Strategic Management:
Concepts and Cases
Part III: Strategic Actions: Strategy Implementation
Chapter 11: Organizational Structure and Controls
1
The Strategic Management Process
2
GE: Strategy and Structure Changes?
 Only company listed in the Dow Jones Industrial Index
that was also in the original (1986) index
 Mid-2005 Jeffrey Immelt (who replaced Jack Welch four
years earlier) changed GE’s structure from eleven to six
strategic business units (SBUs)

Why? “…[to] accelerate GE’s growth in key industries” while
simultaneously helping the firm become more focused on
emerging technologies with significant commercial potential
 Even with this reorganization, GE continued using
related-linked diversification strategy at the corporate
level and SBU form of multidivisional structure
3
GE: Strategy and Structure Changes?
(Cont’d)
 Mid-2007 call for GE to sell non-core businesses
(i.e., NBC Universal and Money). This would
change GE’s corporate-level strategy from related
linked to related constrained, necessitating a change
in structure from SBU form of the multidivisional to
cooperative of multidivisional
4
Introduction
 All firm use at least one business-level strategy
 Once selected, strategies are NOT implemented
in a vacuum!
 Organizational structure and controls provide
framework within which strategies are used
5
Chapter 11: Organizational Structure
(OS) and Controls
 Overview: Six content areas
Define OS and controls and differences between
strategic and financial controls
 Describe relationship between strategy & structure
 Describe the functional structures for businesslevel strategies
 Three versions of multi-divisional (M-form) structure for
different diversification strategies
 OS for implementation three international strategies
 Strategic networks and implementation of center firm

6
Organizational Structure (OS) & Controls (OC)
 Organizational Structure (OS)
 Specifies firm’s formal reporting relationships,
procedures, controls, authority & decision-making
processes (i.e., work to be done and how to do it!)
 Effective use of firm’s strategies facilitated when
structure is properly aligned
Structural stability: Capacity firm requires to
consistently and predictably manage its daily work
routines
 Structural flexibility: Opportunity to explore competitive
advantages firm will need to be successful in the future
Pioneer Alfred Chandler found organizations change
their structures when inefficiencies force them to do so


7
Organizational Structure & Controls
(Cont’d)
 Organizational Controls (OC)
 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
 Two types include strategic and financial
8
Organizational Structure & Controls
(Cont’d)
 Organizational Controls (OC)
 1. Strategic controls: 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




Concerned with what firm might do vs. what it can do
Used to evaluate degree to which firm focuses on the
requirement to implement strategies (i.e., SUB: primary and
support activities; corporate level: knowledge, markets &
technologies across businesses)
Focus on the content of strategic actions
Encourage decisions that incorporate moderate and acceptable
levels of risk
9
Organizational Structure & Controls
 Organizational Controls (OC)
 2. Financial controls



(Cont’d)
(Cont’d)
Objective criteria used to measure firm’s performance against
previously established quantitative standards (used for
unrelated diversification)
Focus on short-term financial outcomes
Produce risk-averse managerial decisions
10
Strategy vs. Structure: Relationships
 Reciprocal relationship
 Implies change to one causes change in the
other
 “Research shows strategy has a much more
important influence on structure than the
reverse.”
11
Chapter 11: Organizational Structure
(OS) and Controls
 Overview: Six content areas
Define OS and controls and differences between
strategic and financial controls
 Describe relationship between strategy & structure
 Describe the functional structures for businesslevel strategies
 Three versions of multi-divisional (M-form)
structure for different diversification strategies
 OS for implementation three international strategies
 Strategic networks and implementation of center firm

12
Strategy vs. Structure: Evolutionary Patterns
 Chandler found firms tend to grow in a predictable
pattern, including the areas of volume, geography,
integration (horizontal & vertical) & product/
business diversification

Growth pattern implies structural changes!
 Several structure forms, used to implement
strategies, evolved including



1. Simple
2. Functional
3. Multidivisional
13
Strategy and
Structure
Growth Pattern
14
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Three main structures
 1. Simple



Owner-manager makes all major decisions and monitors all
activities, staff acts as extension of manager's supervisory
authority
Few rules, limited task specialization, unsophisticated
technology system
As firm grows more complex, need to add layers and controls
15
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Three main structures
 2. Functional




CEO and a limited corporate staff make all decisions, with
functional line managers in dominant organizational areas
Allows functional specialization resulting in active knowledge
sharing in each functional area
Can negatively affect communication and coordination
among those representing different organizational functions
When changing from a simple to functional structure need to
focus on value-destroying bureaucratic procedures
16
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Three main structures
 3A. Multidivisional


Operating divisions each represent a separate business or
profit center in which the top corporate officer delegates
responsibilities for day-to-day operations and business-unit
strategies to division managers
3B. Multidivisional (M-form) structure

Ties together several operating divisions, each representing
a separate business or profit center to which responsibility for
daily operations and business-unit strategy is delegated
17
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Three main structures
 3B. Multidivisional (M-form) structure (Cont’d)

It enables corporate officers to more accurately
monitor the performance of each business, which
simplifies the problem of control

It facilitates comparisons between divisions, which
improves resource allocation process

It stimulates managers of poorly performing divisions
to look for ways of improving performance
18
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 No one structure (simple, functional or
multidivisional) is superior to the others
19
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Business-level strategies & functional structure
matches for implementing strategies (N=3):



1. Cost leadership (CL)
2. Differentiation (D)
3. CL/D strategy
 Structural characteristics (N=3) drive different
forms of organizational structures



1. Specialization
2. Centralization
3. Formalization
20
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Structural characteristics defined
 1. Specialization


2. Centralization


Type and number of jobs required to do work
Degree to which decision-making authority is retained at
higher managerial levels
3. Formalization

Degree to which formal rules and procedures govern work
21
Functional Structure for Implementing
a Cost Leadership Strategy
22
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

1. Cost leadership (CL) & 5 Forces of Competition





Low-cost position is a valuable defense against rivals
Powerful customers can demand reduced prices
Costs leaders are in a position to absorb supplier price
increases and relationship demands, and to force suppliers
to hold down their prices
Continuously improving levels of efficiency and cost
reduction can be difficult to replicate and serve as significant
entry barriers to potential competitors
Cost leaders hold an attractive position in terms of product
substitutes, with the flexibility to lower prices to retain
customers
23
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

1. Cost leadership (CL) and the functional structure








Simple reporting relationships
Few decision-making and authority layers
Centralized corporate staff
Strong operational focus on process improvements
Low-cost culture
Centralized staff decision-making authority
Jobs specialization
Highly formalized rules and procedures
24
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

1. Cost leadership (CL) strategy risks

Processes can become obsolete

Focus on cost reductions can come at the expense of
understanding customer perceptions and needs

Strategy could be imitated, requiring the firm to increase the
value offered to retain customers
25
Functional Structure for Implementing
a Differentiation Strategy
26
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

2. Differentiation (D) strategy



Integrated set of actions designed by a firm to produce or
deliver goods or services at an acceptable cost that
customers perceive as being different in ways that are
important to them
Target customers – perceived product value
Customized products – differentiating on as many features
as possible:
 Unusual features, responsive customer service, rapid product
innovations, technological leadership, perceived prestige and
status, different tastes, engineering design, performance
27
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

2. Differentiation (D) & 5 Forces of Competition





Customer loyalty: the most valuable defense against rivals
Unique products reduce customer sensitivity to raised prices
High margins (for differentiated products) insulate firm from
supplier influence
Significant entry barriers: customer loyalty & product
uniqueness
Firms with customers loyal to their products are positioned
effectively against product substitutes
28
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

2. Differentiation (D) and functional structure







Complex and flexible reporting relationships
Cross-functional product development teams
Strong focus on marketing and product R&D
Development-oriented culture
Decentralized decision making
Broad job descriptions
Informal rules and procedures
29
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

2. Differentiation (D) strategy risks
 Price differential for differentiated product may be perceived



as too large
Firms’ means of differentiation may cease to provide value
for which customers are willing to pay (successful rival
imitation)
Experience can narrow customers' perceptions of the value
of a product's differentiated features
Counterfeit goods might appear in the marketplace
30
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between business-level strategies and
functional structure to implement 3 strategies:

3. CL/D strategy




These firms may sell products that create value
because of relatively low and and reasonable
sources of differentiation
Difficult to implement, but frequently used in the
global economy
Challenge due to primary/support activities
Need to successfully combine specialization,
formalization and centralization
31
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies and
multidivisional structure

3 forms
32
Three Variations of the
Multidivisional Structure
33
Cooperative Form of the Multidivisional Structure
for Implementing a Related Constrained Strategy
34
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies &
multidivisional structure: Cooperative form/related
constrained strategy

Cooperative form: organizational structure using horizontal
integration to bring about interdivisional cooperation

Divisions formed around products, markets or both

All of the divisions share one or more corporate strengths

Interdivisional sharing depends on cooperation

Links resulting from effective integration mechanisms support
sharing of both tangible and intangible resources

Centralization is one integrating mechanism that can be used to link
activities among divisions, allowing firms to exploit common
strengths and share competencies
35
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies &
multidivisional structure: Cooperative
form/related constrained strategy (cont’d)

Success influenced by how well information is
processed among divisions

Success can be influenced by managerial commitment
levels and the response to some lost managerial
autonomy

Matrix organization may evolve

organizational structure in which a dual structure combines both
functional specialization and business product or project
specialization
36
SBU Form of the Multidivisional Structure for
Implementing a Related Linked Strategy
37
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies &
multidivisional structure: SBU form/related linked
strategy

Related linked: Firms that share fewer resources and assets
among their businesses, concentrating on the transfer of
knowledge and competencies among the businesses

Strategic Business-Unit (SBU) Form: multidivisional
organization structure with three levels to support the
implementation diversification strategy

1. Corporate headquarters

2. Strategic Business Units (SBUs)

3. SBU division
38
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies &
multidivisional structure: SBU form/related linked
strategy

SBU Form (Cont’d)

Divisions within each SBU are related in terms of shared products
and/or markets

Divisions of one SBU have little in common with divisions of other
SBUs

Divisions within each SBU share product or market competencies to
develop economies of scope

Integrations used in cooperative form are equally effective for the
SBU form

Each SBU is a profit center

Financial controls are more vital for evaluating performance
39
Competitive Form of the Multidivisional Structure
for Implementing an Unrelated Strategy
40
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies &
multidivisional structure: Competitive form/unrelated
diversification
 Competitive form defined: organizational structure in
which the firm's divisions are completely independent
 Divisions do not share common corporate strengths
 Integration devices not developed to coordinate
activities across divisions
 Efficient capital markets in unrelated strategies
require organizational arrangements that emphasize
divisional competition rather than cooperation
 Specific performance expectations and accountability
for independent divisions stimulate internal
41
competition for future resources
Strategy vs. Structure: Evolutionary Patterns
(Cont’d)
 Matches between corporate-level strategies and
multidivisional structure: Competitive
form/unrelated diversification (Cont’d)



Headquarters maintains a distant relationship to avoid
intervention in divisional affairs
Strategic controls are used to monitor performance
relative to targeted returns
Headquarters remains responsible for cash flow
allocation, performance appraisal, resource allocation,
and the legal aspects related to acquisitions
42
Chapter 11: Organizational Structure
(OS) and Controls
 Overview: Six content areas
 Define OS and controls and differences between
strategic and financial controls
 Describe relationship between strategy and structure
 Describe the functional structures for business-level
strategies
 Three versions of multi-divisional (M-form) structure
for different diversification strategies
 OS for implementation three international
strategies
 Strategic networks and implementation of center firm
43
Worldwide Geographic Area Structure for
Implementing a Multidomestic Strategy
44
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 1. WW geographic area structure to implement the
multidomestic strategy

Multidomestic Strategy: international strategy in which strategic
and operating decisions are decentralized to the strategic
business-unit (SBU) in each country to allow the units to tailor
products to local markets

Worldwide (WW) Geographic Area Structure: organizational
structure emphasizing national interests and facilitates efforts to
satisfy local or cultural differences (used to implement the
multidomestic strategy)
45
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 1. WW geographic area structure to implement the
multidomestic strategy (Cont’d)

Focuses on variations of competition within each country

Customizes products to meet specific needs and preferences of
local customers

Decentralizes the firm's strategic and operating decisions to
business units in each country

Takes steps to isolate the firm from global competitive forces


Establish protected market positions

Compete in industry segments most affected by differences among
local countries
Deals with uncertainty due to differences across markets
46
Worldwide Product Divisional Structure for
Implementing a Global Strategy
47
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 2. WW product divisional structure to implement global
strategy

Global Strategy: International strategy whereby firm offers
standardized products across country markets, with the
competitive strategy being dictated by the home office

Worldwide Product Divisional Structure: Organizational structure
with centralized decision-making authority in the WW division
headquarters to coordinate and integrate decisions and actions
among divisional business units (used to implement the global
strategy)
48
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 2. WW product divisional structure to implement global strategy
(Cont’d)

Emphasizes economies of scale

Facilitated by improved global accounting and financial reporting
standards

Centralizes the firm's strategic and operating decisions at the home
office

Involves SBUs operating in each country that are interdependent

Home office attempts to achieve integration across SBUs, adding
management complexity

Produces lower risk

Is less responsive to local market opportunities

Offers less effective learning processes due to the pressure to conform
and standardize
49
Hybrid Form of the Combination Structure for
Implementing a Transnational Strategy
50
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 3. Combination structure to implement transnational strategy

Transnational Strategy: International strategy through which the firm
seeks to achieve both global efficiency and local responsiveness;
usually implemented through global matrix structure and hybrid global
design

Flexible Coordination: Building a shared vision and individual
commitment through an integrated network

Combination Structure: Organizational structure in which
characteristics and mechanisms are drawn from both the worldwide
geographic area structure and the worldwide product divisional
structure (used to implement transnational strategy)
51
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Three (3) Primary International Strategies:
 3. Combination structure to implement transnational strategy
(Cont’d)

Assets and operations may be centralized/decentralized

Functions may be integrated/nonintegrated

Relationships may be formal/informal

Coordination mechanisms may leverage efficiency/flexibility

Mandates to subsidiaries may be global/specialized-contribution/
localized-implementation
There are competing objectives when a worldwide combination
structure is used to implement a transnational strategy

52
A Strategic Network
53
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Matches between cooperative strategies and
network structures


Network strategy: Partners form several alliances in
order to improve the performance of the alliance
network itself through cooperative endeavors
Strategic network: Group of firms that form [around
core] to create value to participating in multiple
cooperative arrangements

At core: Strategic Center Firm which has 4 primary tasks
54
International Strategy (IS)
&Worldwide (WW) Structure
(Cont’d)
 Strategic Center Firm’s primary tasks
 1. Strategic outsourcing
 2. Competencies
 3. Technology
 4. Race to learn
55
Chapter 11: Organizational Structure
(OS) and Controls
 Overview: Six content areas
 Define OS and controls and differences between
strategic and financial controls
 Describe relationship between strategy and structure
 Describe the functional structures for business-level
strategies
 Three versions of multi-divisional (M-form) structure
for different diversification strategies
 OS for implementation three international strategies
 Strategic networks & implementation of center
firm
56
Implementing Business-level
Cooperative Strategies
 Business-level complementary alliances (N=2)
 Vertical: partnering firms share their resources and
capabilities from different stages of the value chain to
create a competitive advantage.
 Horizontal: partnering firms share resources and
capabilities from the same stage of the value chain to
create a competitive advantage - commonly used for
long-term product development and distribution
opportunities
57
Implementing Corporate-level
Cooperative Strategies
 Used to facilitate product & market diversification
 i.e., Franchising: contractual relationship to describe
and control the sharing of its resources and capabilities
with partners

Allows firms to use its competencies to extend or diversity
product or market reach, without completing a merger or
acquisition
58
A Distributed Strategic Network
59
Implementing International
Cooperative Strategies
 Strategic networks formed to implement
cooperative strategies resulting in firm
competing in several different countries

Distributed strategic networks: Organizational
structure used to manage international
cooperative strategies

Several regional strategic center firms are included in
the distributed network to manage partner firms’
multiple cooperative arrangements
60