Organizational Structure and Innovation

Author(s): Harvey M. Sapolsky

Source: The Journal of Business, Vol. 40, No. 4 (Oct., 1967), pp. 497-510
Published by: The University of Chicago Press
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 ORGANIZATIONAL STRUCTURE AND INNOVATION
HARVEY M. SAPOLSKY*

I. INTRODUCTION gopolistic, or monopolistic) is the most

THOSE who are responsiblefor the
design or redesign of large-scale
business organizations are in a
difficult position. They are constantly
admonished by social commentators to
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 scholarlyliterature on organiza-
tions offers a clear guide to the basic
structureof such organizations.
To be sure, there have been a large
number of case studies of organizations
that have confronted situations where
innovation was possible, but these stud-
ies have been almost exclusivelyconfined
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
business firms, but their concern is with
the structural characteristicsof markets
that promote innovation, rather than
with the sturctural characteristics of
firms that promote innovation. More-
over, their success in isolating the struc-
tural determinants of innovation is not
great, for it is still uncertainwhich type
of market structure (comDetitive. oli-
* Assistantprofessorof politicalscience,Massa- Sons, 1966),chap. xiii.
chusettsInstitute of Technology.
1The case study literatureis summarizedand Notes toward a Theory," in James D. Thompson
analyzedin EverettM. Rogers,Diffusionof Innova- (ed.), Approachesto OrganizationalDesign (Pitts-
tions (New York:Free Press, 1962).
conducive to innovation.2 Social psy-
chologists have offered a variety of
schemes to increase the receptivity of
individualsto change,but their approach
tends to confuse individual change with
modifications in organizational vari-
ables.3Applications of these schemes in
ongoing organizations have not clearly
increasedthe rate of organizationaladop-
tion of innovations.
II. ORGANIZATIONAL INNOVATION
Although there exists no generaltheo-
ry of organizationalinnovation, a recent
paper by James Q. Wilson representsan
important step toward assembling such
a theory.4Wilson'swork, however,offers
no solace for the organizationaldesigner,
since it points out a basic structural
dilemma that 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 See discussionof marketstructureand technical
progress in Richard Caves, American Industry:
Structure,Conduct,Performance(EnglewoodCliffs,
N.J.: Prentice-Hall,Inc., 1964),pp. 98-101.
3 DanielKatz and RobertKahn, TheSocialPsy-
chologyof Organizations (New York: John Wiley &
4 JamesQ. Wilson,"Innovationin Organization:
burgh:Universityof Pittsburgh,1966),pp. 193-218.

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498 THE JOURNAL OF BUSINESS
of potential innovation, then, is distinct
fromand even antagonisticto the stimu-
lation of the adoption of 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 exchangefor whichpersonsparticipate
in an organizationand, once membersof
that organization,contribute such valu-
able resourcesas time, effort, and mon-
ey.5 Tasks are activities that add up to
full-timeparticipationof one member in
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
interested in explainingimportant inno-
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 terms of
scarceinducements,the more radicalthe
innovation, regardlessof the prospective
benefits.An executive of an organization,
assessing the costs of innovation, con-
siders the amounts and types of induce-
ments that must be redistributed or
obtained in orderto maintain the 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.
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many incentives may in part be con-
trolled by groups outside the organiza-
tion, an executive must exert an effort
to maintainthe inducement-contribution
balance that 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 increase in 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-
formedwithin the organizationincreases.
Although incentive structures and task
structures can change independently of
one another, changes in them are fre-
quently interrelated.Thus, an organiza-
tion that hires professionals who have
both outside reference groups 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 greater the diversity of the organ-
ization, the greater the probability that
major innovations will be proposed";
and (3) "the greater the diversity of the
organization,the smaller the proportion
of major innovationsthat will be adopt-
ed."8
8 Ibid., pp. 200-204.
 STRUCTUREAND INNOVATION
A rigoroustesting of the relationships
Wilson has suggested is not possible. As
he points out, precise measures of non-
material incentives do not exist, and
changes in these incentives form the
cornerstone of the hypotheses that he
offers.9Thus, while curves can be drawn
to represent the general effects that
diversity will have on the rates of the
presentation and the adoption of inno-
vation proposals,the intersectionof the
curves indicating the numberof innova-
tions adopted for given degree of 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 confirm the 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 generation of these
proposals and to the frustration of
attempts to implementthem.
The main source of data for the study
is a series of open-endedinterviews con-
ducted during1965-66 with management
personnel at nine retail organizations
affiliatedwith six firms. Forty-fourbuy-
ers and a like numberof executives from
other areas of departmentstore manage-
ment were interviewed in sessions rang-
ing in length from one-half hour to four
hours. Where it was appropriate,names
9 Ibid., p. 205.
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499
of subjects were drawn at random from
lists of managementpersonnel classified
by position. Certain respondents were
interviewed several times, as they were
participants in 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 reported were
among the ten most innovative firms
in the industry. As a main objective was
to examine the origins of proposal for
organizational change, a more repre-
sentative sample of firms in the industry
would have been less useful. Limitations
in funds prevented the inclusion of
western and southernfirmsin this study,
but, based on the opinionof tradesources
and publishedreports,there is no reason
to believe that their experiences with
innovation differedmarkedlyfrom those
of the firms that were examined. In
only one instance was there difficulty in
obtaining permissionfor interviews, and
in that case the needed data were pro-
vided by several outsiders who were
familiar with the operationsof the firm
and quite willing to release information.
A general interview guide was followed
throughout the field work, but as the
interviewsessionswere used 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
The raison d'etre of a department
store is merchandising-the purchasing,
pricing, promoting, and selling of con-
sumergoods and services.To accomplish
500 THE JOURNAL OF BUSINESS
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 financial and credit activities. The
personnel division has formal responsi-
bility for employment, training, deploy-
ment, and union relations. The sales
promotion division 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, normally has 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," "Junior Budget
Dresses," and "Umbrellas." The mer-
10A descriptionof departmentstore organiza-
tional arrangementsin currentuse is containedin
BrucePayne and associates,Surveyof Organization
of Multi-UnitDepartment andSpecialtyStores(New
York: National Retail Merchants Association,
1963).
11The distinction between departmentalization
or specializationby functionand by productused in
our analysiscorrespondsto the processand purpose
distinctionofferedby Luther Gulickin his classic,
"Noteson the Theoryof Organization," in L. Gulick
andL. Urwick,Paperson theScienceof Administra-
tion (New York:Institute of PublicAdministration,
1937),p. 15. Functionalspecializationrefersto or-
ganizationby job or professionalskill (e.g., selling,
cost accounting, and stenography).Product spe-
cializationrefers to organizationby class of mer-
chandise(e.g., all the jobs contributingto the sale of
a particulargood-buying, promoting,and selling),
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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 merchandise divisions (women's
ready-to-wear,furniture) under the di-
rectionof merchandisemanagers;similar
merchandise divisions form "stores"
(store for fashion, store for homes) under
"store managers," and all ultimately
reportto a generalmerchandisemanager.
All merchandising functions relating
to a particularcategory of goods are the
responsibilityof the departmentalbuyer.
The buyer selects the goods to 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
divisionarisesfromthe departmentstore'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
more a store emphasizesfashion,encouragingstyle
preferencesto influencetheir customers'purchase
decisions,the greateris its inventoryproblem.
By placingthe responsibilityfor both the buying
and the sellingof merchandiseon the sameindivid-
ual, the departmentstorereducesthe risksof inven-
tory accumulation.In managingtheir departments,
the buyersare forcedto becomefamiliarwith both
produceroffersand consumerpreferences.To avoid
inventory accumulation,purchasesin the market
must be basedon salesforecasts.Everymerchandise
ordermade by a buyermust includehis calculation
of the consunmers'attitudestowardthe merchandise,
becausehe is also responsiblefor the sales of the de-
partment. Functional specializationwould require
the buying specialist and the selling specialist to
agreeon a salesforecastfor everymerchandiseorder,
 STRUCTUREAND INNOVATION
Nominal subordinates,the buyerspos-
sess a great deal of what can be termed
"organizationalpower." Internal reward
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'decisionsare difficult
to monitor,not only becauseof the sheer
number of decisions that must be made
in each merchandise line each season,
but also because the buyers are the only
and thereare thousandsof merchandiseordersto be
made in each departmenteach year. As sales fore-
casts are essentiallyintuitive decisions,particularly
in the case of new or fashionmerchandise,the co-
ordinationproblemis likelyto be substantialand the
inventoryproblemintolerableunder a functionally
specializedsystem.
13 Forty-eightout of the ninety-sevenbuyers in
Store A earnedin 1965 $1,000 or more per month
exclusiveof bonuses,while no other executivejob
classificationwith the exception of management
boardmembers,merchandisedivisionmanagers,and
branchstoremanagershad as muchas a thirdof the
positions in the classification earning the same
amount (Harvey M. Sapolsky, "Decentralization
and Control:Problemsin the Organizationof De-
partment Stores" [unpublishedPh.D. dissertation,
HarvardUniversity,1966],Table 2, p. 120).
Arch Patton has examined the relationship
amongthe salariesof the highestpaid executivesto
the salaries of the second, third, fourth and fifth
highestpaid executivesof firmsin variousindustries.
The normalpatternwas somethinglike 100 to 75 to
58 to 51, and so on. Withindepartmentstores,how-
ever, the relationshipwas quite different,as the sec-
ond throughthe fifth man'ssalarywas, on the aver-
age, equal to about 95 per cent of the highest paid
man's salary. Patton attributes this closeness in
salariesto the power and prestigeof the top mer-
chantswho arethe executiveswith the second,third,
fourth, and fifth highest salaries in department
stores. Patton's study is discussedin Thomas L.
Whisler, "OrganizationalAspects of Corporate not permitthe departmentsto be runcompletelyin-
Growth,"in W. W. Albertsand Joel E. Segall(eds.), dependentlyof one another.See the discussionof the
The CorporateMerger (Chicago: University of Chi- limit of departmentstore decentralizationin Sapol-
cago Press, 1966),p. 207.
501
executives in a department store who
have direct contact with both producer
and -consumer markets. This, in effect,
gives them an -iformation monopoly.
Store managementsmay allocate dollars
and personnel among departments, but
the buyers control the allocation within
merchandisecategories, determiningthe
specificassortmentof goods and services
that will be presentedto store customers.
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
independent businessesoperated by les-
sees who share their gross receipts with
the store management. Leased or not,
each is normallysubject to some form of
user chargesfor the services of the func-
tional divisions, interest payments on its
borrowings for inventory from the in-
ternal bank, and rent for its space from
the store landlord.Profit and loss state-
ments are preparedfor each merchandise
department, with general management
expensesapportionedto the selling units
as an overhead charge. Buyers come
close to being independent entrepre-
neurs, calculating risks, evaluating mar-
kets, and cutting back or expanding
their purchases as they judge the op-
portunities for gain. Decentralized and
unbureaucratized,departmentstores can
best be describedas federationsof quasi-
independentmerchants.
Through mergers and acquisitions,
many department stores have been ab-
14Merchandiseinterdependencies,however, do
sky, op. cit., chap. vii.

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502 THE JOURNALOF BUSINESS
sorbed into large national chains. Al-
though formed in part to achieve the
economiesof centralizedpurchasing,the
chains have not significantlyaltered the
organizational structure of the depart-
ment store outlined above. Oriented
toward serving the tastes of local mar-
kets, each chain unit still controls the
bulk of its purchases independently
through its own set of merchandise
buyers. The national chains of depart-
ment stores can best be described as
federationsof federations.
IV. PROPOSALS FOR CHANGE
Three major proposals for change
have in recent years been offered in the
industry. Although none of the pro-
posals can truly be said to be original
to the industry, and one of them was
initially presented some 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 merchandise divisions
of the stores. It is this proposalthat was
offeredto the industry duringthe 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
has once again receivedseriousattention.
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 detail in ibid., chaps. ii, iii, and iv.
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ble for the actual sale of the merchandise
in each retail unit.
A second proposal calls for the use of
electronic data processing in merchan-
dise operations. Department stores, de-
spite certain difficult programingprob-
lems unique to retailing, have utilized
electronic data processingas extensively
in their accounting and financial activi-
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 programs are
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 and personalexperience,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 adoption of one facilitates the adop-
16 See R. M. Seyfarth, "Electronicsand Mer-
chandising,"ChainStoreAge, Vol. XXXV, No. 24
(March,1959);and T. T. Kwo, "The Potential for
OfficeAutomationin DepartmentStores,"Manage-
mentScience,XI, No. 10 (August,1965), 271-81.
 STRUCTUREAND INNOVATION
tion of the others. Functional specializa-
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
either duplicationor improvementof the
unarticulatedguidelines currently being
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 would expect that,
under full implementation of the pro-
posals, departmentstores would become
more centralizedand more bureaucratic,
and the buyers would be supplanted by
new organizational elites. The latter
point is particularly important, as the
buyers presently tend to dominate de-
partment stores, but their training and
inclinationswould disqualify them from
taking the key roles in firms that were
bureaucraticallyand scientifically oper-
ated)7
V. THE ORIGINS OF THE PROPOSALS
The proposalshave anothercharacter-
istic in common. They have originated
with, and been supported by, the same
groupswithin the stores. Staff members,
especially the store controllersand their'
assistants,have presentedand advocated
the adoption of 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.
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503
executives in seekingthe implementation
of the proposals.
In the case of the proposals to use
computers in merchandise operations,
the innovation programs were initiated
in five department store units by the
local store controllers and in a sixth
firm by a staff departmentof the owning
chain's central office.Proposalsfor func-
tional specialization are at times sup-
ported by high-level merchandise offi-
cials, but for obvious reasonsthey 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-
making techniquesin all firms examined
were carried on only by the controllers
and chain's central office staffs.
Staff executives are 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 buyers are given wide latitude in
co-ordinatingvolatile producerand con-
sumermarketswithin a 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
store managementjudges the buyers,not
on their adherence to rules, but on
their department'sperformance.Organ-
izational promotions and prestige go to
18 Sapolsky,op. cit., p. 49; and ShoriB. Dicken-
son, "TheSignificanceof InteractionbetweenStatus
Levels"(unpublishedPh.D. dissertation,University
of California[Berkeley],1965).
504 THE JOURNAL OF BUSINESS

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-imposed rules 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 dissatisfied with their
organizationalposition.20Originally,they
were financial trustees 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
essential sales-supportingactivities, such
as credit authorizationand payroll prep-
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-
19A continuing organizationalconflict between ing firms also creates dissatisfaction
merchantsand staff executiveshas frequentlybeen among retail controllers.In serving the
noted in the literatureon departmentstores. See,
e.g., Paul M. Mazur, Principles of OrganizationAp- stores as external auditors, the public
plied to Modern Retailingg (New York: Harper & accounting firms keep the controllers
Bros., 1927);David A. Moore,"ManagerialStrate-
gies and OrganizationalDynamicsin Sears Retail-
ing" (unpublished Ph.D. dissertation, Chicago,
1954);and Retail ResearchInstitute, EDP-Update
(February15, 1965).
20 In interviews,ten of fifteencontrollersand six
of forty-fourbuyers indicated dissatisfactionwith
the power of their respective organizationalposi-
tions.
cluding those in the merchandise divi-
sion, have a more favorable view 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 influentialrole in the generalmanage-
ment of the firms.2'It is the beliefof most
controllersthat their potential contribu-
tion to the general management of the
firms has been greatly undervalued.
Status comparisons with industrial
controllers have become distressing for
the retail controllersin recentyears. The
spectacular success of certain industrial
controllers in shaping the policies of
important government and business or-
ganizations is but one indication to the
retail controllersof the changingposition
of their industrial counterparts.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 management posts
appear to be opening up to industrial
controllers. Shedding completely their
bookkeeping image, the industrial con-
trollers have changed the name of their
professionalgroup from the Controllers
Institute to the Financial Executives
Institute.
Contact with national public account-
21 Retail ResearchInstitute, op. cit.; and ErickA.
Helfert, EleanorG. May, and MalcolmP. McNair,
Controllership in Department Stores (Boston: Har-
vard University GraduateSchool of Business Ad-
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
informedof the most advanced account-
ing techniques. In recent years, public
accountingfirmshave begun to diversify
by offering such specialized services as
planning for 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 important role in the management
of stores.
Among the store divisions, the control
division has the closest contact with
university schools of business adminis-
tration. Through Professor Malcolm P.
McNair (now emeritus) the controllers'
ties with the HarvardUniversity Gradu-
ate School of Business Administration
have been particularly intimate.24Mc-
Nair and his collaboratorsat Harvard
appearto have been importantin stimu-
lating the controllers to action. It was
McNair (with Eleanor May), for ex-
ample, who initially proposedMerchan-
dise Management Accounting, one of
the first decision-makingtechniquesthat
approachedmerchandiseproblemsin an
analytical manner.25The perennialguest
speaker at the retail controllers'profes-
sional association meetings (the Con-
23 Robert Beyer, "ManagementServices-Time.
for Decision," Journal of Accountancy (March,
1965),pp. 43-52.
24 For over forty years, the HarvardBureau of
BusinessResearchunderProfessorMcNair'sdirec-
tion prepareda crucialannualsurveyof department
store operatingand expense statistics. McNair, in
the early 1920's, developed the basic department
store accountingsystem.
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505
trollersCongress)is MalcolmP. McNair,
and, in recent years, the perennialtopic
has been-the need for expandingthe role
of the controllers in company manage-
ment. McNair and a group of 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 councils by overemphasizingtheir
information-gatheringand record-keep-
ing functions.26The "true control job,"
in their view, centers on forecastingand
profit-planningtasks and requires ana-
lytic skills. Accordingto their academic
critics, the controllers must 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 Merchants Asso-
ciation and 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,
particularlyelectronic data processing.27
Its governing board, 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 ErickA. Helfert et al., op. cit.
27 EthelLangtry,"EDP and Its Potentialfor Re-
tailing," Computers and Automation, X (August,
1961), 20-23.
506 THE JOURNAL OF BUSINESS
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
relationships with controllers in other
firms, and these relationshipsare often
a stimulus to change. At professional
conferences of controllers, attention is
always directed toward techniques to
improve the 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 participation in store man-
agement and who have applied the
newest techniques.
The effect of all the controllers'out-
side contacts, those with public account-
ing firms, those with academics, and
those with other controllers, is to push
them toward greaterprofessionalization.
The model of professionalisminvolved
is that of a controllerwho gains influence
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
importantelement in professionalization,
for professional standing requires the
recognitionby clients of an occupation's
distinctive competence,28and the firm is
the retail controllers'only client. By em-
phasizing new management techniques,
the controllers can expect to establish
their distinctive competenceor expertise
28 HaroldL. Wilensky,"The Professionalization
of Everyone,"AmericanJournalof Sociology,LXX,
No. 2 (September,1964), 137-58.
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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
preparinglinearprogramingmodels may
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
separation of buying and selling) limits
the power of line units by increasingthe
interdependenceof organizationalcom-
ponents. With their independence re-
stricted by specialization,the line units
must consult more frequently with staff
units before they can act. Staff units
specializing in co-ordination and infor-
mation-processingtasks becomerelative-
ly more important when line units
functionally specialize, and, in a depart-
ment store, most of these units are part
of the control division. Computerization,
by requiringgreater organizationaldis-
cipline, facilitates the enforcement of
staff unit regulations. The control divi-
sion issues the greatest proportionof 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 formal decision-making techniques
increases the importance of specialized
staff units that can articulate technical
 STRUCTUREAND INNOVATION
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 selecting among
alternative decision-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 decision-making tech-
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 proponents claimed 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 failures and 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
merchandise departments to adhere to
certain standard forms and practices,
central managements customarily set
performancegoals and allow the buyers
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507
considerable flexibility in selecting the
organizational means to achieve those
goals. Thus, despite the fact that central
managementshave warmly endorsedthe
proposals, they have given the propo-
nents of the proposals only a license to
try to persuade the buyers to adopt
these changes.
The department store's decentralized
structure,however,does not prevent the
proponentsof change from initiating in-
novation projects. On the contrary,
the structurefacilitates experimentation.
The controllersin the stores examined,
for example, have been able to commit
the stores to computer development
projects without the desirability of such
commitments ever being considered by
the stores' merchants. Ostensibly, the
decision to initiate a computer program
involves only 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 decision to initi-
ate a computerprogramconfinedto the
control division. If a feasibility study is
instituted, it is conducted by control
division personnel who are candidates
to manage the installed system. 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 capabilities of com-
puters.
The decisionis a crucialone. To oper-
ate equipment,techniciansmust be add-
ed to the controller'sstaff, or technical
skills must be acquiredby staff members.
To employ the technical team fully, new
508 THE JOURNALOF BUSINESS
projects must continually replace com-
pleted projects. To retain their profes-
sional standing by utilizing the most
advancedequipment,technically trained
personnelmust expandthe scope of proj-
ects to tax the existing equipment.
Moreover, because of large overheads,
equipment performanceis measured in
terms of capacity utilized rather than 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
among internalgroups.
The buyers generally oppose the in-
novation proposals, viewing them as
threats to their organizationalposition.
As one buyer put it, "the controllersare
out to get our jobs." In each firm in the
study, the innovationproponentsidenti-
fied the opposition of the merchandise
executives as the major obstacle to or-
ganizational change. Given the decen-
tralizedstructureof the firms,the buyers
can easily frustrate the plans of the
proponents. The buyers cannot be or-
deredto innovate; they must be induced
to innovate.
Thus, after the control division ex-
ecutives of one large eastern department
store had installed in a dozen depart-
ments a computermerchandisereporting
system designedto indicate merchandise
requiring immediate reorders or price
reductions, they discovered that most
buyers simply ignored the reports. In
one case, the buyer did not even bother
learning to read the codes used in the
reportsand had no intention of doing so.
Whenfaced with this type of resistance,
the proponentsusually explainthat they
can wait until the buyer retires to gain
acceptanceof their ideas. There is, how-
ever, an inherent flaw in this policy--in
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a department store, the buyers train
their own replacements.
The department store's decentralized
organizational structure increases the
obstacles to innovation in another way.
Proponents of change in decentralized
organizations must both introduce an
innovation and promote its diffusion
within the same organization. But tac-
tics that facilitate initial applicationscan
be blocks to the diffusion of 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 the situa-
tion requires.Within a single decentral-
ized organization, however, interunit
communicationsare usuallygood enough
so that tactics used in one subunit are
known to others and affect their de-
mands or resistance. The terms of the
first bargain,particularlyas all subunits
are dealing with the same innovator or
innovators, affect all subsequent bar-
gains.
To induce innovation, the proponents
of change in the department stores ex-
amined have 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 established demonstrationprojects
by carefully selecting from among the
available departments those possessing
the most favorable characteristics for
innovation, such as standardized mer-
chandise and long-term ties to fixed
sources of supply. They have offered
co-operativebuyers special inducements,
such as free services or dispensations
from generally applied rules, to encour-
age them to participatein these projects.
And they have rearranged accounting
 STRUCTUREAND INNOVATION
charges so that the costs of developing
and employing decision-making or 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
guarantee the success of the demonstra-
tion projects, and they discount the
results of those projects. As all buyers
within a store compete with 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 special treatment
and assistance when offered, most feel
resentmentwhen these favors are offered
to another buyer. Special arrangements
negotiatedwith one buyer becomeknown
to all. Moreover, as each buyer holds
equal status, all bargains struck within
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
demand equal treatment.
VII. CONCLUSIONS
The innovation experience of de-
partment stores, although the result
of unplanned structural arrangements,
highlights the organizational designer's
dilemma. Diversity in department store
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.
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509
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
frustrated attempts to implement these
proposals.
There appears to be no obvious way
to resolve the dilemma. With the rates
of innovation presentationand 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 achieved only at the cost of decreasing
the other. Without accurate measure-
ments of the rates of innovation presen-
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
satisfied with the knowledgethat a con-
flict exists between the search for in-
novation and the adoptionof innovation.
He must keep in mind that, since a
conflict exists between search and adop-
tion, it may not be possible to structure
an organization that has both a wide
range of search and a high rate of adop-
tion. As an organizational participant
with an interest in the perpetuation of
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
organization as the failure to stimulate
the presentationof innovationproposals.
510 THE JOURNAL OF BUSINESS

Because of the extra-organizational the traditional management concepts of

interestsof their controllers,department
stores are being introducedto a number
of managementtechniquesto which they
would not normally have been exposed.
Ideas that have been successfulin other
organizations are being tested against
department stores. Of course, the hesi-
tancy of the profit-motivated buyers to
utilize these ideas may indicate, not that
the buyers are obtuse, but ratherthat the
proposals are inappropriate for depart-
ment stores.

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