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
CorporateLevel Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Chapter 9
Cooperative
Strategy
Strategic
Competitiveness
Above-Average
Returns
Feedback
2
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
3
Stability and Flexibility in
Structure

Structural stability provides the capacity
– required to consistently and predictably
manage the firm’s daily work routines

Structural flexibility provides the
opportunity to
– explore competitive possibilities
– allocate resources to activities that shape
competitive advantages needed by the firm
4
Organizational Controls

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

Two types of organizational controls
– strategic controls
– financial controls
5
Organizational Controls:
Strategic Controls
Strategic Controls  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)

Used to evaluate the degree
to which the firm focuses on
the requirements to
implement its strategies
6
Organizational Controls:
Financial Controls
Strategic Controls  Objective criteria

Financial Controls
Accounting-based measures
include
– return on investment
– return on assets

Market-based measures
include
– economic value added
7
Matching Control to Strategy

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

Firms grow in predictable patterns
–
–
–
–

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
 Firms frequently alter their structure as
they grow in size and complexity
 Three basic structure types:
– simple structure
– functional structure
– multi-divisional structure (M-form)
10
Strategy and Structure Growth
Pattern: Simple Structure
Simple
Structure
11
Strategy and Structure Growth
Pattern: Simple Structure

Organizational form in which the ownermanager
– makes all major decisions directly
– monitors all activities

Staff
– serves as an extension of the manager’s
supervisory authority

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

Growth creates
– complexity
– managerial and structural challenges

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 GrowthCoordination and
Control Problems
Functional
Structure
14
Strategy and Structure Growth
Pattern: Functional Structure

Chief Executive Officer (CEO)
– limited corporate staff

Functional line managers in dominant
organizational areas
– 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

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

Strategic control
– operating divisions
– each division is separate business or profit
center

Top corporate officer delegates
responsibilities to division managers
– for day-to-day operations
– for business-unit strategy

Appropriate when the firm grows through
diversification
17
Strategy and Structure Growth
Pattern: Multidivisional Structure

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 GrowthCoordination and
Control Problems
Functional
Structure
Efficient
implementation
of formulated
strategy
Sales GrowthCoordination and
Control Problems
19
Matching Structure and Strategy

Different forms of the functional
organizational structure are matched to
– 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
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
 Appropriate for related-diversified
businesses
 Key task of corporate managers is
exploiting synergies among divisions
 Managers use a combination of strategic
controls and financial controls
23
Multidivisional Structure

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
 The decision-making of managers in a
multi-divisional structure may be:
– centralized or decentralized
– bureaucratic or non-bureaucratic
24
Multidivisional Structure

Balance on these dimensions may change
over time
 Structure will evolve over time with:
–
–
–
–
changes in strategy
degree of diversification
geographic scope
nature of competition
25
Three Variations of the
Multidivisional Structure
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
Product
Division
Product
Division
Corporate
Marketing
Corporate
Finance
Product
Division
Product
Division
27
Cooperative Form of Multidivisional
Structure: Related-Constrained Strategy

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
Division
SBU
Division
Division
Division
Division
Division
29
SBU Form of Multidivisional
Structure: Related-Linked Strategy

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
Division
Division
Division
Auditing
Division
Division
31
Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy

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

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

Multi-divisional structure firms use a
combination of:
– strategic controls
– financial controls
33
Characteristics of Various
Structural Forms
Structural
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Type of
Strategy
RelatedConstrained
RelatedLinked
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
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Divisional
Performance
Appraisal
Subjective
Strategic
Criteria
Strategic &
Financial
Criteria
Objective
Financial
Criteria
Divisional
Incentive
Compensation
Linked to
Corporate
Performance
Linked to
Linked to
Corporate
Divisional
SBU & Division Performance
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
Worldwide primary or support
Products
Products
Corporate
activities to the
Division
Division
Headquarters
world’s best providers
• decision-making
authority centralized
Worldwide
Worldwide
Products
Products
in worldwide division
Division
Division
headquarters
Worldwide
Products
Division
Worldwide
Products
Division
37
Using the Combination Structure:
Transnational Strategy

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
 The strategic network seeks to develop a
competitive advantage in primary or
support activities
 A strategic center firm often manages the
network
39
Strategic Network

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

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
 Many large multinational firms form
distributed strategic networks with
multiple regional strategic centers to
manage their array of cooperative
arrangements with partner firms
 Breaking large networks into multiple
manageably-sized networks helps to
manage the complexity of maintaining
many relationships
43
Distributed Strategic Network
Main
Strategic
Strategic
Center
Center
Firm
Firm
= Distributed Strategic Center Firms
44