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MGT504 - Organization Theory and Design - Lecture Handout 20

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ORGANIZATION SIZE – IS BIGGER BETTER?

The question of big versus small begins with the notion of growth and the reasons so many organization feel the need to grow large.

PRESSURES FOR GROWTH

In the early 1990s America’s management guru, Peter Drucker declared that “the fortune 500 is over”; yet the dream of practically every businessperson is still to have his or her company become a member of the Fortune 500 list --- to grow fast and to grow large. Sometimes this goal is more urgent than to make the best products or show the greatest profits. Some observers believe the United States is entering a new era of “bigness,” as companies strive to acquire the size and resources to compete on a global scale, to invest in new technology and to control distribution channels and guarantee access to markets. For example, more than $ 1.6 trillion in mergers took place worldwide in 1997 alone, with over half of the activity in United States.

There are other pressures for organizations to grow. Many executives have found that firms must grow to stay economically healthy. To stop growing is to stagnate. To be stable means that customers may not have their demands met fully or that competitors will increase market share at the expense of your company. Scale is crucial to economic health in marketing-intensive companies such as Coca-Cola and Anheuser –Busch. Greater size give these companies power in the marketplace and thus increased revenues. In addition, growing organizations are vibrant, exciting places to work, which enables these companies to attract and keep quality employees. When the number of employees is expanding, the company can offer many challenges and opportunities for advancement.

LARGE VERSUS SMALL

Organizations feel compelled to grow, but how much and how large? What size organization is better poised to compete in a global environment?

Large: Huge resources and economies of scale are needed for many organizations to compete globally. Only large organization can build a massive pipeline in Alaska. Only a large corporation like Boeing can afford to build a 747, and only a large American Airlines can buy it. Only a large Johnson & Johnson can invest hundreds of millions in new product such as bifocal contact lenses and a birth control patch that delivers contraceptives through the skin. Large companies also are standardized, often mechanistically run, and complex. The complexity offers hundreds of functional specialties within the organization to perform complex tasks and to produce complex products. Moreover, large organizations, once established, can be a presence that stabilizes a market for years. Managers can join the company and expect a career reminiscent of the “organization men” of the 1950s and 1960s. The organization can provide longevity, raises, and promotions.

Small: The competing argument, says small is beautiful because the crucial requirements for success in a global economy are responsiveness and flexibility in fast-changing markets. While the U.S. economy contains many large organizations, research shows that a global trade has accelerated; smaller organizations have become the norm. Since the mid- 1960s most of the then-existing large businesses have lost market share worldwide. Today, fully 96 percent of exporters are small businesses. The economic vitality of the United States, as well as most of the rest of the developed world, is tied to small and mid – sized businesses. Although many large companies have become even larger through merger, they are also less numerous as a result. Countless small businesses have sprung up to fill specialized niches and serve targeted markets. The development of the internet has provided fertile ground for the growth of small firms. In addition, the rapidly growing service sector also contributes to a decrease in average organization size, since most service companies remain small to be more responsive to customers.

The percentage of employees working in large organization continues to decrease. Whereas numerous jobs were wiped out through downsizing at large corporations in the 1980s and 1990s, jobs were springing up in small firms to replace them. Small organization has a flat structure and an organic, free-flowing management style that encourages entrepreneurship and innovation. Today’s leading biotechnological drugs, for example were all discovered by small firms, such as Chiron, which developed the hepatitis B vaccines, rather than by huge pharmaceutical companies, such as Merck. Moreover, the personal involvement of employees in small firms encourages motivation and commitment because employees personally identify with the company’s mission.

Bio – Company / Small –Company Hybrid: The paradox is that the advantages of small companies enable them to succeed and hence, grow large. Fortune magazine reported that the fastest growing companies in America are small firms characterized by an emphasis on putting the customer first and being fast and flexible in responding to the environment. Small companies, however, can become victims of their own success as they grow large, shifting to a mechanistic structure emphasizing vertical hierarchies and spawning “organization men” rather than entrepreneurs.

The solution is what Jack Welch, chairman of General Electric, calls the “big company / small – company hybrid” that combines a large corporation’s resources and reach with a small company’s simplicity and flexibility. The divisional structure, is one way organizations such as General Electric and Johnson & Johnson attain this. By reorganizing into groups of small companies, these huge corporations capture the mind-set and advantages of smallness. Johnson & Johnson is actually a group of 180 separate companies. When a new product is created in one of J&J’s fifty-six labs, a new company is created along with it. When he was CEO of power equipment giant Asea Brown Boveri Ldt. (ABB), Percy Barnevik blasted a 200,000 – employee global enterprise into 5,000 units, averaging just forty people each.

Another approach to creating a big company/small company hybrid is called the front/back approach. Rather than dividing the company into separate businesses, each with its own products, and customer, the company is divided into units with different roles. The “back” part of the organization focuses on creating and producing products, and services, while the “front” focuses on integrating and delivering products and services to customers. this approach is becoming increasingly popular among financial services companies such as Merrill Lynch and Fidelity, as well as multiple-product technology firms such as Sun –Microsystems.

Full –Services, global firms, need a strong resources base and sufficient complexity, and hierarchy to serve clients around the world. The development of new organization forms, with an emphasis on decentralizing authority and cutting out layers of the hierarchy, combined with the increasing use of information technology described earlier, is making it easier than ever for companies to be simultaneously large and small, thus capturing the advantages of each. Retail Giants Home Depot and Wal-Mart, for example, use the advantage of size in areas such as advertising, purchasing, and raising capital; however, they also give each individual, store the autonomy needed to serve customers, as if it were a small, hometown shop. Small companies that are growing can also use these ideas to help their organizations retain the flexibility and customer focus that fueled their growth. Howard Schultz, chairman and CEO of Starbucks, refers to achieving “a fragile balance.” Starbucks, which grew in a decade from 100 employees to almost 30,000, still allow s local managers to experiment without permission from the top. One experimental coffee drink, Frappuccino, was eventually marketed nationwide and generated $ 100 million in revenue during its first year.

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