The Strategic Management Process Figure 1 1 Copyright

The Strategic Management Process Figure 1. 1 Copyright © 2004 South-Western. All rights reserved. 1

Chapter 11: Organizational Structure (and Controls) • Components of internal strategic fit • Role of organizational structure in strategy implementation • Basic forms of organizational structure; advantages/disadvantages of each - simple - functional - multi-divisional (M-Form) - 3 types Copyright © 2004 South-Western. All rights reserved. 2

Chapter 11: Organizational Structure (and Control) • Strategic control; financial control • Strategy-structure “fit” • Contemporary forms of organizational structure - matrix structure - strategic alliances, networks, virtual organizations (Chapter 9) - creative/experimental forms Copyright © 2004 South-Western. All rights reserved. 3

Components of Internal Strategic Fit (Froelich Model) Environment Strategy Structure Systems Resources/Capabilities Organizational Culture Copyright © 2004 South-Western. All rights reserved. 4

Organizational Structure • Organizational structure specifies: Ø The firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes • It is critical to match organizational structure to the firm’s strategy Copyright © 2004 South-Western. All rights reserved. 5

Organization structure - Why so important? • Bounds day-to-day behaviors; it directs daily actions of individuals and groups • Includes authority relationships, which are huge influences on workplace behaviors • Has resource allocation and control implications • Involves pragmatic operational issues related to efficiency and effectiveness • Structural decisions are more common than strategic decisions • Structure expertise is undeveloped Copyright © 2004 South-Western. All rights reserved. 6

Relationships between Strategy and Structure • Strategy and structure have a reciprocal relationship: Ø Structure flows from or follows the selection of the firm’s strategy but … Ø Once in place, structure can influence current strategic actions as well as choices about future strategies Copyright © 2004 South-Western. All rights reserved. 7

Strategy and Structure Growth Pattern • As firms grow larger and become more complex, structural challenges emerge • Firms’ larger sizes dictate the need for more sophisticated workflows and integrating mechanisms ØSimple ØFunctional ØMultidivisional Efficient implementation of formulated strategy Figure 11. 1 Copyright © 2004 South-Western. All rights reserved. 8

Strategy and Structure: Simple Structure • Owner-manager Ø Makes all major decisions directly Ø Monitors all activities • Staff Ø An extension of manager’s supervisor authority • Matched with focus (or niche) strategies and small single business strategies Ø Commonly compete by offering a single product line in a single geographic market Copyright © 2004 South-Western. All rights reserved. 9

Simple Structure (cont’d) Advantages? Copyright © 2004 South-Western. All rights reserved. Disadvantages? 10

Strategy and Structure: Functional Structure • Chief Executive Officer (CEO) Ø Limited corporate staff • Functional line managers in needed organizational areas, possibly: Ø Manufacturing Marketing Engineering Ø Accounting R&D HRM • Supports use of business-level strategies and some corporate-level strategies Ø (larger) Single or dominant business with low levels of diversification Ø Facilitates centralization/company-wide coordination Copyright © 2004 South-Western. All rights reserved. 11

Functional Structure for Implementation of a Differentiation Strategy Notes: • Marketing is the main function for keeping track of new product ideas • New product R&D is emphasized • Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other • Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished • Overall structure is organic; job roles are less structured Figure 11. 3 Copyright © 2004 South-Western. All rights reserved. 12

Functional Structure under a Differentiation Strategy • Marketing is the main function for tracking new product ideas Ø New product R&D is emphasized Ø Most functions are decentralized Ø Formalization is limited to foster change and promote new ideas Ø Overall structure is organic Ø Job roles are less structured Copyright © 2004 South-Western. All rights reserved. 13

Functional Structure for Cost Leadership Strategy Notes: • Operations is the main function • Process engineering is emphasized rather than new product R&D • Relatively large centralized staff coordinates functions • Formalized procedures allow for emergence of a low-cost culture • Overall structure is mechanical; job roles are highly structured Copyright © 2004 South-Western. All rights reserved. Figure 11. 2 14

Functional Structure under a Cost Leadership Strategy • Operations is typically the main function Ø Process engineering is emphasized over research and development Ø Large centralized staff oversees activities Ø Formalized procedures guide actions Ø Structure is mechanical Ø Job roles are highly structured Copyright © 2004 South-Western. All rights reserved. 15

Implementing an Integrated Cost Leadership/Differentiation Strategy • The integrated form of the functional structure must have: Ø Decision-making patterns that are partially centralized and partially decentralized Ø Semi-specialized jobs Ø Rules and procedures that allow both formal and informal job behaviors A hybrid form; no wonder it is hard to implement! Copyright © 2004 South-Western. All rights reserved. 16

Functional Structure (cont’d) • Differences in orientation among organizational functions can: Ø Impede communication and coordination Ø Cause functional-area managers to focus on local versus overall company strategic issues Ø Increase the need for CEO to integrate decisions and actions of business functions Ø Facilitate career paths and professional development in specialized functional areas Copyright © 2004 South-Western. All rights reserved. 17

Evolutionary Growth of the Firm leading to increased diversification • A firm’s continuing success that leads to: Ø Product diversification, or Ø Market diversification, or Ø Both product and market diversification • Increasing diversification creates information processing and coordination problems that the functional structure can’t handle Copyright © 2004 South-Western. All rights reserved. 18

Strategy and Structure: Multidivisional Structure • Top corporate officer delegates responsibilities to division managers Ø For day-to-day operations Ø For business-unit strategy • Appropriate as a firm grows through diversification Copyright © 2004 South-Western. All rights reserved. 19

Example of M-Form Structure Copyright © 2004 South-Western. All rights reserved. 20

Multidivisional Structure (cont’d) • Major Benefits Ø Corporate officers are more detached as they monitor and compare performance of divisions, facilitating resource allocation decisions Ø Stimulates divisional managers to optimize performance of their units Ø Provides for faster reaction to change and a stronger customer focus at division level Ø Development of “general management” expertise within the firm Copyright © 2004 South-Western. All rights reserved. 21

Multidivisional Structure (con’t) • Major Disadvantages Ø Increased complexity of the firm overall Ø Difficulties coordinating and sharing expertise across divisions Ø Duplication of resources Ø Tendency to rely on financial controls rather than strategic controls Copyright © 2004 South-Western. All rights reserved. 22

Organizational Controls Strategic Controls Organizational Controls • “Subjective” (strategically relevant) Criteria Ø Philosophy of the “balanced scorecard” Ø Evaluate the degree to which the firm accomplishes key tasks related to success of the particular strategy being implemented Ø Examples = market share, innovation lead time, image, location advantages, product mix Ø requires in-depth knowledge/insight in market Copyright © 2004 South-Western. All rights reserved. 23

Organizational Controls Strategic Controls Organizational Controls Financial Controls • “Objective” financial criteria Ø Enables comparisons of differing divisions using “standardized financial measures, such as: Ø. . . Ø Requires less strategic understanding Ø Use with caution - do not tell the whole story! Copyright © 2004 South-Western. All rights reserved. 24

Matching Control to Strategy • Relative use of controls varies by type of strategy Ø Large diversified firms using a cost leadership strategy tend to emphasize financial controls Ø Companies and business units using a differentiation strategy typically emphasize strategic controls Copyright © 2004 South-Western. All rights reserved. 25

Corporate-Level Strategies and the Multidivisional Structure (cont’d) • Diversification strategy requires firm to change from functional structure to a multidivisional structure • Different levels of diversification create the need for implementation of a unique form of the multidivisional structure Copyright © 2004 South-Western. All rights reserved. 26

Variations of the Multidivisional Structure Figure 11. 4 Copyright © 2004 South-Western. All rights reserved. 27

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Notes • 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 • Copyright © 2004 South-Western. All rights reserved. • Rewards are subjective and tend to emphasize overall corporate performance in addition to divisional performance • Culture emphasizes cooperative sharing Figure 11. 5 28

Multidivisional Structure: Cooperative Form • Development of integrating mechanisms to bring about cooperation among divisions • Goals = activity sharing/skill transfer • HQ involved in centralized strategic planning, HRM, marketing, and possibly other functions with synergistic potential • R&D is likely centralized • Greater use of strategic control measures Related-Constrained Strategy Copyright © 2004 South-Western. All rights reserved. 29

Cooperative Form (cont’d) • Rewards consider overall corporate performance in addition to division performance • A more cooperative culture is nurtured • A more complex management task compared to the competitive M-Form • Companies need to better figure out/understand how to do this! Related-Constrained Strategy Copyright © 2004 South-Western. All rights reserved. 30

Competitive Form of Multidivisional Structure: Unrelated Strategy Notes • Corporate headquarters has a small staff • Finance and auditing are the most prominent functions in the headquarters office to manage cash flow and assure the accuracy of performance data coming from divisions Copyright © 2004 South-Western. All rights reserved. • 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 Figure 11. 7 31

Multidivisional Structure: Competitive Form • A structure in which there is independence among the firm’s divisions Ø Divisions do not share common strengths, so integrating mechanisms are not employed Ø Corporate HQ has a small staff; strategy is delegated to divisions, but resource allocation among divisions is centralized Ø Financial controls predominate Ø Prominent functions are finance, auditing; plus legal is acquisitions/divestitures are frequent Ø Culture of competition rather than cooperation between divisions Unrelated Strategy 32 Copyright © 2004 South-Western. All rights reserved.

Even More Structures !!! • Structures for international strategies • (Network) structures for cooperative strategies • Matrix structures to facilitate innovation • Creative and experimental structures Copyright © 2004 South-Western. All rights reserved. 33

Worldwide Geographic Area Structure: Multi-domestic Strategy Notes: • The perimeter circles indicate decentralization of operations • Emphasis is on differentiation by local demand to fit an area or country culture • Corporate headquarters coordinates financial resources among independent subsidiaries • The organization is like a decentralized federation Copyright © 2004 South-Western. All rights reserved. Figure 11. 8 34

Worldwide Product Divisional Structure: Global Strategy Notes • The headquarters’ circle indicates centralization to coordinate information flow among worldwide products • Corporate headquarters uses many intercoordination devices to facilitate global economies of scale and scope • Corporate headquarters also allocates financial resources in a cooperative way • The organization is like a centralized federation Copyright © 2004 South-Western. All rights reserved. Figure 11. 9 35

Matrix Organizational Form • Simultaneous use of functional departments and project teams • To facilitate and speed strategies relying on innovation • Seldom used for structuring an entire organization; rather, used in particular areas of the organization as needed Copyright © 2004 South-Western. All rights reserved. 36

Matrix Structure Advantages Copyright © 2004 South-Western. All rights reserved. Disadvantages 37

Creative/Experimental Structural Forms. . . • “Organizational ecosystem” concept of overlapping teams - to facilitate innovation and high employee commitment • Bottom-up structures - to emphasize importance of customers and staff • Non-hierarchical structures - to focus on organizational mission/shared values • . . . Copyright © 2004 South-Western. All rights reserved. 38

Creative and Experimental Structures, (con’t) • think about - is the new structure really cutting edge, or merely a wasteful fad? • BEWARE of the “latest and greatest” consultant’s products! • be pragmatic - does the structure fit your strategy? - are employee relationships clear and workable? - is the structure adequately efficient? Copyright © 2004 South-Western. All rights reserved. 39

A Strategic Network - for elaborate cooperative strategies (Chapter 9) Strategic Center Firm Adapted from Figure 11. 10 Copyright © 2004 South-Western. All rights reserved. 40

Strategic Center Firm • Is the foundation for the strategic network’s structure Ø Manages the complex, cooperative interactions among network partners • Is more obvious in stable and vertically arranged networks, but less obvious in horizontally arranged and dynamic networks Copyright © 2004 South-Western. All rights reserved. 41

The “best” organizational structure = Copyright © 2004 South-Western. All rights reserved. 42

Conclusions about organizational structure: • • Structure must facilitate the necessary tasks to accomplish the organization’s strategy. • Structure is a major “ingredient” in successful strategy implementation. • Change in strategy requires change in structure Copyright © 2004 South-Western. All rights reserved. 43