Management
Fall, 2017
Strategic Management
Session 15
MGMT 490
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Learning Objectives
Define organizational structure and controls and discuss the difference between strategic and financial controls.
Describe the relationship between strategy and structure.
Discuss the functional structures used to implement business-level strategies.
Explain the use of three versions of the multidivisional (M-form) structure to implement different diversification strategies.
Discuss the organizational structures used to implement three international strategies.
Define strategic networks and discuss how strategic center firms implement such networks at the business, corporate, and international levels.
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Fall, 2017
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Organizational Structure and Controls
- Organizational structure specifies:
The firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes
The work to be done and how to do it,
given the firm’s strategy or strategies
- It is critical to match organizational structure to the firm’s strategy.
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Organizational Controls
- Purposes of organizational controls:
Guide the use of strategy.
Indicate how to compare actual results with expected results.
Suggest corrective actions to take when the difference between actual and expected results is unacceptable.
- Two types of organizational controls:
Strategic controls
Financial controls
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Fall, 2017
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Organizational Controls
1. Strategic controls:
Subjective criteria
What the firm might do (external environment)
What the firm can do (competitive advantages)
Demand rich communication
Moderate and acceptable levels of risk
Fall, 2017
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Organizational
Controls
Strategic
Controls
Differentiation strategy
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Organizational Controls
2. Financial controls
Objective criteria
Accounting-based measures: ROA, ROE
Market-based measures: Economic Value Added (EVA), Market value
Short-term financial outcomes
Produce risk-averse
Fall, 2017
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Organizational
Controls
Strategic
Controls
Financial
Controls
cost leadership strategy
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Fall, 2017
A Balanced Scorecard Framework
Cash flow
Return on equity
Return on assets
Assessment of ability to anticipate customer needs
Effectiveness of customer service needs
Percentage of repeat business
Quality of communications with customers
- to verify that the firm has established both strategic and financial controls to assess its performance
Improvements in innovation ability
Number of new products compared to competitors’
Increases in employees’ skills
Asset utilization improvements
Improvements in employee morale
Changes in turnover rates
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Customer
Financial
Learning & Growth
Internal Business Processes
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Fall, 2017
Organizational Architecture
- Organizational structure (OS):
Formal division: subunits
Decision-making responsibilities: centralized vs. decentralized
Integrating mechanisms to coordinate the activities of subunits
Reciprocal relationship
“Strategy has a much more important influence on structure than the reverse.”
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Organizations change their structures when inefficiencies force them to do so”. (Alfred Chandler)
Fall, 2017
Simple
Structure
Functional
Structure
Multidivisional
M-form
Structure
Volume
Scope
Evolutionary patterns of organizational structure
- Growth pattern implies structural changes!
- Most firms begin with no formal structure
Multinational
Structure
Locations
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Strategy and Structure: Simple Structure
Fall, 2017
Start-ups
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| Start-up | Simple |
| Rules | few |
| Task specialization | limited |
| Tech system | Minimal simple |
| communication | informal |
| Decision making | Centralized, CEO |
Manager
Staff
Staff
Staff
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Strategy and Structure:
Simple Structure
- Owner-manager
Makes all major decisions directly.
Monitors all activities.
- Staff
Serves as an extension of the manager’s supervisor authority.
- Matched with focus strategies and business-level strategies
Commonly complete by offering a single product line in a single geographic market.
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Simple Structure (cont’d)
- Growth creates:
Complexity
Managerial and structural challenges
- Owner-managers
Commonly lack organizational skills and experience.
Become ineffective in managing the specialized and complex tasks involved with multiple organizational functions.
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Strategy and Structure: Functional Structure
Fall, 2017
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| Single Dominant | Functional |
| Rules | few |
| Task specialization | More specialization |
| Decision making | CEO and limited staff |
| Benefit | Career path integration |
| Problem | Less communication Local strategic issues |
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Strategy and Structure:
Functional Structure
- Chief Executive Officer (CEO)
Limited corporate staff
- Functional line managers in dominant organizational areas of:
Production Marketing Engineering
Accounting R&D Human resources
- Supports use of business-level strategies and some corporate-level strategies
Single or dominant business with low levels of diversification
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Functional Structure (cont’d)
- Differences in orientation among organizational functions can:
Impede communication and coordination.
Increase the need for CEO to integrate decisions and actions of business functions.
Facilitate career paths and professional development in specialized functional areas.
Cause functional-area managers to focus on local versus overall company strategic issues.
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Functional Structure for Cost Leadership and Differentiation Strategy
Fall, 2017
- Risks:
Ignoring customer perceptions and needs
imitable
The challenge of retaining customers
- Weakness
Lack of coordination and integration
Costs and efficiency problem
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Centralized staff
Cost leadership
Process engineering and operation, not R&D
Job roles are highly structured
The structure is highly mechanical,
The structure may be tall or flat
Functional Structure for a Cost Leadership Strategy
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- Characteristics
Functional Structure for a Cost leadership/Differentiation Strategy
Fall, 2017
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| Reporting relationships |
| Decision-making |
| Corporate staff structure |
| Operational focus |
| Organizational culture |
| Jobs responsibility |
| Rules and procedures |
| Differentiation |
| Complex, flexible |
| Decentralized |
| Decentralized |
| R&D & Marketing |
| External environment |
| Cross-functional team, broad job description |
| Informal |
| Cost Leadership |
| Simple |
| Few, centralized |
| Centralized |
| Process |
| Low-cost |
| Specialization |
| Highly formalized |
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Three Variations of the
Multidivisional Structure
Fall, 2017
Among Fortune 500 firms (1950-1980s)
Diversified firms (30% - 75%)
M-structure (20-90%)
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Functional (F) structure M - structure
Division managers
For day-to-day operations
Benefits:
Monitoring the performance of each business;
Comparisons between divisions
Distinct product lines and markets.
Top managers focus on long-term issues.
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Strategy and Structure:
Multidivisional Structure
- Strategic Control
Operating divisions function as separate businesses or profit centers
- Top corporate officer delegates responsibilities to division managers
For day-to-day operations
For business-unit strategy
- Appropriate as firm grows through diversification
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Multidivisional Structure (cont’d)
- Three Major Benefits
Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control.
Facilitates comparisons between divisions, which improves the resource allocation process.
Stimulates managers of poorly performing divisions to look for ways of improving performance.
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Matches between Business-Level Strategies and the Functional Structure
- Different forms of the functional organizational structure are matched to:
Cost leadership strategy
Differentiation strategy
Integrated cost leadership/differentiation strategy
- Differences in these forms are seen in three important structural characteristics:
Specialization (number and types of jobs)
Centralization (decision-making authority)
Formalization (formal rules and work procedures)
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Cooperative Form of the M-Structure for a Related Constrained Strategy
Integration, tight linkages
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Related-Constrained Strategy
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SBU Form of the M-Structure for a Related Linked Strategy
At least three levels
Unrelated
Related
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Related-Linked Strategy
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Competitive Form of the Multidivisional Structure for an Unrelated Strategy
Efficient internal
capital allocations
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Unrelated Strategy
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Cooperative Form of the M-Structure for a Related Constrained Strategy
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| Integration |
| Cooperation |
| Div formation |
| Decision-making |
| Centralized act. |
| Communication |
| Organizational control |
| Cooperative |
| High-level |
| interdivisional |
| Product fields |
| centralized |
| HR, MarkeTing, R&D |
| Frequent, direct |
| Subjective control Overall performance |
| SBU |
| medium |
| Within SBUs |
| SBUs |
| Decentralized to SBUs |
| HR, Marketing, R&D |
| frequent within SBUs |
| Financial control SBUs- profit centers |
| Characteristics |
| Low |
| Competition |
| Strategic independent |
| Decentralized |
| Capital, auditing, legal |
| Less |
| Financial control |
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What Is An International Divisional Structure?
- An international division.
- What are some potential problem associated with this structure?
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Worldwide Geographic Area Structure for a Multidomestic Strategy
Worldwide geographic structure
- Customized products;
- Decentralizes the firm's strategic and operating decisions to BUs in each country;
- Isolate the firm from global competitive forces;
- Deals with uncertainty due to differences across markets
Fall, 2017
Multi-domestic Strategy
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Worldwide Product Divisional Structure for a Global Strategy
Worldwide product divisional structure
- standardized products
- Less responsive to local market
- centralized decision-making authority in the WW division headquarters.
worldwide coordination of value creation activities
- Global accounting and financial reporting standards
Economies of scale and locational economies
Interdependent SBUs operating in each country
Fall, 2017
Global Strategy
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Hybrid Form of the Matrix (Combination) Structure for a Transnational Strategy
- Assets/operations - centralized/decentralized
- Functions - integrated/nonintegrated
- Relationships - formal/informal
- Coordination mechanisms - efficiency/flexibility
- Mandates to subsidiaries - global/specialized-contribution/ localized-implementation
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Transnational Strategy
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However:
bureaucratic and slow
conflict between areas and product divisions
finger-pointing between divisions when something goes wrong
Fall, 2017
The Design Of Organizational Structure
The International Structural Stages Model
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P&G’s Org. Structure Change
- 50+ categories
- 300+ brands
- 135,000 employees,
- 170+ facilities in 40+ countries
- 20+ R&D centers in 10 countries
Fall, 2017
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Beauty, hair and personal care
Baby, feminine and family care
Fabric and home care
Health and grooming
P&G’s Org. Structure Change
- 50+ categories
- 300+ brands
Fall, 2017
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Beauty, hair and personal care
Baby, feminine and family care
Fabric and home care
Health and grooming
The P&G matrix (1995)
Fall, 2017
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European detergent VP (Brussels)
R&D Global Detergent VP (Cincinnati)
Ariel Brand Manger (Germany)
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(Germany)
CEO
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(Brussels)
Global detergent Leader (Cincinnati)
R&D SVP (Cincinnati)
Sales SVP (Cincinnati)
Prod Supply SVP (Cincinnati)
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(Germany)
Detergent R&D Director, Europe (Brussels)
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(Brussels)
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(Brussels)
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Matches between Cooperative Strategies and Network Structures
- Network strategy exists when:
Partners form several alliances in order to improve performance of the alliance network itself through cooperative endeavors.
- Strategic Network
A group of firms formed to create value by participating in multiple cooperative arrangements such as alliances and joint ventures.
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Matches between Cooperative Strategies and Network Structures (cont’d)
- Strategic networks are used to implement:
Business-level strategies
Corporate-level strategies
International cooperative strategies
- Strategic center firm
The firm around which the network’s cooperative relationships revolve.
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Strategic Center Firm
- Is the foundation for the strategic network’s structure.
Concerned with aspects of organizational structure such as formal reporting relationships.
Manages the complex, cooperative interactions among network partners.
- Engages in four primary tasks:
Strategic outsourcing Competencies
Technology Race to learn
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Implementing Business-Level Cooperative Strategies
- Vertical Complementary Alliances
Firms have complementary competencies in different value chain stages that let them cooperatively integrate their different skills.
- Horizontal Complementary Alliances
Firms that agree to combine competencies to create value in the same stage of the value chain.
- The strategic center firm is obvious in vertical alliances, but not always in horizontal alliances.
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Implementing International
Cooperative Strategies
- Strategic Networks
Are used to implement international cooperative strategies for competing in several countries.
Differences in countries’ regulatory environments increase the challenge of managing international networks.
- Distributed Strategic Networks
Are the organizational structure used to manage international cooperative strategies.
Regional strategic center firms
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Figure 11.12 A Strategic Network
Fall, 2017
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