Case ans

Case 1 United Products, Inc.
Teaching Notes
Copyright © Gareth R. Jones, 1994

Synopsis

United Products, Inc., is a small office products and supply company, headed by the son of the founder,
George Brown, President. Brown is a laissez-faire president/owner who is about to leave on a three-week
European vacation. He doesn’t want much growth because he is unprepared to put forth extra effort.
Growth is limited by his motivation to work harder. Students will tend to be critical of Brown, his
management style, and organizational strategy and structure.

Brown has a good track record as president: His company has grown at an enviable 20 percent a year, and
the functional organizational structure works well. Brown knows how to delegate and decentralize
control. He allows employees to demonstrate their abilities and rewards them for performance, and he
creates an enjoyable organizational culture. His time on vacation or playing golf is a tribute to his
management skills and ability to design a structure that allows for delegation. The case considers basic
management issues such as what organizations do.

Teaching Objectives

1. To familiarize students with small company operations and present the meaning of competition,
strategy, and structure.
2. To critique the management style of a president who appears lazy, but is actually entrepreneurial.
3. To expose a functional organizational structure and a simple hierarchy and show role relationships in
an organic structure.

This case can be used after Chapter 1 or 2 as the first case of the semester. It is easy to analyze and
understand, and is a good preview for many organizational theory topics in the text. Encourage a negative
perspective of Brown and then show the opposite side of the picture. This strategy promotes debate, and
also allows the students to begin to think creatively about management.

Pop Quiz Questions

1. What kind of structure does United Products use?

Answer: A functional structure

2. True or false: George Brown delegates too much authority to lower-level employees.

Answer: False

Issues and Discussion Questions

1. Critically evaluate George Brown’s management style. What does he do well or poorly?

Discuss his personal attitudes and behaviors that appear to be somewhat negative:

1. By his own admission, he doesn’t work long hours.
2. Coming from a wealthy background, he lacks ambition and drive.
3. He is not willing to exert effort and energy to help the company grow faster than 20 percent per year.

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4. His family comes first.
5. He took a 10-month vacation from his company a few years ago.

Consider his managerial policies:
1. There are no formal job descriptions.
2. He has very conservative financial policies and avoids all debt.
3. There are no specific performance standards for employees; salespeople have no specific sales
quotas, but are paid a percentage of sales.
4. There is no formal planning process.
5. There are no profit goals.
6. The size of the workforce and facilities is too large for the volume of business, thus increasing costs.
7. There are very weak training programs; employees train themselves.

It is clear the company is not doing well, and that Brown is a lazy, spoiled millionaire.

2. How well is UPI doing?

From a financial standpoint UPI is very successful. Sales have doubled in the last four years. In 1973
sales were up 22 percent, profits rose 40 percent above 1972, and net worth increased by $123,500. From
the stakeholders' viewpoint, employees earned above-average wages; sales suggest customer satisfaction.
Brown goes out of his way to create a good working atmosphere, and has a personal relationship with
employees and high ethical standards. It seems that the organization is satisfying stakeholders.

3. What explains UPI’s level of performance; for example, is it Brown, luck and chance, or the strategy
pursued by the company over time?

The question arises as to why UPI is doing so well. There will be many reasons offered for the success of
the company. Write them on the board before coming to any conclusions.
Some students will attribute UPI’s success to Brown’s personal actions; play this down and focus on
other factors. Maybe it is chance and luck, the highly motivated sales force, or the strategy developed by
Brown’s father. Consider the company’s strategy.

• UPI’s product lines are broader than its competitors; it carries over 3,500 items in eight
major product categories. This means its customers may need to deal only with UPI.
Limiting contact with many suppliers gives UPI a competitive edge.
• None of its rivals offer such a wide range of products.
• UPI offers a very high level of service, is responsive to customer needs, maintains large
inventory stocks to shorten delivery times, and offers good repair services.
• UPI continually adds new product lines and adds additional salespeople to meet
• customer needs.
• To provide the high level of quality service and maintain expensive inventory, UPI
charges a price above the level of its competitors. Its prices are 10 percent higher than
competitors—the premium customers pay for good-quality service.

UPI is doing a good job of managing its environment and meeting stakeholder needs. UPI is pursuing a
differentiation strategy and is offering a product and service that customers perceive to be unique and
worth a premium price. Because the company operates only in the Northeast, its strategy could be called
focused differentiation strategy as opposed to a strategy pursued at the national or global level. Its
strategy could be the chief reason for its success, but the question arises as to who devised its strategy.

4. Who was responsible for orchestrating UPI’s strategy?

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Brown, because he decided:
• When to add product lines
• To add new salespeople
• On the differentiation, high-service/high-price strategy
• On UPI’s structure to match strategy

So, has Brown been a good leader? Students must reassess Brown’s role, and his apparent laziness has to
be balanced against his successful strategy. Perhaps he doesn’t work 12 hours a day because he has done
everything right, particularly in designing the structure to let people work independently.

5. How has the way Brown designed his structure helped UPI? How does UPI’s structure help explain
his personal and managerial style?

UPI’s structure can be analyzed, and it becomes obvious that Brown has designed UPI’s structure to
allow his employees to perform roles effectively. Being a small company, UPI has a functional structure,
like the B.A.R. and Grille. But unlike many entrepreneurs who are afraid to delegate responsibility and
make all decisions themselves, Brown had recruited a general manager, Hank Stevens, and has
decentralized operating responsibility to him. Brown retains responsibility for strategic decision-making
and makes decisions for the future, but Stevens controls daily business, freeing up Brown to plan and
think ahead.

Brown created the new level of manager in the hierarchy and had all the functional managers report to
Stevens. Stevens is also the sales manager and performs a dual role. UPI employs 34 people and has four
levels in the hierarchy. In terms of the design challenges discussed in Chapter 2:

1. UPI is a simple company. It has a low degree of differentiation and needs only a low level of
integration.
2. Brown has decentralized all day-to-day decision-making and centralized all strategic long-term
decision-making.
3. Brown makes limited use of formalization and encourages the use of mutual adjustment, meeting
with his managers regularly where issues get thrashed out.

6. Because it is a small company, the informal organization and organizational culture play very
important roles in coordinating and motivating employees.

Brown has designed a relatively organic structure in which his employees have freedom and autonomy to
respond to customers’ needs and to search out new accounts. They are rewarded with a generous
commission system. The structure allows UPI to perform well and meet its goals. It gives Brown the
freedom to plan for the future. He may be taking European vacations, but UPI’s strategy is clearly on his
mind.

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7. What problems might Brown and his managers confront in the future in operating UPI’s structure as
the company grows?

Brown’s company is growing, and he has sought out other companies for mergers to become the
dominant regional competitor. As his company grows, he needs to separate the general manager role
from the sales manager role and employ a sales and marketing specialist for training. He may need to
adopt a divisional form of organization, probably a product division structure, and divide up the 3,500
products UPI sells into three or four main product categories. Thus he may need to increase UPI’s level
of differentiation, which will require increased integration and formalization and standardization.

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Case 2 The Paradoxical Twins: Acme and Omega Electronics
Teaching Notes

Synopsis

Based on real events, this case is very useful for discussing the differences in the way organic and
mechanistic structures work. It describes two organizations, Acme and Omega Electronics, that are
bidding for the same contract for manufacturing a memory unit to be used in a photocopier. They have to
meet a deadline to build 100 prototypes that satisfy the customer—a large photocopier manufacturer.
Omega, which has an organic structure, wins the race and builds a more reliable memory unit than Acme,
which has a mechanistic structure and is often late and relatively unreliable—many of its prototypes fail
to work. Omega even corrects a design error in the original blueprint, which improves product quality.
However, each company is given half the order, and Acme takes advantage of this opportunity to
experiment to find ways to reduce its costs, whereas Omega does not. The result is that Acme learns to
reduce its costs and offers the photocopier manufacturer a 20 percent price reduction so that it eventually
wins the whole contract. Omega may have won the battle, but Acme has won the war because its
mechanistic structure fosters a concern for technical efficiency and cost reduction in what is a routine
manufacturing environment.

Teaching Objectives

1. To examine the advantages of an organic structure compared to a mechanistic structure.
2. To understand the need to design a structure that is simultaneously mechanistic and organic.
3. To examine the different ways for organizational effectiveness.

This case can be used in conjunction with another one in this section. It is best used after Chapter 2.

Pop Quiz Questions

1. Does Acme have an organic or a mechanistic structure?

Answer: Mechanistic

2. Which company, Acme or Omega, eventually won the contract for the memory unit?

Answer: Acme

3. Which company produced a prototype quicker?

Answer: Omega


1. Using the mechanistic and organic structure arguments developed in Chapter 2, compare and
contrast the management styles of Acme and Omega.

Acme uses a mechanistic structure. Its president, John Tyler, has a centralized management style and
runs a very tight ship. Communication is top down. Interfunctional coordination takes place through him,
as the different functional managers relay information to him, and he decides what information and
orders to give other functions. Acme has a typical functional structure. You may want to make an

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overhead of Fig. 1 to show students what the structure is and how it works, pointing out the way
communication takes place within the hierarchy up to Tyler.

Tyler uses this structure to control his company’s high-volume mass-production technology. Acme
manufactures and assembles circuit boards, a routine manufacturing activity, and apparently Tyler
believes that a mechanistic structure allows him to control costs. Tyler has a technical approach and
values efficiency. It is related in the case that Acme’s costs have been consistently below those of Omega
and that his company has consistently beaten Omega for contracts of efficiency. Tyler believes that
Omega is in business only because demand is high for circuit boards.

Omega has an organic structure, because Jim Rawls, the president, believes that the company is small
enough for people in different functions to coordinate and solve problems themselves. He has a
decentralized management approach and fosters lateral communication between functions. Organizational
charts, he believes, create barriers to communication and slow decision-making. The management team
as a whole makes decisions; however, some managers feel they spend too much time in meetings “filling
everybody in on what is going on.” Rawls uses an internal systems approach to measure effectiveness
and values the ability to respond quickly to changing events.

2. How do the differences between the companies' management styles explain the way they coordinated
the production of the memory unit prototypes for the photocopying customer? Which company did
better?

Because of its mechanistic structure, Acme’s different functions contributed separately to the planning
needed to produce the memory unit, and activities were coordinated sequentially through Tyler. When
unexpected problems arose during planning, each function’s planning was interrupted and sent each back
to figure out how to assemble the memory unit.

In Omega the functions all planned for the new product from the beginning. There was a longer start-up
time, but problems encountered later were solved quickly because of a high level of coordination. The
case relates that when functional managers finalized assembly plans, they discovered an error in
blueprints, an error that required major design changes. The changes they recommended not only
improved quality but also prevented a bottleneck in production (a problem Acme experienced) and a
delay. When Acme learned of the changes Omega had discovered, they went back to the drawing board;
however, in Omega, functions adjusted smoothly to the changes because of the high level of mutual
adjustment in coordinating.

Omega’s decentralized, organic approach allowed for the building of prototypes 10 days faster than
Acme, correction of errors, and a highly reliable prototype—much more reliable than Acme’s, which had
a 10 percent failure rate. Omega was more effective when evaluated by these criteria, although Acme’s
prices were lower than Omega’s. Were they low enough to make up for lower reliability?

3. If Omega was so much more effective than Acme, why didn’t it win the final contract? How can you
account for the photocopier manufacturer’s decision?

An organic structure has advantages over a mechanistic structure as to innovation and adjusting quickly
and smoothly to customer demands. What customer would not choose Omega and pay a higher price for
speed and reliability? However, the prototype order was the prelude to a routine manufacturing contract
for hundreds of thousands of memory units. Once the product was developed, the rules changed because
the issue was the cost of the product. Here Acme excelled.

Following product development, Omega did not reduce costs, for example, by working out efficient
manufacturing procedures or seeking lower-cost inputs. Acme did, however. It continued to ride down

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the experience curve to find new and better ways of reducing costs. Its mechanistic structure provided it
with the management system and incentives needed to improve and reduce its manufacturing process, so
that like the tortoise, Acme won the final race over Omega, the hare.

4. What changes would you recommend to Acme and Omega if they are to survive in the future in this
increasingly competitive industry?

Both companies need to become simultaneously mechanistic and organic in structure to survive. As the
pace of change in the industry quickens, Acme must coordinate between its functions better, and increase
integration by establishing cross-functional teams, to speed product development and manufacturing. On
the other hand, Omega needs to realize that too much integration slows decision-making and raises costs.
Omega needs to standardize activities and to develop better monitoring and evaluation systems—using
TQM—to reduce costs. Each company needs to move more toward the middle so that flexibility and
innovation balance technical efficiency.

5. Do you think Acme and Omega should merge to better compete in the future? What problems might
be encountered in such a merger?

The question can be raised about a merger to bring out the problems surrounding mergers. Each company
has something the other needs—Acme needs Omega’s skills in cross-functional coordination, Omega
needs Acme’s skills in controlling operating costs. However, as alluded to in Chapter 2 and fully
discussed in Chapter 5, mechanistic and organic structures have different values—different
organizational cultures that might make merger very difficult. Acme has a concern for economy and
frugality and uses an autocratic, centralized way of getting the job done. Omega values cooperation and
innovation and uses participation. Is it possible to harmonize these values and create a new, more
effective organization, or will managers leave after a merger? A discussion of the problems involved in
marrying two different organizational cultures ends the analysis.

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Case 3 Continental Can Company of Canada, Ltd.
Teaching Notes
Copyright © Gareth R. Jones 1994

Synopsis
The case allows an in-depth analysis of a mechanistic structure and allows students to apply the
organizational theory concepts from Chapters 4, 5, and 6. It should be used after Chapter 6, and the TRW
Systems case should follow (a two-class sequence) to illustrate the workings of an organic matrix
structure. This sequence exposes the meaning and significance of the mechanistic-organic distinction and
provides an example of contingency theory. CCC is in a stable environment, uses a mass-production
technology, has simple tasks, and uses a mechanistic structure, while TRW is a high-tech company,
employs highly skilled people, operates an intensive technology in a dynamic, changing environment,
and uses an organic structure. Students should not be asked to provide a written report on this or the
TRW case. These cases should be presented by the instructor to bring out interesting and valuable
implications and protect their teaching value.

Continental Can Company of Canada, Ltd. (CCC) is about a routine mass-production organization that is
experiencing conflict between the manufacturing and sales departments. Manufacturing has all the power,
and managers are rewarded for reducing costs and increasing efficiency. They have no incentive to be
responsive to the needs of the sales department. Sales are declining somewhat and quality is going down.
The issue is how to change the way the company operates and improve its effectiveness.

Teaching Objectives

1. To use organizational theory concepts to analyze an organization.
2. To show the design choices that create a mechanistic structure.
3. To link organizational design to the contingency approach.
4. To demonstrate a classic example of production-sales conflict.
5. To show the power of a budget in shaping expectations and behavior.

Use this case after United Products, Inc. or Bennett’s Machine Shop. It takes about an hour to analyze the
issues and see how organizational structure operates.

Pop Quiz Questions

1. What structure does the St. Laurent plant use?

Answer: Functional structure

2. What structure does the Continental Can Company as a whole use?

Answer: Geographic structure


1. What kinds of organizational design choices has CCC made about the four design challenges
discussed in Chapter 4?

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a. Vertical Differentiation

There are six levels in the hierarchy, including shop floor employees, and 500 employees. This means
that CCC has a relatively tall structure.

Fox, the plant manager, has a span of control of 8 subordinates and Andrews, the assistant plant manager,
has a span of control of 15 subordinates (there are three shifts). Is this too big? No, subordinates are all
doing similar, routine work, and they are all in manufacturing-related functions, so it is easy to monitor
and evaluate activities.

Is CCC centralized or decentralized? CCC is highly centralized: Fox and Andrews solve problems at the
top. The information gives the impression that foremen have a high level of decision-making authority,
and some students will argue that this implies decentralization. The point is to look at where important
or significant decisions are made in the hierarchy, and this is always higher up in CCC. People lower in
the hierarchy handle only routine problems. CCC is tall and centralized.

b. Horizontal Differentiation

Inside the St. Laurent plant, is there a high or a low level of horizontal differentiation—division of labor
and specialization? There are many different departments shown in Exhibit 1, but all are manufacturing
oriented—no sales, research and development, or finance. There is a low level of horizontal
differentiation; it is a simple organization or a low level of complexity.

What kind of structure is it? A functional structure: The main function is manufacturing. CCC makes a
wide variety of different kinds of cans; the other functions are manufacturing support functions like
production control and quality control.

At the company level, it uses a geographic structure because different plants are located in different parts
of Canada. Why does it have many plants? Why not just one big functional structure?

• There are high costs of transporting bulk commodities like cans.
• The needs of regional markets differ.
• There is a large variety of different products.
• To obtain economies of scale; one large plant might experience diseconomies.

So, the St. Laurent plant has a tall, simple, centralized functional structure, and CCC has a geographic
structure.

c. Integration Mechanisms
Integrating mechanisms include:

• Budget
• Bi-weekly production control meetings at which quality control is not present
• Formal once-a-month budget meeting
• Some unscheduled meetings

Conventional integrating mechanisms fit the low level of differentiation—when a company has a low
level of differentiation, it requires only a low level of integration.

d. Standardization—Mutual Adjustment

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Rules and procedures, including the budget, control the manufacturing process. There is a high level of
standardization, and little use of mutual adjustment. Manufacturing managers share a common language
of efficiency and economy.

e. Formal-Informal Organization

The informal organization parallels the formal. Social networks among managers are based on the ability
to influence and affect the manufacturing process, and the budget gives all the power to manufacturing.
There is little cross-functional communication.

2. Given these design choices. how would you describe CCC’s approach to coordinating and
motivating employees?

With its tall, highly centralized, highly standardized, and simple functional structure, the company has
created a mechanistic structure to coordinate and motivate employees. The emphasis is on top-down
communication, roles and authority relationships are clearly defined, and there is a high level of personal
supervision and control.

3. Are CCC’s organizational structure and design choices appropriate?

The company has specific problems, but in general the mechanistic structure is appropriate, given CCC’s
efficiency-driven approach. From a contingency perspective it matches:

• Its routine mass-production technology. This is the typical structure for a mass-production
setting.
• Its relatively routine, stable environment.
• Its low-cost strategy
• The low level of skills and participation it expects from its workforce.

The material on technology and the environment has not been covered yet, so this discussion can only be
brief. However, if the case is used late in the course, the contingency approach can be drawn out in more
detail. With the structure identified and the reasons why it is appropriate outlined, the analysis can
consider the company’s problems and how its structure contribute to them.

4. What problems are occurring in the St. Laurent plant?

The basic problems are:

• High level of conflict and lack of integration between manufacturing and sales
• Falling sales and a lack of response to customer needs
• Deteriorating product quality
• Lack of cooperation and trust between foreman and schedulers

5. Why are these problems occurring?

a. Subunit orientation. Managers at the St. Laurent plant have a manufacturing subunit orientation. This
orientation results from their interests, backgrounds, and experience; they have little interest in sales.

b. The budget. The St. Laurent plant is organized as a profit center, and a strict budget is used to evaluate
plant performance. All the manufacturing managers’ yearly bonuses are linked to targets set in the
budget. The result is that the budget limits their behavior because they must meet the budget and reduce
costs. Customer responsiveness and quality are not rewarded—only reducing costs—so managers have

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no incentive to respond to the needs of sales. Machines are not serviced enough, and this reduces quality
and results in customer returns.

c. Incompatible goals. Some conflict between sales and manufacturing is inevitable because of
incompatible goals. Manufacturing’s goal is to reduce costs, by maximizing the length of production runs
to minimize the downtime to retool to produce different kinds of products. Downtime raises costs.
Attempting to maximize production runs means that manufacturing is unresponsive to customer needs,
particularly to late customers, who are out of cans. So sales suffer when manufacturing refuses to meet
customers’ requests. Manufacturing is pursuing efficiency goals at the expense of effectiveness goals.

d. Structure. In CCC, plant managers have no incentive to respond to sales’ requests, and they control
operations. Plant managers have all the power in the tall, centralized hierarchy and sales has none. The
low level of differentiation at the plant level—sales is not even inside the plant—promotes
manufacturing. The tall, centralized functional structure and the mechanistic, production orientation
compound the problem produced by the budget and employees’ backgrounds.

There is a power imbalance resulting in falling sales, falling quality, and increased returns. Only
manufacturing goals are pursued in the St. Laurent plant. How can the power balance be altered? How
can CCC’s structure and the budget encourage a concern for sales and customer responsiveness?

6. Draw a diagram of the key roles in the plant to show where problems are occurring.

Draw a map of the key reporting relationships to illustrate where problems occur. Andrews, the assistant
plant manager, reports to Fox, the plant manager, who reports to a corporate executive. The district sales
manager is outside the plant and also reports to a corporate executive, not to Fox. These corporate
executives report to a common superior, so that the nearest common point of authority between Fox and
sales is two levels up in the corporate hierarchy. This makes it difficult for sales to exert power over Fox.

Inside the plant, Andrews oversees the foremen who are responsible for the production process in three
shifts. The other key functions or departments are production control, headed by Whitelaw, and quality
control. Production control’s responsibility is to plan the manufacturing process to mediate between
manufacturing’s cost reduction and sales’ customer responsiveness. Because manufacturing has the
power, the needs of sales are not being met. Quality control is similar to production control: Quality is
falling, but Fox and Andrews want to reduce costs, meet the budget, and get their bonuses.

Whitelaw is in charge of those who schedule the production runs, and who have a dotted-line relationship
with the foreman. This means that foremen-schedulers have an informal responsibility to coordinate
activities, but no formal reporting relationships. It is easy to see that production is in control.

7. What changes should be made to the way the St. Laurent plant is operating to solve its problems?

a. Changing the budget. The budget is an important mechanism for maintaining cost control; however,
targets could be relaxed. Or a sales-related goal can be added. Increased product quality could be
rewarded by measuring reductions in the number of returns, or increased customer responsiveness
rewarded by measuring decreases in the time to satisfy customer requests. Changing the budget changes
the incentives and motivation of production managers.

b. Changing the structure. Students can offer suggestions about changing reporting relationships to force
Fox to pay attention to sales and to change manufacturing managers’ orientations. Usually, students want
to alter the hierarchy and give sales more power than production; however, this is difficult without
upsetting the balance of power. Some common suggestions include:

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• Have sales report to Whitelaw, the production controller. Problem—this would further
reduce sales’ power because sales is lower in the hierarchy.
• Put the sales manager in charge of the whole plant. Problem—it’s a manufacturing plant;
production people must be in control.
• Bring in a new plant manager and have sales and Fox report to the new person. Problem—
this lengthens the hierarchy.

There is the possibility of assigning a sales manager who reports to Fox and to the district sales manager.
Making Fox responsible for sales forces him into a sales viewpoint and brings sales into weekly and
monthly meetings. Both Fox and the district sales manager report to the same corporate executive, who
can put pressure on Fox. This gives more power to sales and balances power. Sales, production control,
and quality control can band together to put emphasis on sales and quality goals in meetings. With a new
budget, production managers may change orientations, operations, and show concern for efficiency and
effectiveness.

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Case 4 TRW Systems Group (A and B Condensed)
Teaching Note
Copyright © Gareth R. Jones, 1994.

Synopsis

TRW Systems Group pioneered the matrix structure to develop the Atlas and Titan missiles, the heart of
the United States Intercontinental Ballistic Missile (ICBM) Program in the 1960s. It offers an in-depth
account of the workings of a matrix structure with its advantages and disadvantages. It explains why
TRW needed this complicated structure to manage its activities and provides an example of contingency
theory. It is best used after the Continental Can Company, Case 3, to illustrate the mechanistic-organic
organizational design continuum.

Teaching Objectives

1. To use organizational theory concepts to analyze an organization.
2. To show the design choices that create an organic structure.
3. To link organizational design to the contingency approach.
4. To illustrate the workings of cross-functional teams.

Use the case after United Products Inc. or Bennett’s Machine Shop and the Continental Can Company
case. It usually takes 45 minutes to an hour and can be used with the Paradoxical Twins case.

Pop Quiz Questions

1. What industry is TRW Systems in?

Answer: The aerospace industry

2. What techniques does TRW Systems use to help its project groups work together better?

Answer: T-groups and team building


Discuss how the matrix structure works, its design choices, and why it is used from a contingency
perspective. Then consider the advantages and disadvantages of the structure.

1. What kinds of organizational design choices has TRW made about the five design challenges
discussed in Chapter 2?

TRW used a matrix structure, but what design choices are involved in a matrix structure? Exhibit 2 in the
case shows the organizational chart in 1963.

a. Vertical Differentiation
There are three levels in the hierarchy: President Rube Mettler, the functional and program or project
manager, and the subproject manager, actually work in the teams. The number of employees is not stated,
but there is a flat structure. Authority and decision-making responsibility are decentralized, and
subproject managers, the ones closest to the problems, make important decisions. TRW is flat and
decentralized, the opposite of the Continental Can Co.

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b. Horizontal Differentiation
TRW’s matrix is based on horizontal and vertical grouping. Vertically, tasks are grouped by functional
specialization, which means being a part of mechanics, electronics, physical research, and systems. (In
the book, functions are called divisions). Horizontally, tasks are grouped according to the current project.
Two programs shown in Exhibit 2 are the Titan and Atlas Missile Programs. Subproject managers have a
functional and program boss.

In terms of Chapter 2, TRW’s matrix structure has a high level of differentiation; division of labor is very
high, but is based on a functional and a project logic and changes as projects change.

c. Integration mechanisms

• TRW’s level of integration should be high also. Is it? What are the major integrating
mechanisms? Using Galbraith’s model:
• The two boss managers, the subproject managers, perform an integrating role and coordinate
the functions with projects.
• As a group, the subproject managers working on a project form a team or, in TRW, since
these groups are constantly changing, task forces.
• The matrix is a form of integrating mechanism and is designed to improve coordination.

Thus the matrix structure has a high level of differentiation and integration. What about the other design
choices?

d. Standardization-Mutual Adjustment
Standardization and formalization play a small role in coordinating and motivating employees in TRW.
Given the complex nature of tasks, rules and procedures cannot coordinate functional activities. TRW
relies on mutual adjustment between scientists, and the teams provide the setting for mutual adjustment.

e. Informal-Formal Organization
TRW makes minimal use of formal hierarchical reporting relationships to coordinate activities. There are
not many managers. The informal network of social relationships developed over time is important in
determining how teams perform, and informal status relationships between scientists is important as a
means of coordination. Team values and norms derive from informal interactions between scientists and
are spread as members move between teams.

2. Given these design choices, how would you describe TRW’s approach to coordinating and
motivating employees?

TRW designed a structure that provides freedom and autonomy for employee decision-making and uses
the project teams to coordinate and motivate members. With its flat, decentralized hierarchy and focus on
mutual adjustment and cross-functional communication, TRW has created an organic structure.

3. Are the design choices that TRW has made appropriate for the organization?

TRW’s complex matrix design and its organic structure are appropriate because from a contingency
perspective they match:
• Its very uncertain environment
—“a large job shop subject to frequent changes”
—rapid changes in technology
—increased competition as it gives up protected government contracts
• Its complex and rapidly changing products

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• Its high-tech approach and complex nonroutine research emphasis. In terms of Perrow’s
model, TRW is high in task variability and low in task analyzability. In terms of Thompson’s
model, it uses intensive technology and has reciprocal interdependence.
• It employs highly educated professionals who respond to freedom to experiment and to make
decisions; that allows them control over activities. Professionals are controlled through
norms, values, and socialization.

From a contingency perspective, the matrix structure matches its activities and environment. A matrix
would not be suitable in a simple, stable environment for routine technology and employees with routine
tasks. Here, it would promote coordination and motivation problems and raise bureaucratic costs. TRW
and the Continental Can Co. use different design approaches because they face different contingencies.

4. What are the sources of power to get things done in a matrix organization? How does this affect
relationships among team members and between functional and project managers?

Explore the workings of the matrix in depth and consider the power relationships between functional and
project managers to expose problems.

Ask the students to list the sources of power of the functional and project or program managers:
Program Managers Functional Managers
Money and funding Expertise
Scheduling and planning Functional personnel

The program managers control the purse strings and project scheduling issues. The functional managers
appraise and reward the subproject managers and control functional experts. In a matrix, program
managers “buy” the time of functional experts who move from project to project as needed.

This analysis suggests that a power balance exists between the two roles—they are mutually dependent
—but ask students which role has more power, and then come to the conclusion that they have equal
power. So, what are the implications of this for working relationships? There is an important statement in
the case that there is a large gap between authority and responsibility that forces subproject managers
and functional and project managers to cooperate to get the job done. The nearest point of authority
above functional and project managers is the president, so people lower down solve problems through
mutual adjustment. This has advantages and disadvantages.

On the advantage side, employees with more responsibility than authority are more flexible and the
organization more organic. There is no appeal to formal authority. On the disadvantage side, when
authority is undefined, role conflict and role ambiguity occur. This paralyzes action and polarizes
attitudes. The members of the matrix need strong bonds developed through shared norms and values—
values from a cohesive organizational culture. Many employees do not like ambiguous, matrix like
relationships, and many authority and status problems exist.

Another advantage relates to organizational effectiveness. Ask students about the goals of project
managers and the goals of functional managers. Project managers’ goals are efficiency oriented: they
want projects on time, under budget. Functional and subproject managers are quality and research
oriented: they want the best rocket, no matter what the cost. The power balance forces a compromise
between cost and quality or efficiency and effectiveness that improves performance. Lack of agreement
might lead to conflict and a breakdown of cooperation.

5. What other problems does a matrix cause for TRW?

• Other problems mentioned in the case include:

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• The time spent getting new project teams to run. TRW uses team building and T-groups
to develop group cohesiveness and shared values and norms.
• Promoting successful people is difficult in a flat hierarchy. TRW grew into a huge
multidivisional corporation, so promotion opportunities opened up.
• Stress for team members, People don’t like ambiguity and prefer their present teams.
• Shifting teams causes stress.

6. What problems might TRW have with its matrix structure as it grows?

One major problem is whether a matrix structure is suitable for a large organization and whether TRW
can maintain its organic approach as it grows. This is difficult to achieve, and TRW faced problems as it
grew.

Between 1961 and 1982, TRW grew to a multidivisional company as different projects became divisions.
Different divisions started to compete and refused to share R&D knowledge. Their view was “Why
should I give away this information free to another division when it cost us billions to develop?” Mettler
had to recapture the cooperation of the early days and increase integration between divisions. He
introduced a multidivisional matrix structure and reshaped culture by monitoring and rewarding
divisional performance according to productivity, quality, and cooperation between divisions. Formal
committees encouraged the cross-fertilization of ideas as the matrix was reestablished.

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Case 5 Texana Petroleum Corporation
Teaching Notes

Synopsis

This case introduces the problems of managing a multidivisional structure. It illustrates how conflict and
politics develop in multidivisional structures with inappropriate integration and control systems. Texana
Petroleum is a multidivisional company, attempting to increase profitability by sharing resources and
skills among divisions. The divisions are in conflict, and politics and the pursuit of divisional self-
interest, preventing synergies from emerging.

Texana pursues a vertical integration strategy in the oil industry and related diversification in the plastic-
based consumer products industries. The division, responsible for coordinating company resources—the
Polychemicals Division—enjoys its power as the “resource controller” and frustrates attempts to develop
new products to increase their market share and profitability. The case examines how a corporate center
solves problems and how organizational conflict and politics emerge.

Teaching Objectives

1. To familiarize students with the problems of managing a multidivisional structure.
2. To show how organizational politics and conflict result from organizational structure and control
systems.
3. To provide a setting for changing structure to match strategy.
4. To show how a matrix structure at the multidivisional level can solve problems of politics and
conflict.

This case can be used after Chapter 6 to show the problems of a multidivisional structure. It is best used
at the end of the course, after the lecture on politics and conflict, to provide an example of how politics
and conflict occur in a multidivisional structure. The case also brings out the meaning of the strategy and
structure relationship and underscores the message that strategy and structure should fit, so it could be
used after the chapter on strategy.

Pop Quiz Questions

1. What kind of structure does Texana use?

Answer: Multidivisional

2. What was Texana’s original strategy and what did it change to?

Answer: It was vertical integration; it changed to related diversification.


1. How has Texana’s strategy changed over time? What is the rationale behind the changes?

Texana originally pursued a strategy of vertical integration. The oil company was involved in exploring,
processing and refining, and selling petroleum products through a chain of company-operated service
stations. It was fully vertically integrated and internalized the value added by petroleum operations. The
company experienced stiff competition in its core petroleum business when other oil companies

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competed for customers. Profit margins fell as price competition increased, and the company decided to
change its strategy.

It sold the service stations and abandoned oil production for the consumer petroleum market. The
company changed its strategy to related diversification and expanded into processing petroleum for
chemical and plastics products. Texana entered the consumer products businesses of plastic, packaging,
and building products, which used raw materials provided by Texana’s Polymer and Chemical Division,
responsible for developing chemicals for these divisions. The rationale was to obtain synergies because
resources flowed from the petroleum business to the polychemicals division and to the end-using
divisions. Another rationale was to enter industries where competition was less severe and profit margins
higher than in the petroleum business. Finally, by diversifying outside one industry, Texana exploited its
competences in chemical processing and was no longer tied to one industry.

In changing strategy, Texana built upon existing skills in chemical processing and developed the
polychemicals division. Texana developed the molded products division. It acquired packaging and
building products by buying existing firms to enter these industries. So, Texana was poised to expand
market share by providing new and improved chemical and plastic products developed through skills in
polychemical processing.

2. What structure did Texana employ to pursue its new strategy? What problems did this structure
cause the organization?

Texana used a multidivisional structure to manage strategy. Each division had a functional structure with
support functions, including research and development. Each division was a separate profit center, and
aggressive new managers were recruited to maximize the growth potential of each division. Control was
decentralized to the managers of the various divisions. Divisional managers were evaluated by return on
investment against the budget, and corporate management did not interfere in each division’s business-
level strategy. The philosophy was that decentralized control would allow maximum growth.

Decentralized control permitted the divisions to grow, but there were serious problems:

a. The corporate center’s failure to help create synergies between divisions created a vacuum of power at
the top of the organization and allowed divisions to behave according to self-interest.

b. The corporate center’s policy of evaluating divisions separately against ROI criteria created transfer-
pricing problems between divisions. Because the central polychemicals division controlled the supply of
chemicals to the end-using divisions, it maximized ROI and hurt end-users, unable to obtain resources to
expand their business.

c. As a result, gains from synergy were not achieved. Polychemicals had no incentive to help the end-
using divisions’ business-level strategies because it was not rewarded for cooperation. Polychemicals
would be harmed by developing products with uncertain returns. Because the corporate center was
uninvolved, no integrating mechanisms were in place to foster cooperation.

Texana’s structure did not match its strategy—integration and control systems were not in place to reap
the gains from related diversification. Lack of control created the context in which politics and conflict
could flourish.

3. Chart the sources of power of the various divisions in Texana. Which is (are) the most powerful
division(s).

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Looking at the sources of power of the divisions makes clear a power play between the polychemicals
division and the end using divisions. Polychemicals is more powerful than the end-users because it has
the following sources of power:

a. It is central to other divisions because it supplies resources to the end-using divisions and knows about
their demands and needs.

b. It is nonsubstitutable because the chemicals can only be supplied by the polychemicals division. It is
substitutable for chemicals acquired in the open market.

c. It is powerful because it has the expertise to produce the chemicals. The end-using divisions lack the
knowledge or resources to produce chemicals.

d. It can cope with the uncertainty facing the end-using divisions. It can reduce uncertainty because it can
supply or withhold resources—the chemicals.

In contrast, the only power of the end-using divisions is control over contingencies — namely, the ability
to generate revenues and increase market share. This depends on the ability to develop new products
from the chemicals supplied by the polychemicals division. The power of the corporate center is a
consequence of its ability to control financial resources. The corporate center has decentralized control to
the divisions, and there is a power imbalance, with polychemicals holding the most power.

4. What is the effect of the distribution of power in the organization on interdivisional relations and
corporate performance?

The power imbalance has led to a high level of politicking and conflict between divisions. The result is
the loss of synergies and lower organizational performance. Top management is looking for solutions.

5. What are the main sources of conflict between divisions in Texana?

a. Differences in divisional orientations. Polychemicals has a research and development orientation and
operates in a centralized way. It uses language very different from that of the end-using divisions, which
have a marketing orientation and are concerned with increasing market share.

b. Status inconsistencies. Because of its centrality and nonsubstitutability, the polychemicals division
views itself as the elite division. It responds to end-users’ needs when it wishes. It has the power, and the
corporate center does not intervene. The scientists regard themselves above the marketers.

c. Task interdependencies. Because of the resource flows through polychemicals, end-users are
dependent on this division, so polychemicals’ unwillingness to respond to the end-users’ needs leads to
conflict.

d. Incompatible evaluation systems. Divisions are rewarded on return on investment, so polychemicals
is unwilling to risk supplying new chemicals with limited demand, as this raises costs. The evaluation
system is causing problems and provoking transfer-pricing problems.

e. Scarcity of resources. The ability of the divisions to grow depends on capital from the corporate
center. As all the divisions wish to expand, including polychemicals, there is a fight for limited
resources.

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The way Texana is managing its multidivisional structure is promoting problems between divisions and
corporate performance is suffering. How should Prentice, the new CEO alter the design of Texana’s
structure to create synergies and improved performance?

6. How should George Prentice change the way Texana manages its multidivisional structure to
improve corporate performance? Discuss possible solutions to the problem, and suggest a plan for
changing the organization’s structure.

Prentice must change the multidivisional structure to reduce the power of polychemicals and increase
integration between divisions. Students can recommend solutions. Hold a discussion of the utility of
these different solutions.

a. Texana can employ more liaison roles between divisions and establish task forces and teams to
enhance cooperation.

b. It can introduce integrating roles and create new positions to feed information between divisions and
enhance product development as well as resource transfer between divisions.

c. The firm could introduce a multidivisional matrix structure at the corporate level. On the horizontal
axis would be the various divisions; on the vertical axis would be the corporate staff offices of research
and development (to be created), finance, marketing, and soon. The matrix would involve the top officers
of the divisions and corporate center. This structure would increase the power of corporate headquarters,
and balance power among divisions since polychemicals becomes just another division.

d. It can centralize R&D at corporate headquarters so that the polychemicals lose some power. This
would ensure that end-using divisions’ requests for materials are in the interests of the corporation.

e. It can change the way polychemicals is evaluated. Rather than evaluate polychemicals on ROI, it could
be evaluated on a cost basis, on how efficiently it produces chemicals, or on how much cost savings are
achieved each year against a budgeted target. This would remove the division’s incentive to compete
with the end-users and allow for its R&D aspirations.

f. To enhance cooperation, it can centralize divisional headquarters in one building in Chicago so that
managers can easily meet and interact with each other and with corporate managers.

g. New managers can change the corporate culture to foster more cooperative values and develop the
culture necessary for pursuing related diversification.

The debate over the best combination of solutions can be interesting and provocative. Students can devise
a plan for change.

• First they decide what to change in the corporation.
• Next they can chart the obstacles to change, such as existing divisional orientations or
balance of power and lack of by corporate managers. The culture is an obstacle to change.
• Then they can decide about top-down or bottom-up change. Should the firm move to a
multidivisional matrix structure and start with integrating roles and task forces and build a
matrix? Or implement a matrix immediately and centralize headquarters in Chicago?
• Finally, they would decide how to evaluate the change effort and how to choose measures to
assess the effects of the changes.

The case generates discussion on the relationship between strategy and structure.

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Case 6 W.L. Gore & Associates
Teaching Notes

Synopsis
This case examines the origin of cultural values and norms; it mirrors the position taken in Chapter 7 that
cultural values result from people, structure, property rights, and ethics. Each of these four factors is
considered. The entrepreneurial culture shows the relationship between organizational structure and
culture. This case depicts an organic approach and a highly decentralized organization.

W.L. Gore & Associates, Inc., best known for its Gore-Tex fabric, manufactures a wide range of products
derived from polytetrafluoroethylene, an artificial fiber frequently referred to as PTFE. PTFE is best
known by Du Pont’s brand name, Teflon. W.L. Gore began in 1958 to use PTFE for insulating electric
cables. By 1990 it manufactured a wide range of related products, arranged into four divisions:
electronics, medical products, fabrics, and industrial products. The case chronicles the growth of the
company and the nature of the structure and culture created by its founder, Wilbert (Bill) Gore.

Teaching Objectives

1. To illustrate the role of leadership and entrepreneurial vision in creating a culture for an organization.
2. To illustrate the nature of terminal and instrumental values and to show how these are transmitted to
an organization’s members.
3. To illustrate how culture results from people, property rights, organizational structure, and ethics.
4. To show how an organization’s culture can be a source of competitive advantage and to demonstrate
how organizational structure and culture can facilitate innovation.

This case is best used directly after Chapter 5 to illustrate the origins and nature of organizational culture.
Used in conjunction with one or both of the other cases on organizational culture, it provides examples of
the importance of culture in organizational design and shows that culture can be created to achieve a
competitive advantage. It also illustrates how an organic structure works and the design challenges that
an organization confronts when it chooses to use this structure.

Pop Quiz Questions

1. What was the name given to the structure created by W.L. Gore?

Answer: Lattice structure

2. Do Gore employees enjoy strong or weak property rights?

Answer: Strong


1. What influenced the Gore system of “unmanagement”?

The major influence on the Gore system of unmanagement was the strong leadership of W.L. Gore
himself. Bill Gore exemplifies the visionary, charismatic leader who founds an organization that
functions according to the founder’s values. From the very beginning, he envisioned an organization
where people were not inhibited by such traditional principles of management as hierarchical levels of
authority, reporting channels, and subordinate relationships. He and more recently his son, Bob Gore,

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have carried forward this vision. Both Bob and Bill Gore show that strong leadership does not have to be
authoritarian. A leader who can communicate an organizational direction does not have to use
authoritarian approaches and generates greater loyalty. This case illustrates the importance of leadership
in shaping a company’s development and culture.

2. What are the values of the Gore culture?

The terminal values of the Gore company are high quality, innovation, and excellence. The instrumental
values that guide the achievement of terminal values are fairness, freedom, commitment, and discretion.
Gore’s employees have freedom to experiment, to take risks, to respond creatively to new product
development or improvement, and to use the company’s resources responsibly for innovation and
excellence.

The case discusses the norms and rules that indicate appropriate behavior at Gore, such as behavior
governing travel expenses. The emphasis is on the maximum amount of self-control and the minimum
amount control and direction from written rules and procedures.

3. How are these values transmitted to Gore associates?

The very word associate–employee is not used by Gore—it is a part of the language that has emerged in
the Gore company to transmit terminal and instrumental values. There are no job titles and minimal
emphasis on superior-subordinate distinctions and differences between functions. The organizational
language mirrors the company’s guiding values—fairness, freedom, commitment, and discretion.
Employees learn their own roles in the organization. Other ways of transmitting the company’s values are
the design of offices and factories, their location in attractive areas, the central communal eating areas,
and the minimum of status differences.

Gore epitomizes the meaning of individualized socialization practices. New employees are left alone to
discover how the organization works and what their role should be. The role of existing Gore associates
is to be supportive, to invest new employees, and to provide guidance to help newcomers discover their
role and behavior. Individualized socialization tactics encourage an innovative role orientation that
supports terminal values.

4. What are the origins of Gore’s cultural values?

Following the discussion of Gore’s culture and how it is transmitted, focus on the four factors that cause
cultural values: people, property rights, structure, and ethics.

People. The vision and values of the founder play a major role in explaining the origin of this company’s
culture. Based on his experiences in many other organizations, such as Du Pont, Gore saw how the four
instrumental values of fairness, freedom, commitment, and discretion resulted in entrepreneurship and
excellence. He made them central to his organization and transmitted them to his associates. Presumably,
the people attracted to Gore accept these values. There is turnover by those who find ambiguity in
company operations, so using the attraction-selection-attrition framework, these values become stronger
as people become more homogeneous.

Property Rights and Personnel Policies. The strength of the property rights given to employees can be
seen in personnel policies, a direct product of the founder’s leadership and vision. These policies are
based in company culture and explain company success. Gore avoids the we/they atmosphere and has
achieved its culture by practicing equality from the parking lot to the office. There are no status
differentials at Gore: no reserved parking spots except for customers and the handicapped, no separate
dining facilities, no plush offices for a management elite, no organizational charts, no lengthy policy

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manuals, no separate compensation systems, and no job titles (everyone is an associate). What does exist
is a flexible organization based on fairness and contribution.

Gore’s employees get formal feedback twice a year on their performance from a compensation committee
that includes their peers. They regularly receive informal feedback from their sponsors. Associates are
encouraged to make commitments, join teams, create new products or production processes, make
suggestions, and in general improve themselves on the job.

To recognize and reward associates’ achievements, Gore has established a property rights system that
compensates everyone through six-month salary reviews, a profit-sharing scheme, and an Associates
Stock Ownership Program, giving associates 20 percent of the company. Strong property rights
encourage a feeling of ownership, and employees are encouraged to contribute in whatever way they feel
best suits them. Clearly, Gore’s property rights system leads to values that encourage commitment.

Structure. Gore reinforces these values by using its very flat, decentralized lattice structure, really a
product team structure in which teams are formed and disbanded as products are developed and
marketed. Gore’s flat hierarchy and minimum supervision reinforce property rights. Both are based on
the philosophy that employees control their behavior and work effort. The flexible nature of the system
allows employees to find suitable roles within the organization

The lattice structure demonstrates how an organic structure works and the importance of mutual
adjustment as people are responsible for communicating and coordinating to solve problems. The lattice
structure illustrates the design challenges outlined in Chapter 4 and shows how design choices create an
organic structure.

1. Differentiation—Gore keeps this to a minimum to reduce the problems of integration
2. Decentralization of authority
3. Mutual adjustment
4. The importance of the informal organization

Ethics. Gore has a clear and unambiguous set of ethical values that guide behavior. As a major supplier
of medical products, Gore demonstrates its values to stakeholders by recalling products and absorbing the
costs.

The interaction of the personal and professional characteristics, property rights, and structure
demonstrates the power of culture in shaping behavior and in motivating and coordinating employees.

5. What is the source of Gore’s competitive advantage?

Gore’s competitive advantage stems from three company features. First, the Gore family clearly
articulated a company vision and has pursued it without variation since 1958. Second, the company has a
core competence in applying PTFE to numerous applications. PTFE-based materials manufactured by
Gore have found applications in areas as diverse as insulation cables for the space shuttle, cables in
computers, outdoor clothing, and medical products. Gore has reaped the benefits of being a first mover.
Its first-mover advantage is protected by patents and by keeping processes secret. Its first-mover
advantage allows for a premium price charged for many products and has helped develop a strong brand
name.

The third source of Gore’s competitive advantage is its culture. Gore’s decentralized culture,
characterized by direct lines of communication, no fixed or assigned authority, a flat hierarchy, and use
of self-managing teams, (1) facilitates employee commitment, (2) promotes innovation—demonstrated

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by Gore’s history of new products, and (3) allows a quick response to market demands and crisis
situations.

6. Can Gore maintain its culture as it continues to grow?

Gore’s culture is best suited to a small organization. To have an organization in which everyone has
access to others, in which people find their niche, in which teams play a large role, and in which formal
authority structures are absent, the number of people must be small. Bill Gore recognized this when he
decided that no facility should exceed 150–200 associates. By following this policy, Gore has grown big
while remaining small. The company exceeds 5,300 employees, divided among 44 plants worldwide, so
the size of any one facility is held to manageable proportions.

Of course, there is a cost to this policy: It limits economies of scale and leads to duplication. Because
many of Gore’s products serve niche markets, the lack of scale economies might not be serious. So far,
the benefits of limiting facility size outweigh the costs.

7. Can the Gore management culture work in other companies?

Other companies send managers to Gore to learn how to produce a creative, loyal, and motivated
workforce. Yet, other companies cannot imitate Gore’s culture without radical destructuring and a change
of established cultures. Gore has built its culture from its inception. Others could follow the Gore model,
but it is doubtful whether an established organization could adopt Gore’s radical structure. In an
established organization with a well-developed structure and hierarchy of authority relationships, Gore’s
personnel practices would at best be unsettling to those in power. Subordinates could see these practices
as a revolt.

8. Are there any clouds on Gore’s horizon?

There are three clouds on Gore’s horizon. First, Gore is dependent on a single basic material, PTFE, for
manufacturing a high percentage of its products. If the raw material required to make PTFE became
expensive or the product or production process were found to be environmentally unsafe or a low-cost or
technically superior substitute became available, Gore could face difficulties. To reduce risk, Gore might
diversify its material base.

Second, Gore’s products are vulnerable to imitation by competitors. To grow and remain profitable, Gore
must innovate, or the company could fall upon hard times. Gore’s culture seems ideally suited for
innovation.

Third, Gore’s culture has been sustained through a prolonged period of corporate growth. The company
has not tried to sustain itself through a period of slow growth and/or market reversals. Other companies,
such as IBM, have had real difficulties trying to sustain their culture in such circumstances. It is not clear
how well Gore’s culture would stand up to adversity.

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Case 7 Three Roads to Innovation
Teaching Notes

Synopsis
This short case introduces students to the way in which 3M, a company whose lifeblood is innovation,
seeks to promote and maintain a culture of innovation among its employees. It describes the various
programs and techniques that 3M has developed to support entrepreneurship, including cross-functional
teams and recognition and reward of employees.

Teaching Objectives

1. To show how a company maintains a culture of innovation.
2. To show how interactions among people, property rights. structure, and ethics produce organizational
culture.

This case is best used after the W.L. Gore case in the same class period. It provides a succinct account of
3M’s product development process and how this entrepreneurial company maintains its ability to
innovate new products. 3M’s goal is that 25 percent of its growth each year should come from new
products.

Pop Quiz Questions

1. What percentage of time does 3M encourage its researchers to use on projects of their own choosing?

Answer: 15 percent

2. What is the structural innovation that 3M uses to encourage product innovation?

Answer: A product team structure or cross-functional teams


1. What are the terminal and instrumental values of 3M’s culture?

3M’s main terminal value seems to be innovation—pushing its employees to excel at inventing new and
improved products and processes that benefit customers. To achieve this ideal end state, it promotes the
instrumental values of entrepreneurship, risk-taking, and autonomy to encourage experimentation. 3M
develops norms and practices to encourage these values, including the expectation that 15 percent of
employee time is for projects they choose with resources provided for these projects.

2. What are the main ways in which 3M tries to create a culture that supports innovation?

3M creates a culture for innovation in the following ways:

a. Providing employees with freedom and resources for risk-taking. 3M encourages employees to use 15
percent of their time on projects they choose.

b. Management sponsorship, whereby senior managers encourage and support innovation, and recognize
and reward failure.

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c. Creation of cross-functional teams from product development, process development, marketing,
manufacturing, packaging, and other functions, empowered to design and develop products to meet
customer needs. Teams bring about the rapid development of shared norms and values that increase
communication and reduce problems of subunit orientations to speed the development process.

d. Rewarding and honoring cross-functional teams who introduced successful new products through the
3M Golden Step Program, which provides tangible rewards, and the Carleton Society, a hall of fame for
3M scientists.

e. Rewarding innovators with promotions, in research or management, using its dual-ladder system of
promotion and the practice of promoting from within the organization.

f. Using product champions to head each team and providing entrepreneurial leadership needed for
product development. A product champion supports group members, encourages shared group norms,
and provides the resources needed to meet team goals.

3. How do the interactions among people, property rights, and structure and ethics combine to
influence 3M’s cultural values?

Values contribute to culture as product champions and management sponsors provide leadership and
support to teams for experimentation. Cross-functional teams and the product team structure provide an
organic structure, so people from different functions can cooperate and develop the shared norms and
values that enhance innovation. Teams provide autonomy and allow risk-taking and individual decision-
making. Property rights can be seen, as 3M tangibly rewards employees through promotion into
management in 3M’s dual promotion system, bonuses for successful new product development, and
intangible rewards like its scientists’ hall of fame. Ethics can be seen through 3M’s concern for
customers and in extensively testing and developing products to meet customer needs.

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Case 8: The Scaffold Plank Incident
Teaching Notes
Copyright © Stewart C. Malone and Brad Brown, 1994. Used with permission.

Synopsis
A young “trader,” Bob Hopkins, quotes a price on a fairly large order of 3 x 12 rough-sawn planks to one
of his wholesale lumber company’s best retail customers, Quality Lumber. Later, in an offhand
conversation with a fellow trader, Bob becomes concerned that the rough-sawn lumber might be intended
to be used as scaffold plank. Scaffold plank while 3 x 12 and rough-sawn, is inspected and certified to
stringent standards to ensure its strength. It is also much more expensive than the lumber Bob gave the
quote on.

Bob’s first dilemma is whether or not he should call back his customer, Stan, and make sure he
understands that his quote was not for scaffold plank. Bob is advised against calling because it is none of
his business what his customer is ordering: Bob’s company has the lumber for sale and somebody wants
to buy it.

Bob calls Stan back anyway, and finds that the lumber order is intended to be used as scaffold plank, but
the end customer wants to save some money. Besides, there is no scaffold plank in stock in the city. Now
Bob’s dilemma is whether or not he should sell the lumber, knowing it is going to be used for a purpose
for which it is not certified.

Bob’s boss, John White, has made this a test of Bob’s loyalty to the company by writing up a sales order
for the lumber and putting Bob’s name on it. Bob has to decide whether he should listen to John White, a
well-respected businessman, or follow his own conscience.

Teaching Objectives

The Scaffold Plank Incident is appropriate for a stimulating lively discussion about ethical behavior and
corporate social responsibility. It is a short case, but the discussion is sometimes quite intense and can
easily fill a regular 50- to 75-minute class period. It is best used after Chapter 2.

This case illustrates well the different styles of thinking associated with the Utilitarian, Moral Rights, and
Justice models of ethics. Draw upon Table 2.2 in the book in order to bring this point out. Students will
have different perspectives on the case depending upon which model they use to view and frame the
issues.

Pop Quiz Questions

1. What is scaffold plank used for?

Answer: It is a higher-grade lumber generally used by construction workers or window washers that
stand on the planks high above the ground.

2. What position did John White, the owner of the company, have regarding whether or not to sell the
lumber?

Answer: He was in favor of selling it.


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We generally follow the “seven step moral reasoning model” that was used as the discussion framework
for ethical vignettes at the Arthur Andersen & Co. series of Conferences on Teaching Business Ethics1.
This Teaching Note will follow that format because it provides an organized vehicle for bringing out all
of the relevant aspects of the case.

1. What are the relevant facts in the case?

• Bob Hopkins has a straightforward order for lumber that his company regularly sells
without question.

• The order represents a substantial, but not incredible, sum of money, $13,536. (Board
feet are calculated as the product of the thickness in inches, the width in feet, and the
length in feet. Thus, this order is calculated as:
Price = [3”x 1’x 16’x 600 pc.] x $470/1000 Bd Ft = $13,536.

• Bob’s customer, Quality Lumber, is going to sell the lumber to a contractor who will use
the lumber as scaffold plank.

• If White Lumber does not sell the 3 x 12 planking, the end customer may end up using 2
x 12 planking—an even worse scaffolding solution—because there is no scaffold plank
readily available.

The economy is slow and White Lumber Company needs this sale as well as future sales that might be
foregone if Quality Lumber is lost as a customer.

2. What are the ethical issues?

• First, should Bob even try to confirm his suspicion that this perfectly legal order o
f lumber will be used for a purpose it is not legally certified for?
• Should the lumber be sold once its intended use is determined?
• What should Bob do if he decides not to participate in this lumber sale?

3. Who are the primary players?

• Bob Hopkins
• John White—owner of White Lumber Company
• Stan Parrish—the buyer at Quality Lumber Co.
• Employees of White Lumber Company—many of whom are far less employable than
Bob Hopkins if White Lumber has to have a lay-off.
• The foreman at the end-purchaser’s firm
• The workers who will be standing on the scaffolding

4. What are the possible alternatives?

• Bob could sign the order, as is, and sell the lumber.
• Bob could agree to sell the lumber, but ensure that the invoice is clearly marked “not
certified for use as scaffold plank.” (This option would not please Mr. White, Quality
Lumber, or the contractor foreman. And it would not really do anything for the end-
1
This model is based on an extension of Gerald F. Cavanagh, Dennis J. Moberg, and Manual Velasquez, “The
ethics of organizational politics,” Academy of Management Review 6 (1981) 363-78.

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users, the workers on the planks, because they are not likely to see the invoice. However,
this will be a popular suggestion from the students in your class.)
• Bob could refuse to sign the order. If he does this, he may be fired—or he may not be
fired, at least not immediately.
• Bob could be a “whistle-blower,” attempting to expose the whole situation to protect the
lives of unknown workers.

5. What are the ethics of the alternatives?

Three philosophical approaches can be introduced to students as a way of analyzing the ethics of the
alternatives.

Utilitarian Approach: The utilitarian approach to ethical decision-making holds that moral decisions
should produce the greatest good for the greatest number in society as a whole. While appealing
conceptually, especially to quantitatively oriented students who understand cost/benefit analysis, the
actual calculations can be complex when the costs and benefits to all of society must be considered. For
that reason, simplifying assumptions are generally made to limit the calculations to only those directly
impacted. (These simplifying assumptions often give rise to criticisms that this model is simplistic, often
self-serving, and unable to appropriately consider impacts that are not easily reduced to dollars and
cents.)

In this Scaffold Plank Incident, the benefits are fairly easily measured once the societal dimension is
reduced to the primary stakeholders. But the costs can be complicated. One might want to calculate the
cost to the contractor of having to wait for certified scaffold plank to be delivered (an alternative almost
never suggested in class). The probability of this lumber causing an accident and the severity of that
accident should be assessed. These probabilities can then be multiplied times the “cost” of the accident to
develop the probabilistic “cost” of using uncertified lumber as scaffold planks. How do you place a dollar
value on a life (or limbs)? Students have trouble wrestling with this issue even though we do it all the
time in society. For instance, the installation of seat belts and air bags in automobiles can be projected to
save a certain number of lives, but we generally delay implementation for several years because of costs.
The classic case concerning the “exploding” gas tanks in Ford Pintos can be brought up at this part of the
discussion as an example of a utilitarian decision that was viewed as unacceptable in retrospect.

Moral-Rights Approach: The moral-rights approach asserts that people have fundamental rights as human
beings that cannot be taken away by another’s decisions. Those rights include:

• The right of free consent. In this case the workers have the right to know they are risking
their lives on substandard planking material.
• The right of freedom of conscience. Individuals may refrain from carrying out any order
that violates their moral or religious norms. In the Scaffold Plank Incident, Bob Hopkins
has the moral right to not be forced to sign the purchase order.
• The right to life and safety. In this case the characters seem to think that OSHA
regulations are overcautious; but are they? How can they justify this belief?
Justice Approach: The justice approach holds that moral decisions must be made on the
basis of equity, fairness, and impartiality. And a decision must not make the least
advantaged portions of society worse off. In this case, the justice model would lead us to
conclude that the incomes of the lumber yard owners, brokers, and buyers is being traded
off against the safety of the poor worker on the plank.

6. What are the practical constraints?

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a. It is very difficult for Bob Hopkins to find out who the end-user is in order to protect the workers’
interests. If he cannot do that, then just remaining “uninvolved” does not really solve any problems,
because someone else in his company will sell the lumber to Stan and the dangerous scaffolding will be
put up anyway.

b. John White has turned this incident into a loyalty test. Bob Hopkins’s job may be jeopardized if he
does not cooperate.

7. What actions should be taken?

Here the discussion must be managed sensitively to ensure that attacks on other people’s positions do not
become personal attacks on their character.
We want the students to be developing an ethical reasoning framework for decision-making, rather than
just stating their “feelings” without some grounding model.

If the discussion lags or the class seems overwhelmingly committed to one course of action, the
instructor may need to play the role of “devil’s advocate.” If the class seems to want to sign the purchase
order because “it’s legal; what’s the problem?” ask a question such as “What if your brother worked on
scaffolding? This might be his company. Would that make a difference?” Or, “How would you feel if
you read in the paper that someone was killed in an accident because of uncertified scaffold plank?” (A
former student mailed us just such an article from the Johnstown, Pennsylvania, Tribune Democrat dated
October 1991.) The article recounts how in 1991, a Pittsburgh jury awarded $1.15 million dollars to
Schree Toth, the widow of construction worker, Joseph Toth, who fell to his death when a rotten plank
snapped on a construction project managed by Mellon-Stuart. It was discovered that Mellon-Stuart had
used common planking instead of higher quality scaffold planking in the project.

On the other hand, if the whole class seems too willing to refuse to sign the purchase order without
facing the seriousness of the consequences, keep pressing them to see how far they could follow up on
ensuring worker safety. Are we responsible for righting all the wrongs in the world, or only those we are
directly in contact with?

You could also introduce the concept of risk. Is there a point where the risk of danger is so small that we
don’t have an ethical dilemma? After all, accidents will happen, won’t they? This tends to be a lively
discussion.

Our students always want to know what should be done. We avoid a direct answer and state that when
they are in a situation where they have to make a difficult ethical decision, we want them to identify the
issue and alternatives, have an ethical framework in their minds to give them guidance, and to agonize
over their decision. If they do that, we can accept the decision. (We hope.)

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Case 9 Beer and Wine Industries: Bartles & Jaymes
Teaching Notes

Synopsis

This case is about a new industry—the wine cooler industry—and the manner in which Bartles &
Jaymes, a subsidiary of Gallo Wines, became the market leader. It links the industry environment to
organizational strategy and shows how competition develops in a new industry. It points out that a
distinctive competence (e.g., marketing and distribution) leads to competitive advantage. It demonstrates
the importance of using distinctive competences to manage the organizational environment and allows
for an evaluation of Bartles & Jaymes’s strategy. The case considers how Gallo Company manages its
environment and strategy as the leading wine company in the United States.

Teaching Objectives

1. To analyze the organizational environment.
2. To show how new industries through new products and how environmental competition changes.
3. To illustrate the importance of developing a distinctive competence to compete in an industry.
4. To demonstrate how strategy develops from a distinctive competence and how firms use their
strengths to manage the industry environment.
5. To show how vertical integration helps defend competitive advantage and manage the environment.

This case offers insights into many organization-environment issues and is best used after Chapters 8. It
shows how a strategy evolved into a new industry. Gallo Brothers introduced a new product—a wine
cooler—through a new subsidiary, Bartles & Jaymes, which became the market leader. The parent
company’s strategy helped the new subsidiary’s strategy, increasing its competitive advantage. The case
clarifies competition issues in the industry environment.

Pop Quiz Questions

1. What corporate-level strategy contributes most to Gab’s competitive advantage?

Answer: Vertical Integration

2. Did Bartles & Jaymes pursue a low-cost or a differentiation strategy?

Answer: Differentiation strategy


Begin with an analysis of Gallo and look at the development and nature of its strategy at all levels in the
firm. Examine threats and opportunities in the alcoholic beverage industry and the development of the
wine cooler industry. Then examine how Gallo used its distinctive competences to exploit environmental
opportunities by founding Bartles & Jaymes to enter the wine cooler industry.

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1. Chart the development of Gallo’s functional-, business-, and corporate-level strategies. What are the
strengths and weaknesses of these strategies, and how do they fit together to provide the firm with its
competitive advantage?

At the functional level, Gallo’s distinctive competences have been in manufacturing and marketing. From
the beginning, the two Gallo brothers took different roles in the company. Julio became responsible for
increasing the output of wine from the family’s vineyards, and Ernest became responsible for finding
innovative marketing techniques. The brothers seemed to be in competition: one tried to produce more
than the other could sell, the other tried to sell more than his brother could produce. The two
competences were complementary and resulted in Gallo’s being the largest vintner in the United States
today. See Exhibit I.

At the business level, strategy followed the development of these distinctive competences. At first, when
the company concentrated on increasing output, it focused on selling bulk wine, bottled under other
names. As marketing skills developed, the Gallo brothers bottled their own wine and concentrated on the
inexpensive jug wine end of the market. They brought out such brands as Thunderbird (a cheap wine,
high in alcohol content), and as a result, their image was connected with the jug wine business.

Beginning in 1975, they changed their image and became broad differentiators in the wine industry.
Besides cheap jug wines, they market a full range of varietal wines, such as Cabernet Sauvignon and
Chardonnay, in both the premium, high-priced end of the market and the good-quality, medium-priced
end of the market. They have expanded their domain and serve niches in the wine market by pursuing a
product proliferation strategy. They have moved from a focused to a differentiated strategy by serving all
market segments. Their marketing skills have contributed to this change in strategy, and to a degree, their
jug wine image is fading.

Gallo’s strategy now is to act as a broad differentiator, with many product lines aimed at all market
segments. Though it is a closely held company, Gallo is probably the most profitable wine company in
the market today. Its functional strategy matches its business strategy.

The fit between functional- and business-level strategies occurs as well at the corporate level. From the
beginning, Gallo has pursued a strategy of vertical integration that has contributed in many ways to its
business-level strategy. Gallo operates in almost every value-added stage in the wine industry. First, it
owns one of the biggest intrastate trucking companies in California to handle transportation needs. It
ships its grapes to its winemaking facilities, makes its own bottles, and ships the raw materials needed for
glass production (such as lime and sand) in its trucking fleet. It also makes its aluminum bottle tops in its
own manufacturing unit.

On the output side, Gallo controls marketing and distribution. It owns more of its distributors than
competitors, and even the distributors it does not own conform to Gallo marketing practices to sell and
distribute Gallo wines. Gallo has coopted distributors who rely on it for wine supplies and has power
over them. Gallo enjoys extensive control over product marketing and can promote its own products
rather than competitors’. Gallo decides how its wines are marketed in supermarkets.

Gallo’s control over the environment through vertical integration illustrates resource dependence theory.
Its strategy of vertical integration allows it to control and protect its resources because (1) it avoids the
problems of using the market, such as the expense of middlemen, (2) it controls the value added at each
stage of production, thus increasing productivity, and (3) controls distribution complements marketing
skills, enabling Gallo to become the full-line differentiator.

Student can see the reason for Gallo’s success. It has used strategy to control the environment—each
level of strategy reinforces the next and feeds back to the other levels. All levels are complementary and

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allow the firm to reap gains from the fit among functional-, business-, and corporate-level strategies. At
this point, discussion can turn to the wine industry and the opportunities and threats the firm is facing
from the specific and general environmental forces.

2. What forces in the specific and general environments of the beer and wine industry result in threats
and opportunities for Gallo?

a. Specific Environment
Forces in the specific environment include competitors, customers, suppliers, and so on. Some points to
note are:

• The threat of entry is low. Large firms with large share of the market dominate both
industries. Small firms can enter the market, but dominant firms are not threatened, and they
can counter threats by introducing competing brands.
• In addition, one of the principal barriers to entry for new firms is the huge marketing
expenditures needed to enter these industries. And firms such as Gallo and Miller Brewing
Co. are protected in this respect by their distinctive competence in marketing.
• Industry competition is high. Firms are competing for market share. Competition is not
principally by price, but by image and differentiation. Each large wine firm has its jug wine,
its middle-of-the-road brand, and its top-quality varietals in different price brackets, but
within each price bracket there is little price competition.
• Large, powerful customers can be a problem in that large distributors control the distribution
and marketing of beers and wines. Gallo owns many of its distributors, so it faces no threats.
• Large, powerful suppliers pose not problem for Gallo because it is vertically integrated
backwards. It controls the supply of grapes, bottles, and so on.

b. General Environment
Several forces in the general environment cause problems for beer and wine firms. Tough drunk-driving
laws and the emergence of organizations such as MADD (Mothers Against Drunk Driving) have affected
consumer attitudes toward alcohol and the level of consumption.

• An increasingly health-conscious consumer, realizing that beer and wine are high in calories,
demand lower-calorie beers and “healthier” alcohol products.
• The raising of the legal age for drinking and the increasing age of the population are reducing
alcohol consumption. (People under 34 are typically the biggest consumers of alcoholic
beverages.)

To these threats in the general environment, beer and wine firms responded with light or alcohol-free
beers and wines. It was precisely this context that provided an opportunity for Gallo and other wine
producers—the wine cooler industry.

3. In what ways did the Bartles & Jaymes venture enable Gallo to use its distinctive competences to
introduce a new product and expand its domain?

The emergence of the wine cooler industry was tailor made for Gallo. With the consumption of wine
expected to level off or even decline, here was an opportunity to add to its product line and capitalize on
its distinctive competences in manufacturing, marketing, and distribution. It was a perfect opportunity to
exploit a new industry, and as yet there were no barriers to entry. The product itself was simple to
produce (50 percent wine mixed with 50 percent fruit juice to produce a 6 percent level of alcohol, half as
strong as wine but 30–40 percent stronger than beer). Wine coolers capitalized on the increasing
popularity of soda, as the resulting mixture was sweet and carbonated.

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Gallo quickly exploited this opportunity by creating the product and using its marketing strengths to
position the product to appeal to the wine cooler consumer. The product was marketed to the more
sophisticated consumer as being healthier, because it had less alcohol, but fun and refreshing to drink.
Gallo’s control over sales and distribution gave it an enormous advantage in terms of ability to reach the
consumer. An innovative marketing campaign featuring two “good old boys,” rather than a California
beach scene, contributed to the differentiated image. Bartles & Jaymes was given a multimillion dollar
advertising budget to establish the product and achieve market leader status. By 1986 its combination of
marketing and distribution skills had enabled it to replace the former industry leader, California Cooler.

4. What business-level strategy would you recommend that Bartles & Jaymes pursue in the future?

How should Gallo continue to exploit its competitive advantage in this new industry environment?
Although Gallo has now achieved market leader status, there are many competitors in the market.
Barriers to entry include huge marketing budgets needed to establish new products—Bartles & Jaymes’s
1986 budget was $30 million. The case documents how competitors have positioned their products and
attempted to segment the market to protect and enlarge their domains.

Can Gallo maintain its status by marketing alone, or will it need to introduce new products to compete?
The number of flavored wine coolers is increasing, as is the number of coolers whose base is not wine,
but beer (Stroh’s) or bourbon (Jack Daniels). Should Bartles & Jaymes expand its product range or
concentrate on its present formula? After all, no one would want Miller Lite to change, so should wine
coolers change? Similarly, what is the future of the industry? Are wine coolers a fad, or will they
continue to grow in demand as consumers switch from beer and wine to the new product?

Answers will vary, but the case can be brought to a close by reviewing the way Gallo seized
environmental opportunities and used its strategy of staying with the wine industry, its core business.
Maybe Gallo’s should expand globally. The company is expanding California wines to enter the
European and the Far East markets. Can wine coolers be far behind?

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