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PART 3: STRATEGIC ACTIONS:

STRATEGY IMPLEMENTATION

CHAPTER 11 ORGANIZATIONAL STRUCTURE AND CONTROLS

Authored by:

Marta Szabo White, PhD.

Georgia State University

THE STRATEGIC MANAGEMENT PROCESS

©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE 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.

KNOWLEDGE OBJECTIVES

● 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.

INTRODUCTION

Strategy may be implemented via:

Structure

Reward mechanisms

Organizational culture

Leadership

This chapter focuses on structure.

IMPORTANT: The match or degree of fit between strategy and structure influences the firm’s ability to earn above-average return.

ORGANIZATIONAL STRUCTURE

Strategy pioneer Alfred Chandler found organizations change their structures when inefficiencies force them to.

A firm’s strategy is supported when its structure is properly aligned to its strategy

Two considerations regarding alignment

Structural stability: capacity firm requires to consistently and predictably manage its daily work routines

Structural flexibility: opportunity to explore competitive advantages firm will need to be successful in the future

Source: A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press.

ORGANIZATIONAL CONTROLS

Controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable.

Two types:

Strategic Controls

Financial Controls

STRATEGIC CONTROLS

Largely SUBJECTIVE criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages.

Are concerned with examining the fit between:

What the firm might do (opportunities in its external environment)

What the firm can do (competitive advantages)

Evaluate the degree to which the firm focuses on the requirements to implement strategy

Business-level: primary and support activities

Corporate-level (related): sharing of knowledge, markets, and technologies across businesses

Focus on the content of strategic actions

FINANCIAL CONTROLS

Largely OBJECTIVE criteria used to measure firm’s performance against previously established quantitative standards

Focus on short-term financial outcomes

Include accounting-based measures

ROI (return on investment)

ROA (return on assets)

Include market-based measures

EVA (economic value added)

Produce risk-averse managerial decisions

Are essential when a firm pursues a strategy with unrelated diversification

RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE

● RECIPROCAL RELATIONSHIP - change in one typically causes a change in the other, underscoring the interconnectedness between strategy formulation and strategy implementation

STRATEGY STRUCTURE

● Strategy typically has a much more important influence on structure than structure on strategy

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE

Chandler found that firms tend to grow in predictable patterns:

● first by volume

● then by geography

● then by integration (vertical, horizontal)

● finally through product/business diversification

Growth pattern determines structure!

1 – Chandler, 1962

Source: A. Chandler, 1962, Strategy and Structure, Cambridge, MA: MIT Press.

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE

■ Firms typically alter their structure as they grow in size and complexity

■ Three key structural forms used to implement strategies:

Simple structure

Functional structure

Multidivisional structure (M-form)

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE

FIGURE 11.1

Strategy Structure Growth Pattern

STRATEGY AND STRUCTURE: SIMPLE STRUCTURE

● Owner-manager makes all major decisions and monitors all activities

● Staff acts as extension of manager's supervisory authority

● Matched focus strategies and business-level strategies: these firms offer single product lines in single geographic markets

● Few rules, limited task specialization, basic technology system

● With size comes complexity and managerial and structural challenges; firms tend to move from a simple to a functional structure

STRATEGY AND STRUCTURE: FUNCTIONAL STRUCTURE

● CEO and a limited corporate staff make all decisions.

● Functional line managers are in dominant organizational areas

Production Marketing

Engineering R&D

Accounting Human resources

● WITHIN – functional specialization results in active knowledge sharing within each area

● BETWEEN – impedes communication and coordination among different functional areas

STRATEGY AND STRUCTURE: MULTIDIVISIONAL (M-FORM) STRUCTURE

● Operating divisions each represent a separate business or profit center

● Top corporate officer delegates responsibilities for day-to-day operations and business-unit strategies to division managers

● Ties together all operating divisions

● Each division represents a separate business or profit center with its own functional hierarchy

● Each division is responsible for daily operations

● Business-unit strategy is delegated to the division

STRATEGY AND STRUCTURE: THE RIGHT STRUCTURE

IT DEPENDS

● No one organizational structure (simple, functional, or multidivisional) is inherently superior to the others

● The firm must select a structure that is “right” for the chosen strategy

● Managers develop proper matches between strategies and organizational structures rather than searching for an “optimal” structure

MATCHES BETWEEN BUSINESS-LEVEL STRATEGIES AND THE FUNCTIONAL STRUCTURE

Firms use different forms of the functional organizational structure to support their strategy

Business-level strategies are:

Cost leadership (broad or focused)

Differentiation (broad or focused)

Integrated cost leadership/differentiation

Structural choices are:

Simple

Functional

Multidivisional

MATCHES BETWEEN BUSINESS-LEVEL STRATEGIES AND THE FUNCTIONAL STRUCTURE

The choice of structure is influenced by structural characteristics needed to compete:

Specialization: the type and number of jobs required to complete the work of the firm

Centralization: the degree to which decision-making authority is retained at higher managerial levels

Formalization: the degree to which formal rules and procedures govern work

USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY

FIGURE 11.2

Functional Structure for Implementing a Cost Leadership Strategy

USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP STRATEGY

The choice of structure is influenced by structural characteristics:

Specialization: departments are designed around areas of expertise—engineering to accounting

Centralization: highly centralized; staff are all together

Formalization: reporting roles are clearly defined; simple lines of communication

USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY

FIGURE 11.3

Functional Structure for Implementing a Differentiation Strategy

USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY

The choice of structure is influenced by structural characteristics

Specialization: departments are designed around areas of expertise—engineering to accounting

Centralization: the key departments are coordinated through a highly centralized office that reflects a focus on product design and marketing; otherwise DECENTRALIZED

Formalization: reporting roles are clearly defined; simple lines of communication

USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION STRATEGY

Differentiation and the functional structure results:

Marketing is the main function; new product ideas

New product R&D is emphasized

Most functions are decentralized, but R&D and marketing may have centralized staffs

Cross-functional product development teams

Complex and flexible reporting relationships

Development-oriented culture

Decentralized decision making

Broad job descriptions

Informal rules and procedures

Overall structure is organic; less structured job roles

THREE VARIATIONS OF THE MULTIDIVISIONAL STRUCTURE

FIGURE 11.4

Three Variations of the Multidivisional Structure

COOPERATIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED CONSTRAINED STRATEGY

FIGURE 11.5

Cooperative Form of the Multidivisional Structure for Implementing a Related Constrained Strategy

COOPERATIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED CONSTRAINED STRATEGY

● Structural integration devices create tight links among all divisions

● Corporate office dictates centralized decision-making

● Rewards are subjective and tend to emphasize overall corporate performance in addition to divisional performance

● Culture emphasizes cooperative sharing

● Economies of scope (cost savings resulting from the sharing of competencies developed in one division with another division) are important for the related constrained strategy

● Interdivisional sharing of competencies depends on cooperation- links result from effective integration mechanisms

● Sharing of both tangible and intangible resources

● The cooperative structure uses different characteristics of structure (centralization, standardization, and formalization) as integrating mechanisms to facilitate interdivisional cooperation

SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED LINKED STRATEGY

FIGURE 11.6

SBU Form of the Multidivisional Structure for Implementing a Related Linked Strategy

SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED LINKED STRATEGY

● Firms that share fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses (related linked strategy)

● Organization structure with three levels to support the implementation diversification strategy:

Corporate headquarters

Strategic business units (SBUs)

Divisions under each SBU

COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN UNRELATED STRATEGY

FIGURE 11.7

Competitive Form of the Multidivisional Structure for Implementing an Unrelated Strategy

COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN UNRELATED STRATEGY

● Financial economies are pivotal for the unrelated strategy

Creates value through two types of financial economies

▪ Cost savings realized through improved allocations of financial resources based on investments inside or outside firm

▪ Efficient internal capital market allocation: restructuring of acquired assets

● The efficient internal capital market is the key for this strategy, and requires divisional competition rather than cooperation.

● Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources

● Divisions are independent and separate for financial evaluation purposes; and retain strategic control

MATCHES BETWEEN INTERNATIONAL STRATEGIES AND WORLDWIDE STRUCTURE

International strategies allow the firm to search for new:

Markets

Resources

Core competencies

Technologies

Three primary international strategies:

Multidomestic

Global

Transnational

WORLDWIDE GEOGRAPHIC AREA STRUCTURE FOR IMPLEMENTING A MULTIDOMESTIC STRATEGY

FIGURE 11.8

Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy

WORLDWIDE PRODUCT DIVISIONAL STRUCTURE FOR IMPLEMENTING A GLOBAL STRATEGY

FIGURE 11.9

Worldwide Product Divisional Structure for Implementing a Global Strategy

HYBRID FORM OF THE COMBINATION STRUCTURE FOR IMPLEMENTING A TRANSNATIONAL STRATEGY

FIGURE 11.10

Hybrid Form of the Combination Structure for Implementing a Transnational Strategy

EXAMPLE OF A STRATEGIC NETWORK

Main strategic center of the firm

Key raw material supplier

Competitor with alliance agreement

Research team at local university

Top legal firm in intellectual property

Key technology supplier

Distributed strategic center of the firm