CH 11 Im

Chapter 11: Organizational Structure and Controls
Chapter 11
Organizational Structure and Controls
KNOWLEDGE OBJECTIVES
1.
2.
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5.
6.
Define organizational structure and controls and discuss the difference between strategic and financial
controls.
Describe the relationship between strategy and structure.
Discuss the functional structures used to implement business-level strategies.
Explain the use of three versions of the multidivisional (M-form) structure to implement different
diversification strategies.
Discuss the organizational structures used to implement three international strategies.
Define strategic networks and discuss how strategic center firms implement such networks at the
business, corporate and international levels.
CHAPTER OUTLINE
Opening Case Are Strategy and Structural Changes in the Cards for GE?
ORGANIZATIONAL STRUCTURE AND CONTROLS
Organizational Structure
Strategic Focus Increased Job Autonomy: A Structural Approach to Increased Performance and Job
Satisfaction?
Organizational Controls
RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE
Simple Structure
Functional Structure
Multidivisional Structure
Matches between Business-Level Strategies and the Functional Structure
Matches between Corporate-Level Strategies and the Multidivisional Structure
Matches between International Strategies and Worldwide Structures
Strategic Focus Using the Worldwide Geographic Area Structure at Xerox Corporation
Matches between Cooperative Strategies and Network Structures
IMPLEMENTING BUSINESS-LEVEL COOPERATIVE STRATEGIES
IMPLEMENTING CORPORATE-LEVEL COOPERATIVE STRATEGIES
IMPLEMENTING INTERNATIONAL COOPERATIVE STRATEGIES
SUMMARY
REVIEW QUESTIONS
EXPERIENTIAL EXERCISES
NOTES
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LECTURE NOTES
Chapter Introduction: As students will recall, the discussion in the previous chapter (Chapter
10) described how governance mechanisms are used to align the interests of a firms toplevel managers with those of the firms owners. It also described how those mechanisms
influence the firms ability to execute strategies that have been implemented successfully as
the firm strives to achieve a competitive advantage in the new competitive landscape. The
same could be said of organizational structure, the focus of the current chapter.
OPENING CASE
Are Strategy and Structural Changes in the Cards for GE?
For more than a century, GE has occupied a spot on the Dow Jones Industrial Index. This is the result of
GEs stellar performance during its 100-plus year history. For 2006, GE reported earnings of $20.7 billion
on revenue of $163 billion, which validates that GE is performing extremely well. One of the most
effective avenues to profitable growth has been GEs emphasis on innovation. In 2006, research and
development spending totaled nearly $6 billion. But analysts and investors have pointed out that all is not
well with GE. In response to these concerns, there may be some changes in corporate-level strategy and
structure in the offing at GE.
When Jeffrey Immelt took over as CEO at GE following the legendary Jack Welch, he initiated changes
that resulted in the reduction of operating units from eleven down to six. Those six include Commercial
Finance, Healthcare, Industrial, Infrastructure, Money, and NBC Universal. In announcing his decision,
Immelt said that these changes will accelerate GEs 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 the related-linked diversification strategy at the
corporate level; the SBU form of the multidivisional structure remained the structure in place to facilitate
use of the related-linked strategy.
In mid-2007, a prominent analyst called for GE to sell one or more of its six businesses. Specifically, his
argument called for GE to sell noncore businesses such as NBC Universal and Money (formerly called
Consumer Finance) to raise billions (and) make this colossus a heck of a lot easier for one man to
manage. The thought is that these two businesses have relatively little in common with the other four, and
having them in GEs portfolio of businesses is a diversion from developing additional synergies (primarily
in the form of economies of scope) across the four with greater similarities. Immelt and Welch both reacted
less than positively to this suggestion, with Welch saying that following this advice would be a tragedy of
enormous proportions. If these two businesses were sold, GEs corporate-level strategy would change
from related linked to related constrained. If this change in strategy were to occur, the firms structure
would also need to be changed from the SBU form of the multidivisional structure to the cooperative form
of the multidivisional structure. From the perspective of strategic management, the important outcome is
that a change to organizational structure accompany a decision to change a firms strategy. The reason for
making such a change is that a mismatch between strategy and structure negatively affects performance.
GEs management has a deeply entrenched, highly respected profitability record. While analysts
arguments regarding diversion and dilution of managements attention away from core operations
might have some validity, GE has done a yeomans job historically of managing what could be
referred to as a full-plate. With annual R and D expenditures of $5.7 billion, it seems very
apparent that innovation is not taking a backseat at the feeding trough. Is this a case of analysts
taking themselves too seriously? Both Immelt and Welch have successfully managed the GE
stable. Theyve been there; done that.
Define organizational structure and controls and discuss the
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difference between strategic and financial controls.

The match or degree of fit between strategy and structure influences the firms attempts to earn above-average
returns. Thus, the ability to select an appropriate strategy and match it with the appropriate structure is an
important characteristic of effective strategic leadership.
The focus of this chapter is on the structure- and control-related issues of strategy implementation, including:
the pattern of growth and changes in organizational structure experienced by strategically competitive firms
the organizational structures and controls that are used to implement separate business-level, corporate-level,
international, and cooperative strategies
a series of figures to highlight the structures firms match with different strategies
ORGANIZATIONAL STRUCTURE AND CONTROLS
When the firms strategy isnt matched with the most appropriate structure and controls, performance declines.
Teaching Note: Selecting the organizational structure and controls that result in effective
implementation of chosen strategies is a fundamental challenge for managers, especially toplevel managers. The reasons for this are:
Firms must be flexible, innovative, and creative in the global economy if they are to exploit
their core competencies in the pursuit of marketplace opportunities.
Firms must also maintain a certain degree of stability in their structures so that day-to-day
tasks can be completed efficiently.
Organizational Structure
Organizational structure specifies the firms formal reporting relationships, procedures, controls, and
authority and decision-making processes.
Developing an organizational structure that effectively supports the firms strategy is difficult, especially
because of the uncertainty (or unpredictable variation) in cause-effect relationships in the global economys
rapidly changing, dynamic competitive environments. Structure facilitates effective implementation of a firms
strategies when elements of that structure (e.g., reporting relationships, procedures, and so forth) are properly
aligned with one another. Thus, organizational structure is a critical component of effective strategy
implementation processes.
Structure specifies the work to be done and how to do it (given the firms strategy or strategies) by specifying
the processes that are to be used to complete organizational tasks.
Effective structures provide the stability the firm needs to rely on its current competitive advantages to
successfully implement todays strategies while providing the flexibility required to develop competitive
advantages that will be needed to use future strategies; thus, an effective organizational structure allows the firm
to exploit current competitive advantages while developing new ones.
Modifications to the firms current strategy or selection of a new strategy call for changes to organizational
structure. This is not uncommon since organizational inertia often inhibits structural changes, even if
performance declines. Because of inertial tendencies, structural change is often induced by the actions of
stakeholders who are no longer willing to tolerate the firms inadequate performance.
STRATEGIC FOCUS
Increased Job Autonomy: A Structural Approach to Increased Performance and Job Satisfaction?
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Best Buy, well-known consumer electronics retailer with over 100,000 employees in 800 stores, has taken a
step toward improving employee performance, job satisfaction, and its overall performance. In 2002, Best
Buy introduced an in-house developed program called ROWE (Results-Only Work Environment) to 4000
headquarters employees on a trail-basis. Results generated because of this program have been very
impressive: Productivity has increased an average of 35 percent within six to nine months in Best
Buy units implementing ROWE. Voluntary turnover has dropped between 52 and 90 percent in three Best
Buy locations being studied. Results also indicate that employees take more ownership of their work and
express much more satisfaction with what they do as well as how they complete the tasks associated with
their jobs.
The basic premise of ROWE is the redesign of how work activities are performed. Essentially, employees
have the freedom and responsibility to decide when and where they will work. Those supervising
employees empowered in this manner believe that they are managing outcomes rather than directly
managing the people expected to reach the desired outcomes. A designer of the program describes one of
ROWEs objectives in this manner: We want people to stop thinking of work as someplace you go to, five
days a week from 8 to 5, and start thinking of work as something you do.
The primary focus of Best Buys ROWE program is changing a deeply embedded mindset of
employees at all levels within the organization. It demonstrates how confident Best Buy is in its
restructuring in order to accommodate employees values and work ethics. Best But is not
reluctant to do things differently on behalf of its employees, and the measurable results
indicate that ROWE has been and will continue to be a win-win process.
Organizational Controls
Organizational controls guide the use of strategy, indicate how to compare actual results with expected results,
and suggest corrective actions to take when the difference between actual and expected results is unacceptable.
Properly designed organizational controlsstrategic and financialprovide insights into behaviors that
enhance firm performance.
Strategic controls are largely subjective criteria intended to verify that the firm is using strategies that are
appropriate given the conditions in the external environment and the companys competitive advantages. Thus,
strategic controls are concerned with examining the fit between what the firm might do (external environment)
and what it can do (its competitive advantages).
Effective strategic controls help the firm understand what it takes to be successful. Strategic controls demand
rich communication between managers using them and those implementing the firms strategy. These frequent
exchanges are both formal and informal in nature.
Strategic controls help evaluate how well a firm is focusing on what it takes to implement its strategies.
For a business-level strategy, the concern is to study primary and support activities (see Tables 3.6 and 3.7)
to verify that those that are critical to successful execution of the chosen strategy are being properly
emphasized and executed.
With related corporate-level strategies, strategic controls are used to verify that intended levels of sharing of
relevant strategic factorssuch as knowledge, markets, technologies, and so forthare taking place. When
evaluating related diversification strategies, executives must have a deep understanding of each units
business-level strategy. Extensive diversification often requires that financial controls be emphasized.
Teaching Note: The use of strategic controls, which are behavioral in nature, requires high
levels of cognitive diversity among the firms top-level managers. Cognitive diversity is a term
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that captures differences among top-level executives regarding their beliefs about cause-andeffect relationships and outcome-related preferences.
Financial controls are largely objective criteria used to measure the firms performance against previously
established quantitative standards, and these include accounting-based (e.g., return on investment, return on
assets) and market-based (e.g., Economic Value Added) measures.
Both strategic and financial controls are important aspects of each organizational structure; thus, any structures
effectiveness is determined by using a combination of strategic and financial controls.
Describe the relationship between strategy and structure.
RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE

Strategy and structure have a reciprocal relationship, highlighting the interconnectedness between strategy
formulation (Chapters 4-9) and strategy implementation (Chapters 10-13).
In general, structure follows the selection of the firms strategy. However, once in place, structure has the
potential to influence current strategic actions as well as choices about future strategies.
Regardless of the strength of the relationships between strategy and structure, those choosing the firms strategy
and structure should be committed to matching each strategy with a structure that provides the stability needed
to use current competitive advantages as well as the flexibility required to develop future advantages.
Teaching Note: Using the four criteria of sustainability, the firms strategy/structure match is
an advantage when that match is valuable, rare, imperfectly imitable, and nonsubstitutable.
Charles Schwab & Co. and Strategy/Structure Fit: A Mini-Case

A premier discount broker, Schwab is challenged by declines in its online trading volume and its overall
financial performance. At least partly as a result of uncertainty created by the events of 9/11, Schwabs
average daily trades in 2001s third quarter fell 26 percent compared to the same period a year earlier. In
turn, revenue declines were instrumental in the 50.6 percent fall in year-to-year (2000-2001) net income.
Following analysis of these data as well as current and possible future conditions in the global financial
industry, Schwab concluded that its expansive Web site and discount trades could no longer be the
foundation for the firms strategy in what were rapidly changing financial markets. Supporting this
conclusion was feedback indicating that an increasing number of investors want a relationship, offered in
the form of financial advice, in addition to low trading costs when making their investment choices. This
is not surprising, in that recent evidence suggests that customers for firm services of all types want to
receive them through relationships rather than through encounters. Resulting from Schwabs evaluation
of its current situation and future possibilities was a decision to change its cost leadership strategy as a
discount broker to be more like an integrated cost leadership/differentiation strategy as Schwab tried to
offer relatively low cost financial advice while simultaneously becoming a full service brokerage.
Schwab decision makers recognized that the firms structure had to change to support the new strategy.
Historically, the firms structure called for Schwab brokers to take orders rather than sell them. In this
low-cost structure, brokers worked as intermediaries between customers who had decided what they
wanted to buy and the sellers of those products. As planned, the structure needed to support brokers
efforts to find customers and sell advice and a broad array of products to them. Work in the previous
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structure was largely centralized, dictated by rules and procedures. To support an advice driven strategy,
Schwabs structure needed to be decentralized, with decision responsibility given to individual brokers.
Schwab attempted to match structure with the new strategy. If that match is found to be valuable, rare,
imperfectly imitable and nonsubstitutable, the firm will have a competitive advantage based on its
integration between strategy and structure.
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE

Chandler found that firms tended to grow in somewhat predictable patterns: volume geography
integration (vertical, horizontal) product/business diversification.
Figure Note: Figure 11.1 graphically illustrates the evolution of structure as the organization
grows. This evolution will be explained in subsequent sections of this chapter. At this point,
students should begin to be aware of the necessity of fit. Just as a firms strategy must fit
with its resources, capabilities, and core competencies, so its strategy must fit with its
structure if it hopes to achieve strategic competitiveness.
FIGURE 11.1
Strategy and Structure Growth Pattern
As indicated by Figure 11.1, firm structure evolves from simple to functional to multidivisional.
This evolution is caused by sales growth and/or coordination and control problems that prevent the firm from
efficiently implementing its formulated strategy.
Thus, as implementation efforts falter due to growth or other problems, the firm may need to change its
organizational structure to achieve an appropriate fit between strategy and structure.
Simple Structure
A simple structure is an organizational form in which the owner-manager makes all major decisions directly
and monitors all activities, and the firms staff is merely an extension of the managers supervision authority.
The simple structure is characterized by:
little specialization of tasks
few rules
little formalization
unsophisticated information systems
direct involvement of owner-manager in all phases of day-to-day operations
frequent and informal communications between the owner-manager and employees
Teaching Note: In the U.K., some analysts believe that the simple organizational structure
may result in competitive advantages for some small firms relative to their larger
counterparts. These competitive advantages include a broad openness to innovation, greater
structural flexibility, and an ability to respond more rapidly to environmental changes.
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If they are successful, small firms grow larger; and as a result, the firm outgrows the simple structure.
There is a significant increase in the amount of competitively relevant information that requires analysis.
More extensive and complicated information-processing requirements place significant pressures on ownermanagers (often due to a lack of organizational skills or experience). At this evolutionary point, firms tend to
move from the simple structure to a functional organizational structure.
Functional Structure
The functional structure consists of a chief executive officer and limited corporate staff with functional line
managers in dominant functionse.g., production, accounting, marketing, R&D, engineering, human resources.
This structure allows for functional specialization, facilitating active knowledge sharing within each functional
area. Knowledge sharing usually supports career paths and professional development of functional specialists.
However, compared to the simple structure, there also are some potential problems. For example, differences in
functional specialization and orientation may impede communication and coordination.
Teaching Note: Functional specialists often may develop a myopic or narrow perspective,
losing sight of the firms strategic vision and mission. When this happens, the problem can
be overcome by implementing the multidivisional structure.
The functional structure supports implementation of business-level strategies and corporate-level strategies with
low levels of diversification (e.g., dominant business).
Multidivisional Structure
Because of limits to an individual chief executive officers ability to process complex strategic information,
problems related to isolation of functional area managers, and increasing diversification, the structure of the
firm must change again. In these instances, the multidivisional or M-form structure is most appropriate.
The multidivisional (M-form) structure is composed of operating divisions where each division represents a
separate business to which the top corporate officer delegates responsibility for day-to-day operations and
business unit strategy to division managers.
As initially designed, the M-form was thought to have three major benefits.
1. It allows corporate officers to accurately monitor business unit performance, simplifying control problems.
2. It facilitated comparisons between divisions, which improved the resource allocation process.
3. It stimulated managers of poorly performing divisions to look for ways of improving performance.
Teaching Note: An expanded discussion of M-form may be helpful at this point. Some facts
related to use of the multidivisional structure at DuPont and GM follow.
The multidivisional or M-form structure was developed in the 1920s, in response to
coordination and control problems in large firms such as DuPont and GM.
Functional departments often had difficulty dealing with distinct product lines and markets,
especially in coordinating conflicting priorities among the products.
Costs were not allocated to individual products, so it was not possible to assess an
individual products profit contribution.
Loss of control meant optimal allocation of firm resources between products was difficult.
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Top managers got over-involved in short-run matters (e.g., coordination, communications,
conflict resolution) and neglected long-term strategic issues.
The new, innovative structure adopted at General Motors called for
creating separate divisions, each representing a distinct business
each division would house its functional hierarchy
division managers were given responsibility for managing day-to-day operations
a small corporate office would determine the long-term strategic direction of the firm and
exercise overall financial control over the semi-autonomous divisions
This would enable the firm to
accurately monitor performance of each business, simplifying control problems
facilitate comparisons between divisions, improving the allocation of resources
stimulate managers of poorly performing divisions to seek ways to improve
Discuss the functional structures used to implement businesslevel strategies.
Matches between Business-Level Strategies and the Functional Structure

Different forms of the functional organizational structure are used to support implementation of the cost
leadership, differentiation, and integrated cost leadership/differentiation strategies. The differences in these
forms are accounted for primarily by different uses of three important structural characteristics or dimensions
specialization (the type and number of jobs required to complete work), centralization (the degree to which
decision-making authority is retained at higher managerial levels), and formalization (the degree to which
formal rules and procedures govern work).
Using the Functional Structure to Implement the Cost Leadership Strategy
Firms using the cost leadership strategy want to sell large quantities of standardized products to an industrys or
a segments typical customer. The cost leadership form of the functional structure usually features:
simple reporting relationships
few layers in the decision-making and authority structure
a centralized corporate staff
a strong focus on process improvements through the manufacturing function rather than the development of
new products through an emphasis on product R&D
Teaching Note: Because of firm restructuring during the late 1980s and early 1990sand
the reduction in the number of management layersfirms now have flatter structures.
Higher in the organizational structure has thus become a relative term.
Cost leadership strategies emphasize:
centralization of decision-making to maintain cost reduction
jobs that are specialized to increase efficiency
formalization of rules and procedures to converge on the most efficient approaches
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Figure Note: Figure 11.2 summarizes the functional structural characteristics required for
successful implementation of the cost leadership strategy.
FIGURE 11.2
Functional Structure for Implementation of a Cost Leadership Strategy
Key points include the following:
Dotted lines from the centralized staff to each function represent tight controls and centralized coordination.
The focus is on the operations (production) function.
Emphasis is placed on process engineering not on new product research and development.
Relatively large central staff coordinates functions.
Job roles are highly structured.
The overall structure is mechanical.
The structure may be either relatively tall or flat (depending the on the extent of firm restructuring).
Teaching Note: Southwest Airlines has successfully implemented the cost leadership
strategy by encouraging the emergence of a low-cost culture (1) by using specialized work
tasks and (2) by striving continuously to reduce costs below those of competitors.
Using the Functional Structure to Implement the Differentiation Strategy
Firms offering products that are considered unique by customers usually are following a differentiation strategy.
A differentiation strategy requires
the firm to sell nonstandardized products to customers with unique needs
relatively complex and flexible reporting relationships
frequent use of cross-functional product development teams
a strong focus on marketing and product R&D rather than manufacturing and process R&D
continuous product innovation, requiring people be able to interpret and take action based on ambiguous,
incomplete, and uncertain information
a strong focus on the external environment to identify new opportunities
rapid responses to collected information suggesting a need for decentralization
creativity and the continuous pursuit of new sources of differentiation and new products requiring a lack of
specialization (i.e., workers have a relatively large number of tasks in their job descriptions)
low formalization, decentralization, and low specialization of work tasks allowing people to interact
frequently to further differentiate products while developing ideas for new products
Figure Note: Figure 11.3 summarizes the discussion of the relationships between the
differentiation strategy and the functional structure.
FIGURE 11.3
Functional Structure for Implementing a Differentiation Strategy
A first glance, Figure 11.3 appears to be very similar to Figure 11.2 (Functional Structure for Implementation of
a Cost Leadership Strategy). However, there are several subtle but important differences.
The centralized corporate staff (between the president and the individual functions) has been replaced by the
central staffs of R&D and marketing, which work closely together.
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Dotted lines between the centralized staff and individual functions have been removed, indicating a
decentralization of decision making.
Formalization is limited to enable emergence of new product ideas and enhanced ability to change.
Job roles are less structured.
The structure is organic.
Using the Functional Structure to Implement the Integrated Cost Leadership/Differentiation Strategy
As discussed in Chapter 4, some firms may attempt to implement simultaneously both the cost leadership and
differentiation strategies by providing value through
low cost relative to a differentiated firms products
differentiated features relative to features offered by cost leadership firms products
The integrated cost leadership/differentiation strategy is used frequently in the global economy, though it is
difficult to implement. This difficulty is due largely to the fact that different primary and support activities (see
Chapter 3) must be emphasized.
Low-cost strategies emphasize production and manufacturing process engineering and few product changes.
Differentiation strategies require an emphasis on marketing and new product R&D.
Teaching Note: Toyota Motor Corporation has become a world leader in the auto industry
primarily through its ability to implement cost leadership and differentiation at the same time.
The key to Toyotas success has been the differentiated design and manufacturing process
that the company has implemented through its integrated product design process.
Explain the use of three versions of the multidivisional (M-form)

structure to implement different diversification strategies.
Matches between Corporate-Level Strategies and the Multidivisional Structure

The firms level of diversification is a function of decisions about the number and type of businesses in which it
will compete, as well as how it will manage the businesses (see Chapter 6). Geared to managing individual
organizational functions, increasing diversification eventually creates information processing, coordination, and
control problems that the functional structure cant handle. This requires a shift from a functional structure to a
complex multidivisional structure.
The demands created by different levels of diversification require that each strategy be implemented through a
unique organizational structure.
Teaching Note: From 1950 to the late 1980s, among Fortune 500 firms, diversification and
implementation of the multidivisional structure increased dramatically.
The percentage of diversified firms increased from 30% to approximately 75%.
The multidivisional structure increased from less than 20% to approximately 90%.
Figure Note: Figure 11.4 should be used to indicate to students that there are three
variations (or versions) of the multidivisional structure.
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FIGURE 11.4
Three Variations of the Multidivisional Structure
The three variations of the multidivisional structure that will be discussed from the perspective of how each is
best suited to specific diversification strategies are the:
Cooperative form
Strategic Business Unit (SBU) form
Competitive form
Teaching Note: It is important to reiterate that the functional structure is not as well suited to
managing and controlling multiple businesses as is the multidivisional structure or M-form.
Using the Cooperative Form of the Multidivisional Structure to Implement the Related Constrained Strategy
The cooperative form structure uses horizontal integration to bring about interdivisional cooperation. The
divisions in the firm using the related-constrained diversification strategy commonly are formed around
products, markets, or both.
Figure Note: Figure 11.5 summarizes the structural characteristics of the Cooperative Mform that create and encourage cooperation.
FIGURE 11.5
Cooperative Form of the Multidivisional Structure for Implementing a Related-Constrained Strategy
The first variant of the M-form structurethe Cooperative M-formis characterized by an increased emphasis
on integration devices and horizontal human resource practices.
The large box at the top of Figure 11.5 illustrates what is referred to as the central, corporate, or headquarters
office. It includes the firms top-level executives and all staff specialty functions.
All divisions are controlled by the central office and integrated by one of the integrating mechanisms (such as
division managers meeting face-to-face, integrating teams, or task forces).
Integrating mechanisms are indicated by the dotted line connecting the divisions which create:
tight linkages between divisions
corporate office emphasizing centralized planning, human resources, and marketing to facilitate cooperation
centralized R&D to coordinate new product introductions and/or process engineering improvements
a subjective reward system emphasizing corporate and division performance
a cooperative, sharing culture
All of the related-constrained firms divisions share one or more corporate strengths. Production competencies,
marketing competencies, or channel dominance are examples of strengths that the firms divisions might share.
Production expertise is one of the strengths of Sonys divisions, but they have had difficulties in
coordinating across divisions to create joint products in online music.
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Outback Steakhouse, Inc. has sought to diversify across eight different chains using a cooperative M-form
structure, to centralize a number of critical functions across the businesses for activities sharing, and to share
its expertise in running franchise operations across contracting, advertising, training and more.
The sharing of divisional competencies facilitates the corporations efforts to develop economies of scope
(which are cost savings resulting from the sharing of competencies developed in one division with another
division) that are linked with successful use of the related-constrained strategy. Interdivisional sharing of
competencies depends on cooperation, suggesting the use of the cooperative form of the multidivisional
structure. Increasingly, it is important that the links resulting from effective use of integration mechanisms
support the cooperative sharing of both intangible resources (e.g., knowledge) as well as tangible resources
(e.g., facilities and equipment).
The following are different characteristics of structure that are used as integrating mechanisms by the
cooperative structure to facilitate interdivisional cooperation:
Centralizationcontrol at the corporate level allows the linking of activities among divisions.
Frequent, direct contact between division managersencourages and supports cooperation and the sharing
of competencies or resources that can be used to create new advantages. These mechanisms include liaison
roles, temporary teams/task forces, formal integration departments, and a matrix organization configuration.
Coordination among divisions sometimes results in an unequal flow of positive outcomes to divisional
managers. In other words, when managerial rewards are based at least in part on the performance of
individual divisions, the manager of the division that is able to benefit the most by the sharing of corporate
competencies might be viewed as receiving relative gains at others expense. Strategic controls are important
in these instances, as divisional managers performance can be evaluated at least partly on the basis of how
well they have facilitated interdivisional cooperative efforts. Furthermore, using reward systems that
emphasize overall company performance, besides outcomes achieved by individual divisions, helps
overcome problems associated with the cooperative form.
Using the Strategic Business Unit Form of the Multidivisional Structure to Implement the Related Linked
Strategy
The strategic business unit (SBU) structure is most appropriate for the related-linked (mixed related and
unrelated) strategy.
A strategic business unit (SBU) structure consists of at least three levels, with a corporate headquarters at the
top, SBU groups at the second level, and divisions grouped by relatedness within each SBU at the third level.
This means that,
within each SBU, divisions are related to each other
SBU groups are unrelated to each other
within each SBU, divisions producing similar products and/or using similar technologies can be organized to
achieve synergy
individual SBUs are treated as profit centers and controlled by corporate headquarters
corporate headquarters can concentrate on strategic planning rather than operational control
Teaching Note: Many of GEs SBUs attempt to form competencies in services and
technology as a source of competitive advantage. Recently technology was identified as an
advantage for the GE Medical Systems SBU as that units divisions share technological
competencies to produce an array of sophisticated equipment, including computed
tomography (CT) scanners, magnetic resonance imaging (MRI) systems, nuclear medicine
cameras, and ultrasound systems. Once a competence is developed in one Medical Systems
division, it is quickly transferred to the other divisions in that SBU so the competence can help
to increase the units overall performance.
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Figure Note: Figure 11.6 summarizes structural characteristics of the SBU multidivisional
structure and leads to a discussion of this structural forms potential pitfalls or disadvantages.
FIGURE 11.6
SBU Form of the Multidivisional Structure for Implementing a Related Linked Strategy
While the SBU M-form appears similar to the Cooperative M-form (that was presented as Figure 11.5), there
are several differences.
The SBU M-form includes an addition layer the strategic business unit or SBU between the corporate
headquarters and product divisions.
There may be integration and coordination between divisions in a specific SBU.
There is independence among and between SBUs.
Headquarters manages approval of strategic planning of SBUs for the president.
Individual SBUs may have budgets and staffs for within-SBU integrating mechanisms.
Corporate headquarters staff serve as consultants to SBUs and divisions on product strategy (rather than
having direct input).
Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated Diversification
Strategy
Recalling the discussion in Chapter 6, firms following an unrelated diversification strategy can create value by:
efficient internal capital allocations
restructuring, buying, and selling businesses
Unrelated diversified firms should adopt the third variant of the multidivisional structure, the competitive form
of the multidivisional structure, where controls emphasize competition between separate (usually unrelated)
divisions for corporate capital allocations.
Figure Note: Figure 11.7 summarizes structural characteristics of the Competitive M-form.
FIGURE 11.7
Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy
The Competitive M-form differs from both the Cooperative and SBU M-forms (see Figures 11.5 and 11.6) by:
establishing a smaller headquarters office, generally containing three functions:
1. legal affairs, which increases in importance when a firm acquires or divests units
2. auditing, which monitors divisional performance to ensure performance data are accurately reported
3. finance, which manages the firms cash flow and allocates capital
allowing independent divisions so financial performance can be monitored separately for each
setting up divisions that retain strategic control, but give up cash flow control
allowing competition between divisions for capital allocations
The efficient internal capital market that is the foundation for use of the unrelated diversification strategy
requires organizational arrangements that emphasize divisional competition rather than cooperation, and three
benefits are expected from this internal competition:
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1. Internal competition creates flexibility, allowing resources to be allocated to the division that is working with
the most promising technology to fuel the entire firms success.
2. Internal competition challenges the status quo and inertia, because division heads know that future resource
allocations are a product of excellent current performance as well as superior positioning of their division in
terms of future performance.
3. Internal competition motivates effort.
Teaching Note: Newell Rubbermaid Company (a supplier of hardware items to discount
retailers) has used the competitive M-form to implement an unrelated diversification strategy.
Features of the firm that match this structural selection include the following:
The basic strategy of the firm was to market a multi-product offering of brand-name
consumer products to mass retailers.
The firm emphasized excellent customer service.
Newell Rubbermaid was committed to growth by acquisition.
Product lines added over time to the firms divisions share no common characteristics.
Newell Rubbermaid sold an array of products, including household products, hardware,
and home and office furnishings.
The firms competitive advantage was created at the corporate level.
Using a small corporate headquarters staff, the firm developed a sophisticated electronic,
logistical system that was given to each division.
Although not related to each other, each of Newell Rubbermaids divisions created value
from the lower cost and improved customer relations provided by the system.
Table Note: Table 11.1 compares the structural attributes of the three variants of the
multidivisional structure from the perspectives of centralization, integrating mechanisms,
divisional performance appraisal criteria, and bases of incentive compensation.
TABLE 11.1
Characteristics of the Structures Necessary to Implement the Related Constrained, Related Linked, and
Unrelated Strategies
Table 11.1 provides a handy reference that can be used to compare the structural attributes of the Cooperative,
SBU, and Competitive M-form structures based on the
degree that operations are centralized or decentralized
extent to which each form uses integrating mechanisms
emphasis on subjective or objective criteria for appraising divisional performance
linkages to corporate, SBU, and/or divisional performance as bases for divisional incentive compensation
Discuss the organizational structures used to implement three

international strategies.
Matches between International Strategies and Worldwide Structures

Forming proper matches between international strategies and organizational structures intended to support their
use facilitates the firms efforts to effectively coordinate and control its global operations.
Importantly, recent research findings confirm the validity of the strategy/structure matches discussed.
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Using the Worldwide Geographic Area Structure to Implement the Multidomestic Strategy
Although centralization of decision-making authority has been recognized as a means of achieving coordination
(and control) in organizations, some strategies require that local business units (or divisions) have the flexibility
that will enable them to adapt to local market preferences. This may mean that a decentralized structure will be
needed to provide this flexibility.
The multidomestic strategy is a strategy in which strategic and operating decisions are decentralized to business
units in each country to facilitate tailoring of products to each country.
The structure used to implement the multidomestic strategy is the worldwide geographic area structure, an
organizational form in which national interests dominate and that facilitates managers efforts to satisfy local or
cultural differences.
Figure Note: Characteristics of the worldwide geographic area structure (presented in Figure
11.8) illustrate the decentralized nature of the structure.
FIGURE 11.8
Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy
The worldwide geographic area structure is characterized by:
an emphasis on differentiation or adaptation to local market preferences or cultural requirements
individual national market operations as decentralized and independent
corporate headquarters coordinating movement of financial resources
organization representing a decentralized federation
The multidomestic strategy requires a decentralized structure.

National or country-specific preferences require local adaptation for success.
Little coordination is required because of local market differences.
There is no need for integrating mechanisms among divisions.
The level of formalization is low.
Coordination mechanisms are informal in nature.
However, firms adopting multidomestic strategies and the worldwide geographic area structure must give up the
ability to achieve global efficiency.
Using the Worldwide Product Divisional Structure to Implement the Global Strategy
In contrast with the multidomestic strategy, a global strategy is characterized by
a corporate home office that dictates competitive strategy
a firm that offers standardized products across country markets
the development and exploitation of economies of scope and scale on a global level
decisions to outsource some primary or support activities
The appropriate structure for implementation of a global strategy is the worldwide product divisional structure,
which is characterized by centralized decision-making authority at the worldwide division headquarters and the
establishment of effective coordination and joint problem-solving among disparate divisional subunits.
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Figure Note: Characteristics of the worldwide product divisional structure are presented in
Figure 11.9. They illustrate the centralized nature of the structure.
FIGURE 11.9
Worldwide Product Divisional Structure for Implementing a Global Strategy
The worldwide product divisional structure is characterized by:
an emphasis on inter-division coordination devices to facilitate global economies of scale and scope
information flows that are coordinated by the shaded global headquarters office
corporate headquarters allocates financial resources in a cooperative way
organization represents a centralized federation
Multiple integrating mechanismswhich result in effective coordination through mutual adjustment via
personal interactioninclude,
encouraging direct, face-to-face contact between managers
assigning liaison roles between departments
forming temporary task forces or teams
Using the Combination Structure to Implement the Transnational Strategy
The last international strategy (the transnational strategy) combines multidomestic and global strategies by
seeking national or country-specific advantages by emphasizing adaptation to local differences
attempting simultaneously to achieve global economies of scale and scope
The combination structure is an organizational form with characteristics and structural mechanisms that result
in an emphasis on both geographic and product structures.
The transnational strategy is often implemented through two possible combination structures: a global matrix
structure or a hybrid global design.
The global matrix design brings together both local market and product expertise into teams who develop
and respond to the global marketplace worldwide.
In the hybrid structure some divisions are oriented towards products while others are oriented toward market
areas.
FIGURE 11.10
Using the Hybrid Form of the Combination Structure for Implementing a Transnational Strategy
In this design, some divisions are oriented toward products while others are oriented toward market areas.
Thus, in some products, where the geographic area is more important, the division managers are area-oriented.
In other divisions, where worldwide product coordination and efficiencies are more important, the division
manager is more product-oriented.
As alluded to previously, specific attributes of the transnational structure are difficult to identify because of the
conflicting requirements that firms organize to provide the firm simultaneously with the
flexibility required for adapting to local market preferences
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coordination and control necessary to pursue global economies of scale and scope
Firms implementing transnational strategies must encourage employees to understand the effects of cultural
diversity on the firms operations and adopt a combination structure that is simultaneously
centralized and decentralized
integrated and nonintegrated
formalized and nonformalized
Teaching Note: Many features of the transnational strategy are tricky to sort out. Emphasize
that point here with the chapters discussion of the combination structure.
STRATEGIC FOCUS
Using the Worldwide Geographic Area Structure at Xerox Corporation
As an organization, Xerox Corporation, emphasizes product innovation to best serve customers needs and
process innovations to simultaneously improve quality and reduce its production costs. Allocating more
than 6 percent of total revenues to research and development (R&D), Xeroxs Innovation Group
collaborates with personnel across the firms business units to facilitate development of product and
process innovations.
Xerox has concentrated its efforts in three primary markets: (1) high-end production and commercial print
environment, (2) networked offices from small to large and (3) value-added services. Xerox is applying a
multidomestic strategy in all three markets in order to leverage off its service capabilities in selling
solutions to customers in different geographic regions. Even though the need for documentation is generic
worldwide, specific needs vary due to business culture and the sophistication of the local business
environment. Because of these idiosyncrasies, Xerox uses the worldwide geographic area structure to
support its multidomestic strategy. Supporting these units efforts to serve the unique needs of customers in
different regions are groups such as Innovation, Corporate Strategy/Alliances, and Human
Resources/Ethics. Xerox relies on the match between its international strategy and structure as a key driver
of profitable growth.
Xeroxs strategic approach to its global effort can best be described as hybrid. It is regionally
customized based on business cultures and sophistication levels and yet allows the economies
generated through support sameness.
Define strategic networks and discuss how strategic center firms

implement such networks at the business, corporate and
international levels.
Matches between Cooperative Strategies and Network Structures

As discussed in Chapter 9, firms often may develop multiple strategic alliances to implement cooperative
strategies.
A strategic network is a grouping of organizations that has been formed to create value by participating in an
array of cooperative arrangements. It is often a loose federation of partners who participate in the networks
operations on a flexible basis. A strategic center firm is the one around which the networks cooperative
relationships revolve.
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Figure Note: Figure 11.11 illustrates the structure of the strategic network.
FIGURE 11.11
A Strategic Network
The strategic center firm sits in the middle of the strategic network so that it can coordinate the activities of
network members firms.
Note: Four critical aspects of functions performed by the strategic center firmstrategic outsourcing,
capability development, technology management, and managing learning processesare discussed next.
As coordinator or manager of activities carried out by partners in the strategic network, the strategic center firm
and other network partnersshould note four critical aspects of the strategic center firms functions:
1. Strategic Outsourcing
2. Development of Competencies
3. Technology Management
4. Race to Learn (or Managing Learning Processes)
Strategic Outsourcing is one of the strategic center firms key functions. In addition to outsourcing more than
other members of the strategic network, the center firm also encourages member firms to go beyond contracting
to solve problems and to initiate competitive actions that the network can pursue.
The Competence-related role of the center firm is to build or develop the core competencies of other network
member firms and encourage them to share these with other network partners.
Technology aspects of the center firms role include managing the development and sharing of technology-based
ideas among network partners.
Emphasizing the Race to Learn implies that the strategic center firm must encourage positive rivalry among
partner firms that will strengthen each partners (as well as the networks) value chain. The effectiveness of the
center firm is related to how well it learns to manage learning processes among network partners.
IMPLEMENTING BUSINESS-LEVEL COOPERATIVE STRATEGIES
Recall from Chapter 9 that complementary assets at the business level can be vertical or horizontal. Vertical
complementary strategic alliances are more common than are horizontal alliances and generally are focused on
buyer-supplier relationships.
With Toyotas strategic network of vertical alliances in Japan, Toyota, as the strategic center firm:
encourages subcontractors to modernize their facilities
supplies them with any necessary technical and financial assistance
reduces transactions costs by entering into long-term contracts which allow supplying partners to increase
long-term productivity (as opposed to entering into a series of short-term contracts based on unit pricing)
provides engineers in upstream companies (suppliers) with better communication with contractees
allows suppliers and center firms to become more interdependent and less independent
is able to achieve a competitive advantage because of the imperfect imitability of the structure and the
proprietary actions that it uses to manage its strategic network
Horizontal complementary strategic alliances are much more difficult to manage than are vertical
complementary strategic alliances because, in a horizontal alliance, it is difficult to select a strategic center firm
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when several network members have been aggressive competitors. An example is the instability of alliances
between large airlines (see chapter).
IMPLEMENTING CORPORATE-LEVEL COOPERATIVE STRATEGIES
It is less difficult to select a strategic center firm in corporate-level cooperative strategic alliances structured as
centralized franchise networks than in those that are decentralized sets of diversified strategic alliances.
McDonalds has established a centralized strategic network in which its corporate office acts as the strategic
center for its network of franchisees.
The headquarters office uses strategic controls and financial controls to verify that the franchisees
operations create the greatest value for the entire network.
A strategic control issue is the location of franchisee unitsMcDonalds believes that its greatest expansion
opportunities are outside the United States.
Financial controls are framed around requirements an interested party must satisfy to become a McDonalds
franchisee, as well as performance standards that are to be met when operating a unit.
IMPLEMENTING INTERNATIONAL COOPERATIVE STRATEGIES
Competing across national borders increases the complexity of the task of managing strategic networks that
have been formed through international cooperative strategies and stifles the selection of a strategic center firm
because great differences may exist among the regulatory environments of partners home countries.
In response to this complexity:
distributed strategic networks are formed
multiple regional strategic centers are established
Figure Note: Configuration of a distributed strategic network is illustrated in Figure 11.12.
FIGURE 11.12
A Distributed Strategic Network
While the distributed strategic network has a primary or main strategic center firm, it also is characterized by
multiple strategic center firms that are distributed throughout the world.
For example, firms such as Ericsson and Electrolux establish multiple strategic centers, which enables them to
better manage multiple cooperative relationships with partnering firms that may cross national or regional
boundaries or to manage specific global product markets more effectively.
The distributed strategic network form of organization enables the international cooperative network to ensure
that region-, country- or product-specific market requirements are managed by the appropriate distributed
strategic center firm.
ANSWERS TO REVIEW QUESTIONS

1. What is organizational structure and what are organizational controls? What are the differences
between strategic controls and financial controls? (pp. 307-309)
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Organizational structure specifies the firms formal reporting relationships, procedures, controls, and authority
and decision-making processes. Influencing managerial work, structure essentially details the work to be done
and how that work is to be accomplished. Organizational controls guide the use of strategy, indicate how to
compare actual and expected results, and suggest actions to take to improve performance when it falls below
expectations. When properly matched with the strategy for which they were intended, structure and controls can
be a competitive advantage.
Strategic controls (largely subjective criteria) and financial controls (largely objective criteria) are the two types
of organizational controls used to successfully implement a firms chosen strategy. Both types of controls are
critical, although their degree of emphasis varies based on individual matches between strategy and structure.
Strategic controls are concerned with examining the fit between what the firm might do (as suggested by
opportunities in its external environment) and what it can do (as indicated by its competitive advantages).
Effective strategic controls help the firm understand what it takes to be successful. Strategic controls demand
rich communication between managers responsible for using them to judge the firms performance and those
with primary responsibility for implementing the firms strategies. These frequent exchanges are both formal
and informal in nature.
Strategic controls are also used to evaluate the degree to which the firm focuses on the requirements to
implement its strategies. For a business-level strategy, for example, the strategic controls are used to study
primary and support activities to verify that those critical to successful execution of the business-level strategy
are being properly emphasized and executed. With related corporate-level strategies, strategic controls are used
to verify the sharing of appropriate strategic factors such as knowledge, markets, and technologies across
businesses. To effectively use strategic controls when evaluating related diversification strategies, executives
must have a deep understanding of the involved businesses.
Partly because strategic controls are difficult to use with extensive diversification, financial controls are
emphasized to evaluate the performance of the firm following the unrelated diversification strategy. The
unrelated diversification strategys focus on financial outcomes requires the use of standardized financial
controls to compare performances between units and managers. When using financial controls, firms evaluate
their current performance against previous outcomes as well as their performance compared to competitors and
industry averages.
2.
What does it mean to say that strategy and structure have a reciprocal relationship? (pp. 311.312)
Strategic competitiveness can be attained only when the firms selected structure is congruent with its
formulated strategy. As such, a strategys potential to create value is reached only when the firm configures
itself in ways that allow the strategy to be implemented effectively. Thus, as firms evolve and change their
strategies, new structural arrangements are required. Additionally, existing structures influence the future
selection of strategies. Therefore, the two key strategic actions of strategy formulation and strategy
implementation continuously interact to influence managerial choices about strategy and structure.
Regardless of the strength of the reciprocal relationships between strategy and structure, those choosing the
firms strategy and structure should be committed to matching each strategy with a structure that provides the
stability needed to use current competitive advantages as well as the flexibility required to develop future
advantages. This means, for example, that when changing strategies, the firm should simultaneously consider
the structure that will be needed to support use of the new strategy.
Research suggests that most firms experience a certain pattern of relationships between strategy and structure.
Chandler found that firms tended to grow in somewhat predictable patternsi.e., in the following order: (1)
volume, (2) geography, (3) integration [vertical, horizontal], and (4) product diversification (see Figure 11.1).
Chandler interpreted his findings to indicate that the firms growth patterns determine its structural form.
As shown in Figure 11.1, sales growth creates coordination and control problems that the existing
organizational structure cant efficiently handle. Organizational growth creates the opportunity for the firm to
change its strategy to try to become even more successful. However, the existing structures formal reporting
11-20

relationships, procedures, controls, and authority and decision making processes lack the sophistication required
to support use of the new strategy. A new structure is needed to help decision makers access the knowledge and
understanding required to effectively integrate and coordinate actions to implement the new strategy.
3. What are the characteristics of the functional structures that are used to implement the cost
leadership, differentiation, integrated cost leadership/differentiation, and focused business-level
strategies? (pp. 313-315)
A functional structure is used to implement the cost leadership, differentiation, and integrated cost
leadership/differentiation strategies. The functional structure consists of a chief executive officer and limited
corporate staff with line managers in dominant functions such as production, accounting, marketing, R&D,
engineering, and human resources. This structure allows for functional specialization, thereby facilitating
knowledge sharing and idea development. Because the differences in orientation among organizational
functions can impede communication and coordination, the central task of the CEO is to integrate the decisions
and actions of individual business functions for the benefit of the entire corporation. This organizational form
also facilitates career paths and professional development in specialized functional areas.
The structural characteristics of specialization, centralization, and formalization play important roles in the
successful implementation of the cost leadership strategy. Specialization refers to the type and numbers of job
specialties that are required to perform the firms work. For the cost leadership strategy, managers divide the
firms work into homogeneous subgroups. The basis for these subgroups is usually functional areas, products
being produced, or clients served. By dividing and grouping work tasks into specialties, firms reduce their costs
through the efficiencies achieved by employees specializing in a particular and often narrow set of activities.
Firms using the differentiation strategy produce products that customers perceive as being different in ways that
create value for them. With this strategy, the firm wants to sell nonstandardized products to customers with
unique needs. Relatively complex and flexible reporting relationships, frequent use of cross-functional product
development teams, and a strong focus on marketing and product R&D rather than manufacturing and process
R&D (as with the cost leadership form of the functional structure) characterize the differentiation form of the
functional structure (see Figure 11.3). This structure contributes to the emergence of a development-oriented
culturea culture in which employees try to find ways to further differentiate current products and to develop
new, highly differentiated products.
Continuous product innovation demands that people throughout the firm be able to interpret and take action
based on information that is often ambiguous, incomplete, and uncertain. With a strong focus on the external
environment to identify new opportunities, employees often gather this information from people outside the
firm, such as customers and suppliers. Commonly, rapid responses to the possibilities indicated by the collected
information are necessary, suggesting the need for decision-making responsibility and authority to be
decentralized. To support creativity and the continuous pursuit of new sources of differentiation and new
products, jobs in this structure are not highly specialized. This lack of specialization means that workers have a
relatively large number of tasks in their job descriptions. Few formal rules and procedures are also
characteristics of this structure. Low formalization, decentralization of decision-making authority and
responsibility, and low specialization of work tasks combine to create a structure in which people interact
frequently to exchange ideas about how to further differentiate current products while developing ideas for new
products that can be differentiated to create value for customers.
Firms using the integrated cost leadership/differentiation strategy want to sell products that create value because
of their relatively low cost and reasonable sources of differentiation. The cost of these products is low relative
to the cost leaders prices while their differentiation is reasonable compared to the clearly unique features of
the differentiators products.
The integrated cost leadership/differentiation strategy is used frequently in the global economy, although it is
difficult to successfully implement. This difficulty is due largely to the fact that different primary and support
activities must be emphasized when using the cost leadership and differentiation strategies. To achieve the lowcost position, emphasis is placed on production and process engineering, with infrequent product changes. To
achieve a differentiated position, marketing and new-product R&D are emphasized while production and
11-21

process engineering are not. Thus, use of the integrated strategy results when the firm successfully combines
activities intended to reduce costs with activities intended to create additional differentiation features. As a
result, the integrated form of the functional structure must have decision-making patterns that are partially
centralized and partially decentralized. Additionally, jobs are semi-specialized, and rules and procedures call for
some formal and some informal job behavior.
The focus strategy is best implemented by means of the simple structure. The simple structure is most
appropriate for firms that follow a single business strategy and offer a line of products in a single geographic
market and for firms implementing focused cost leadership or focused differentiation strategies. A simple
structure is an organizational form in which the owner-manager makes all major decisions directly and monitors
all activities, while the firms staff merely serves as an extension of the managers supervisory authority. It is
characterized by little specialization of tasks, few rules, little formalization, unsophisticated information
systems, and direct involvement of the owner-manager in all phases of day-to-day operations.
At some point, however, the increased sales revenues resulting from success will necessitate changing from a
simple to a functional structure. The challenge for managers is to recognize when a structural change is
required to coordinate and control effectively the firms increasingly complex operations.
4. What are the differences among the three versions of the multidivisional (M-form) organizational
structures that are used to implement the related-constrained, related-linked, and unrelated corporatelevel diversification strategies? (pp. 315-323)
The three variants of the multidivisional or M-form structure that should be used to implement corporate-level
strategies are the cooperative form, SBU form, and competitive form.
The related-constrained strategy is best implemented using the cooperative form of the multidivisional
structure. This bears out in practice because the cooperative form is an organizational structure that uses many
integration devices and horizontal human resource practices to foster cooperation and integration among the
firms divisions. The cooperative form (see Figure 11.5) emphasizes horizontal links and relationships more
than the two other variations of the multidivisional structure. Cooperation among divisions that are formed
around either products offered or markets served is necessary to realize economies of scope and to facilitate the
transferring of skills. Increasingly, it is important for these links to allow and support the sharing of a range of
strategic assets, including employees know-how as well as tangible assets such as facilities and methods of
operations.
Firms implementing a related-linked strategy usually employ the SBU (or strategic business unit) form of the
multidivisional structure. The SBU form consists of at least three levels, with the top level being corporate
headquarters; the next level, SBU groups; and the final level, divisions grouped by relatedness (either product or
geographic market) within each SBU (see Figure 11.6). The firms business portfolio is organized into those
related to one another within a SBU group and those unrelated in other SBU groups. Thus, divisions within
groups are related, but groups are largely unrelated to each other. Within the SBU structure, divisions with
similar products or technologies are organized to achieve synergy. Each SBU is a profit center that is controlled
by the firms home office. An important benefit of this structural form is that individual decision makers, within
their strategic business unit, look to SBU executives rather than headquarters personnel for strategic guidance.
Firms implementing the unrelated strategy seek to create value through efficient internal capital allocations or
by restructuring, buying, and selling businesses. The competitive form of the multidivisional structure is used
to implement the unrelated diversification strategy. The competitive form (see Figure 11.7) is an
organizational structure in which the controls used emphasize competition between separate (usually unrelated)
divisions for corporate capital. To realize benefits from efficient resource allocations, divisions must have
separate, identifiable profit performance and must be held accountable for such performance. The internal
capital market requires organizational arrangements that emphasize competition rather than cooperation
between divisions. To emphasize competitiveness among divisions, the home office maintains an arms-length
relationship and does not intervene in divisional affairs except to audit operations and discipline managers of
poorly performing divisions.
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5. What organizational structures are used to implement the multidomestic, global, and transnational
international strategies? (pp. 324-328)
The multidomestic strategy is one in which strategic and operating decisions are decentralized to business units
in each country to facilitate tailoring of products to local markets. However, it is sometimes difficult for firms
to know how local their products should or can become. Firms implementing the multidomestic strategy often
attempt to isolate themselves from global competitive forces by establishing protected market positions or by
competing in industry segments that are most affected by differences among local countries. The worldwide
geographic area structure (see Figure 11.8) is used to implement the multidomestic strategy. This structural
form emphasizes national interests and facilitates managers efforts to satisfy local or cultural differences.
Because the multidomestic strategy requires little coordination between different country markets, there is no
need for integrating mechanisms among divisions in the worldwide geographic area structure. As such,
formalization is low and coordination among units in a firms worldwide geographic area structure is often
informal.
Given its emphasis on international scale and scope economies, the global strategy is a strategy in which
standardized products are offered across country markets and where competitive strategy is dictated by the
firms home office. The worldwide product divisional structure (see Figure 11.9) is used to implement the
global strategy. This structure represents an organizational form in which decision-making authority is
centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among
disparate divisional business units. This form is the structure of choice for rapidly growing firms seeking to
manage their diversified product lines effectively. Integrating mechanisms also create effective coordination
through mutual adjustments in personal interactions. Such integrating mechanisms include direct contact
between managers, liaison roles between departments, temporary task forces or permanent teams, and
integrating roles. As managers participate in cross-country transfers, they are socialized in the philosophy of
managing an integrated strategy through a worldwide product divisional structure. A shared vision of the firms
strategy and structure is developed through standardized policies and procedures (formalization) that facilitate
implementation of this organizational form.
The transnational strategy is an international strategy through which a firm seeks to provide the local
responsiveness of the multidomestic strategy while achieving the global efficiency of the global strategy. The
combination structure has characteristics and structural mechanisms that result in an emphasis on both
geographic and product structures. Thus, this structure has the multidomestic strategys geographic area focus
and the global strategys product focus. The structure used to implement the transnational strategy must be
simultaneously centralized and decentralized, integrated and nonintegrated, and formalized and nonformalized.
These seemingly opposing structural characteristics must be managed by a structure that is capable of
encouraging all employees to understand the effects of cultural diversity on a firms operations. Accordingly, a
strong educational component is needed to change the whole culture of the organization. If the cultural change
is effective, the combination structure should allow the firm to learn how to gain competitive benefits in local
economies by adapting capabilities and core competencies that often have been developed and nurtured in less
culturally diverse competitive environments.
6.
What is a strategic network? What is a strategic center firm? (pp. 329-330)
A strategic network is a group of firms that has been formed to create value by participating in multiple
cooperative arrangements, such as strategic alliances. An effective strategic network facilitates the discovery of
opportunities beyond those identified by individual network participants. A strategic network can be a source of
competitive advantage for its members when its operations create value that is difficult for competitors to
duplicate and that network members cant create by themselves. Strategic networks are used to implement
business-level, corporate-level, and international cooperative strategies.
Commonly, a strategic network is a loose federation of partners who participate in the networks operations on a
flexible basis. At the core or center of the strategic network, the strategic center firm is the one around which
the networks cooperative relationships revolve.
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Because of its central position, the strategic center firm is the foundation for the strategic networks structure.
Concerned with various aspects of organizational structure, such as formal reporting relationships and
procedures, the strategic center firm manages what are often complex, cooperative interactions among network
partners. The strategic center firm is engaged in four primary tasks as it manages the strategic network and
controls its operations:
Strategic Outsourcing is one of the strategic center firms key functions. In addition to outsourcing more than
do other members of the strategic network, the center firm also encourages member firms to go beyond
contracting to solve problems and to initiate competitive courses action that the network can pursue.
The Competence-related role of the center firm is to build or develop the core competencies of other network
member firms and encourage them to share capabilities and competencies with other network partners.
Technology aspects of the center firms role include managing the development and sharing of technology-based
ideas among network partners.
Emphasizing the Race to Learn implies that the strategic center firm must encourage positive rivalry among
partner firms that will strengthen each partners as well as the networks value chain. The effectiveness of the
center firm is related to how well it learns how to manage learning processes among network partners.
Taken together, the effective management of all aspects of the network by the strategic center firm is critical to
the networks ability to successfully implement business-level, corporate-level and international cooperative
strategies.
Exercise 1: The Merits of ROWE (Results-Only Work Environment)
For this exercise, you and your classmates will debate the merits of Best Buys ROWE initiative. To
complete this exercise, your instructor will divide the class into five groups of roughly equal size. The
groups will have these responsibilities:
Team 1 will present arguments why ROWE is desirable and should be implemented in other organizations.
Team 2 will present a counterargument why ROWE is undesirable, and hence should not be implemented
in other organizations.
Team 3 will cross-examine Team 1.
Team 4 will cross-examine Team 2.
Team 5 will decide which of the two arguments is most convincing.
Exercise 2: Burger Buddy and Ma Maison
Assume that it is a few months before your college graduation. You and some classmates have decided to
become entrepreneurs. The group has agreed on the restaurant industry, but your discussions thus far have
gone back and forth between two different dining concepts: Burger Buddy and Ma Maison. Details about
these two concepts follow.
Burger Buddy would operate near campus in order to serve the student market. Burger Buddy will be a
1950s-themed hamburger joint, emphasizing large portions and affordable prices.
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Ma Maison is the alternate concept. One of your partners has attended cooking school and has proposed the
idea of a small, upscale French restaurant. The menu would have no set items, but would vary on a daily
basis instead. Ma Maison would position itself as a boutique restaurant providing superb customer service
and unique offerings.
Working in small groups, answer the following questions:
1.
What is the underlying strategy for each restaurant concept?
2.
How would the organizational structure of the two restaurant concepts differ?
3.
How would the nature of work vary between the two restaurants?
4.
If the business concept is successful, how might you expect the organizational structure and nature
of work at each restaurant to change in the next five to seven years?
INSTRUCTOR'S NOTES FOR

Exercise 1: The merits of ROWE

This exercise uses a debate format to discuss the Best Buy ROWE (Results-Only Work Environment)
initiative that is described in the Strategic Focus section of the chapter. On the surface, many students may
look at elements of the program no fixed work hours, optional attendance at work meetings, etc as
nirvana. The goal of the debate is to highlight the strategy structure connection by debating how
applicable ROWE might be to other settings. Students should be divided into five teams, with the
following responsibilities:
Team 1: Will present arguments why ROWE (Results-Only Work Environment) is desirable, and should be
implemented in other organizations.
Team 2: Will present a counter-argument why ROWE is undesirable, and hence should not be implemented
in other organizations.
Team 3: Will cross-examine Team 1.
Team 4: Will cross-examine Team 2.
Team 5: Will decide which side of the argument is most convincing.
Teams should be given 20 to 30 minutes to prepare. The instructor should indicate that outside research is
not allowed. Concurrently, students should be encouraged to draw on ideas presented in both their strategy
course and prior courses as well.
A recommended format for the debate is:
Team 1 makes a 5 to 7 minute presentation
Team 2 makes a 5 to 7 minute presentation
Team 3 does a 5 minute cross-examination of Team 1
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Team 4 does a 5 minute cross-examination of Team 2
Team 1 gives a 2 minute summation
Team 2 gives a 2 minute summation
Judges deliberate, then make a brief presentation explaining their rationale for which side had a more
compelling case.
Once the debate has ended, the instructor can ask the following questions to help ensure the main points
have been brought out:
1.
How well did the debate tap the notion that a given structure should be matched to a given
strategy?
2.
Since strategy and structure are linked, what do you think of Best Buys initiative to sell the
ROWE model to other firms?
3.
What types of firms (and industries) might ROWE be the most appropriate for? The least?
4.
Who in class believes they would personally be more effective in a ROWE setting? Less
effective? Why?
5.
How might ROWE be received in cultures outside the US?
Additionally, the instructor may wish to visit the ROWE website, at: http://www.culturerx.com/.
Exercise 2: Burger Buddy and Ma Maison
The purpose of this exercise is to use a familiar industry restaurants to illustrate how organizational
structure and job design differ for firms which are pursuing different strategies. Student teams are asked to
consider two different restaurant concepts.
Burger Buddy is the first concept. The idea for this restaurant is to operate near campus, serving the
student market. Burger Buddy will be a 1950s-themed hamburger joint, emphasizing large portions and
affordable prices.
Ma Maison is the alternate concept. One of your partners has attended cooking school, and has proposed
the idea of a small, upscale French restaurant. The menu would have no set items, but would vary on a
daily basis instead. Ma Maison will position itself as a boutique restaurant providing superb customer
service and unique offerings.
Working in small groups, students are asked to answer the following questions:
5.
What is the underlying strategy for each restaurant concept?
6.
How would the organizational structure of the two restaurant concepts differ?
7.
How would the nature of work vary between the two restaurants?
8.
If the business concept is successful, how might you expect items 2 and 3 to change in the next 5
to 7 years?
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Regarding the first question, Burger Buddy is clearly following a low-cost strategy. Ma Maison, however,
is pursuing differentiation. Additionally, given the narrow focus in the concept statement, Ma Maison
would be positioning itself as a niche differentiator, versus a broader market.
Organizational structure would be very different for the two concepts. Some students might propose that
both restaurants would follow a simple structure: as noted in the book, this is a common approach for small
businesses, including restaurants. When students respond with a simple structure, acknowledge that this is
a commonly used format, but challenge whether a simple structure is optimal for firm performance.
Ask students if they have worked in a fast food restaurant and what the organizational structure was like.
Themes that will emerge include a formal hierarchy of management, established procedures, clear rules for
decision making, and so on. In contrast, the boutique restaurant would likely have a flatter hierarchy,
decentralized decision making, and more flexible procedures.
The nature of work for firms pursuing low cost versus differentiation will differ substantially. One way to
frame this distinction is to compare what it means to be a cook at Burger Buddy versus Ma Maison: at
Burger Buddy, the skill sets are easily learned, and quickly replaced if an employee leaves. At the upscale
restaurant, however, a chef will play a key role in the success of the business. Employees will typically be
paid less in the low cost setting, have higher turnover, and require less knowledge or training. Incentive
pay may be used at Ma Maison, but not at Burger Buddy. The two work settings will also differ in task
complexity, task significance, and levels of autonomy.
The last question addresses the stability of organizational structure and the nature of work over time.
Because the Ma Maison concept is framed around a niche, the restaurant would operate at a steady state
over time. Burger Buddy, however, is a scalable business concept. As such, it has the potential to grow
into multiple locations. One question to ask students is what would it take for a multi-location version of
Burger Buddy to be considered an M-form structure. As an example, the firm could organize a
headquarters which is responsible for advertising, expansion, and oversight of strategy. Managers of
individual branches would have operational autonomy, and profit/loss accountability.
ADDITIONAL QUESTIONS AND EXERCISES

The following questions and exercises can be presented for in-class discussion or assigned as homework.
Application Discussion Questions
1.
2.
3.
4.
5.
Why do firms experience evolutionary cycles in which there is a fit between strategy and structure,
punctuated with periods in which strategy and structure are reshaped? Have the students provide examples
of global firms that have experienced this pattern.
Ask the students to select an organization (for example, an employer, a social club, or a nonprofit agency)
of which they currently are members. What is this organizations structure? Is the organization using the
structure that is appropriate, given its strategy? If not, what structure should it use?
Have the students use the Internet to find a firm that uses the multidivisional structure. Which form of the
multidivisional structure is the firm using? What is there about the firm that makes it appropriate for it to
use the M-form?
Through reading of the business press, students should identify a firm implementing the global strategy and
one implementing the multidomestic strategy. What organizational structure is being used in each firm? Are
these structures allowing each firms strategy to be implemented successfully? Why or why not?
Students should define strategic and financial controls for a businessperson in the local community. Ask the
businessperson to describe the use of each type of control in his or her business. In which type of control
does the businessperson have the greatest confidence? Why?
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Ethics Questions
1.
2.
3.
4.
5.
When a firm changes from the functional structure to the multidivisional structure, what responsibilities
does it have to current employees?
Are there ethical issues associated with the use of strategic controls? With the use of financial controls? If
so, what are they?
Are there ethical issues involved in implementing the cooperative and competitive M-form structures? If
so, what are they? As a top-level manager, how would you deal with them?
Global and multidomestic strategies call for different competitive approaches. What ethical concerns might
surface when firms attempt to market standardized products globally? When they develop different
products or approaches for each local market?
What ethical issues are associated with the view that the redesign of organizations throughout a society
indeed, globallyentails losses as well as gains?
Internet Exercise
Many retail industries, such as music sales, are ideal for Web-based organizational and selling structures. Visit
the sites of some of the most popular venues: CD Universe (http://www.cduniverse.com), CD Quest
(http://www.cdquest.com), and Amazon.com (http://www.amazon.com). Can you define the type of
organizational structure each company uses? What attempts are being made by each to diversify and expand
into other businesses?
*e-project: Suppose you want to launch your own CD sales company on the Internet that will have an immense
global reach to the large Spanish-speaking market around the world. Suppose further that you have hired a
Web design firm to construct a site for you. Based on your research of top sites, how will you describe your
Web design and business-level strategy for this project? What organizational structure is appropriate to
implement the business-level strategy selected?
11-28

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Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Define organizational structure and controls and discuss the

Chapter 11: Organizational Structure and Controls

difference between strategic and financial controls.

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Describe the relationship between strategy and structure.

RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE

Charles Schwab & Co. and Strategy/Structure Fit: A Mini-Case

Chapter 11: Organizational Structure and Controls

EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL STRUCTURE

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Discuss the functional structures used to implement businesslevel strategies.

Matches between Business-Level Strategies and the Functional Structure

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Explain the use of three versions of the multidivisional (M-form)

Matches between Corporate-Level Strategies and the Multidivisional Structure

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Discuss the organizational structures used to implement three

Matches between International Strategies and Worldwide Structures

Chapter 11: Organizational Structure and Controls

The multidomestic strategy requires a decentralized structure.

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Define strategic networks and discuss how strategic center firms

Matches between Cooperative Strategies and Network Structures

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

ANSWERS TO REVIEW QUESTIONS

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

What is a strategic network? What is a strategic center firm? (pp. 329-330)

Chapter 11: Organizational Structure and Controls

Chapter 11: Organizational Structure and Controls

What is the underlying strategy for each restaurant concept?

INSTRUCTOR'S NOTES FOR

Exercise 1: The merits of ROWE

Chapter 11: Organizational Structure and Controls

How might ROWE be received in cultures outside the US?

What is the underlying strategy for each restaurant concept?

Chapter 11: Organizational Structure and Controls

ADDITIONAL QUESTIONS AND EXERCISES

Chapter 11: Organizational Structure and Controls

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