10. Structure and control.pdf

7/25/2019 10. Structure and control.pdf

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Strategy Implementation:

Organizational Structure and Controls


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Chapter 11: Organizational Structure (OS) andControls

Overview: Five content areas

Define OS and controls and differences betweenstrategic and financial controls

Describe relationship between strategy & structure

Describe the functional structures used to implementbusiness-level strategies

Three versions of multi-divisional (M-form) structure fordifferent diversification strategies

OS for implementation of three international strategies


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Introduction

All firms use at least one business-level strategy

Once selected, strategies are NOT implemented ina vacuum!

Organizational structure and controls provide

framework within which strategies are used

Top management has the responsibility fordesigning structures

The strategy and structure should match


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Strategy vs. Structure: Relationships

Strategy and structure have Reciprocal relationship

Implies change to one causes change in the other

Research shows strategy has a much moreimportant influence on structure than the reverse.

The structure should have stability for sustaining CAand flexibility to create new CA

Properly matching strategy and structure can createa CA


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Organizational Structure (OS) & Controls (OC)

Organizational Structure (OS)

Specifies firms formal reporting relationships,procedures, controls, authority & decision-makingprocesses (i.e., work to be done and how to do it!)

Effective use of firms strategies facilitated whenstructure is properly aligned

Structural stability: Capacity firm requires to consistently andpredictably manage its daily work routines

Structural flexibility: Opportunity to explore competitiveadvantages firm will need to be successful in the future

Pioneer Alfred Chandler found organizations changetheir structures when inefficiencies force them to do so-imposed by stakeholders-investors /customers

Otherwise inertia operates within firms


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Organizational Structure & Controls (Contd)

Organizational Controls (OC)

Guide the use of strategy, indicate how to compareactual results with expected results, and suggestcorrective actions to take when the difference is

unacceptable If differences are small the strategy is working-

otherwise need corrective action

Two types include strategic and financial


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Organizational Controls (OC)

1. Strategic controls: largely subjective criteriaintended to verify that the firm is using appropriatestrategies for the conditions in the external

environment and the companys competitiveadvantages

Concerned with what firm might do vs. what it can do

Used to evaluate degree to which firm focuses on therequirement to implement strategies (i.e., SBU: primary andsupport activities; corporate level: knowledge, markets &

technologies across businesses) Focus on the content of strategic actions in above areas

Encourage decisions that incorporate moderate and acceptablelevels of risk


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Organizational Controls (OC) (Contd)

2. Financial controls

Objective criteria used to measure firms performance againstpreviously established quantitative standards (used forunrelated diversification) ROI or ROA or EVA

Focus on short-term financial outcomes

Compare against own previous outcomes and those ofcompetitors

In global context highly sophisticated controls

SAP and Oracle sell software and services to automate control

systems Produce risk-averse managerial decisions

Companies using cost leadership emphasize financial controls,and differentiation emphasize strategic controls

Related diversification uses strategic controls, unrelatedstrategy uses financial controls


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Strategy vs. Structure: Evolutionary Patterns

Chandler found firms tend to grow in a predictablepattern, including the areas of volume, geography,integration (horizontal & vertical) & product/business diversification

Growth pattern implies structural changes! Several structure forms are used to implement

strategies, including:

1. Simple

2. Functional

3. Multidivisional


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Strategy and Structure Growth Pattern

SimpleStructure

Efficient implementation

Of formulated strategy

SalesGrowth-coordination

and ControlProblems

FunctionalStructure

Efficient implementation

Of formulated strategy

Sales

Growth-coordinationAnd controlproblems

MultidivisionalStructure


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Strategy vs. Structure: Evolutionary Patterns(Contd)

Three main structures

1. Simple

Owner-manager makes all major decisions and monitors allactivities, staff acts as extension of manager's supervisoryauthority

Few rules, limited task specialization, unsophisticatedtechnology system, frequent and informal communication

The simple structure is matched with focus strategy andbusiness level strategies because of single business, singlegeography

Local restaurants and repair shops are examples As firm grows more complex, need to add layers and controls


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Three main structures (Contd)

2. Functional

CEO and a limited corporate staff make all decisions, withfunctional line managers in dominant organizational areas

Allows functional specialization resulting in active knowledgesharing in each functional area as marketing, manufacturing,R&D, engineering and human resources

It helps growth and development of specialists career

It supports business level and corporate strategies (single anddominant business)

Can negatively affect communication and coordination amongthose representing different organizational functions

When changing from a simple to functional structure need tofocus on value-destroying bureaucratic procedures- destroyscreativity and innovation across functions


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Three main structures (Contd)

3. Multidivisional (M-form) structure

Operating divisions each represent a separate business orprofit center in which the top corporate officer delegatesresponsibilities for day-to-day operations and business-unit

strategies to division managers Used when geographic and product diversification happens

Ties together several operating divisions, each representing aseparate business or profit center to which responsibility fordaily operations and business-unit strategy is delegated


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Three main structures

Multidivisional (M-form) structure (Contd)

It enables corporate officers to more accurately monitor theperformance of each business, which simplifies the problem ofcontrol

It facilitates comparisons between divisions, which improvesresource allocation process

It stimulates managers of poorly performing divisions to lookfor ways of improving performance

It is widely used to implement diversification strategy- bothrelated and unrelated

No single structure is superior to other. It should support thestrategy


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Business-level strategies & functional structurematches for implementing strategies:

1. Cost leadership

2. Differentiation

3. Integrated cost leadership/differentiation Structural characteristics drive different forms of

organizational structures

1. Specialization (type and no. of jobs required tocomplete work)

2. Centralization(the degree to which authority isretained at higher managerial levels)

3. Formalization (degree to which formal rules andprocedures govern work)


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Functional Structure for Implementing a CostLeadership Strategy

Office of the President

Centralized Staff

Engineering Marketing Operations Personnel Accounting

Ma

ybearelativelyflator

tallstructure


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Matches between business-level strategies andfunctional structure to implement them:

1. Cost leadership and the functional structure

Simple reporting relationships

Few decision-making and authority layers Centralized corporate staff

Strong operational focus on process improvements

Low-cost culture

Centralized staff decision-making authority

Jobs specialization

Highly formalized rules and procedures

Wal-Mart uses functional structure to follow cost leadershipstrategy in all its formats and stores- Supercentres, Discountand Neighborhood Market retailing Save money, live better


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Functional Structure for Implementing aDifferentiation Strategy

President and

Limited Staff

R&D Marketing

New Product

R&D

Operations MarketingHuman

ResourcesFinance


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Matches between business-level strategies andfunctional structure to implement them :

2. Differentiation strategy

Integrated set of actions designed by a firm to produce ordeliver goods or services at an acceptable cost that customersperceive as being different in ways that are important to them

Target customers perceived product value

Customized products differentiating on as many features aspossible:

Unusual features, responsive customer service, rapid productinnovations, technological leadership, perceived prestige and status,different tastes, engineering design, performance


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2. Differentiation and functional structure

Complex and flexible reporting relationships

Cross-functional product development teams Strong focus on marketing and product R&D

Development-oriented culture

Decentralized decision making

Broad job descriptions

Informal rules and procedures

Under Armour has used differentiation strategy in sportsapparels, leaving behind Nike and other apparel companies. Ituses functional structure that match with differentiationstrategy


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3. Integrated cost leadership/differentiation strategy

These firms may sell products that create value because ofrelatively low price and reasonable sources of differentiation

Difficult to implement, but frequently used in the globaleconomy

Challenge due to primary/support activities in the Value Chain

Need to successfully combine Partial specialization, partialformalization and partial centralization


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Three Variations of theMultidivisional Structure

Multidivisional

Structure

(M-form)

Cooperative

Form

Strategic Business Unit

(SBU) Form

Competitive

Form

Cooperative Form of the Multidivisional Structure for


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Cooperative Form of the Multidivisional Structure forImplementing a Related Constrained Strategy

President

Government

Affairs

Legal

Affairs

Corporate

R&D Lab

Strategic

Planning

Corporate

Human

Resources

Corporate

Finance

Corporate

Marketing

Headquarters Office

Product

Division

Product

Division

Product

Division

Product

Division

Product

Division

St t St t E l ti P tt


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Matches between corporate-level strategies &multidivisional structure: Cooperative

form/related constrained strategy Cooperative form: organizational structure using horizontal

integration to bring about interdivisional cooperation

Divisions formed around products, markets or both

All of the divisions share one or more corporate strengths

Interdivisional sharing depends on cooperation Links resulting from effective integration mechanisms support

sharing of both tangible and intangible resources

Centralization is one integrating mechanism that can be used tolink activities among divisions, allowing firms to exploit commonstrengths and share competencies. Using this structure H-P has

implemented the related constrained strategy to sell integratedsolutions to corporate data centers

More relationships in servers, storage devices, mobile computingand high speed printers coordinated through value addedservices by using cooperative M-form


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Matches between corporate-level strategies &multidivisional structure: Cooperativeform/related constrained strategy (contd)

Success influenced by how well information is

processed among divisionsSuccess can be influenced by managerial commitment

levels and the response to some lost managerialautonomy

Reward system can overcome the weaknesses

Matrix organization may evolve organizational structure in which a dual structure combines

both functional specialization and business product or projectspecialization

SBU F f h M l idi i i l S f


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SBU Form of the Multidivisional Structure forImplementing a Related Linked Strategy

President

Corporate

R&D

Corporate

Finance

Strategic

Planning

Corporate

Marketing

Corporate

Human

Resources

Strategic

Business

Unit

Strategic

Business

Unit

Strategic

Business

Unit

Division Division Division Division Division Division Division Division Division

Headquarters Office


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Matches between corporate-level strategies &multidivisional structure: SBU form/related linkedstrategy

Related linked: Firms that share fewer resources and

assets among their businesses, concentrating on thetransfer of knowledge and competencies among thebusinesses

Strategic Business-Unit (SBU) Form: multidivisionalorganization structure with three levels to support theimplementation of diversification strategy

1. Corporate headquarters

2. Strategic Business Units (SBUs)

3. SBU division


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Matches between corporate-level strategies &

multidivisional structure: SBU form/related linkedstrategy

SBU Form (Contd)

Divisions within each SBU are related in terms of shared productsand/or markets

Divisions of one SBU have little in common with divisions of otherSBUs

Strategy review takes place at headquarters-HQ staff as consultant

SBU has its own budget for staff to foster integration

Divisions within each SBU share product or market competencies todevelop economies of scope

Integrations used in cooperative form are equally effective for theSBU form

Each SBU is a profit center

Financial controls are more vital for evaluating performance


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Sears Holdings changed to SBU form in 2008 into 5 SBUs

-Brands, real estate, support, online and store operations

This allowed related business to work together to focus ontheir distinct customer group

Provided better control at headquarters to evaluateperformance at SBU and division levels

The cooperation between division is good but difficultacross SBUs


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Competitive Form of the Multidivisional Structure forImplementing an Unrelated Strategy

Headquarters Office

President

Finance AuditingLegal Affairs

Division Division Division Division Division Division


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Matches between corporate-level strategies &multidivisional structure: Competitiveform/unrelated diversification

Competitive form defined: organizational structure inwhich the firm's divisions are completely independent

Divisions do not share common corporate strengths Integration devices not developed to coordinate

activities across divisions

Efficient capital markets in unrelated strategies requireorganizational arrangements that emphasize divisional

competition rather than cooperationSpecific performance expectations and accountability

for independent divisions stimulate internal competitionfor future resources


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Matches between corporate-level strategies andmultidivisional structure: Competitiveform/unrelated diversification (Contd) Headquarters maintains a distant relationship to avoid

intervention in divisional affairs

Strategic controls are used to monitor performance relative totargeted returns

Headquarters remains responsible for cash flow allocation,performance appraisal, resource allocation, and the legal aspectsrelated to acquisitions

Textron has four divisions and follows this structure

ROIC criteria is used for resource allocation

HQ role is appraisal, resource allocation, and long range planning

1. Inter division competition creates flexibility

2. It challenges inertia and status quo

3. Strong competition generates motivation and high performance


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Summary of corporate structures

Structuralcharacteristics

Relatedconstrained

Related Linked Unrelatedstrategy

Centralization ofoperations

Centralization atcorporate office

Partiallycentralized inSBUs

Decentralized todivisions

Use ofintegrationmechanisms

Extensive Moderate nonexistent

Divisionalperformanceappraisal

Emphasizesubjective(strategic) criteria

Us a mixture ofsubjective andobjective criteria

Emphasizeobjective(financial) criteria

Divisionalincentivecompensation

Linked to overallcorporateperformance

Mixed linkage tocorporate , SBUand divisionperformance

Linked toDivisionalperformance

I t ti l St t i d ld id


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International Strategies and worldwidestructure

International strategies are important for long-termcompetitive success

It allows firms to search new markets, resources, corecompetencies, and technologies

Unique structures are required to implement international

strategies

It helps in effective coordination of efforts worldwide

Worldwide Geographic Area Structure for


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Worldwide Geographic Area Structure forImplementing a Multidomestic Strategy

AsiaUnited

States

Europe

Middle

East/

Africa

Australia

Latin

America

Multinational

Headquarters

International Strategy and Worldwide


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International Strategy and WorldwideStructure (Contd)

Three Primary International Strategies:

1. Worldwide geographic area structure toimplement the Multidomestic Strategy

Multidomestic Strategy: international strategy in which

strategic and operating decisions are decentralized tothe strategic business-unit (SBU) in each country toallow the units to tailor products to local markets

Worldwide Geographic Area Structure: organizationalstructure emphasizing national interests and facilitatesefforts to satisfy local or cultural differences (used toimplement the multidomestic strategy)

Focuses on variations of competition within eachcountry


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Worldwide Product Divisional Structure for


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Implementing a Global Strategy

Worldwide

Products

Division

Worldwide

Products

Division

Worldwide

Products

Division

Worldwide

Products

Division

Worldwide

Products

Division

Worldwide

Products

Division

Global

Corporate

Headquarters



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2. Worldwide product divisional structure toimplement Global Strategy

Global Strategy: International strategy whereby firmoffers standardized products across country markets,

with the competitive strategy being dictated by thehome office

Worldwide Product Divisional Structure: Organizationalstructure with centralized decision-making authority inthe WW division headquarters to coordinate andintegrate decisions and actions among divisionalbusiness units (used to implement the global strategy)

Facilitated by improved global accounting and financialreporting standards



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2. Worldwide product divisional structure toimplement Global Strategy (Contd)

Emphasizes economies of scale

Centralizes the firm's strategic and operating decisions

at the home office Involves SBUs operating in each country that are

interdependent

Home office attempts to achieve integration acrossSBUs, adding management complexity

Produces lower risk Is less responsive to local market opportunities

Offers less effective learning processes due to thepressure to conform and standardize

Avon follow this structure

Hybrid Form of the Combination Structure forImplementing a Transnational Strategy


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Implementing a Transnational Strategy

Area 1 Area 2 Product A Product B Product A Product BArea 1 Area 2

Product

Division A

Geographic

Area

Division 1

Product

Division B

Geographic

Area

Division 2

Headquarters



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Three Primary International Strategies: 3. Combination structure to implement the

Transnational Strategy

Transnational Strategy: International strategy through

which the firm seeks to achieve both global efficiencyand local responsiveness; usually implemented throughglobal matrix structure and hybrid global design

Flexible Coordination: Building a shared vision andindividual commitment through an integrated network

Combination Structure: Organizational structure inwhich characteristics and mechanisms are drawn fromboth the worldwide geographic area structure and theworldwide product divisional structure (used toimplement transnational strategy)



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3. Combination structure to implement theTransnational Strategy (Contd)

Assets and operations may be centralized/decentralized

Functions may be integrated/nonintegrated

Relationships may be formal/informalCoordination mechanisms may leverage

efficiency/flexibility

Mandates to subsidiaries may be global/specialized-contribution/ localized-implementation

There are competing objectives when a worldwidecombination structure is used to implement atransnational strategy

Pepsico and IKEA use this form of structure

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