Strategy Implementation:

Organizational Structure and Controls

Chapter 11: Organizational Structure (OS) and
Controls
Overview: Five content areas
Define OS and controls and differences between
strategic and financial controls
Describe relationship between strategy & structure
Describe the functional structures used to implement
business-level strategies
Three versions of multi-divisional (M-form) structure for
different diversification strategies
OS for implementation of three international strategies
Introduction
All firms 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
Top management has the responsibility for
designing structures
The strategy and structure should match
Strategy vs. Structure: Relationships
Strategy and structure have 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.
The structure should have stability for sustaining CA
and flexibility to create new CA
Properly matching strategy and structure can create
a CA
Organizational Structure (OS) & Controls (OC)
Organizational Structure (OS)
Specifies firms formal reporting relationships,
procedures, controls, authority & decision-making
processes (i.e., work to be done and how to do it!)
Effective use of firms 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-
imposed by stakeholders-investors /customers
Otherwise inertia operates within firms
Organizational Structure & Controls (Contd)
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
If differences are small the strategy is working-
otherwise need corrective action
Two types include strategic and financial
Organizational Structure & Controls (Contd)
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 companys 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., SBU: primary and
support activities; corporate level: knowledge, markets &
technologies across businesses)
Focus on the content of strategic actions in above areas
Encourage decisions that incorporate moderate and acceptable
levels of risk
Organizational Structure & Controls (Contd)
Organizational Controls (OC) (Contd)
2. Financial controls
Objective criteria used to measure firms performance against
previously established quantitative standards (used for
unrelated diversification) ROI or ROA or EVA
Focus on short-term financial outcomes
Compare against own previous outcomes and those of
competitors
In global context highly sophisticated controls
SAP and Oracle sell software and services to automate control
systems
Produce risk-averse managerial decisions
Companies using cost leadership emphasize financial controls,
and differentiation emphasize strategic controls
Related diversification uses strategic controls, unrelated
strategy uses financial controls
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 are used to implement
strategies, including:
1. Simple
2. Functional
3. Multidivisional
Strategy and Structure Growth Pattern
Simple
Structure
Efficient implementation
Of formulated strategy
Sales
Growth-coordination
and Control
Problems
Functional
Structure
Efficient implementation
Of formulated strategy
Sales
Growth-coordination
And control
problems
Multidivisional
Structure
Strategy vs. Structure: Evolutionary Patterns
(Contd)
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, frequent and informal communication
The simple structure is matched with focus strategy and
business level strategies because of single business, single
geography
Local restaurants and repair shops are examples
As firm grows more complex, need to add layers and controls
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Three main structures (Contd)
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 as marketing, manufacturing,
R&D, engineering and human resources
It helps growth and development of specialists career
It supports business level and corporate strategies (single and
dominant business)
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- destroys
creativity and innovation across functions
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Three main structures (Contd)
3. Multidivisional (M-form) structure
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
Used when geographic and product diversification happens
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
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Three main structures
Multidivisional (M-form) structure (Contd)
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
It is widely used to implement diversification strategy- both
related and unrelated
No single structure is superior to other. It should support the
strategy
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Business-level strategies & functional structure
matches for implementing strategies:
1. Cost leadership
2. Differentiation
3. Integrated cost leadership/differentiation
Structural characteristics drive different forms of
organizational structures
1. Specialization (type and no. of jobs required to
complete work)
2. Centralization(the degree to which authority is
retained at higher managerial levels)
3. Formalization (degree to which formal rules and
procedures govern work)
Functional Structure for Implementing a Cost
Leadership Strategy
Office of the President
Centralized Staff
Engineering Marketing Operations Personnel Accounting
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Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between business-level strategies and
functional structure to implement them:
1. Cost leadership 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
Wal-Mart uses functional structure to follow cost leadership
strategy in all its formats and stores- Supercentres, Discount
and Neighborhood Market retailing Save money, live better
Functional Structure for Implementing a
Differentiation Strategy
President and
Limited Staff
R&D
Marketing
New Product
R&D
Operations Marketing
Human
Resources
Finance
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between business-level strategies and
functional structure to implement them :
2. Differentiation 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
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between business-level strategies and
functional structure to implement them :
2. Differentiation 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
Under Armour has used differentiation strategy in sports
apparels, leaving behind Nike and other apparel companies. It
uses functional structure that match with differentiation
strategy
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between business-level strategies and
functional structure to implement them :
3. Integrated cost leadership/differentiation strategy
These firms may sell products that create value because of
relatively low price and reasonable sources of differentiation
Difficult to implement, but frequently used in the global
economy
Challenge due to primary/support activities in the Value Chain
Need to successfully combine Partial specialization, partial
formalization and partial centralization
Three Variations of the
Multidivisional Structure
Multidivisional
Structure
(M-form)
Cooperative
Form
Strategic Business Unit
(SBU) Form
Competitive
Form
Cooperative Form of the Multidivisional Structure for
Implementing a Related Constrained Strategy
President
Government
Affairs
Legal
Affairs
Corporate
R&D Lab
Strategic
Planning
Corporate
Human
Resources
Corporate
Finance
Corporate
Marketing
Headquarters Office
Product
Division
Product
Division
Product
Division
Product
Division
Product
Division
Strategy vs. Structure: Evolutionary Patterns
(Contd)
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. Using this structure H-P has
implemented the related constrained strategy to sell integrated
solutions to corporate data centers
More relationships in servers, storage devices, mobile computing
and high speed printers coordinated through value added
services by using cooperative M-form
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between corporate-level strategies &
multidivisional structure: Cooperative
form/related constrained strategy (contd)
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
Reward system can overcome the weaknesses
Matrix organization may evolve
organizational structure in which a dual structure combines
both functional specialization and business product or project
specialization
SBU Form of the Multidivisional Structure for
Implementing a Related Linked Strategy
President
Corporate
R&D
Corporate
Finance
Strategic
Planning
Corporate
Marketing
Corporate
Human
Resources
Strategic
Business
Unit
Strategic
Business
Unit
Strategic
Business
Unit
Division Division Division Division Division Division Division Division Division
Headquarters Office
Strategy vs. Structure: Evolutionary Patterns
(Contd)
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 of diversification strategy
1. Corporate headquarters
2. Strategic Business Units (SBUs)
3. SBU division
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between corporate-level strategies &
multidivisional structure: SBU form/related linked
strategy
SBU Form (Contd)
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
Strategy review takes place at headquarters-HQ staff as consultant
SBU has its own budget for staff to foster integration
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
Sears Holdings changed to SBU form in 2008 into 5 SBUs
-Brands, real estate, support, online and store operations
This allowed related business to work together to focus on
their distinct customer group
Provided better control at headquarters to evaluate
performance at SBU and division levels
The cooperation between division is good but difficult
across SBUs
Competitive Form of the Multidivisional Structure for
Implementing an Unrelated Strategy
Headquarters Office
President
Finance Auditing Legal Affairs
Division Division Division Division Division Division
Strategy vs. Structure: Evolutionary Patterns
(Contd)
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 competition
for future resources
Strategy vs. Structure: Evolutionary Patterns
(Contd)
Matches between corporate-level strategies and
multidivisional structure: Competitive
form/unrelated diversification (Contd)
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
Textron has four divisions and follows this structure
ROIC criteria is used for resource allocation
HQ role is appraisal, resource allocation, and long range planning
1. Inter division competition creates flexibility
2. It challenges inertia and status quo
3. Strong competition generates motivation and high performance
Summary of corporate structures
Structural
characteristics
Related
constrained
Related Linked Unrelated
strategy
Centralization of
operations
Centralization at
corporate office
Partially
centralized in
SBUs
Decentralized to
divisions
Use of
integration
mechanisms
Extensive Moderate nonexistent
Divisional
performance
appraisal
Emphasize
subjective(strate
gic) criteria
Us a mixture of
subjective and
objective criteria
Emphasize
objective(financi
al) criteria
Divisional
incentive
compensation
Linked to overall
corporate
performance
Mixed linkage to
corporate , SBU
and division
performance
Linked to
Divisional
performance
International Strategies and worldwide
structure
International strategies are important for long-term
competitive success
It allows firms to search new markets, resources, core
competencies, and technologies
Unique structures are required to implement international
strategies
It helps in effective coordination of efforts worldwide
Worldwide Geographic Area Structure for
Implementing a Multidomestic Strategy
Asia
United
States
Europe
Middle
East/
Africa
Australia
Latin
America
Multinational
Headquarters
International Strategy and Worldwide
Structure (Contd)
Three Primary International Strategies:
1. Worldwide 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 Geographic Area Structure: organizational
structure emphasizing national interests and facilitates
efforts to satisfy local or cultural differences (used to
implement the multidomestic strategy)
Focuses on variations of competition within each
country
International Strategy and Worldwide
Structure (Contd)
)
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
Key disadvantage is the inability to create strong global
efficiency. But increasingly use of economies of scale has
become important
Worldwide Product Divisional Structure for
Implementing a Global Strategy
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Global
Corporate
Headquarters
International Strategy and Worldwide
Structure (Contd)
Three Primary International Strategies:
2. Worldwide 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)
Facilitated by improved global accounting and financial
reporting standards
International Strategy and Worldwide
Structure (Contd)
Three Primary International Strategies:
2. Worldwide product divisional structure to
implement Global Strategy (Contd)
Emphasizes economies of scale
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
Avon follow this structure
Hybrid Form of the Combination Structure for
Implementing a Transnational Strategy
Area 1 Area 2 Product A Product B Product A Product B Area 1 Area 2
Product
Division A
Geographic
Area
Division 1
Product
Division B
Geographic
Area
Division 2
Headquarters
International Strategy and Worldwide
Structure (Contd)
Three Primary International Strategies:
3. Combination structure to implement the
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)
International Strategy and Worldwide
Structure (Contd)
Three Primary International Strategies:
3. Combination structure to implement the
Transnational Strategy (Contd)
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
Pepsico and IKEA use this form of structure