five traditional divisions—Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac—as marketing units. But all production, product design, and purchasing will be done in one separate unit. The story of GM’s reorganization efforts remains unfinished. In fact, what progress the company makes will depend upon’; Jack Smith’s success at eliminating the remaining vestiges of bureaucracy that persist even in the midst of massive efforts to make the company more responsive to market conditions” and technological developments. Centralization or Decentralization? Which is the appropriate response: centralize some functions, such as purchasing and production, and decentralize other functions such as marketing?
Despite all the efforts of its CEOs from Roger Smith to Jack Smith, GM continues its long slide down the profitability curve. The efforts to reverse this slide through organization redesign and other measures seem to have yielded little gain. If General Motors cannot cope with the rigors of global competition, can the country?
1. Identify the environmental forces that have driven General Motors to change its organizational design.
2. Have the changes in structure been in the appropriate direction? Have they been misguided? Explain your answer and your reasoning.
3. General Motors has a collaboration with Hindustan Motors-makers of iconicAmbassador.However,they are also trying to independently establish own set up.what changes may happen to their parent organization structure?.
4. Discuss the possibility that redesigning the organizational structure is actually an irrelevant response: to what ails General Motors.
MicroAge Undergoes Massive Structural Change
In April 2000, MicroAge Technology Services transformed itself to an e-Business infrastructure services company that operates as a virtual organization, with an agile and mobile sales force able to reach broader geographic markets. “The rapidly-changing climate of the technology industry, primarily due to the growth of the Internet and emphasis on reducing operating and technology costs through e-Business, has made it clear that we must make significant changes to our business to meet the demands of the new digital marketplace,” said MicroAge Technology Services President, Jeff Swanson.
“As a virtual organization, our sales teams will no longer be tied to physical brick-and-mortar facilities. They will be able to cover broad geographic areas to meet the needs of clients wherever they do business. At the same time, we will continue migrating clients to MicroAgeDirect for product procurement so MicroAge Technology Services sales associates can focus their full attention on relationship management of their clients in fulfilling their infrastructure services needs.”
Swanson continued, “As a client-centric organization the need for physical locations is minimized so that we can work more directly with clients to help them profit from technology in the internet economy.”
The company’s strategic initiatives, aimed at transforming MicroAge Technology Services into a flexible and agile organization fully .capable-of providing the e-Business infrastructure services its clients require, included:
- Expansion of market coverage through the establishment of a field structure composed of thirteen broad geographic market areas, eliminating in three phases the costly network of thirty-five branch
- Centralization of operations and, processes to lower costs and increase efficiency as MicroAge Technology Services moved to a virtual, field organization.”Branch inside sales functions will transition to centralized sales support and client site based sales teams as appropriate.
- Completion of centralized service dispatch for all MicroAge launched plans to centralize service dispatch in order to implement consistent quality standards and enhance overall client satisfaction.
- Migration of all clients toMicroAgeDirect for product procurement. Sales support for major clients will continue to be provided by existing client-site teams or by a centralized team operating from the company’s Tempe offices.
MicroAge Inc., President Christopher Koziol noted that the restructuring of ,the procurement function allows the MicroAge Technology Services sales force to focus their full attention on serving the needs of clients and meet the demands of the new connected economy. “This strategy allows our associates to focus their full attention on managing client relationships and releases them from the burden of managing product transactions, which are more efficiently handled by automated procurement systems such as MicroAge Direct. We will also be able to reduce the costs of delivering services and products, significantly streamline operations and ensure consistent, high-quality service delivery to all clients. The most significant benefits of this new structure will be improved sales productivity and growth increased profitability, and client satisfaction,” he said.
Questions for Discussion
1. The changes in organizational structure discussed in this case were initiated in April 2000. Go on-line and look up MicroAge today. Do you think the company has prospered as a result of these changes? Explain. What is the status of the company today?
2. MicroAge made several organizational changes at the same time. What problems might be encountered by making so many changes at once? How can managers deal with this type of massive structural change?
3. The MicroAge sales force will work independently for much of their time with the elimination of the thirty-five field offices. How can managers at corporate headquarters keep track of sales Activity? What technologies might be used to ensure that sales goals are being met?
4. Compare organization structure of any Indian company involved in e Commerce with Microage
Organizing For Innovation At Raytheon Company.
Raytheon Company depends upon innovation for survival. The company competes in the highly technical and volatile electronic based product industry. Its business with the government includes missile systems, radar, and underwater surveillance products which account for more than half of its $7 billion annual sales. The other half comes from business groups including such well-known consumer products as Amana appliances, speed Queen laundry products, and Caloric cooking appliances. In this environment the importance of development of new products and new technology becomes crucial to the firm’s very survival and it is imperative to design an organization that facilitates new product development. Typically, firms create research and development (R&D) units to do product and process development research and, Raytheon uses this organizational form but supplements it with a centralized, corporate level, New Products Center.
The New products Centre (NPC) is a 35 person group located at a corporate headquarters in Burlington. Massachusetts. Since its formation in 1969, it has participated in the early development of 39 products which have become mainstays in the firm’s product line. The NPC stands alone and works with all the divisions and subsidiaries of the company including those R&D units that are parts of the divisions and subsidiaries. The company also uses other ways to initiate and sustain innovation including external consultants as well as internal and external ventures groups. The NPC plays the special role in this configuration of approaches to innovation because it views the entire organization as both a source of clients and a source of resources. All the expertise in all the divisional R&D groups can be made available to the NPC during the course of developing new products.
The NPC serves as a way to cross functional and divisional boundaries so as to tap all the skills and abilities in Raytheon. The primary goal of the NPC is to develop profitable products. New products are worthless if they do not generate profits, no matter how brilliant or interesting the underlying idea. Thus the bottom-line criterion for evaluating the performance of the NPC is its contribution to profit. Its basic operating procedure is to develop the first functioning model of a new product that can then be turned over to the appropriate product or business center. If the product is successful, it will extend the product line and will be manufactured with existing facilities and distributed through existing channels.
The center is staffed by both generalists and specialists. The generalists are capable of working on a variety of products and fields simultaneously. Three major categories of specialists in Raytheon’s NPC focus on: (1) computer applications for electronic controls, (2) materials design and development, and (3) product engineering which transfers the product manufacturing responsibility to a product or business group. However, even the ablest of research and technical talent will go untapped if a satisfactory relationship with the client group is not established. In Raytheon every organizational unit is a potential client group of NPC, and the development of satisfactory working relationships requires mutual trust. A satisfactory working relationship includes agreement on which market to target with what product, the scale of company investment, the role of each person involved, and who will get credit for success and blame for failure. These are important issues that must be negotiated before the real work of developing the product can begin.
The internal operations, organization, staffing, and interpersonal skills are critical to the success of the NPC. But its place in the overall organizational structure is also critical. In recognition of the possibility that the center could be the first victim of hard times when revenues and cash flows require retrenchment, Raytheon funds the center’s $3 million annual cost entirely out of the executive office resources. This practice means that no operating division or group will be assessed any cost for using the center’s resources for product development. In addition, the director of the center reports to the CEO thus emphasizing the support of top management for the center’s importance. Raytheon’s experience with its NPC indicates that it is one approach to organizing for innovation that other firms could adopt.
1. Evaluate Raytheon’s approach to organizing for innovation. What alternatives come to mind? Would any of these alternatives be appropriate for Raytheon to consider?
2. Select an Indian company known for Innovation. Justify choice.
3. Compare their approach with Raytheon
Krispy Kreme: Where Growth Is Really Sweet
At Krispy Kreme’s 324th store opening in late October 2003, a crowd began gathering early outside the store. Close to 100 people huddled under a tent and umbrellas on that cold, rainy morning” waiting for the store’s opening. With the local media present, the store opened at 5:30 a.m. to the crowd’s chanting “Doughnuts! Doughnuts!” One customer who had been in line since 3:00 a.m. admitted to getting up early to see Presidents and Governors—and now to purchase Krispy Kreme doughnuts. As admirable—or crazy—as this may seem, it’s tame compared to the doughnut dedication shown by others. Some people will even camp out at the stores in the final days of construction and set up before the opening. Rob Perugini camped outside of the 324th Krispy Kreme for 1 7 days before the opening, breaking the old record of 13 days. What does Krispy Kreme do to produce such devotion to its doughnuts?
The Founding and Early Growth of Krispy Kreme
Krispy Kreme Doughnuts, founded in 1937, has grown from a small doughnut shop in a rented building into “a leading branded specialty retailer, producing more than 5 million doughnuts a day and over 1.8 billion a year.” After purchasing a yeast-raised doughnut recipe from a French chef in New Orleans, Vernon Rudolph, Krispy Kreme’s founder, began making doughnuts in a rented building in Winston-Salem, North Carolina, and selling them to local grocery stores. Soon Rudolph began selling hot doughnuts directly to customers.In the ensuing years, Krispy Kreme grew into a small chain of stores, all using the same recipe. Product quality varied, however, and the company established a dry-mix plant and distribution system to ensure a consistent product. Krispy Kreme continued to expand and enjoyed steady growth until the mid-1970s when the company was sold to Beatrice Foods subsequent to Rudolph’s death.
The sale to Beatrice Foods ushered in an era in which Krispy Kreme stores sold ice cream, sausage biscuits, and other food products in addition to doughnuts. Even the doughnut recipe was changed. Horrified by what was happening, a group of Krispy Kreme franchisees repurchased the company from Beatrice foods a few years later.
With the 1982 repurchase, Krispy Kreme refocused on making the hot doughnut experience a company priority. The company continued expanding throughout the Southeastern United States, and then in 1996 it opened its first unit outside the Southeast. This store was in New York City. In 1999, Krispy Kreme opened its first store in California. National expansion has accelerated rapidly since then. In December 2001, the company opened a store in Canada, its first outside the United States.
Growth Through Excellence
Krispy Kreme has a strategic philosophy that is oriented toward growth through excellence. The company’s strategic philosophy revolves around the following beliefs:
- “All products we make in our stores will have a taste and quality that are second to none.”
- “The starting point in controlling product quality is controlling the quality and freshness of the ingredients.”
- “We will be thoroughly prepared to execute growth ini”
- “We view quality, service, and innovation as keys to creating and maintaining a competitive advantage.”
- We view our company as a set of capabilities, not just a product or brand.”
- “We view our growth and success as a company as a natural result of the growth and success of our people.”7
Krispy Kreme’s growth has been partly fueled by the company’s obsession with product consistency. Krispy Kreme strives for such consistency that a doughnut purchased anywhere in the world at any time will taste exactly the same. This is accomplished by testing all raw ingredients before delivery is accepted. If a test sample of a shipment does not meet the company’s standards, the entire shipment is rejected. Krispy Kreme also makes sample doughnuts from every single 2,500-pound batch of mix to ensure that each batch is blended correctly.
Krispy Kreme is more like a factory than a bakery. Krispy Kreme stores typically operate around the clock, producing doughnuts for walk-in customers as well as for wholesale purchase by supermarkets and grocery stores.
National expansion through franchising has driven a good portion of Krispy Kreme’s growth, particularly since the mid-1990s. Significant growth has occurred even though a Krispy Kreme franchise is the most costly food franchise available—being about five times the standard cost for most operations, as estimated by the International Franchise Association. A Krispy Kreme franchise costing $2 million per location on average, is both extraordinarily difficult to obtain and in great demand. Krispy Kreme requires its franchisees to have “$5 million in net worth to apply and . . . ownership and operating experience with multi-unit food service operations.” Krispy Kreme also seeks “area developers”— franchisees who will open at least 10 stores in a region.
Krispy Kreme stores are high-volume operations with higher profit margins than other fast-food business. A typical McDonald’s franchise has revenues of about $1.5 million annually and a typical Dunkin Donuts averages about $744,000. In fiscal 2001, Krispy Kreme franchisees had average revenue of $2.2 million per location. This jumped to $2.8 million in fiscal 2002 and $3 million in fiscal 2003. Company stores had even higher annual sales volume, reaching about $4 million in fiscal 2003.
“Krispy Kreme now takes an ownership stake in all new franchisees, claiming anywhere from 33% to 75%,” a strategy that increasingly is being adopted by other franchising companies. ‘The parent companies engage in such partnerships because they lead to higher earnings and faster expansion.” Krispy Kreme takes an ownership stake even though franchisees “have the money and desire to open as many stores as the company will allow.”
While fueling growth, this joint-partnership strategy has not been a smooth road. A lawsuit over the terms of an alleged contract was filed by two franchisees in northern California. An equity fund that was formed by 35 Krispy Kreme executives to invest in franchise stores was disbanded in the aftermath of the Enron scandal so “that no individual’s personal gain would conflict with the overall good of the company.”
Krispy Kreme’s rapid growth has also been facilitated by its use of information technology. The company uses the Internet as well as a corporate intranet to aid national and international expansion. Using its information technology, Krispy Kreme has made more and more of its services and information accessible to corporate staff, stores, franchisees, and suppliers. The vast majority of orders from individual units are placed over the company’s intranet. Using the Internet and intranet, individual stores from anywhere in the world can train employees around the clock.
Krispy Kreme continues to expand into new markets, both in the United States and overseas. In fiscal 2003, the company entered 17 new U.S. markets as well as one in Canada. It also opened its first store outside of North America, which is in Sydney, Australia. At the end of fiscal 2003, the company is also preparing for a store opening in London. In addition, the company acquired Montana Mills Bread Company and successfully introduced Krispy Kreme Signature Coffees—an outgrowth of its earlier acquisition of Digital Java, Inc. Krispy Kreme has developed a roasting process for coffee beans that ensures the same high level of quality and consistency with its coffees as it has with its doughnuts.
In line with its emphasis on product consistency, Krispy Kreme’s opening of a new store engenders highly consistent customer behavior. A Krispy Kreme store opening attracts a lot of attention. The experience of James Consentino, a West Palm Beach, Florida, franchisee is typical on the morning of a store opening and in the ensuing days. “At 5:30 a.m. that morning, he’ll let in a mob of people who’ve been waiting outside for hours for the warm doughnuts streaming from his ovens at a rate of 2,640 per hour. The event will probably be covered by a TV news crew—most Krispy Kreme openings are—and in his first week Consentino will take in almost as much in revenue as the typical Dunkin’ Donuts store makes in a year.”
1. What are the key elements of Krispy Kreme’s philosophy’? How do these elements relate to the organizing trend of balancing decentralization with centralization?
2. What type of organizational structure does Krispy Kreme appear to be using?
3. What is the potential for developing a network structure at Krispy?
4. Based on its recent growth history, (Including expected entry in India),what type of organizational structure should be used to accommodate the growth in the next 5 years?
Tata Electric Locomotive Company-TATA MOTORS
Tata Electric Locomotive Company started functioning at J’Pur in 1955 and was engaged in manufacture and supply of electric engines to the Indian Railways. Known as TELCO; it soon began to make diesel trucks in collaboration with World renowned Mercedes- Benz at the same location. TELCO duplicated the facility near Pune in 1965 and 1985 initiated a third facility at Lucknow. Today it is known as Tata Motors.
The main activities at Telco consisted of manufacturing the spare parts and assembling these parts into Engine, transmission and the Truck: selling Trucks and accessories: procurement of raw materials required for manufacture of these parts as well as other indirect items: making drawings and designs of product, spare parts, equipment etc; maintaining a check on quality; ensuring proper upkeep of various equipments etc. In addition to these activities, TELCO management started as Engineering Research Centre (ERC) at Pune in early 70’s.
Automobile policy changes initiated by Government in 1978, enabled TELCO to design and develop four wheel products other than trucks to which TELCO was initially restricted. TELCO soon developed smaller Trucks, which could successfully compete with Japanese products. Encouraged by this success, TELCO came into market with products like Tata Mobile and others which were serving as passenger cars also. This range of vehicles known as Tata Family’ was manufactured at Pune. However, these products did not enjoy a great success. The other two Jeep like offerings Tata-Sumo and Safari were however, a great success initially. TELCO started working on design and development of a car in 1995. ERC was briefed to make a car which could compete with Zen, but should have diesel engine. With help from French & Italian designers, TELCO successfully launched Indica car by 1998. Later on, a large version Indigo was introduced.
Unfortunately for TELCO, however the environment had changed and many other cards like Matiz, Santroetc were available to the customer, in addition to new models introduced by Maruti. So initially the car model failed. After a series of quality improvement, car model Indica succeeded.
In 2004, TELCO became Tata Motors. In 2008/09 of company launched a small car at Rs.1 lac price – Nano, which would be produced at a new location. It also introduced several variants of models already existing. Also Tata Motors also brought car models with engines procured from FIAT. Nano plant in Gujarat has been activated recently.
Q.1: How do you think TELCO activities were organized initially?
Q.2: In light of the current situation, do you think Tata Motors needs to charge its organization structure?
Q.3: How would you like to effect this change? Why?
Q 4 In the past two years, Tata Motors is losing market share rapidly, with the off take of Nano car reduced drastically. A new MD has been appointed and one of his mandates is to reduce costs. How could this be achieved via restructuring?
ABCL Petrochemical Company
ABCL is a Petrochemical company, which was founded as collaboration between a UK Company and an Indian Management Group in the late 60’s (The collaboration agreement expired in the 70’s).
Almost from the inception, the company manufactured and sold three products – P, A and T- at the only facility near Pen in Raigad district. These products found applications in Resins, Industrial salt, Paints, Dyes respectively. During the next two decades, when the Industrial activity in the country and particularly around Thane- Belapur belt, was expanding rapidly, the company found theses products (known collectively as Commodity products) to be in short supply with the supply far outstripping the demand. The financial performance was exceptionally well (It may be mentioned that till 1991, any company had to get Government license to increase volume, add any new product and to get collaboration).
Basic activities within the company consisted of manufacturing these products in the facility (the equipment had been installed with the help of the foreign collaborators, and was capital intensive and complicated) maintaining and repairing / replacing the facility, modifying the manufacturing process to suit Indian conditions, purchasing raw materials (which were standard outputs of other petrochemical companies in the vicinity and spare parts required for the equipment importing critical auxiliary material, distribution the finished products though 10 wholesalers/ Distributors located across India. Due to the restrictions mentioned earlier the company started an in-house R&D activity in the mid 80’s and successfully developed 10 new products for applications in pharmaceutical perfumery, pesticides, Agrochemicals etc. these products were required in low volumes but fetched higher prices. This portfolio was known as specialty chemicals. Due to very little competition and low volumes, these products were also sold through some distribution channels. Company kept on doing something exceptionally well tell 90’s.
However, with liberalization and globalization the import duty protection provided on all the company products vanished and import of all company products from abroad became a reality, thereby squeezing the margins. The company also began to feel the need for development of higher value added products, reduce costs etc.
Q1. How do you think the activities of the company were arranged initially?
Q2. With which changing environment is there a need to change the organization structure?Why?
Q3. How would you re-organize? Why?
Q 4 study and compare organization structure of Reliance.
Lucent: Clean Break, Clean Slate?
The company that could seemingly do no wrong in the first three years after it was spun off from AT&T in 1996 seriously lost its way in 2000. Worst of all, it has been completely bested by archrival Nortel Networks Corp. in the key market for optical-fiber telephone switches.
The contrast with Nortel is what stings Lucent execs the most. It was only a few years ago that Nortel was the industry dog. But today, Nortel has 45 percent of the exploding optical-transmission-switch market. That compares with just 15 percent for Lucent, which decided in 1996 to develop a slower switch precisely because its customers weren’t asking for anything faster. Lucent now rues the decision to settle for less transmission speed. And CEO Henry Schacht is quick to acknowledge that he is as much at fault as former CEO Richard McGinn. Schacht says he is planning one-on-one meetings with Lucent’s customers and is reviewing all the processes now in place with an eye to streamlining Lucent’s cumbersome structure.
Under McGinn, Lucent embarked on an organizational overhaul in September 2000. To head up key divisions, it has appointed some aggressive new outsiders who are not mired in the company’s bureaucratic mindset. One of those, CFO Deborah C. Hopkins, is putting in place a companywide standard for evaluating a product’s profitability, replacing the piecemeal, business-by-business standard used before. The company is also chopping away at management layers, more closely tying compensation to performance, and trying to better integrate its vaunted Bell Labs with product-development teams. But the world’s largest telecom-equipment maker actually has a more cosmic task: It must remake itself into a company that can be quick to respond to needs, quick to deliver new technology, and far less bureaucratic. And it has to do all of this while suffering from a 20 percent turnover rate that is siphoning off top talent.
Granted, such an overhaul has been prescribed for just about every lumbering old economy behemoth. Lucent is determined to pull itself apace with that market. And it may have a secret weapon: In September, Lucent named Jeong Kim to head its optical-networks business. Clearly different from the Lucent lifers around him. Kim has reorganized the group into 17 small divisions based on product lines, with managers closely matched to customers and compensation tied to performance. His goal: to improve time to delivery by 30 percent. “I have a 100-day plan,” he says.
Kim’s entrepreneurial spirit is sorely needed at Lucent, and he is convinced healready has had a positive effect on morale. He recently visited a Lucent plant in North Andover, Massachusetts, and found general managers there very involved in suggesting ways the operation could he improved. “They were really taking ownership of their operation. And morale was running really high. I was very encouraged.”
Lucent must also start regaining the trust of its employees if it wants to stem the flood of talent that started rushing out the door as soon as executives’ pre-IPO options were excersid on October 1, 1999. And it hasn’t done any better at hanging on to the employees who came on board with its many acquisitions. Adopted employees who have headed for the doors regularly complain that they found them selves stifled by Lucent’s many-layered management. “There are a lot of top-level people trying to get out of Lucent right now,” our Silicon Valley headhunter says.
Lucent’s executives are sounding all of the right turnaround noises. William T. O’Shea, vice president for corporate strategy and business development, is in charge of a massive effort that kicked off this past summer to streamline Lucent’s businesses. The goal: in encourage entrepreneurship. “We are putting new people in charge and organizing groups to focus their energy in small teams.” he says, rather than structuring the company in large, often uncommon inactive divisions. And the company is including Bell Lab researchers in these teams, to make sure that their invention areproperly promoted. “We are bringing a much broader collection of people to the table internally to make strategic decisions,” he says.
1. What are the reasons behind these changes in strategy?
2. How would you characterize the changes in Lucent’s vertical and horizontal structures?
3. What other management issues do you see in this case? How do they combine with issues of org structure?
DECENTRALIZATION AT CURTICE-BURNS, INC.
Curtice-Burns, Inc., consists of seven food manufacturing divisions with sales in excess of $270 million. The company grew primarily through acquisitions of food companies which then became divisions of the company. The management philosophy at Curtice-Burns, Inc., emphasizes decentralization and autonomy. Each division is completely responsible for its own business—with the exception of major capital investments. To underscore the importance of decentralization, the company has a headquarters staff of only 12 people.
President and CEO Hugh Cumming is committed to decentralization and can readily identify the advantages and disadvantages of the approach. The primary advantage is the clearly defined responsibility of each division’s CEO for that division’s performance. A CEO whose division’s-performance is below planned performance cannot blame headquarters for meddling in division matters. Instead, he alone makes all the strategic and operational decisions.
A second advantage derives from the company’s incentive plan. Because of the cyclical nature of the food business, Curtice-Burns does not tie its incentive plan to the performance of a single division. Rather, the plan is based upon overall corporate results and allocated to the divisions on the basis of payroll. The incentive plan creates positive peer pressure because a poorly performing division will reduce the bonus for all divisions.
Decentralization stimulates and sustains the entrepreneurial spirit so often found in small business, but often missing in large corporations. All the top-management personnel began their careers in small business, and they tend to continue to manage entrepreneurially. For example, when one division decided it was time to get into the natural potato chip business, it did so in less than a month. By contrast, Pepsico’sFrito-Lay Division took 15 months to bring out the product.
The decentralized concept is not without difficulties. For example, the emphasis on divisional marketing of regional brands does little to promote the visibility of Curtice-Burns stock. Consequently, the stock sells at prices lower than what the company’s board of directors thinks is appropriate. Investors simply are not familiar with Curtice-Burns.
A second disadvantage of decentralization is the inherent duplication of functions such as accounting, sales, and marketing. A corollary problem is that some divisions (acquired companies) are too small to operate independently. Small divisions often cannot provide the full range of functional support required to operate as an independent unit.
A third problem is difficult to define. But it relates to the managerial question of knowing when headquarters should assist or even overrule division decision. Constant interference in division affairs obviously ruins the concept, but total disregard is likewise ruinous. Striking a balance between the two extremes is a problem only because it is a matter of managerial judgment.
Cumming believes the advantages of decentralization outweigh its disadvantages. In fact, he sees the practice as the primary cause for the company’s steady growth.
1. Evaluate Curtice-Burns, Inc.’s policy of decentralization.
2. What specific company strategies facilitate the use of decentralized authority?
3. At what point should Cumming consider centralizing certain functions?Which are the function most likely to be centralized when and if that point is reached?
FORD’S GLOBAL STRATEGY: CENTERS OF EXCELLENCE
In 1986 Ford passed its bigger competitor, General Motors, with earnings of $3.3 billion. Ford’s market share is about 20 percent. But success, in many instances, may be only temporary, and Ford’s chairman, Donald E. Petersen, is concerned about complacency. Indeed, the company has to work hard to maintain its reputation for stylish, aerodynamic cars and high quality.
Under the former leadership of Henry Ford II, the company was very centralized. But Petersen’s plan is to make Ford an integrated global enterprise. Thus, a great deal of authority for the development of specific models or components is now centralized in the company’s various technical centers around the world rather than in Detroit. Under this plan, the car or its components are developed in the technical center with the best expertise in a particular field, anywhere in the world. This could save the company a lot of money by avoiding duplication in development and reducing tooling costs. For example, Ford of Europe, located in England, is the center for developing the platform for the new model that will replace the European Sierra and the American Tempo and Topaz. Ford will sell the new cars in Europe and in the United States. Similarly, in Japan Mazda (Ford owns 25 percent of the company), which has much experience in building small cars, will be the center for developing the platform for the replacement car for the Escort. The North American center of excellence will focus on midsize cars. Similar centers are planned for major component, such as transmissions and engines. While these centers of excellence develop platform and key components, exterior and interior styling will be the responsibility of companies in various regions.
The concept of the centers of excellent may seem promising, yet a previous attempt in the early 1980s to build a “world car in Europe failed. It is said that the American car Escort, shared only one part with European counterpart, namely, a seal in water pump.
1. What do you think of Ford’s overall decentralization with centralized authority for development of specific cars and components at the technical centers?
2. Why does Ford think that the concept of having centers of excellence located in various part the world will be the correct organization structure for the twenty-first century?
3. Research to find out if these centres of excellence are still operating.
4. As is known Ford came to india a few years ago. Research and report their organization.
Stopping the Sprawl at HP
When Randy Mott joined Wal-Mart fresh out of college in 1978, its in-house tech staff had only 30 members and company founder Sam Walton had not yet become a believer in the power of computing to revolutionize retailing. But Mott and his cohorts developed a network of computerized distribution centers that made it simple to open and run new stores with cookie-cutter efficiency.
Then in the early 1990s, Mott, by this time chief information officer, persuaded higher-ups to invest in a so-called data warehouse. That let the company collect and sift customer data to analyze buying trends as no company ever had, right down to which flavor of Pop-Tarts sells best at a given store.
By the time Mott took his latest job last summer, as CIO of HP, he had become a rock star of sorts among the corporate techie set as an executive who not only understood technology and how it could be used to improve a business but how to deliver those benefits. Besides his 22-year stint at Wal-Mart, Mott helped Dell hone its already huge IT advantage. By Welding nearly 100 separate systems into a single data warehouse, Mott’s team enabled Dell to quickly spot rising inventory for a particular chip, for instance, so the company could offer online promotions for devices containing that part before the price fell too steeply.
Now Mott, 49, is embarking on his boldest and most challenging project yet: a three-year, $1 billionplus makeover of HP’s internal tech systems that will replace 85 loosely connected data centers around the world with six cutting edge facilities—two each in Austin, Atlanta, and Houston. Mott ispushing sweeping changes in the way HP operates, slashing thousands of smaller projects at the decentralized company to focus on a few corporate wide initiatives
including scrapping 784 isolated databases for one companywide data warehouse. Says Mott: “We want to make HP the envy of the technology world.” If it works, Mott’s makeover could have more impact than any new HP advertising campaign, printer, or PC and could turbocharge the company’s already impressive turnaround. HP posted profits of $1.5 billion in its second quarter, up 51% from the year before, on a 5% increase in sales. If Mott is successful, HP’s annual spending on tech should be cut in half in the years ahead, from $3.5 billion in 2005, say insiders.
More important, a Wal-Mart style data warehouse could help HP make headway on its most vexing problem in recent years: how to capitalize on its vast product breadth. While HP sells everything from $10 ink cartridges to multimillion dollar supercomputers, the company has operated more like a conglomerate of separate companies than a one-stop tech superstore. “We shipped 55 million printers, 30 million PCs, and 2 million servers last year,” says CEO Hurd. “If we can integrate all that information, it would enable us to know exactly how we’re doing in Chicago on a given day, or whether the CIO of a big customer also happens to own any of our products at home.”
Mott’s initiatives may well stir up a hornet’s nest within HP. They will likely require thousands of layoffs, while requiring the support of remaining staffers in a company that has long resisted centralized control. Mott is testing the limits of the HP culture, taking away the right of thousands of IT workers to purchase their own tech equipment.
But Mott has the absolute backing of Hurd, who began recruiting him shortly after arriving at HP in February 2005. The pair have known each other for years. At both Wal-Mart and Dell, Mott bought data warehousing gear from Hurd, who was a leading evangelist for the technology during his years at NCR Corp. Hurd eventually wooed Mott in July on the strength of a $15 million pay package and a promise to support him if he’d sign on for the aggressive three year transformation.
Still, Mott’s greatest strength may be that while a technologist, he has the management skills to actually make IT take root in a company’s culture. Linda M. Dillman, a onetime Wal-Mart CIO and now its executive vice president for risk management and benefits administration, recalls how Mott championed the deployment of IT by showing how it achieved Wal-Mart’s business goals. Underlings say Mott’s low-key Southern charm belies an intensity that typically brings him into the office by 6:15 a.m. He has no patience for quick summaries during grueling two day long business reviews he convenes once a month. That certainly jibes with Hurd’s view of the world which is why he’s centralizing HP’s balkanized information systems, even while working to decentralize operational control. The idea is to make sure all of HP’s businesses are working off the same set of data, and to give them the tools to quickly make the best decisions for the entire company say, a single customer management system, so executives can know the full breadth of what any account buys from HP.
1. In what ways is Randy Mott trying to change HP’s structure and the way it works?
2. In what ways has he been trying to change HP’s Culture?
3. How will the changes he has made affect HP’s competitive advantage and performance?
4. Research about HP’s org structure in India Is it appropriate to conditions in India?
Organisation Structure of Saxe Realty Company
Saxe Realty Company, Inc,. located in the San Francisco bay area, was founded in 1938 by Jules and Marion Saxe. For most of its history, the company was a single office agency run by its history, the company was a single-office agency run by its founders. Over time, the company grew in size and sales revenue, which increased from 41 million in 1973 to over 10 million in 1979. Rather than a single office, the company had six branches in the San Francisco and Marin County areas.
The firm grew for many reasons. An important reason was the founders’ ability to do certain things very well. They knew how to select location, time moves, and design offices. They recruited and hired people with above-average ability and trained them to be effective salespeople. The rewards of growth were enjoyed by the Saxe family and employees of their firm.
But with growth came problems stemming from the mismatch between the firm’s organization structure, management practices, and the requirements of a large firm compared to a small one. In the early days, Saxe Realty could handle its business matters in simple and informal ways. After all, its business matters in simple and informal ways. After all, it was a family corporation, and family members ran it as a family, not as a business.
Some of the problems that surfaced with growth included the absence of clearly defined roles and areas of responsibility. People were in jobs because of family relationship rather than skills. Important decisions were made by relatively few people, who often did not have knowledge of all available information. The firm, moreover, had no strategic plan. It responded. The firm, moreover, had no strategic plan. It responded and reacted to opportunities rather than being responded. In a sense, the firm’s success had simply outgrown its organization.
Saxe consequently had to make many changes in its operations and organization structure, the overriding goal being to move Saxe away from an entrepreneurial style firm toward a professionally managed one. The change itself involved a process of preparation and implementation.
The organization structure that Saxe adopted relies on geography as the basis for departmentalization. There is a central office and the branch offices report to it. Geographic departmentalization encourages decentralization. One of the outcomes sought by Saxe’s top management. Branch management are responsible for the day to day activities of their offices. The central office maintains overall direction through planning and controlling processes. For example, all branch offices participate in the annual planning process, during which objective for each branch are developed. These objectives are then the targets and the responsibility of branch managers.
Saxe’s top management developed formal descriptions for all key positions, defining the responsibilities of each job with special attention to avoiding overlap and duplication of effort. The company’s experience during its entreneurial stage was that things were often left undone because everyone assumed that someone else was doing them. In other instances, several people would assume responsibility for a task when it required the attension of only one person. A key consideration in the new organization structure was to define explicitly and formally the work expected from each individual job.
The new structure provides for reporting channels from each branch associate to the chief executive officer. The chain of command is the channel for progress reports on planned objectives, financial and sales reports, and other informational needs. In comparison with the previous organization, the chain of command is much more explicit and formal. Individuals are encouraged to go through channels.
The entire change at Saxe has been both extensive and time consuming. Nearly every aspect of the firm’s operations has been affected, and the changes took two years or more to fully implement.
Questions for Analysis:
1. Draw an organization chart that depicts the structure being implemented at Saxe.
2. Which alternative structures could Saxe have implemented and what would be the advantages of each in comparison to the Saxe did implement?
3. What are the relationships between the planning function and the organization function as depicted in the Saxe case?
4. How is Hiranandani real estate organized in India?
It was about 2 p.m. on March 9 when three Nucor Corp. electricians got the call from their colleagues at the Hickman (Ark.) plant. It was bad news: Hickman’s electrical grid had failed. For a minimillsteelmaker like Nucor, which melts scrap steel from autos, dishwashers, mobile homes, and the like in an electric arc furnace to make new steel, there’s little that could be worse. The trio immediately dropped what they were doing and headed out to the plant. Malcolm McDonald, an electrician from the Decatur (Ala.) mill, was in Indiana visiting facility. He down arriving at 9 o’clock that night. LssHart and Bryson Trumble, from Nucor’s facility in Hertfore County N.C., boarded a plane that anded in Memphis at 11 p.m. Then they drove two hours to the troubled plant.
No supervisor has asked them to make frit trip, are no one had to. They went on their own. Camping out in the electrical substation with the Hickman staff, the team worked 20-hour shifts to get the plant up and running again in three days instead of the anticipated full week. There wasn’t any direct financial incentive for them to blow their weekends, no extra money in their next paycheck, but-for the company- their contribution was huge. Hickman went on to post a first-quarter record for tons of steel shipped.
What’s most amazing about this story is that at Nucor it’s not considered particularly remarkable. Says Executive Vice President John J. Ferriola, who oversees the Hickman plant and seven others, “It happens daily.” In an industry as Rust Belt as they come, Nucor has nurtured one of the most dynamic and engaged workforces around. The 11,300 nonunion employees at the Charlotte (N.C.) company don’t see themselves as worker bees waiting for instructions from above. Nucor’s flattened hierarchy and emphasis on pushing power to the front line lead its employees to adopt the mindset of owner-operators. It’s a profitable formula as Nucor’s 387% return to shareholders suggests. Nucor gained renown in the late 1980s for its radical pay practices, which base the vast majority of most workers’ income on their performance. An upstart nipping at the heels of the integrated steel giants, Nucor had a close-knit culture that was the natural outgrowth of its underdog identity. Legendary leader F. Kenneth Iverson’s radical insight: that employees, even hourly clock-punchers, will make an extraordinary effort if you reward them richly, treat them with respect, and give them real power.
Nucor is an upstart no more, and the untold story of how it has clung to that core philosophy even as it has grown into the largest steel company in the U.S. is in many ways as compelling as the celebrated tale of its brash youth. Iverson retired in 1999. Under CEO Daniel R. DiMicco, a 23-year veteran, Nucor has snapped up 13 plants over the past five years while managing to instill its unique culture in all of the facilities it has bought, an achievement that makes him a more than worthy successor to Iverson,
At Nucor the art of motivation is about an unblinking focus on the people on the front line of the business. It’s about talking to them, listening to them, taking a risk on their ideas, and accepting the occasional failure. It’s a culture built in part with symbolic gestures. Every year, for example, every single employee’s name goes on the cover of the annual report. And like Iverson before him, DiMicco flies commercial, manages without an executive parking space, and really does make the coffee in the office when he takes the last cup.
Although he has an Ivy League pedigree, including degrees from Brown University and the University of Pennsylvania, DiMicco retains the plain-talking style of a guy raised in a middle-class family in Mt. Kisco, N.Y. Only 65 people—yes, 65—work alongside him at headquarters.
Money is where the rubber meets the road. Nucor’s unusual pay system is the single most daring element of the company’s model and the hardest for outsiders and acquired companies to embrace. An experienced steel-worker at another company can easily earn $16 to $21 an hour. At Nucor the guarantee is closer to $10. A bonus tied to the production of defect-free steel by an employee’s entire shift can triple the average steelworker’s take-home pay.
With demand for steel scorching these days, payday has become a regular cause for celebration. Nucor gave out more than $220 million in profit sharing and bonuses to the rank and file in 2005. The average Nucor steelworker took home nearly $79,000 last year. Add to that a $2,000 one-time bonus to mark the company’s record earnings and almost $18,000, on- average, in profit sharing. Not only is good work rewarded, but bad work is penalized. Bonuses are calculated on every order and paid out every week. At the Berkeley mill in Huger, S.C., if workers make a bad batch of steel and catch it before it has moved on, they lose the bonus they otherwise would have made on that shipment. But if it gets to the customer, they lose three times that.
Managers don’t just ask workers to put a big chunk of their pay at risk. Their own take-home depends heavily on results as well. Department managers typically get a base pay that’s 75% to 90% of the market average. But in a great year that same manager might get a bonus of 75% or even 90%, based on the return on assets of the whole plant. “In average-to-bad years, we earn less than our peers in other companies. That’s supposed to teach us that we don’t want to be average or bad. We want to be good,” says James M. Coblin, Nucor’s vice president for human resources.
Compared with other U.S. companies, pay disparities are modest at Nucor. Today, the typical CEO makes more than 400 times what a factory worker takes home. Last year, Nucor’s chief executive collected a salary and bonus precisely 23 times that of his average steel-worker. DiMicco did well by any reasonable standard, making some $2.3 million in salary and bonus (plus long-term pay equaling $4.9 million), but that’s because Nucor is doing well. When things are bad, DiMicco suffers, too.
Executive pay is geared toward team building. The bonus of a plant manager, a department manager’s boss, depends on the entire corporation’s return on equity.
So there’s no glory in winning at your own plant if the others are failing. But to focus only on pay would be to miss something special about the culture Nucor has created. There’s a healthy competition among facilities and even among shifts, balanced with a long history of cooperation and idea-sharing. Since there’s always room for improvement, plant managers regularly set up contests for shifts to try to outdo one another on a set goal, generally related to safety, efficiency, or output. Ryan says Nucor’s Utah plant is the benchmark these days. It is the most profitable, with the lowest costs per ton. “They’ve got everything down to a science,” says Ryan admiringly. “It gives you something to shoot for.”
1. What is Nucor’s managers’ approach to organizing?
2. In what ways has this approach affected its organizational structure?
3. Study Tata Steels India operation and Compare its organization structure with Nucor. What are the differences and what is the reason for those differences?