Transcript Strategic Management: Competitiveness and Globalization

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
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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
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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
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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
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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
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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
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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)
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Strategy and Structure Growth
Pattern: Simple Structure
Simple
Structure
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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
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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
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Strategy and Structure Growth
Pattern: Functional Structure
Simple
Structure
Efficient implementation
of formulated strategy
Sales GrowthCoordination and
Control Problems
Functional
Structure
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Three Variations of the
Multidivisional Structure
Multidivisional
Structure
(M-form)
Cooperative
Form
Competitive
Form
Strategic Business-Unit
(SBU) Form
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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
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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
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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
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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
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Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy
Headquarters Office
President
Legal
Affairs
Finance
Division
Division
Division
Division
Auditing
Division
Division
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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
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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
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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
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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
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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
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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
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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)
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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
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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)
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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)
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Strategic Network
Strategic
Center
Firm
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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
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