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Organizational Structure and Innovation Author(s): Harvey M. Sapolsky Source: The Journal of Business, Vol. 40,

Organizational Structure and Innovation Author(s): Harvey M. Sapolsky Source: The Journal of Business, Vol. 40, No. 4 (Oct., 1967), pp. 497-510

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ORGANIZATIONALSTRUCTURE AND INNOVATION

HARVEY M. SAPOLSKY*

I.

INTRODUCTION

THOSE who

design or redesign of large-scale business organizations are in a difficult position. They are constantly admonishedby social commentatorsto

design organizationsthat are both crea- tive and innovative, in preparationfor a future that will be characterizedby rapid social and technological changes. And yet neither conventional wisdom nor the scholarlyliteratureon organiza-

tions offers a clear guide to the basic structureof such organizations. To be sure, there have been a large

number of

that have confronted situations where innovationwas possible, but these stud- ies have been almostexclusivelyconfined to a narrow range of relatively small- scale organizations (particularly farms and schools),and they yield little knowl- edge that can be usefully applied at the design stage.) Economists, of course, have studied the rate of innovation in businessfirms,but their concernis with the structural characteristicsof markets that promote innovation, rather than with the sturctural characteristics of firms that promote innovation. More- over, their successin isolatingthe struc- tural determinantsof innovation is not great, for it is still uncertainwhich type of market structure (comDetitive. oli-

* Assistantprofessorof politicalscience,Massa- chusettsInstituteof Technology. 1 The case study literatureis summarizedand analyzedin EverettM. Rogers,Diffusion of Innova- tions(New York:FreePress,1962).

are responsiblefor the

case studies of organizations

gopolistic, or monopolistic) is the most conducive to innovation.2 Social psy- chologists have offered a variety of schemes to increase the receptivity of individualsto change,but theirapproach tends to confuse individual change with modifications in organizational vari- ables.3Applicationsof these schemes in ongoing organizations have not clearly increasedthe rateof organizationaladop- tion of innovations.

II. ORGANIZATIONAL INNOVATION

Althoughthere exists no generaltheo- ry of organizationalinnovation,a recent paper by James Q. Wilson representsan important step toward assemblingsuch a theory.4Wilson'swork,however,offers no solacefor the organizationaldesigner, since it points out a basic structural dilemmathat makes the combinationof creative and innovative organizationex- tremely difficult to obtain. The essence of the dilemmais as follows:The factors that increasethe probabilitythat organ- izational participants will devise and present innovation proposals are pre- cisely those factors that decrease the probability that the organization will adopt the proposals. The stimulation

2 Seediscussionof marketstructureandtechnical progress in Richard Caves, American Industry:

Structure,Conduct,Performance(EnglewoodCliffs, N.J.: Prentice-Hall,Inc., 1964),pp. 98-101.

3 DanielKatz andRobertKahn,TheSocialPsy- chologyof Organizations(New York:John Wiley &

Sons,1966),chap.xiii.

4 James Q. Wilson,"Innovationin Organization:

Notes towarda Theory,"in James D. Thompson (ed.), Approachesto OrganizationalDesign (Pitts- burgh:Universityof Pittsburgh,1966),pp. 193-218.

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of potential innovation,then, is distinct fromand even antagonisticto the stimu- lation of the adoptionof innovation. Wilson conceives of an organization as an economy of incentives that con- venes around a set of tasks. Incentives are tangible or intangible gratifications, in exchangeforwhichpersonsparticipate in an organizationand, once membersof that organization,contributesuch valu- able resourcesas time, effort, and mon- ey.5Tasks are activities that add up to full-timeparticipationof one memberin an organization.6Within this scheme, the organization'sexecutive is that per- son (or group of persons) who is re- sponsible for maintaining the induce- ment-contribution balance. Wilson is interestedin explainingimportantinno- vations, that is, innovations that rep- resent a "fundamental change in a 'significant' number of tasks."7 What are "fundamental"and "significant,"of course, cannot be defined a priori but must be determinedby the organizations themselves. Wilson argues, however, that the greater the cost in termsof scarceinducements,the moreradicalthe innovation,regardlessof the prospective benefits.An executiveof an organization, assessing the costs of innovation, con- sidersthe amounts and types of induce- ments that must be redistributed or obtainedin orderto maintainthe organ- ization in the face of innovation. Since desired incentives include such difficult to manipulate variables as prestige, or- ganizationalpower, rewardingsocial re- lationships,and organizationalgoals, as well as money payments, and since

5 Ibid., p. 196. For an elaboration on

this point,

see Peter B. Clark and James Q. Wilson, "Incentive

Systems: A Theory of Organization," Administrative Science Quarterly,VI (1961), 129-66.

6 Wilson, op. cit., p. 196.

7

Ibid.

many incentives may in part be con- trolled by groups outside the organiza- tion, an executive must exert an effort to maintainthe inducement-contribution balancethat is proportionalto the drain of an innovation on the store of incen- tives. Wilson states that the diversity of an organization'sincentive and task struc- tures affect the rates at which an organ- ization will generate and adopt innova- tions. Incentive structuresbecome more diverse when there is an increasein the number of membership and reference groups, both inside and outside the organization,with which organizational participants are affiliated. Task struc- tures become more diverse when the number of unprogramedactivities per- formedwithinthe organizationincreases. Although incentive structures and task structures can change independentlyof one another, changes in them are fre- quently interrelated.Thus, an organiza- tion that hires professionalswho have both outside referencegroups and un- programedtasks discoversthat the com- plexity of its incentive and task struc- tures has increased. Diversity affects all three stages of organizational change-the conception of possible change (invention), the pro- posal of change, and the adoption and implementation of change-but differ- ently. Wilson hypothesizesthat (1) "the greaterthe diversity of the organization, the greaterthe probabilitythat members will conceive of major innovations";(2) "the greaterthe diversity of the organ- ization, the greaterthe probabilitythat major innovations will be proposed"; and (3) "the greaterthe diversity of the organization,the smallerthe proportion of majorinnovationsthat will be adopt-

ed."8

8 Ibid., pp. 200-204.

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A rigoroustesting of the relationships Wilson has suggestedis not possible. As he points out, precise measuresof non- material incentives do not exist, and changes in these incentives form the cornerstoneof the hypotheses that he offers.9Thus, while curvescan be drawn to represent the general effects that diversity will have on the rates of the presentationand the adoption of inno- vation proposals,the intersectionof the curves indicatingthe numberof innova- tions adopted for given degreeof organ- izational diversity cannot be uniquely located as there is no way to determine the steepnessof the curves.Nevertheless, the evidence supporting Wilson's hy- potheses is more than anecdotal. The experiencesof governmentagencies,vol- untary associations, and business firms tend to confirmthe hypotheses he has offered. In this paper we examine the innovation experience of a number of large department store organizations. The specific proposals for changes we will examine are (1) the separation of buying and selling functions, (2) the applicationof computersto merchandise problems, and (3) the introduction of sophisticateddecision-makingtechniques in retail operations. The unique struc- tural features of departmentstores con- tribute to both the generationof these proposals and to the frustration of attempts to implementthem. The main sourceof data for the study is a seriesof open-endedinterviewscon- ductedduring1965-66with management personnel at nine retail organizations affiliatedwith six firms.Forty-fourbuy- ers and a like numberof executivesfrom other areasof departmentstore manage- ment were interviewedin sessions rang- ing in length from one-half hour to four hours.Where it was appropriate, names

9 Ibid., p. 205.

of subjects were drawn at randomfrom lists of managementpersonnelclassified by position. Certain respondents were interviewedseveral times, as they were

participantsin innovation projects that were in progress during the field-work period. Nineteen interviews were also conducted with management consult- ants, equipment salesmen, and trade associationpersonnel. The firms included in this study are eastern and midwestern department stores that trade sources reportedwere among the ten most innovative firms in the industry.As a main objectivewas

to examine the origins of proposal for

organizational change, a more repre- sentative sampleof firmsin the industry would have been less useful.Limitations in funds prevented the inclusion of westernand southernfirmsin this study, but, basedon the opinionof tradesources and publishedreports,there is no reason to believe that their experiences with innovationdifferedmarkedlyfromthose of the firms that were examined. In only one instance was there difficultyin

obtainingpermissionfor interviews,and

in that case the needed data were pro-

vided by several outsiders who were

familiarwith the operationsof the firm and quite willing to releaseinformation.

A general interview guide was followed

throughout the field work, but as the interviewsessionswereused to construct the history of decisions unique to par- ticular firms, it was impossible to ask

each respondentexactly the same ques- tions.

III. THE STRUCTURE OF

DEPARTMENT STORES

a department

store is merchandising-the purchasing, pricing, promoting, and selling of con- sumergoods and services.To accomplish

The raison d'etre of

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this task a departmentstore is normally organizedinto five functionaldivisions- operations,control,personnel,sales pro- motion,and merchandising.'0The opera- tions division is concerned with the physical movement of merchandiseand with general store maintenance activi- ties. The control division is concerned with financialand credit activities. The personneldivision has formal responsi- bility for employment,training, deploy- ment, and union relations. The sales promotiondivision handles advertising, displays, and public relations,while the actual ordering and selling of goods is the responsibility of the merchandise division. Each division is further sub- dividedby subfunction.The controldivi- sion, for example,normallyhas subunits for accounts receivable, accounts pay- able, expense control, statistical work, and payroll. The exceptionto this neatly functional pattern of organizationis the merchan- dise division, which is subdivided by productclass."Instead of subunitscalled "Purchasing"and "Sales," it has from 100 to 150 departmentsknown by such titles as "Swim Wear," "JuniorBudget Dresses," and "Umbrellas." The mer-

10A descriptionof departmentstore organiza- tional arrangementsin currentuse is containedin BrucePayne and associates,Surveyof Organization

of Multi-UnitDepartmentandSpecialtyStores(New

York: National Retail Merchants Association,

1963).

11 The distinction between departmentalization orspecializationby functionandby productusedin ouranalysiscorrespondsto the processandpurpose distinctionofferedby Luther Gulickin his classic, "Noteson the Theoryof Organization,"in L. Gulick andL. Urwick,Paperson theScienceofAdministra-

tion(NewYork:Instituteof PublicAdministration, 1937),p. 15. Functionalspecializationrefersto or-

ganizationby job or professionalskill (e.g.,

cost accounting,and stenography).Product spe- cializationrefersto organizationby class of mer- chandise(e.g.,all the jobscontributingto the saleof

a particulargood-buying, promoting,and selling),

selling,

chandisedivision is composedof experts in merchandise categories rather than in functional skills. Its hierarchyalso is based upon merchandise rather than upon function. Each department is headedby a merchandisespecialistcalled a "buyer."Similardepartments(budget dresses, coats, sportswear) are grouped

into

ready-to-wear,furniture) under the di- rectionof merchandisemanagers;similar merchandise divisions form "stores" (storefor fashion,storefor homes)under "store managers," and all ultimately reportto a generalmerchandisemanager. All merchandisingfunctions relating to a particularcategoryof goods are the responsibilityof the departmentalbuyer. The buyerselectsthe goodsto be offered for sale, prices them, arranges for dis- plays and advertising to promote their sale, and then supervises the actual sales transaction.The term "buyer," of course, is a misnomer,for the buyer is the buyer, the seller, and much of what lies between.12

12 This organizationalformis not capricious.The lack of functionalspecializationin the merchandise divisionarisesfromthedepartmentstore'sinventory problem.Departmentstore merchandisedecisions are risky becausethey concern,to a large extent, fashion merchandise,and fashion merchandiseis perishable.Goodspurchasedon what appearto be ideal termscan be quicklyconvertedinto unsalable inventory due to market and taste changes. The morea store emphasizesfashion,encouragingstyle preferencesto influencetheir customers'purchase decisions,the greateris its inventoryproblem. By placingthe responsibilityforboth the buying and the sellingof merchandiseon the sameindivid- ual, the departmentstorereducesthe risksof inven- tory accumulation.In managingtheirdepartments, the buyersare forcedto becomefamiliarwith both produceroffersandconsumerpreferences.To avoid inventory accumulation,purchasesin the market mustbe basedon salesforecasts.Everymerchandise ordermadeby a buyermust includehis calculation of the consunmers'attitudestowardthe merchandise, becausehe is alsoresponsibleforthe salesof the de- partment.Functionalspecializationwould require the buying specialistand the selling specialist to agreeona salesforecastforeverymerchandiseorder,

merchandise divisions

(women's

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STRUCTUREAND INNOVATION

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Nominalsubordinates,the buyerspos- sess a great deal of what can be termed "organizationalpower."Internalreward systems tied to the performanceof the merchandise departments permit the buyers to earn substantially more than most executives in the other store divi- sions and, at times, even more than executives at formal-lyhigher positions within the merchandisedivision itself.'3 The review and evaluation procedures common to business bureaucraciescan- not be applied to the decisions of the buyers.The buyers'decisionsaredifficult to monitor,not only becauseof the sheer numberof decisionsthat must be made in each merchandise line each season, but also becausethe buyers are the only

andtherearethousandsof merchandiseordersto be madein each departmenteach year. As sales fore- casts are essentiallyintuitivedecisions,particularly in the case of new or fashionmerchandise,the co- ordinationproblemis likelyto besubstantialandthe inventoryproblemintolerableundera functionally specializedsystem. 13 Forty-eightout of the ninety-sevenbuyersin Store A earnedin 1965$1,000or moreper month exclusiveof bonuses,while no other executivejob classificationwith the exception of management boardmembers,merchandisedivisionmanagers,and branchstoremanagershadas muchas a thirdof the positions in the classificationearning the same amount (Harvey M. Sapolsky, "Decentralization and Control:Problemsin the Organizationof De- partmentStores"[unpublishedPh.D. dissertation, HarvardUniversity,1966],Table2, p. 120). Arch Patton has examined the relationship amongthe salariesof the highestpaid executivesto the salariesof the second, third, fourth and fifth highestpaidexecutivesof firmsin variousindustries. The normalpatternwas somethinglike 100to 75 to 58 to 51, andso on. Withindepartmentstores,how- ever,the relationshipwas quitedifferent,as the sec- ondthroughthe fifthman'ssalarywas, on the aver- age, equalto about 95 per cent of the highestpaid

man's salary. Patton attributes this

salariesto the powerand prestigeof the top mer- chantswhoarethe executiveswiththe second,third, fourth, and fifth highest salaries in department stores. Patton's study is discussedin Thomas L.

Whisler, "OrganizationalAspects of

Growth,"in W. W.AlbertsandJoelE. Segall(eds.),

The CorporateMerger (Chicago: University of Chi-

cagoPress,1966),p. 207.

closeness in

Corporate

executives in a department store who have direct contact with both producer and-consumermarkets. This, in effect, gives them an -iformation monopoly. Store managementsmay allocate dollars and personnelamong departments, but the buyers control the allocationwithin merchandisecategories,determiningthe specificassortmentof goods and services that will be presentedto storecustomers. Even the general allocation decisions, those among departments, are influ- enced by the buyers, as they must be based in part on the sales estimates and risk preferencesof the buyers. Each merchandise department in a department store is run almost as if it were an independentbusiness."4In fact, some of the departments are actually independentbusinessesoperated by les- sees who share their gross receipts with the store management. Leased or not, each is normallysubject to someformof user chargesfor the servicesof the func- tional divisions,interestpayments on its borrowingsfor inventory from the in- ternal bank, and rent for its space from the store landlord.Profit and loss state- ments arepreparedfor each merchandise department, with general management expensesapportionedto the sellingunits as an overhead charge. Buyers come close to being independent entrepre- neurs, calculatingrisks, evaluating mar- kets, and cutting back or expanding their purchases as they judge the op- portunities for gain. Decentralized and unbureaucratized,departmentstorescan best be describedas federationsof quasi- independentmerchants.

acquisitions,

many department stores have been ab-

14 Merchandiseinterdependencies,however, do not permitthe departmentsto be runcompletelyin- dependentlyof oneanother.Seethediscussionof the limit of departmentstoredecentralizationin Sapol-

Through mergers and

sky, op. cit., chap. vii.

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sorbed into large national chains. Al- though formed in part to achieve the economiesof centralizedpurchasing,the chainshave not significantlyalteredthe organizationalstructure of the depart- ment store outlined above. Oriented toward serving the tastes of local mar-

kets, each chain unit still controls the

bulk of

purchases independently

through its own set of merchandise buyers. The national chains of depart-

its

ment stores can best be described as federationsof federations.

IV. PROPOSALS FOR CHANGE

Three major proposals for change have in recent years been offeredin the industry. Although none of the pro- posals can truly be said to be original to the industry, and one of them was initially presentedsome forty years ago, the vigor with which they are currently put forth, and their cumulative effect on industry structure and practices if they were adopted, make them major innovation proposals. We do not need to examine the merits of the proposals here."5We should, however, point out that they are consideredin the industry

to be controversial. One of the proposals calls for the

separation of buying and selling func- tions within the merchandisedivisions

of the stores.It is this proposalthat was

offeredto the industryduringthe 1920's.

With the rapid expansion of suburban

branch stores in the last decade placing

a strain on the standard department store organizationalform, the proposal hasonceagainreceivedseriousattention.

Essentially, it involves the functional specialization of the buyers' role and the establishment of a parallel set of selling managers who would be responsi-

15 The proposalsand their justificationsare ex- aminedin detailin ibid.,chaps.ii, iii, andiv.

ble for the actual sale of the merchandise in each retail unit.

A second proposalcalls for the use of

electronic data processing in merchan- dise operations. Department stores, de- spite certain difficult programingprob- lems unique to retailing, have utilized electronicdata processingas extensively in their accountingand financialactivi- ties as any other type of business firm. The merchandisecontrol area, the most important and costly aspect of depart- ment store operations, however, has hardly been touched by the computer revolution."6Proponents of change sug- gest that computersbe used to manage the merchandiseholdingsby replenishing depleted stocks on an automatic basis. Several inventory control programsare being devised to deal with the charac- teristics of particularmerchandiselines. The third proposal is of a less con- crete nature. Department store mer- chants are not noted for their use of so- phisticated decision-makingtechniques. Intuition andpersonalexperience,rather than calculation and study, guide their market actions. It has been proposed that department stores gain from the management experiences of firms in other industries by applying such de-

cision-makingtechniques as PERT and operationsresearchto merchandiseprob- lems. More a mood than a set of specific suggestions, the objective in this case is to shift department stores toward more analytical decision-makingmeth- ods, makingmerchandisea sciencerather than an art. The proposalsare highly interrelated; the adoptionof one facilitates the adop-

16 See R. M. Seyfarth, "Electronicsand Mer- chandising,"ChainStoreAge, Vol. XXXV, No. 24 (March,1959);and T. T. Kwo, "ThePotentialfor OfficeAutomationin DepartmentStores,"Manage- mentScience,XI, No. 10 (August,1965),271-81.

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STRUCTUREAND INNOVATION

503

tion of the others. Functionalspecializa- tion would increase the information- processing needs of department stores, and computers could help carry the burdens of informationprocessing.The operationof a computerizedinformation and control system would require the formulation of decision rules, through eitherduplicationor improvementof the unarticulatedguidelinescurrentlybeing applied by the buyers. Moreover, the impact of the adoption of the proposals runs in the same direction-a radical restructuring of the department store organization.Because of the experience of other industries that have adopted similarproposals,one wouldexpectthat, under full implementation of the pro- posals, departmentstores would become morecentralizedand morebureaucratic, and the buyers would be supplantedby new organizational elites. The latter point is particularly important, as the buyers presently tend to dominate de- partment stores, but their training and inclinationswould disqualifythem from taking the key roles in firms that were bureaucraticallyand scientificallyoper-

ated)7

V. THE ORIGINS OF THE PROPOSALS

The proposalshave anothercharacter- istic in common. They have originated with, and been supportedby, the same groupswithin the stores.Staff members, especiallythe store controllersand their' assistants,have presentedand advocated the adoptionof the proposals.When the stores are part of national chains, the chain's central office executives have allied themselves with the local staff

17 Although most buyers are college educated, a substantial proportion attended junior colleges and fashion institutes. Their training for specific buying positions comes during an apprenticeship period un- der an experienced buyer. Nearly half of the buyers are females.

executivesin seekingthe implementation of the proposals. In the case of the proposals to use computers in merchandise operations, the innovation programswere initiated in five department store units by the local store controllers and in a sixth firmby a staff departmentof the owning chain'scentraloffice.Proposalsfor func- tional specialization are at times sup- ported by high-level merchandise offi- cials, but forobviousreasonsthey obtain little support from the buyers them- selves. Of the five firms in the study that considered separating the buyers' buying and selling functions, the actual proposals for change originated with controllers or other staff executives in three instances and with merchandise officials in two instances. Discussions of the use of sophisticated decision- makingtechniquesin all firmsexamined were carriedon only by the controllers and chain'scentralofficestaffs. Staff executivesare not in a favorable position in department stores. Decen- tralization is more than a management doctrinein these stores;it is the manage- ment practice. The individual depart- mental buyersare given wide latitude in co-ordinatingvolatile producerand con- sumermarketswithina specificmerchan- dise category. Rules establishedby staff units to increase the efficiency of their operationsare ignoredwith impunity by the buyers when the latter believe that the regulations interfere with the effi- ciency of merchandiseoperations."8The storemanagementjudgesthe buyers,not on their adherence to rules, but on their department'sperformance.Organ- izational promotionsand prestige go to

18 Sapolsky,op. cit., p. 49; and ShoriB. Dicken- son,"TheSignificanceof InteractionbetweenStatus Levels"(unpublishedPh.D. dissertation,University of California[Berkeley],1965).

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those directly connected with merchan- dise operations. The merchants appear to believe, as one controller reported, that the workof the staff is unproductive and parasitic. The negative stereotype merchants hold of staff executives ap- pears to be derived from the buyers' beliefs that staff-imposedrules restrict their ability to react to market changes and that all store revenues are solely the result of merchandisingdecisions.'9 Departmental operating reports listing user charges and contributionsto over- head-remind the buyers that they di- rectly support the activities of the staff units. Controllers,in contrast to mer- chants, are quite dissatisfiedwith their

organizationalposition.20Originally,they

were financialtrustees for the founding entrepreneurs,recording and reporting all commercialactivities of the stores.As the stores grew in size and as manage- ment separated from ownership, the controllersgainedjurisdictionover many essentialsales-supportingactivities, such as creditauthorizationand payrollprep- aration, but their main tasks remained accounting and auditing. Among lower- level organizational participants, the controllersare still viewed as the com- pany spies,the internalinvestigatorsand conservativebookkeeperswho searchfor error and demand burdensome docu- mentation. Higher-level executives, in-

19 A continuingorganizationalconflictbetween merchantsand staff executiveshas frequentlybeen noted in the literatureon departmentstores. See,

e.g., Paul M. Mazur, Principles of OrganizationAp- plied to Modern Retailingg(New York: Harper &

Bros.,1927);David A. Moore,"ManagerialStrate-

gies and OrganizationalDynamicsin SearsRetail-

dissertation, Chicago,

1954);and Retail ResearchInstitute, EDP-Update (February15, 1965).

20 In interviews,ten of fifteencontrollersand six of forty-fourbuyers indicateddissatisfactionwith the power of their respectiveorganizationalposi- tions.

ing" (unpublishedPh.D.

cluding those in the merchandisedivi- sion, have a more favorableview of the controllersand their reportingactivities (because they themselves lack direct information on the operations of the decentralized subunits), but they tend to prevent the controllersfrom holding an influentialrolein the generalmanage- ment of the firms.2'It is the beliefof most controllersthat theirpotential contribu- tion to the general managementof the firmshas been greatly undervalued. Status comparisons with industrial controllershave become distressing for the retail controllersin recentyears. The spectacularsuccess of certain industrial controllers in shaping the policies of important governmentand business or- ganizations is but one indication to the retailcontrollersof the changingposition of their industrialcounterparts.In self- description, industrial controllers claim to be as concernedwith policy planning and program evaluation activities as they are with traditional accounting activities.22More and more company presidenciesand top managementposts appear to be opening up to industrial controllers. Shedding completely their bookkeepingimage, the industrial con- trollershave changed the name of their professionalgroup from the Controllers Institute to the Financial Executives Institute. Contactwith nationalpublic account- ing firms also creates dissatisfaction among retail controllers.In serving the stores as external auditors, the public accounting firms keep the controllers

21 RetailResearchInstitute,op. cit.; andErickA. Helfert,EleanorG. May, and MalcolmP. McNair,

Controllershipin

Department Stores (Boston: Har-

vard UniversityGraduateSchool of BusinessAd-

ministration,1965).

22 See, e.g., J. Brooks Heckert and James D. Willson,Controllership(2d ed.; New York:Roland

Press,1963).

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STRUCTURE AND INNOVATION

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informedof the most advancedaccount- ing techniques. In recent years, public accountingfirmshave begunto diversify by offering such specialized services as planningfor the conversionto electronic data processing,inventory control pro- graming,organizationaldesign,and man- agement consulting on a continuing basis.23As their access to the store is through the control division, the public accounting firms must encourage con- trollers to take the broadest view of their responsibilities in order to sell these services. The national public ac- counting firms provide advice, profes- sional approval, and packaged argu- ments for controllerswho seek to gain a more importantrole in the management of stores. Amongthe store divisions,the control division has the closest contact with university schools of business adminis- tration. Through ProfessorMalcolm P. McNair (now emeritus) the controllers' ties with the HarvardUniversity Gradu- ate School of Business Administration

have

Nair and his collaboratorsat Harvard appearto have been importantin stimu- lating the controllersto action. It was McNair (with Eleanor May), for ex- ample, who initially proposedMerchan- dise Management Accounting, one of the firstdecision-makingtechniquesthat approachedmerchandiseproblemsin an analyticalmanner.25The perennialguest speakerat the retail controllers'profes- sional association meetings (the Con-

been particularly intimate.24Mc-

23 Robert Beyer, "ManagementServices-Time.

for

Decision,"

Journal

1965),pp. 43-52.

of

Accountancy

(March,

24 For over forty years, the HarvardBureauof

BusinessResearchunderProfessorMcNair'sdirec-

tionprepareda crucialannualsurveyof department store operatingand expensestatistics. McNair, in the early 1920's, developedthe basic department storeaccountingsystem.

trollersCongress)is MalcolmP. McNair, and, in recent years, the perennialtopic has been-the need for expandingthe role of the controllersin company manage- ment. McNair and a groupof his associ- ates at Harvard have published an analysis of the retail controllers'job in which they argue that the controllers have limited their own role in manage- ment councilsby overemphasizingtheir information-gatheringand record-keep- ing functions.26The "true control job," in their view, centerson forecastingand profit-planningtasks and requiresana- lytic skills. Accordingto their academic critics, the controllersmust emphasize "Creative (i.e., analytic) Controller- ship" as opposed to "Preventive (i.e., bookkeeping) Controllership"to partic- ipate effectively in the management of the stores. Another lobbyist for progressive ac- tion on the part of the controllersis the Retail Research Institute, an affiliate of the National Retail MerchantsAsso- ciationand an offshootof the Controllers Congress.Although there are many al- ternative areas for investigation within the stores, the Retail ResearchInstitute has focused on problems related to the control division's interests. The insti- tute's director, a former controller, is convinced of the value of introducing into the store new control techniques, particularlyelectronicdata processing.27 Its governingboard, composedpredom- inantly of corporate research directors or store controllers,supports the direc-

2"Malcolm P. McNair and Eleanor G. May, "Pricingfor Profit:A RevolutionaryApproachto

Retail Accounting," HarvardBusiness Review(May-

June, 1957).

28

27

ErickA. Helfertet al., op. cit.

EthelLangtry,"EDPandIts PotentialforRe-

tailing,"

Computers and Automation, X

1961),20-23.

(August,

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tor's views. The institute's publications and meetings provide a convenient forum from which equipment manu- facturersand accountingconsultantscan addressthe controllerson the opportuni- ties of the future. The controllers generally have close relationshipswith controllers in other firms, and these relationshipsare often

a stimulus to change. At professional conferencesof controllers, attention is always directed toward techniques to improvethe status of the control func- tion in the stores. Controllerswho have implementednew techniquesmake their

experiencesavailable to their colleagues

in other stores by preparingpapers and

opening their facilities to inspection.

Prestige among controllers naturally goes to the controllerswho have gained

the greatest participationin store man-

agement and who have

applied the

newest techniques. The effect of all the controllers'out- sidecontacts, those with public account- ing firms, those with academics, and those with other controllers,is to push them towardgreaterprofessionalization. The model of professionalisminvolved is that of a controllerwho gainsinfluence within a firm by applying sophisti- cated information-processingand deci- sion-making techniques to department store problems. Increasing the control- lers' influence within the firm is an importantelementin professionalization, for professional standing requires the recognitionby clients of an occupation's distinctivecompetence,28and the firm is the retailcontrollers'only client. By em- phasizingnew managementtechniques, the controllers can expect to establish theirdistinctive competenceor expertise

28 HaroldL. Wilensky,"TheProfessionalization ofEveryone,"AmericanJournalof Sociology,LXX, No. 2 (September,1964),137-58.

in an esoteric and prestigefulfield. Pay- ing invoices, preparing payrolls, and keeping the account books will not provide the controllers with increased power and status, but controling infor- mation channels,evaluating projects on the basis of their cost effectiveness,and preparinglinearprogramingmodelsmay well give the controllers the increased status and power they are seeking. Professionalizationrequiresthat the con- trollers take a larger role in manage- ment, and a strategy to gain that larger role is professionalizationitself. The adoption of the proposals de- scribed previously would significantly alter the position of the staff executives, and especially that of the retail con- troller. Functional specialization (the separationof buying and selling) limits the powerof line units by increasingthe interdependenceof organizationalcom- ponents. With their independence re- stricted by specialization,the line units must consult more frequentlywith staff units before they can act. Staff units specializing in co-ordinationand infor- mation-processingtasks becomerelative- ly more important when line units functionallyspecialize,and, in a depart- ment store, most of these units are part of the controldivision.Computerization, by requiringgreater organizationaldis- cipline, facilitates the enforcement of staff unit regulations.The control divi- sion issuesthe greatestproportionof the organization'sregulations.Moreover,as the controller nominally has the most experiencein computerapplications,the increaseduse of computersin the opera- tion of the business requires that the controllers be consulted on more and more management questions. The use

of

increases the importance of specialized staff units that can articulate technical

formal decision-making techniques

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STRUCTUREAND INNOVATION

507

constraints,as opposedto line units that cannot. As the control division claims

a particular competence in devising

these techniques,it will most likely have the greatest influencein selectingamong alternativedecision-makingcriteria.

VI. ATTEMPTS TO INNOVATE

The innovation proposals have not

been widely implemented. Few firms have followed the suggestion to adopt functional specialization in their mer- chandiseunits. The computeris still not extensively used in merchandiseopera- tions. There are no major applications

of sophisticated

niques to speak of in departmentstores.

While differences in internal politics, personalities, and expectations of in- novational costs and benefits led to

somewhat different results in each firm examined,a generalpattern of presenta- tion, experimentation, and frustraton related to structural arrangementscan

be discerned.

The central managements of the stores did not exercise their legal au- thority to order the adoption of the proposals.The proponentsclaimed that the changes they suggested would in- crease the efficiency of the firms, but some of the organizationalparticipants, most notably the buyers,disputed these claims. (In the interviews, buyers and division merchandisemanagerscontinu- ally emphasizedthe failuresand limita- tions of the variousinnovationprojects.) Due to the difficulty of establishing causal relationshipsin retailing, the ef- fects of any given organizationalchange on performanceis the subject of con- tinuous debate. Rather than ordering merchandisedepartments to adhere to certain standard forms and practices, central managements customarily set performancegoals and allow the buyers

decision-making tech-

considerableflexibility in selecting the organizational means to achieve those goals. Thus, despitethe fact that central managementshave warmlyendorsedthe proposals, they have given the propo- nents of the proposalsonly a license to try to persuade the buyers to adopt these changes. The department store's decentralized structure,however,does not preventthe proponentsof change from initiating in- novation projects. On the contrary, the structurefacilitatesexperimentation. The controllersin the stores examined, for example, have been able to commit the stores to computer development projectswithout the desirabilityof such commitments ever being consideredby the stores' merchants. Ostensibly, the decisionto initiate a computerprogram involvesonly technicalaccountingissues, since the initial computer projects are invariably conversions of standard ac- counting routines. The controllers, as the firms'accountingexperts, are auton- omous in the management of the con- trol division and in accounting matters in general. Although the controllersex- pect the computerto have an important impact on the managementof the entire business,they keep the decisionto initi- ate a computerprogramconfinedto the control division. If a feasibility study is instituted, it is conducted by control division personnel who are candidates to managethe installedsystem. There is no need to involve the merchants in the decision because, as one controller put it, the merchantshave no knowledge of or interest in the capabilitiesof com- puters. The decisionis a crucialone. To oper- ate equipment,techniciansmust be add- ed to the controller'sstaff, or technical skillsmust be acquiredby staffmembers. To employthe technicalteam fully, new

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projects must continually replace com-

a

department store, the buyers train

pleted projects. To retain their profes- sional standing by utilizing the most advancedequipment,technicallytrained personnelmust expandthe scopeof proj-

their own replacements. The departmentstore's decentralized organizational structure increases the obstacles to innovation in anotherway.

ects to tax the existing equipment.

Proponents of change in decentralized

organizations must both

introduce an

Moreover, because of large overheads, equipmentperformanceis measured in termsof capacity utilized ratherthan in terms of benefits returned. Merchan-

dising operations soon become an area of experimentation.What initially ap- peared to be a technical decision best left to the specialist can, in retrospect, be seen as the first move in a struggle amonginternalgroups. The buyers generally oppose the in-

can easily frustrate the plans of the

innovation and promote its diffusion within the same organization.But tac- tics that facilitateinitialapplicationscan be blocks to the diffusionof innovation

within the same organization.In multi- organization systems, the information distancebetweenorganizationsis usually great enough so that tactics used to induce innovation in one part of the system can be repeated or avoided in

approachinganother part, as

tion requires.Within a single decentral-

ized organization, however, interunit

communicationsareusuallygoodenough

the situa-

mands or resistance. The terms of

first bargain,particularlyas all subunits

the

gains.

novation proposals, viewing them as

threats to their organizationalposition.

As one buyer put it, "the controllersare

out to get our jobs." In each firmin the study, the innovationproponentsidenti- fied the opposition of the merchandise

so that tactics used in one subunit are known to others and affect their de-

executives as the major obstacle to or-

ganizational change. Given the decen- tralizedstructureof the firms,the buyers

are dealing with the same innovator or innovators, affect all subsequent bar-

proponents.The buyers cannot be or- deredto innovate;they must be induced

 

To induce innovation,the proponents

of

change in the department stores ex-

to innovate. Thus, after the control division ex- ecutivesof one largeeasterndepartment store had installed in a dozen depart- mentsa computermerchandisereporting system designedto indicatemerchandise

aminedhave utilized a variety of tactics that have adversely affected either the prospects or the value of the diffusion of innovation within the stores. They have establisheddemonstrationprojects

requiring immediate reorders or

price

by carefully selecting from among the

reductions, they discovered that

most

available departments those possessing

buyers simply ignored the reports. In one case, the buyer did not even bother learningto read the codes used in the reportsand had no intentionof doingso. Whenfaced with this type of resistance, the proponentsusuallyexplainthat they

the most favorable characteristics for innovation, such as standardized mer- chandise and long-term ties to fixed sources of supply. They have offered co-operativebuyersspecialinducements, such as free services or dispensations

can wait until the buyer retires to

gain

from generally applied rules, to encour-

acceptanceof their ideas. There is, how- ever, an inherentflaw in this policy--in

age them to participatein these projects. And they have rearrangedaccounting

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STRUCTUREAND INNOVATION

509

charges so that the costs of developing and employing decision-makingor in- formation-processingsystems designed for specific departments are borne as overheadsby all departments. Because of their proximity to one another, however,buyers become aware of all the special arrangements that guaranteethe successof the demonstra- tion projects, and they discount the results of those projects. As all buyers within a store competewith one another (either directly by merchandiseline or indirectly by performance rankings), they are sensitive to any competitive advantages obtained by rivals.29While each buyer will accept specialtreatment and assistance when offered, most feel resentmentwhen these favorsareoffered to another buyer. Special arrangements negotiatedwith one buyer becomeknown to all. Moreover, as each buyer holds

equal status,

the firm are subject to "most favored nation clauses."The diffusionof innova- tion becomes difficult, expensive, and, sometimes, impossible, in firms com- posed of a large number of equals who

demandequal treatment.

all bargains struck within

VII.

CONCLUSIONS

The innovation experience of de- partment stores, although the result of unplanned structural arrangements,

highlights the organizationaldesigner's

dilemma. Diversity

reward structures, specifically the in- creased professionalizationof the retail controllers,led to the conceptualization of several important innovations. Di-

29 When asked to name the strongest competitor in their merchandise line, eighteen of twenty-seven buyers name another department in the same store. Department store executives encourage merchandise duplication among departments in order to develop standards for measuring department or buyer per- formance.

in departmentstore

versity in department store task struc- tures, or the autonomy of the control division in accounting matters, facili- tated the presentation of innovational proposals. Yet diversity in department store structural arrangements,the de- centralization of decision-making au- thority, and the existence of a large number of equally situated subunits frustratedattempts to implement these proposals. There appearsto be no obvious way to resolve the dilemma. With the rates of innovationpresentationand adoption related in precisely opposite directions to the amount of diversity that occurs in organizational incentive and task structures,an effort to increaseone rate is achievedonly at the cost of decreasing the other. Without accurate measure- ments of the rates of innovationpresen- tation and adoption,and without models of their optimal relationship,there is no way to specify an organizationaldesign that will satisfy the innovation require- ments envisioned by social commenta- tors. Until these measurementsand models are developed, the designer must be satisfiedwith the knowledgethat a con- flict exists between the search for in- novationandthe adoptionof innovation. He must keep in mind that, since a conflict exists between searchand adop- tion, it may not be possibleto structure an organization that has both a wide rangeof searchand a high rate of adop- tion. As an organizational participant with an interest in the perpetuationof the organization,he should not be dis- turbed to learn that such a conflict exists, for the adoptionof all innovations proposed may be as disastrous for an organizationas the failure to stimulate the presentationof innovationproposals.

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Because of

the extra-organizational

interestsof their controllers,department

storesare being introducedto a number of managementtechniquesto whichthey wouldnot normallyhave been exposed.

Ideas that

organizationsare being tested against

have been successfulin other

the traditional managementconcepts of department stores. Of course, the hesi- tancy of the profit-motivatedbuyers to utilize these ideas may indicate,not that the buyersareobtuse,but ratherthat the proposals are inappropriatefor depart- ment stores.

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