The Strategic
Management
Process
Figure 1.1
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11–1
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
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11–2
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
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11–3
Components of Internal Strategic Fit
(Froelich Model)
Environment
Strategy
Structure
Systems
Resources/Capabilities
Organizational Culture
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11–4
Organizational Structure
• Organizational structure specifies:
 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
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11–5
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
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11–6
Relationships between Strategy and
Structure
• Strategy and structure have a reciprocal
relationship:
 Structure flows from or follows the selection of
the firm’s strategy
but …
 Once in place, structure can influence current
strategic actions as well as choices about future
strategies
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11–7
Strategy and Structure
Growth Pattern
Efficient implementation
of formulated strategy
• As firms grow larger and
become more complex,
structural challenges
emerge
• Firms’ larger sizes dictate
the need for more
sophisticated workflows and
integrating mechanisms
Simple
Functional
Efficient implementation
of formulated strategy
Multidivisional
Figure 11.1
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11–8
Strategy and Structure: Simple Structure
• Owner-manager
 Makes all major decisions directly
 Monitors all activities
• Staff
 An extension of manager’s supervisor authority
• Matched with focus (or niche) strategies and
small single business strategies
 Commonly compete by offering a single product
line in a single geographic market
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11–9
Simple Structure (cont’d)
Advantages?
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Disadvantages?
11–10
Strategy and Structure: Functional Structure
• Chief Executive Officer (CEO)
 Limited corporate staff
• Functional line managers in needed
organizational areas, possibly:
 Manufacturing Marketing
 Accounting
R&D
Engineering
HRM
• Supports use of business-level strategies
and some corporate-level strategies
 (larger) Single or dominant business with low
levels of diversification
 Facilitates centralization/company-wide
coordination
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11–11
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
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11.3
11–12
Functional Structure under
a Differentiation Strategy
• 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
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11–13
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
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Figure 11.2
11–14
Functional Structure under
a Cost Leadership Strategy
• Operations is typically the main function
 Process engineering is emphasized over
research and development
 Large centralized staff oversees activities
 Formalized procedures guide actions
 Structure is mechanical
 Job roles are highly structured
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11–15
Implementing an Integrated Cost
Leadership/Differentiation Strategy
• The integrated form of the functional
structure must have:
 Decision-making patterns that are partially
centralized and partially decentralized
 Semi-specialized jobs
 Rules and procedures that allow both formal and
informal job behaviors
A hybrid form; no wonder it is hard to implement!
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11–16
Functional Structure (cont’d)
• Differences in orientation among
organizational functions can:
 Impede communication and coordination
 Cause functional-area managers to focus on
local versus overall company strategic issues
 Increase the need for CEO to integrate decisions
and actions of business functions
 Facilitate career paths and professional
development in specialized functional areas
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11–17
Evolutionary Growth of the Firm
leading to increased diversification
• A firm’s continuing success that leads to:
 Product diversification, or
 Market diversification, or
 Both product and market diversification
• Increasing diversification creates
information processing and coordination
problems that the functional structure can’t
handle
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11–18
Strategy and Structure:
Multidivisional Structure
• Top corporate officer delegates
responsibilities to division managers
 For day-to-day operations
 For business-unit strategy
• Appropriate as a firm grows through
diversification
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11–19
Example of M-Form Structure
Diageo, PLC
Premium
Drinks
Quick Service
Restaurants
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Processed
Food
11–20
Multidivisional Structure (cont’d)
• Major Benefits
 Corporate officers are more detached as they
monitor and compare performance of divisions,
facilitating resource allocation decisions
 Stimulates divisional managers to optimize
performance of their units
 Provides for faster reaction to change and a
stronger customer focus at division level
 Development of “general management” expertise
within the firm
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11–21
Multidivisional Structure (con’t)
• Major Disadvantages
 Increased complexity of the firm overall
 Difficulties coordinating and sharing expertise
across divisions
 Duplication of resources
 Tendency to rely on financial controls rather than
strategic controls
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11–22
Organizational Controls
Strategic
Controls
Organizational
Controls
• “Subjective” (strategically relevant) Criteria
 Philosophy of the “balanced scorecard”
 Evaluate the degree to which the firm
accomplishes key tasks related to success of the
particular strategy being implemented
 Examples = market share, innovation lead time,
image, location advantages, product mix
 requires in-depth knowledge/insight in market
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11–23
Organizational Controls
Strategic
Controls
Organizational
Controls
Financial
Controls
• “Objective” financial criteria
 Enables comparisons of differing divisions using
“standardized financial measures, such as:
. . . . . .
 Requires less strategic understanding
 Use with caution - do not tell the whole story!
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11–24
Matching Control to Strategy
• Relative use of controls varies by type of
strategy
 Large diversified firms using a cost leadership
strategy tend to emphasize financial controls
 Companies and business units using a
differentiation strategy typically emphasize
strategic controls
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11–25
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
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11–26
Variations of the Multidivisional Structure
Figure 11.4
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11–27
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•
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• Rewards are subjective and tend to emphasize overall corporate
performance in addition to divisional performance
• Culture emphasizes cooperative sharing
Figure 11.5
11–28
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
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11–29
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
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11–30
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
• 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
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11–31
Multidivisional Structure: Competitive Form
• A structure in which there is independence
among the firm’s divisions
 Divisions do not share common strengths, so
integrating mechanisms are not employed
 Corporate HQ has a small staff; strategy is
delegated to divisions, but resource allocation
among divisions is centralized
 Financial controls predominate
 Prominent functions are finance, auditing; plus
legal is acquisitions/divestitures are frequent
 Culture of competition rather than cooperation
between divisions
Unrelated Strategy
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11–32
Even More Structures !!!
• Structures for international strategies
• (Network) structures for cooperative
strategies
• Matrix structures to facilitate innovation
• Creative and experimental structures
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11–33
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
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Figure 11.8
11–34
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
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Figure 11.9
11–35
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
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11–36
Matrix Structure
Advantages
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Disadvantages
11–37
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
•.....
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11–38
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?
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11–39
A Strategic Network - for elaborate
cooperative strategies (Chapter 9)
Strategic
Center
Firm
Adapted from
Figure 11.10
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11–40
Strategic Center Firm
• Is the foundation for the strategic network’s
structure
 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
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11–41
The “best” organizational structure =
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11–42
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
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11–43