Chapter 11 Organizational Structure and Controls Michael A

Chapter 11 Organizational Structure and Controls Michael A. Hitt R. Duane Ireland Robert E. Hoskisson © 2003 Southwestern Publishing Company 1

Strategic Inputs The Strategic Management Process Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment Strategy Implementation Strategic Outcomes Strategic Actions Strategy Formulation Chapter 5 Chapter 4 Competitive Rivalry Business-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 Corporate. Level Strategy Chapter 10 Corporate Governance Chapter 9 Cooperative Strategy Strategic Competitiveness Above-Average Returns Feedback Chapter 11 Organizational Structure and Controls 2

Organizational Structure Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes l It is critical to match organizational structure to the firm’s strategy l 3

Stability and Flexibility in Structure l Structural stability provides the capacity – required to consistently and predictably manage the firm’s daily work routines l Structural flexibility provides the opportunity to – explore competitive possibilities – allocate resources to activities that shape competitive advantages needed by the firm 4

Organizational Controls l 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 l Two types of organizational controls – strategic controls – financial controls 5

Organizational Controls: Strategic Controls l Concerned with examining the fit between – what the firm might do (as suggested by opportunities in its external environment) – what it can do (as indicated by its competitive advantages) l Used to evaluate the degree to which the firm focuses on the requirements to implement its strategies 6

Organizational Controls: Financial Controls Strategic Controls l Objective criteria l Accounting-based measures include Financial Controls – return on investment – return on assets l Market-based measures include – economic value added 7

Matching Control to Strategy l Relative use of controls varies by type of strategy – large diversified firms using the cost leadership strategy emphasize financial controls – companies and business units using the differentiation strategy emphasize strategic controls 8

Evolutionary Patterns of Strategy and Organizational Structure l Firms grow in predictable patterns – – l by volume by geography integration (vertical, horizontal) through product/business diversification A firm’s growth patterns determine its structural form 9

Evolutionary Patterns of Strategy and Organizational Structure All organizations require some form of organizational structure to implement and manage their strategies l Firms frequently alter their structure as they grow in size and complexity l Three basic structure types: l – – – simple structure functional structure multi-divisional structure (M-form) 10

Strategy and Structure Growth Pattern: Simple Structure 11

Strategy and Structure Growth Pattern: Simple Structure l Organizational form in which the ownermanager – makes all major decisions directly – monitors all activities l Staff – serves as an extension of the manager’s supervisory authority l Matched with focus strategies and business-level strategies – commonly compete by offering a single product line in a single geographic market 12

Strategy and Structure Growth Pattern: Simple Structure l Growth creates – complexity – managerial and structural challenges l Owner-managers – commonly lack organizational skills and experience – become ineffective in managing the specialized and complex tasks involved with multiple organizational functions 13

Strategy and Structure Growth Pattern: Functional Structure Simple Structure Efficient implementation of formulated strategy Sales Growth. Coordination and Control Problems Functional Structure 14

Strategy and Structure Growth Pattern: Functional Structure l Chief Executive Officer (CEO) – limited corporate staff l Functional line managers in dominant organizational areas – – – l 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 15 diversification

Strategy and Structure Growth Pattern: Functional Structure l 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 16

Strategy and Structure Growth Pattern: Multidivisional Structure l Strategic control – operating divisions – each division is separate business or profit center l Top corporate officer delegates responsibilities to division managers – for day-to-day operations – for business-unit strategy l Appropriate when the firm grows through diversification 17

Strategy and Structure Growth Pattern: Multidivisional Structure l Three major benefits – corporate officers 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 18

Strategy and Structure Growth Pattern: Multidivisional Structure Simple Structure Efficient implementation of formulated strategy Multidivisional Structure Sales Growth. Coordination and Control Problems Functional Structure Efficient implementation of formulated strategy Sales Growth. Coordination and Control Problems 19

Matching Structure and Strategy l Different forms of the functional organizational structure are matched to – – – l cost leadership strategy differentiation strategy integrated cost leadership/differentiation strategy differences in these forms seen in three important structural characteristics – – – specialization centralization formalization 20

Structure for Cost Leadership Strategy • Operations is main function • Process engineering is Office of the President emphasized over R&D • Large centralized staff • Formalized procedures • Structure is mechanical, job roles highly structured Engineering Centralized Staff Accounting Operations Marketing Personnel 21

Structure for Differentiation Strategy President and Limited Staff R&D New Product R&D Marketing Operations Finance Human Resources • Marketing is the main function for tracking new product ideas • New product R&D is emphasized • Most functions are decentralized • Formalization is limited to foster change and promote new ideas • Overall structure is organic; job roles are less structured 22

Multidivisional Structure Each division is operated as a separate business l Appropriate for related-diversified businesses l Key task of corporate managers is exploiting synergies among divisions l Managers use a combination of strategic controls and financial controls l 23

Multidivisional Structure l Managers try to strike a balance between: – competing among divisions for scarce capital resources – creating opportunities for cooperation to develop synergies The goal is to maximize overall firm performance l The decision-making of managers in a multi-divisional structure may be: l – centralized or decentralized – bureaucratic or non-bureaucratic 24

Multidivisional Structure Balance on these dimensions may change over time l Structure will evolve over time with: l – – changes in strategy degree of diversification geographic scope nature of competition 25

Three Variations of the Multidivisional Structure (M-form) Cooperative Form Competitive Form Strategic Business-Unit (SBU) Form 26

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office President Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Product Division Corporate Marketing Corporate Finance Product Division 27

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy l l l Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing 28

SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office Corporate R&D Lab President Strategic Planning Corporate HRM SBU Division Corporate Marketing Corporate Finance SBU Division Division 29

SBU Form of Multidivisional Structure: Related-Linked Strategy l l l Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing 30

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office President Legal Affairs Finance Division Auditing Division 31

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy l l l Corporate headquarters has a small staff Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions The legal affairs function becomes important when the firm acquires or divests assets Divisions are independent and separate for financial evaluation purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources 32

Multidivisional Structure: Other Points l Complex multi-divisional structure firms may be simultaneously – centralized and decentralized – depending upon the various business-level strategies employed throughout the firm’s individual businesses l Multi-divisional structure firms use a combination of: – strategic controls – financial controls 33

Characteristics of Various Structural Forms Structural Cooperative Characteristics M-Form SBU M-Form Competitive M-Form Type of Strategy Related. Constrained Related. Linked Unrelated Diversification Degree of Centralization Centralized at Corporate Office Partially Centralized in SBUs Decentralized to Divisions Extensive Moderate Nonexistent Use of Integrating Mechanisms 34

Characteristics of Various Structural Forms Structural Cooperative Characteristics M-Form Divisional Performance Appraisal Subjective Strategic Criteria Divisional Incentive Compensation Linked to Corporate Performance SBU M-Form Competitive M-Form Strategic & Financial Criteria Objective Financial Criteria Linked to Corporate Divisional SBU & Division Performance 35

Worldwide Geographic Area Structure: Multidomestic Strategy Asia Latin America United States Multinational Headquarters Australia Middle East/ Africa Europe • product characteristics tailored to local preferences • isolation from global competitiion – establish protected market positions –compete in industry segments most affected by differences among local countries 36

Worldwide Product Divisional Structure: Global Strategy • standardized products across countries • economies of scope and scale • outsource some Global Worldwide primary or support Products Corporate activities to the world’s Division Headquarters best providers • decision-making authority centralized in Worldwide Products worldwide division Division headquarters Worldwide Products Division 37

Using the Combination Structure: Transnational Strategy l The combination structure has characteristics and mechanisms that result in an emphasis on both geographic and product structures – local responsiveness (multidomestic strategy) – global efficiency (global strategy) 38

Strategic Network A strategic network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as alliances and joint ventures l The strategic network seeks to develop a competitive advantage in primary or support activities l A strategic center firm often manages the network l 39

Strategic Network l strategic center firm engages in four primary tasks – strategic outsourcing (outsources and partners with more firms than do other network members) – competencies (supports each member’s efforts to develop core competencies that can benefit the network) 40

Strategic Network l strategic center firm engages in four primary tasks – technology (manages the development and sharing of technology-based ideas among network members) – race to learn (guides participants in efforts to form network-specific competitive advantages) 41

Strategic Network Strategic Center Firm 42

Distributed Strategic Network International cooperative strategies often require more complex networks l Many large multinational firms form distributed strategic networks with multiple regional strategic centers to manage their array of cooperative arrangements with partner firms l Breaking large networks into multiple manageably-sized networks helps to manage the complexity of maintaining many relationships l 43

Distributed Strategic Network Main Strategic Center Firm = Distributed Strategic Center Firms 44