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A planned acquisition of Sun Microsystems by IBM also fell through.
When rumours of the takeover started circulating, a Sun vice-president warned there would be a culture clash. He said the developer staff at Sun were “weirder” than those at IBM. In fact, Sun did have a some- what radical culture, because it had been pushing open systems like Unix. This contrasted with IBM’s more proprietary approach. The talks eventually broke off because the two companies could not agree on terms.
A similar-looking situation was evident when Kraft Foods tried to acquire Cadbury. The finance director at Cadbury (the maker of such well-known brands as Caramilk candy bars and Bubblicious gum), warned that Cadbury’s unique corporate culture would be lost if Kraft acquired it. He said that the Cadbury “magic” was important for the brands it markets. The company’s CEO also weighed in, saying Cadbury’s culture of “principled capitalism” was what made it great.
The British public was concerned about losing one of its icons, and Warren Buffett sold off almost one-quarter of his Kraft stock when he heard about the plan. The two companies did, in fact, have quite different histories and cultures. Cadbury had tried to build a socially benign business and had launched a fair trade initiative with its Dairy Milk brand; Kraft was a much more traditional multinational business firm. In spite of these concerns, after protracted negotiations Kraft did acquire Cadbury.
CULTURE CLASHES WITHIN AN ORGANIZATION
Culture clashes don’t happen only when two independent companies try to merge. They can also happen when a top manager’s vision for a culture comes into conflict with the culture lower-level employees prefer. Consider the situation that arose at the DeGroote School of Business at McMaster University when Paul Bates, a former Bay Street brokerage executive, was hired as dean of the business school. When he sought reappointment for a second term, he was opposed by 80 percent of the faculty, but the views of faculty members were overruled by the board of governors and Bates was reappointed. Many profes- sors were unhappy with Bates’s corporate management style; they accused him of bullying and intimidation, and of not understanding the academic culture of the school. Those who supported the dean said he had done good things for the school, and that the faculty members were biased against anyone not “academic” enough. A report issued by the McMaster Office of Human Rights and Equity Services concluded that the business school had a dysfunctional work environment, and that immediate action should be taken to resolve the problem. The report also noted that the school had a history of conflict between deans and faculty members.
Sometimes a new top executive is brought in to change the cor- porate culture in response to a crisis the company is facing. Edward Whitacre, the former CEO of General Motors, was one such person.
He was recruited in 2009 and given the mandate to turn the company around and change GM’s plodding culture. But he did not have an easy job: GM was going to have to introduce massive changes to dig itself out of the financial hole it was in. He tried to reduce bureaucracy and push decision-making authority down into GM’s many manage- ment layers so that decisions were made more quickly and the com- pany would be more responsive to changes in the marketplace. Prior received large bonuses. Vale wanted to raise the threshold at which the
bonus kicked in, and also wanted to convert the defined benefit pen- sion plan to a defined contribution plan. The union strongly resisted.
Vale is seen as a company with an “attitude,” and Vale’s management has been very aggressive in dealing with the Canadian workers it inher- ited from Inco.
One of the most visible signs of the culture difference was a strike by the United Steelworkers union. Workers rejected an offer to settle by a wide margin, saying that Vale’s offer fell far short of what the union mem- bers expected. Vale then took legal action against the union, accusing it of vandalism, assaults, and death threats. It also laid off many employ- ees and shut down various projects because of the uncertain economic environment. Vale then announced it was going to bring in replacement workers in order to get two of the nickel mines back up to full produc- tion. The federal government did not get involved in the dispute, in spite of claims by the union that Vale was a foreign company trying to change the culture of Canadian union–management relations.
Vale’s CEO said that the cultures of the two companies would sim- ply have to adjust. But Vale also removed the name “Inco” from its nickel business. (Note: The Vale takeover of Inco did not go nearly as smoothly as the Xstrata takeover of Falconbridge, partly because Xstrata gave Canadian managers a lot more say in changes made after the takeover.)
China National Offshore Oil Corp. (CNOOC) and Nexen. In 2012, the China National Offshore Oil Corp. (CNOOC) announced its inten- tion to purchase Nexen, a Canadian oil producer. There was concern that a communist government was buying a Canadian oil company, but CNOOC made a public commitment to boost capital expenditures in Canada, maintain Nexen’s workforce, and keep all of Nexen’s senior executives. The federal government of Canada approved the sale, but said no more sales to organizations controlled by foreign governments would be allowed.
Soon after the takeover, CNOOC started laying off Nexen employees and introducing cost-cutting programs. The unexpected fall in oil prices during 2014 also caused CNOOC to substantially reduce its capital bud- get. Many current and former employees said that the cultures of the two companies were very different, and that a climate of fear had developed among Nexen employees worried about even more layoffs. They also claimed that the Chinese viewed Canadians as lazy. About half of the former Nexen executives are no longer at the new company (now called Nexen Energy ULC).
Some planned mergers never happen, because concerns about a possible culture clash inhibit negotiations. For example, when two Japanese companies (Kirin Holdings Co. and Suntory Holdings Ltd.) announced plans to merge in order to create one of the world’s larg- est beverage companies, it was thought a merger would create a company that could break out of the domestic Japanese market and become a major player on the international scene. But it never took place, partly because of differences in management styles. Kirin (a member of the Mitsubishi group) had solid, traditional management, but Suntory had a unique style influenced by the fact that families owned about 90 percent of the company’s shares. During negotia- tions, the companies simply could not reconcile the differences and the merger was called off.
Chapter 6Managing the Business Enterprise145 QUESTIONS FOR DISCUSSION
1. What is corporate culture? Compare and contrast the companies described in this case in terms of their corporate culture.
2. Can the CEO of a company really influence the culture of an organi- zation in a substantial way?
3. Consider the following statement: The idea that a culture clash is important is overstated. People generally are so focused on doing their own jobs that abstract issues like “culture” don’t influence their behaviour very much. Do you agree or disagree? Defend your answer.
to Whitacre’s arrival, decisions were not made until approved by many different committees. For example, a few years earlier the company had introduced a program to stamp out bureaucracy, but the com- mittee guiding the effort had trouble deciding how many committee meetings were necessary to achieve the goal. That kind of dithering was not what Whitacre had in mind. One of the things he did to change the culture was to be more hands-on and accessible than his pre- decessors (who spent most of their time in the executive suite). He had some success with that strategy, as GM employees began talking about “Ed sightings” in the hallways and cafeteria. He also visited GM manufacturing plants to talk to workers. But Whitacre is no longer the CEO of GM.
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Time to Reorganize!
07
In our fast-paced modern economy, business organiza- tions must constantly change their organization structures in order to remain competitive. Listed below are just some of the companies that changed their structures in 2014:
Ţ Bombardier Inc. changed its organization structure after experiencing many delays in the development of the CSeries jet. The company previously had just two business units (Transportation and Aerospace), but now it will have four (Transportation, Aerostruc- tures and Engineering Services, Business Aircraft, and Commercial Aircraft). The new structure is designed to reduce costs, increase profitability, increase respon- siveness to customer needs, and focus attention on Bombardier’s growth areas.
Ţ After experiencing a decline in sales, McDonald’s announced that it was changing its organization struc- ture in order to more effectively respond to consumer needs in the diverse markets that it serves. The new organization structure is based on four geographic
LO
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:LO-1 Discuss the elements that influence a firm’s organi- zational structure.
LO-2 Explain how specialization and departmentalization are the building blocks of organizational structure.
LO-3 Distinguish between responsibility and authority and explain the differences in decision making in central- ized and decentralized organizations.
LO-4 Explain the differences between functional, divisional, project, and international organization structures, and describe the most popular forms of organizational design.
LO-5 Understand how the informal organization is different from the formal organization.
zones: Northeast, South, Central, and West. It will give local managers more autonomy to develop menu items that consumers in their area prefer.
Ţ In response to declining sales, Sears Canada laid off hundreds of employees and changed its organi- zational structure in order to reduce the number of people at the vice-presidential level.
Organizing the
Business Enterprise
CHAPTER
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Part 2The Business of Managing148
Ţ BlackBerry changed its structure by dropping the Chief Operating Officer (COO) and Chief Marketing Officer (CMO) positions from its organization chart.
These were the two most important consumer- oriented executives in the company, and the move shows that BlackBerry is going to focus on business customers, not individual consumers.
Ţ Nissan Canada Inc. stream- lined its organizational struc- ture as part of a larger effort to increase sales. Formerly, Nissan dealers reported to a regional general manager, who reported to a sales director, who reported to a regional vice-president. The new structure eliminates the
sales director position and shortens the chain of com- mand so decisions can be made more quickly.
Ţ Coty Inc., the cosmetics company, has introduced a new organizational structure that is based on four pro- duct categories (fragrance, skin care, colour cosmetics, and body care) in four distinct regions (North America, Europe, Latin America, and Asia-Pacific/Middle East, Africa). The new structure replaces one that had just two divisions (Coty Prestige and Coty Beauty).
Ţ Hewlett-Packard announced plans to split into two companies, one focusing on computers and printers, and the other focusing on corporate hardware and service operations. The change was made to reduce inefficiencies that are often evident in large conglomer- ate businesses.
When companies decide to reorganize, they may face certain dilemmas. Three of the most common are: (1) whether to emphasize centralization or decentralization, (2) whether to use geographical or product departmental- ization, and (3) whether to split a single company into two (or more) companies.
Centralization vs.
Decentralization
It may not be easy to decide whether to operate with a centralized structure (where decision-making authority is
concentrated at the top of the organizational hierarchy) or a decentralized structure (where decision-making author- ity is pushed down to lower levels in the hierarchy). This dilemma can clearly be seen in the long history of General Motors. In the 1920s, GM’s president, Alfred Sloan, introduced a decentralized structure that gave each car division considerable autonomy to produce what the divi-
sion managers thought would attract whatever market seg- ment the division was pursu- ing. It worked so well that GM became the largest automo- bile manufacturer in the world by the middle of the twentieth century. But all this autonomy resulted in widely differing car designs that were very expen- sive to produce. As decades passed, costs soared and competition from cost-conscious Japanese automakers became ferocious. GM’s sales and overall profitability plummeted. In response, GM then took away much of the autonomy that managers in various international divi- sions had, and instituted a requirement that its worldwide units work much more closely together to design cars that could be sold (with modest variations) worldwide. A
“Global Council” in Detroit made key decisions about how much would be spent on new car development. But even these actions were not sufficient to stem GM’s decline, and in 2008 the company was bailed out by the U.S. and Canadian governments and entered bankruptcy protec- tion as it tried to recover.
Geographic vs. Product Departmentalization
Some firms use geographic departmentalization (orga- nizing on the basis of geographic regions) and some use product departmentalization (organizing on the basis of products that are sold). But it is not always easy to decide which form is best. In recent years, increased global competition and reduced impediments to cross- border communication have led some companies to switch from geographic to product departmentalization.
For example, Heinz abandoned geographical depart- mentalization in favour of product departmentalization.
HOW WILL THIS HELP ME?
Companies frequently introduce changes to improve their organizational structures. By understanding the material in this chapter, as an employee, you’ll understand your “place” in the organization that employs you. As a boss or owner, you’ll be better equipped to decide on the optimal structure for your own organization.
Chapter 7Organizing the Business Enterprise149
slowly than in the snacks business. The decision to create two companies required Kraft managers to make interest- ing decisions about which products would go where. They decided, for example, that Planters Peanuts would go with the grocery company and move from its current home in snack foods. But for Philadelphia Cream Cheese—whose sales revenue is about evenly split between North America and the rest of the world—one company would license the brand from the other.
Tyco International is another company that split up. It now focuses on selling security and fire-suppression sys- tems to businesses. Tyco’s two other divisions, which sold ADT residential alarms and industrial valves and pipes, were spun off. This restructuring may allow all three units to be more easily acquired by other companies, or for them to pursue other takeovers on their own.
Sobeys split into two units, but both will continue to operate under the umbrella of a single company. The IGA Operations unit includes IGA, IGA Extra, Les Marchés Tradition, Marché Bonichoix, and Rachelle-Béry in Quebec.
The Multi-Format Operations includes Sobeys, Thrifty Foods, Sobeys Urban Fresh, Foodland, FreshCo, Needs, Fast Fuel, Sobeys liquor operations, and IGA stores in western Canada.
Managers in various countries work with each other to apply the best ideas from one region to all the others.
Exide Corp.’s structure formerly consisted of several
“country organizations” that had considerable latitude to make decisions that were best for that country. But it adopted a new product structure with global business units to oversee the company’s various product lines such as car and industrial batteries.
Either approach—products or geography—can cause problems if taken to an extreme. If a company organizes by products, it can standardize manufactur- ing, introduce new products around the world faster, and eliminate overlapping activities. But if too much emphasis is put on product and not enough on geography, a com- pany is likely to find that local decision making is slowed and products are not tailored to a specific country’s cus- tomers. When Ford Motor Co. moved to product depart- mentalization, the reorganization saved the company $5 billion in its first few years of operation, but Ford’s market share declined during the same period. Ford responded by giving executives in various regions more authority to decide what types of vehicles were best for their local market. In other words, it moved back a bit toward the geographical model.
Splitting a Single Company into Two (or More)
Companies
In 2014, the German utility E.ON SE reorganized into two separate companies, one focusing on renewables and one on fossil fuels. A spokesperson said that the missions of the two new companies are so fundamentally different that they need to have different structures.
Kraft Foods also decided to split into two distinct companies, one focusing on worldwide snacks (includ- ing brand names like Oreo and Lu cookies, Cadbury chocolate, and Trident gum), and the other on the North American grocery business (including brands like Velveeta cheese and Maxwell House coffee). The North American grocery business was launched as a publicly traded com- pany, but both companies retained the Kraft Foods name.
One reason for the restructuring was the realization that sales revenue in the grocery business was growing more
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