Why do firms experience evolutionary cycles in which there is a fit between strategy and structure, punctuated with periods in which strategy and structure are reshaped? Provide examples of global fir

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Narration

Introduction

Welcome to Senior Seminar in Business Administration.

In this lesson we will discuss Organizational Structure and Controls.

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Objectives

Upon completion of this lesson, you will be able to:

Describe the relationship between strategy and organizational structure.

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Supporting Topics

In order to achieve these objectives, the following supporting topics will be covered:

Organizational structure and controls;

Relationships between strategy and structure;

Evolutionary patterns of strategy and organizational structure;

Implementing business-level cooperative strategies;

Implementing corporate-level cooperative strategies; and Implementing international cooperative strategies.

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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. Developing an organizational structure that effectively supports the firm’s strategy is difficult, especially because of the uncertainty about cause-effect relationships in the global economy’s rapidly changing and dynamic competitive environments. When a structure’s elements are properly aligned with one another, the structure is a critical component of effective strategy implementation processes.

A firm’s structure specifies the work to be done and how to do it, given the firm’s strategy or strategies. Thus, organizational structure influences how managers work and the decisions resulting from that work. Supporting the implementation of strategies, structure is concerned with processes used to complete organizational tasks.

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Organizational Structure and Controls, continued

Organizational controls are an important aspect of structure. Organizational 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. When fewer differences separate actual from expected outcomes, the organization’s controls are more effective.

It is difficult for the company to successfully exploit its competitive advantages without effective organizational controls. Properly designed organizational controls provide clear insights regarding behaviors that enhance firm performance. Firms use both strategic controls and financial controls to support using their strategies.

Strategic controls are 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.

Financial controls are largely objective criteria used to measure the firm’s performance against previously established quantitative standards.

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Relationships Between Strategy and Structure

Strategy and structure have a reciprocal relationship. This relationship highlights the interconnectedness between strategy formulation and strategy implementation. Once in place though, structure can influence current strategic actions and future strategies. Research that strategy has a much more important influence on structure than the reverse. Regardless of the strength of the reciprocal relationships between strategy and structure, those choosing the firm’s strategy and structure should be committed to matching each strategy with a structure that provides the stability needed to use current competitive advantages. We also want to make sure that there is flexibility to develop future advantages. As a result of this a firm should simultaneously consider the structure that will be needed to support use of the new strategy. By properly matching strategy and structure can create a competitive advantage.

Evolutionary Patterns of Strategy and Organizational Structure

Firms choose from among three major types of organizational structures:

Simple;

Functional; and

Multidivisional.

Across time, successful firms move from the simple to the functional to the multidivisional structure to support changes in their growth strategies.

The simple structure is a structure in which the owner-manager makes all major decisions and monitors all activities while the staff serves as an extension of the manager’s supervisory authority.

The functional structure consists of a chief executive officer and a limited corporate staff with functional line managers in dominant organizational areas such as production, accounting, marketing, resource and development, engineering, and human resources. This structure allows for functional specialization, thereby facilitating active sharing of knowledge within each functional area.

The multidivisional structure consists of operating divisions, each representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

Firms use different forms of the functional organizational structure to support implementing the cost leadership, differentiation, and integrated cost leadership/ differentiation strategies. The differences in these forms are accounted for primarily by different uses of three important structural characteristics which include:

Specialization;

Centralization; and

Formalization.

Firms using the cost leadership strategy sell large quantities of standardized products to an industry’s typical customer. Firms using this strategy need a structure and capabilities that allow them to achieve efficiencies and produce their goods at costs lower than those of competitors. In terms of centralization, decision- making authority is centralized in a staff function to maintain a cost- reducing emphasis within each organizational function. While encouraging continuous cost reductions, the centralized staff also verifies that further cuts in costs in one function won’t adversely affect the productivity levels in other functions. Jobs are highly specialized in the cost leadership functional structure; work is divided into homogeneous subgroups. Organizational functions are the most common subgroup, although work is sometimes batched on the basis of products produced or clients served. Specializing in their work allows employees to increase their efficiency, resulting in reduced costs. Guiding individuals’ work in this structure are highly formalized rules and procedures, which often emanate from the centralized staff.

Firms using the differentiation strategy produce products that customers hopefully perceive as being different in ways that create value for them. With this strategy, the firm wants to sell nonstandardized products to customers with unique needs. From this structure emerges a development- oriented culture in which employees try to find ways to further differentiate current products and to develop new, highly differentiated products. Continuous product innovation demands that people throughout the firm interpret and take action based on information that is often incomplete or uncertain. Following a strong focus on the external environment to identify new opportunities, employees often gather this information from people outside the firm. Commonly, rapid responses to the possibilities indicated by the collected information are necessary, suggesting the need for decentralized decision-making responsibility and authority. It also requires building a strong technological capability and strategic flexibility, which allow the organization to take advantage of opportunities created by changes in the market. To support the creativity needed and the continuous pursuit of new sources of differentiation and new products, jobs in this structure are not highly specialized. This lack of specialization means that workers have a relatively large number of tasks in their job descriptions. Few formal rules and procedures also characterize this structure.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

Firms using the integrated cost leadership/ differentiation strategy sell products that create value because of their relatively low cost and reasonable sources of differentiation. The cost of these products is low relative to the cost leader’s prices while their differentiation is reasonable when compared with the clearly unique features of the differentiator’s products. Although challenging to implement, the integrated cost leadership/ differentiation strategy is used frequently in the global economy. The challenge of using this strategy is due largely to the fact that different primary and support activities are emphasized when using the cost leadership and differentiation strategies. To achieve the cost leadership position, production and process engineering need to be emphasized, with infrequent product changes.

The firm’s level of diversification is a function of decisions about the number and type of businesses in which it will compete as well as how it will manage the businesses. Using a diversification strategy requires the firm to change from the functional structure to the multidivisional structure to develop an appropriate strategy/ structure match. Corporate- level strategies have different degrees of product and market diversification. The demands created by different levels of diversification highlight the need for a unique organizational structure to effectively implement each strategy.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

The cooperative form is an M- form structure in which horizontal integration is used to bring about interdivisional cooperation. Divisions in a firm using the related constrained diversification strategy commonly are formed around products, markets, or both. Research suggests that informal ties may be even more important than formal coordination devices in achieving cooperation. Sharing divisional competencies facilitates the corporation’s efforts to develop economies of scope. Economies of scope are linked with successful use of the related constrained strategy. Interdivisional sharing of competencies depends on cooperation, suggesting the use of the cooperative form of the multidivisional structure.

Sometimes, liaison roles are established in each division to reduce the time division managers spend integrating and coordinating their unit’s work with the work occurring in other divisions. Temporary teams or task forces may be formed around projects whose success depends on sharing competencies that are embedded within several divisions. Ultimately, a matrix organization may evolve in firms implementing the related con-strained strategy. A matrix organization is an organizational structure in which there is a dual structure combining both functional specialization and business product or project specialization. Although complicated, an effective matrix structure can lead to improved coordination among a firm’s divisions. The success of the cooperative multidivisional structure is significantly affected by how well divisions process information. However, because cooperation among divisions implies a loss of managerial autonomy, division managers may not readily commit themselves to the type of integrative information- processing activities that this structure demands.

Strategic controls are important because divisional managers’ performance can be evaluated at least partly on the basis of how well they have facilitated interdivisional cooperative efforts. In addition, using reward systems that emphasize overall company performance helps overcome problems associated with the cooperative form. Still, the costs of coordination and inertia in organizations limit the amount of related diversification attempted.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

Firms with fewer links or less constrained links among their divisions use the related linked diversification strategy. The strategic business unit form of the multidivisional structure supports implementation of this strategy. The strategic business unit or SBU form is an M- form structure consisting of three levels which include:

Corporate headquarters;

Strategic business units; and

SBU divisions.

The SBU structure is used by large firms and can be complex, given associated organization size and product and market diversity. The divisions within each SBU are related in terms of shared products or markets or both, but the divisions of one SBU have little in common with the divisions of the other SBUs. Divisions within each SBU share product or market competencies to develop economies of scope and possibly economies of scale. In this structure, each SBU is a profit center that is controlled and evaluated by the headquarters office. Although both financial and strategic controls are important, financial controls are vital to headquarters’ evaluation of each SBU. Strategic controls on the other hand are critical when the heads of SBUs evaluate their divisions’ performances. Strategic controls are also critical to the headquarters’ efforts to determine whether the company has formed an effective.

The SBU structure is difficult to implement. Sharing competencies among units within an SBU is an important characteristic of the SBU form of the multidivisional structure. A drawback to the SBU structure is that multifaceted businesses often have difficulties in communicating this complex business model to stockholders. Furthermore, if coordination between SBUs is needed, problems can arise because the SBU structure does not readily foster cooperation across SBUs.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

Firms using the unrelated diversification strategy want to create value through efficient internal capital allocations or by restructuring, buying, and selling businesses. The competitive form of the multidivisional structure supports implementation of this strategy. The competitive form is an M- form structure characterized by complete independence among the firm’s divisions which compete for corporate resources. Unlike the divisions included in the cooperative structure, divisions that are part of the competitive structure do not share common corporate strengths. Because strengths are not shared, integrating devices are not developed for use by the divisions included in the competitive structure. The efficient internal capital market that is the foundation for using the unrelated diversification strategy requires organizational arrangements emphasizing divisional competition rather than cooperation. Three benefits are expected from the internal competition and they include:

Internal competition creates flexibility;

Internal competition challenges the status quo and inertia; and

Internal competition motivates effort in that the challenge of competing against internal peers.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

As explained previously, international strategies are becoming increasingly important for long- term competitive success in what continues to become an increasingly border-less global economy. Among other benefits, international strategies allow the firm to search for new markets, resources, core competencies, and technologies as part of its efforts to outperform competitors. As with business- level and corporate- level strategies, unique organizational structures are necessary to successfully implement the different international strategies. Forming proper matches between international strategies and organizational structures facilitates the firm’s efforts to effectively coordinate and control its global operations.

The multidomestic strategy decentralizes the firm’s strategic and operating decisions to business units in each country so that product characteristics can be tailored to local preferences. Firms using this strategy try to isolate themselves from global competitive forces by establishing protected market positions or by competing in industry segments that are most affected by differences among local countries. The worldwide geographic area structure is used to implement this strategy. The worldwide geographic area structure emphasizes national interests and facilitates the firm’s efforts to satisfy local differences.

Using the multidomestic strategy requires little coordination between different country markets, meaning that integrating mechanisms among divisions around the world are not needed. Coordination among units in a firm’s worldwide geographic area structure is often informal. A key disadvantage of the multidomestic strategy/ worldwide geographic area structure match is the inability to create strong global efficiency.

With the corporation’s home office dictating competitive strategy, the global strategy is one through which the firm offers standardized products across country markets. The firm’s success depends on its ability to develop economies of scope and economies of scale on a global level. The worldwide product divisional structure supports use of the global strategy. In the worldwide product divisional structure, decision- making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among divisional business units. This structure is often used in rapidly growing firms seeking to manage their diversified product lines effectively.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

The transnational strategy calls for the firm to combine the multidomestic strategy’s local responsiveness with the global strategy’s efficiency. Firms using this strategy are trying to gain the advantages of both local responsiveness and global efficiency. The combination structure is used to implement the transnational strategy. The combination structure is a structure drawing characteristics and mechanisms from both the world-wide geographic area structure and the worldwide product divisional structure. The transnational strategy is often implemented through two possible combination structures which include a global matrix structure and a hybrid global design.

The global matrix design brings together both local market and product expertise into teams that develop and respond to the global marketplace. The global matrix design also promotes flexibility in designing products and responding to customer needs. However, it has severe limitations in that it places employees in a position of being accountable to more than one manager. At any given time, an employee may be a member of several functional or product group teams. Relationships that evolve from multiple memberships can make it difficult for employees to be simultaneously loyal to all of them. Although the matrix places authority in the hands of managers who are most able to use it, it creates problems in regard to corporate reporting relationships.

The fit between the multidomestic strategy, worldwide geographic area structure, global strategy, and the worldwide product divisional structure is apparent. However, when a firm wants to implement the multidomestic and global strategies simultaneously through a combination structure, the appropriate integrating mechanisms are less obvious. The structure used to implement the transnational strategy must do the following:

Simultaneously be centralized and decentralized;

Integrated and nonintegrated; and

Formalized and nonformalized.

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Evolutionary Patterns of Strategy and Organizational Structure, continued

A network strategy exists when partners form several alliances in order to improve the performance of the alliance network itself through cooperative endeavors. The greater levels of environmental complexity and uncertainty facing companies in today’s competitive environment are causing more firms to use cooperative strategies such as strategic alliances and joint ventures. The breadth and scope of firms’ operations in the global economy create many opportunities for firms to cooperate. A firm can develop cooperative relation-ships with many of its stakeholders, including customers, suppliers, and competitors. When a firm becomes involved with combinations of cooperative relationships, it is part of a strategic network, or an alliance constellation or portfolio.

A strategic network is a group of firms that has been formed to create value by participating in multiple cooperative arrangements. An effective strategic network facilitates discovering opportunities beyond those identified by individual network participants. A strategic network can be a source of competitive advantage for its members when its operations create value that is difficult for competitors to duplicate. Strategic networks are used to implement business- level, corporate- level, and international cooperative strategies.

At the core or center of the strategic network, the strategic center firm is the one around which the network’s cooperative relationships revolve. Due to its central position, the strategic center firm is the foundation for the strategic network’s structure. Concerned with various aspects of organizational structure, the strategic center firm manages what are often complex, cooperative interactions among network partners.

The strategic center firm is engaged in four primary tasks as it manages the strategic network and controls its operations. These tasks include the following:

Strategic outsourcing;

Competencies;

Technology; and

Race to learn.

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Check Your Understanding

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Cooperative Strategies

The two types of business-level complementary alliances are vertical and horizontal. Firms with competencies in different stages of the value chain form a vertical alliance to cooperatively integrate their different, but complementary, skills. Firms combining their competencies to create value in the same stage of the value in the same stage of the value chain are using a horizontal alliance. Vertical complementary strategic alliances are formed more frequently than horizontal alliances.

Corporate-level cooperative strategies are used to facilitate product and market diversification. As a cooperative strategy, franchising allows the firms to use its competencies to extend or diversify its product or market reach, but without completing a merger or an acquisition.

Strategic networks formed to implement international cooperative strategies result in firms competing in several countries. Differences among countries’ regulatory environments increase the challenge of managing international networks and verifying that at a minimum, the network’s operations comply with all legal requirements.

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Summary

We have reached the end of this lesson. Let’s take a look at what we have covered.

First, we went over organizational structure. Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes.

We then talked about organizational controls. Organizational 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.

Next, we went over types of structure. Types of structure include simple, functional, and multidivisional. We also went over several different types of strategies and structures.

We concluded the lesson with a discussion on cooperative strategies. These include business-level cooperatives, corporate-level cooperatives, and international cooperatives.

This completes this lesson.