CHARLES W. L. HILL / GARETH R. JONES
Strategic Management
Chapter
12
An Integrated Approach 10th ed.
Implementing
Strategy in
Companies that
Compete in a Single
Industry
Student Version
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University
Learning Objective: After reading this
chapter you should be able to understand
how organizational design requires
strategic managers to select the right
combination of organizational structure,
control, and culture.
IMPLEMENTING STRATEGY THROUGH
ORGANIZATIONAL DESIGN
 Strategy implementation involves the use of
organizational design, the process of
deciding how a company should create, use,
and combine organizational structure control
systems, and culture to be successful.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
IMPLEMENTING STRATEGY THROUGH
ORGANIZATIONAL DESIGN
 Organizational structure assigns employees to
specific value creation tasks and roles and
specifies how these tasks and roles are to work
together.
 A control system provides managers with:
1) a set of incentives to motivate employees to
work toward increasing efficiency, quality,
innovation, responsiveness to customers, and
2) specific feedback on its members’
performance.
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BUILDING BLOCKS OF
ORGANIZATIONAL STRUCTURE
Grouping Tasks, Functions, and Divisions
 A function is a collection of people who work
together and perform the same types of tasks.
 As organizations grow and produce a wider range
of products, the amount and complexity of the
work exchanges of transfers among people,
functions, and subunits, increase.
 A division is a way of grouping functions to allow
an organization to better produce and transfer its
goods and services to customers.
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12-4
Learning Objective: After reading this
chapter you should be able to explain
why it is so important that strategic
managers keep the organizational
hierarchy as flat as possible and what
factors determine the way they decide to
centralize or decentralize authority.
ALLOCATING AUTHORITY AND
RESPONSIBILITY
 A hierarchy of authority, or chain of command,
defines each manager’s relative authority.
 A span of control refers to the number of
subordinates who report directly to a manager.
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12-5
ALLOCATING AUTHORITY AND
RESPONSIBILITY
 A tall organizational structure has many levels
of authority relative to the company’s size.
 A flat organizational structure has fewer levels
relative to a company’s size.
 The taller the organizational structure, the more
problems that are encountered.
1) It can take a long time for decisions from top
managers to reach lower management and reverse
problems with feedback.
2) There is a higher chance for distortion of
commands.
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12-6
ALLOCATING AUTHORITY AND
RESPONSIBILITY
 Top managers might follow the principle of the
minimum chain of command which states that a
company should choose the hierarchy with the
fewest levels of authority necessary.
 An important way to reduce the problems
associated with too-tall hierarchies and reduce
bureaucratic costs is to decentralize authority.
1) Top managers should delegate authority to middleand first-level managers.
2) Allowing managers in bottom layers to implement
strategies is motivating and accountability increases.
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12-7
INTEGRATION AND
INTEGRATING MECHANISMS
 As a structure becomes complex, top managers
need to use various integration mechanisms to
increase communication and coordination among
functions and divisions.
1) Direct contact among managers creates a context within
which managers from different functions or divisions can
work together to solve mutual problems.
2) When the volume of contact between two functions or
divisions increases, create a liaison role for one of the
managers.
3) When more than one function or division share a common
problem, a team may be appropriate.
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12-8
STRATEGIC CONTROL SYSTEMS
 Strategic control systems are tools that top
managers use to monitor and evaluate whether, in
fact, their strategy and structure are working as
intended.
 Strategic control helps managers obtain the four
basic building blocks of competitive advantage.
 To determine production efficiency (how well the
company is using resources), managers must be
able to accurately measure how many units of
inputs are required to produce a unit of output.
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12-9
STRATEGIC CONTROL SYSTEMS
 An effective strategic control system should have
the following three characteristics:
1) It should be flexible enough to allow managers to
respond as necessary to unexpected events.
2) It should provide accurate information, thus giving a
true picture of organization performance.
3) It should supply managers with the information in a
timely manner because making decisions on the
basis of outdated information is a recipe for failure.
 Strategic control systems are developed to
measure performance at four levels: corporate,
divisional, functional, and individual.
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12-10
STRATEGIC CONTROL SYSTEMS
Types of Strategic Control Systems
 Personal control is the desire to shape and
influence the behavior of a person in a face-to-face
interaction in the pursuit of a company’s goals.
 Output control is a system in which strategic
managers estimate or forecast appropriate
performance goals for each division.
 Behavior control is control through the
establishment of a comprehensive system of rules
and procedures to direct the actions or behavior of
divisions, functions, and individuals.
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12-11
STRATEGIC CONTROL SYSTEMS
Types of Strategic Control Systems
 An operating budget is a blueprint that outlines
how managers intend to use the organizational
resources to efficiently achieve organizational goals.
 Standardization refers to the degree to which a
company specifies how decisions are to be made so
that employees’ behavior becomes predictable.
 In practice, there are three things an organization
can standardize: inputs, conversion activities, and
outputs.
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12-12
ORGANIZATIONAL CULTURE
 Another element of successful strategy
implementation is managing organizational
culture, the specific collection of values and norms
shared by people and groups in an organization.
 An adaptive culture is one that is innovative and
that encourages and rewards middle- and lowerlevel managers for taking initiative.
 Successful companies have values promoting a bias
for action.
 The company must do what it does best and
develop a business model focused on its mission.
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Learning Objective: After reading this
chapter you should be able to explain the
many advantages of a functional
structure and why and when it becomes
necessary to utilize a more complex form
of organization structure.
BUILDING DISTINCTIVE COMPETENCIES
AT THE FUNCTIONAL LEVEL
Functional Structure: Grouping by Function
 In the quest to deliver a final product to the
customer, two problems arise: the range of value
chain activities that must be performed expands,
and it quickly becomes clear that the company lacks
expertise to perform these activities effectively.
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BUILDING DISTINCTIVE COMPETENCIES
AT THE FUNCTIONAL LEVEL
Functional Structure: Grouping by Function
 Functional structures group people on the basis
of their common expertise and experience or
because they use the same resources.
 Functional structures have several advantages:
 If people who perform similar tasks are grouped
together, they can learn from one another.
 They can monitor each other to make sure that all
are performing their tasks effectively.
 They give managers greater control over activities.
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12-15
BUILDING DISTINCTIVE COMPETENCIES
AT THE FUNCTIONAL LEVEL
Developing Culture at the Functional Level
 In manufacturing, functional strategy usually
centers upon improving efficiency and quality.
 Pursuing TQM (total quality management), the
inputs and involvement of all employees in the
decision-making process are necessary to improve
efficiency and quality.
 In TQM, work teams are created and given the
responsibility and authority to discover and
implement improved work procedures.
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12-16
BUILDING DISTINCTIVE COMPETENCIES
AT THE FUNCTIONAL LEVEL
Developing Culture at the Functional Level
 The functional strategy for an R&D department is to
develop distinctive competencies in innovation and
quality as excellence that result in products that fit
customer needs.
 The cost-effective way to monitor the behavior of
salespeople is to develop sophisticated output and
behavior controls.
 Set specific sales goals or goals for increasing
responsiveness to customers.
 Require reports describing interaction with customers.
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12-17
Learning Objective: After reading this chapter
you should be able to differentiate between the
more complex forms of organizational structure
managers adopt to implement specific kinds of
business-level strategies.
IMPLEMENTING STRATEGY
IN A SINGLE INDUSTRY
 To pursue its business model successfully,
managers must find the right combination of
structure, control, and culture that links and
combines the competencies in a company’s value
chain functions so that it enhances its ability to
differentiate products or lower costs.
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12-18
IMPLEMENTING STRATEGY
IN A SINGLE INDUSTRY
 Effective organizational design:
 Improves the way in which people and groups choose
business-level strategies that lead to increasing
differentiation, thus providing more value to customers,
and the opportunity to charge a higher price.
 Reduces the bureaucratic costs associated with
solving the measurement and communication
problems, such as transferring a product in process
between functions.
 A more-complex structure will cost more to
operate because additional and experienced
managers will be needed.
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12-19
IMPLEMENTING STRATEGY
IN A SINGLE INDUSTRY
Implementing Cost Leadership
 The aim of a company pursuing cost leadership
is to become the lowest-cost producer in the
industry, and this involves reducing costs across
all functions in the organization.
 Cost leadership requires that managers
continuously monitor their structures and control
systems to find ways to restructure or streamline
them so that they operate more effectively.
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12-20
IMPLEMENTING STRATEGY
IN A SINGLE INDUSTRY
Implementing Differentiation
 Effective strategy implementation can improve a
company’s ability to add value and to differentiate its
products.
 To make its products unique, a company must
design its structure, control, and culture around the
particular source of competitive advantage.
 Companies pursuing differentiation often have a
markedly different kind of culture than those
pursuing cost leadership.
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12-21
IMPLEMENTING STRATEGY
IN A SINGLE INDUSTRY
Product Structure: Implementing
a Wide Product Line
 An organization that chooses a product structure
first divides its overall product line into product
groups or categories.
 Each product group focuses on satisfying the
needs of a particular customer group and is
managed by its own team of managers.
 Because all of the R&D teams belong to the same
centralized function, they can share information.
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12-22
MARKET STRUCTURE: INCREASING
RESPONSIVENESS TO CUSTOMER GROUPS
 Suppose the source of competitive advantage
depends upon the ability to meet the needs of
distinct and important sets of customers.
 Many companies develop a market structure that
is similar to the product structure except it focuses
on customer groups instead of product groups.
 A market structure brings customer group
managers and employees closer to specific groups
of customers.
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12-23
GEOGRAPHIC STRUCTURE:
EXPANDED BY LOCATION
 A company that begins to expand locally,
regionally, or nationally through internal expansion
or horizontal integration frequently moves to a
geographic structure in which geographic
regions become the basis for grouping activities.
 This structure allows the company to be
responsive to the needs of regional customers and
reduce transportation costs.
 A geographic structure provides more coordination
and control than a function structure does.
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12-24
MATRIX AND PRODUCT-TEAM
STRUCTURES: COMPETING IN FASTCHANGING, HIGH-TECH ENVIRONMENTS
 In a matrix system, value chain activities are
grouped in two ways.
1) Activities are grouped vertically by function so there
is a familiar differentiation of tasks into functions.
2) Superimposed upon this vertical pattern is a
horizontal pattern based on grouping by product or
project in which people and resources are grouped to
meet ongoing product development needs.
 Implementing a matrix structure permits intensive
cross-functional integration.
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12-25
RESTRUCTURING AND REENGINEERING
 Restructuring a company involves two steps:
1) Streamlining the hierarchy of authority and reducing
the number of levels in the hierarchy to a minimum.
2) Reducing the number of employees to lower
operating costs.
 A company may operating more effectively using
reengineering, which involves the fundamental
rethinking and radical redesign of business
processes to achieve dramatic improvements in
critical, contemporary measures of performance.
 Reengineering and TQM are highly interrelated
and complementary.
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