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PowerPoint slides by:
R. Dennis MiddlemistColorado State University
Copyright 2004 South-Western
All rights reserved.
Chapter 11
OrganizationalStructure andControls
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Knowledge Objectives
Studying this chapter should provide you with thestrategic management knowledge needed to:
Define organizational structure and controls and discussthe 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 strategic center firms.
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Organizational Structure
Organizational structure specifies:The firms formal reporting relationships,
procedures, controls, and authority and decision-making processes
The work to be done and how to do it, given thefirms strategy or strategies
It is critical to match organizationalstructure to the firms strategy
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Organizational Controls
Purposes of Organizational Controls:Guide the use of strategy
Indicate how to compare actual results withexpected results
Suggest corrective actions to take when thedifference between actual and expected results isunacceptable
Two types of organizational controlsStrategic controls
Financial controls
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Organizational Controls
Subjective CriteriaAre concerned with examining the fit between:
What the firm might do (opportunities in its externalenvironment
What the firm can do (competitive advantages)
Evaluate the degree to which the firm focuses onthe requirements to implement its strategy
OrganizationalControls
StrategicControls
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Organizational Controls
Objective criteriaAccounting-based measures include:
Return on investment
Return on assets
Market-based measures include:
Economic Value Added (EVA)
OrganizationalControls
StrategicControls
FinancialControls
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Matching Control to Strategy
Relative use of controls varies by type ofstrategy
Large diversified firms using a cost leadershipstrategy emphasize financial controls
Companies and business units using adifferentiation strategy emphasize strategiccontrols
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Relationships between Strategy andStructure
Strategy and structure have a reciprocalrelationship:
Structure flows from or follows the selection of
the firms strategybut
Once in place, structure can influence currentstrategic actions as well as choices about future
strategies
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Evolutionary Patterns of Strategy andOrganizational Structure
Firms grow in predictable patterns:
First by volume
Then by geographyThen integration (vertical, horizontal)
And finally through product/businessdiversification
A firms growth patterns determine its
structural form
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Evolutionary Patterns of Strategy andOrganizational Structure
All organizations require some form oforganizational structure to implement andmanage their strategies
Firms frequently alter their structure as theygrow in size and complexity
Three basic structure types:
Simple structureFunctional structure
Multidivisional structure (M-form)
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Strategy and StructureGrowth Pattern
Figure 11.1
Efficient implementationof formulated strategy
Efficient implementation
of formulated strategy
As firms grow larger andbecome more complex,structural challengesemerge
Firms larger sizes dictate
the need for moresophisticated workflows andintegrating mechanisms
Simple
Functional
Multidivisional
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Strategy and Structure: Simple Structure
Owner-managerMakes all major decisions directly
Monitors all activities
Staff
Serves as an extension of the managers
supervisor authority
Matched with focus strategies and business-
level strategiesCommonly compete by offering a single product
line in a single geographic market
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Simple Structure (contd)
Growth creates:Complexity
Managerial and structural challenges
Owner-managersCommonly lack organizational skills and
experience
Become ineffective in managing the specialized
and complex tasks involved with multipleorganizational functions
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Strategy and Structure: Functional Structure
Chief Executive Officer (CEO)Limited corporate staff
Functional line managers in dominantorganizational areas of:
Manufacturing Marketing EngineeringAccounting R&D Human
resources
Supports use of business-level strategies
and some corporate-level strategiesSingle or dominant business with low levels of
diversification
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Functional Structure (contd)
Differences in orientation amongorganizational functions can:
Impede communication and coordination
Increase the need for CEO to integrate decisionsand actions of business functions
Facilitate career paths and professionaldevelopment in specialized functional areas
Cause functional-area managers to focus onlocal versus overall company strategic issues
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Strategy and Structure: MultidivisionalStructure
Strategic Control
Operating divisions function as separatebusinesses or profit centers
Top corporate officer delegatesresponsibilities to division managers
For day-to-day operations
For business-unit strategy Appropriate as firm grows through
diversification
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Multidivisional Structure (contd)
Three Major BenefitsCorporate officers are able to more accurately
monitor the performance of each business,which simplifies the problem of control
Facilitates comparisons between divisions,which improves the resource allocation process
Stimulates managers of poorly performing
divisions to look for ways of improvingperformance
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Matching Strategy and Functional Structure
Different forms of the functionalorganizational structure are matched to:
Cost leadership strategy
Differentiation strategy
Integrated cost leadership/differentiation strategy
Differences in these forms are seen in threeimportant structural characteristics:
Specialization (number and types of jobs)
Centralization (decision-making authority)
Formalization (formal rules and work procedures)
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Functional Structure for Cost Leadership Strategy
Notes: Operations is the main function Process engineering is emphasized rather than new product R&D Relatively large centralized staff coordinates functions Formalized procedures allow for emergence of a low-cost culture Overall structure is mechanical; job roles are highly structured Figure 11.2
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Functional Structure undera Cost Leadership Strategy
Operations is the main function
Process engineering is emphasized overresearch and development
Large centralized staff oversees activities
Formalized procedures guide actions
Structure is mechanical
Job roles are highly structured
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Functional Structure for Implementation ofa Differentiation Strategy
Figure 11.3
Notes: Marketing is the main function for keeping track of new product ideas New product R&D is emphasized Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished Overall structure is organic; job roles are less structured
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Functional Structure undera Differentiation Strategy
Marketing is the main function for trackingnew product ideas
New product R&D is emphasized
Most functions are decentralized
Formalization is limited to foster change andpromote new ideas
Overall structure is organic
Job roles are less structured
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Implementing an Integrated CostLeadership/ Differentiation Strategy
Selling products that create customer valuedue to:
Their relatively low product cost through anemphasis on manufacturing and processengineering, with infrequent product changes
Reasonable sources of differentiation based onnew-product R&D are emphasized whilemanufacturing and process engineering are not
Used frequently in global economy
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Implementing an Integrated CostLeadership/Differentiation Strategy (contd)
The integrated form of the functionalstructure must have:
Decision-making patterns that are partiallycentralized and partially decentralized
Semi-specialized jobs
Rules and procedures that allow both formal andinformal job behaviors
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Corporate-Level Strategies and theMultidivisional Structure
A firms continuing success that leads to:
Product diversification, or
Market diversification, or
Both product and market diversification
Increasing diversification creates controlproblems that the functional structure cant
handle Information processing, coordination
Control
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Corporate-Level Strategies and theMultidivisional Structure (contd)
Diversification strategy requires firm tochange from functional structure to amultidivisional structure
Different levels of diversification create theneed for implementation of a unique form ofthe multidivisional structure
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Variations of the Multidivisional Structure
Figure 11.4
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Cooperative Form of Multidivisional Structure: Related-Constrained Strategy
Notes Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions
R&D is likely to be centralized
Rewards are subjective and tend to emphasize overall corporateperformance in addition to divisional performance
Culture emphasizes cooperative sharing
Figure 11.5
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Multidivisional Structure: Cooperative Form
Horizontal integration is used to bring aboutinterdivisional cooperation
Sharing divisional competencies facilitatesdevelopment of economies of scope
To foster divisional cooperation, thecorporate office emphasizes centralization:
Strategic planning
Human resources
Marketing
Related-Constrained Strategy
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Cooperative Form (contd)
R&D is likely to be centralized Frequent, direct contact between division
managers encourages and supportscooperation and sharing of competenciesand resources
Use of liaison roles
Rewards are subjective, emphasizing overallcorporate performance in addition todivisional performance
Related-Constrained Strategy
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SBU Form of Multidivisional Structure: Related-Linked Strategy
Notes: Structural integration among divisions within SBUs, but independenceacross SBUs
Strategic planning may be the most prominent function in headquartersfor managing the strategic planning approval process of SBUs for thepresident Figure 11.6
Each SBU may have its own budget for staff to foster integration Corporate headquarters staff serve as consultants to SBUs and divisions,
rather than having direct input to product strategy, as in the cooperative form
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Multidivisional Structure: SBU Form
Strategic business unit (SBU) form is astructure consisting of three levels:
Corporate headquarters
Strategic business units (SBUs)SBU divisions
Divisions within SBUs share
Products, or markets, or both
Related-Linked Strategy
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Multidivisional Structure: SBU Form
Divisions within SBUs develop economies ofscope and/or scale by sharing product ormarket competencies
Each SBU is a profit center controlled and
evaluated by the headquarters office
Used by large firms
Can be complex due to an organizations size
and diversity in products and markets
Related-Linked Strategy
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Competitive Form of Multidivisional Structure:Unrelated Strategy
Figure 11.7
Notes Corporate headquarters has a small staff Finance and auditing are the most prominent functions
in the headquarters office to manage cash flow andassure the accuracy of performance data coming fromdivisions
The legal affairs function becomes important when the firm acquires or
divests assets Divisions are independent and separate for financial evaluation purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources
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Multidivisional Structure: Competitive Form
A structure in which there is completeindependence among the firms divisions
Divisions do not share common corporatestrengths
Because strengths arent shared, integrating
devices arent developed
Organizational arrangements emphasize
divisional competition rather than cooperation
Unrelated Strategy
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Competitive Form (contd)
Three benefits from the internal competitionFlexibilitycorporate headquarters can have
divisions working on different technologies toidentify those with greatest future potential
Challenges the status quo and inertia
Motivates effort
Creates specific profit performance
expectations for each division to promoteinternal competition for resources
Unrelated Strategy
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Characteristics of Structures to ImplementDiversification Strategies (contd)
a Strategy implemented with structural form.Table 11.1
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International Strategies and WorldwideStructures
Allow the firm to search for new:
Markets
Resources Core competencies
Technologies
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Worldwide Geographic Area Structure:Multidomestic Strategy
Notes: The perimeter circles indicate decentralization ofoperations
Emphasis is on differentiation by local demand to fit
an area or country culture Corporate headquarters coordinates financial
resources among independent subsidiaries The organization is like a decentralized federation
Figure 11.8
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Worldwide Geographic Area Structure:Implementing a Multidomestic Strategy
Multidomestic strategy decentralizesstrategic and operating decisions to:
Business units in each country
Product characteristics tailored to localpreferences
Firms counter global competitive forces by:
Establishing protected market positions, orCompeting in industry segments most affected
by differences among local countries
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Worldwide Geographic Area Structure
Worldwide geographic area structureEmphasizes national interests
Facilitates the firms efforts to satisfy local or
cultural differences
Multidomestic strategyRequires little coordination between different
county markets: integrating mechanisms arent
needed
Key disadvantage is inability to create globalefficiencies
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Worldwide Product Divisional Structure:Implementing a Global Strategy
Global strategy
Allows firm to offer standardized productsacross country market
Effects on Firm
Success depends on firms ability to develop and
take advantage of economies of scope and scaleon global level
Firm tends to outsource some primary or supportactivities to the worlds best providers
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Worldwide Product Divisional Structure
Centralizes decision-making authority in theworldwide division headquarters
Headquarters coordinates and integratesdecisions and actions among divisional business
units
Integrating mechanisms are important:
Direct contact between managers
Liaison roles between departmentsTemporary task forces as well as permanent
teams
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Combination Structure: A TransnationalStrategy
Transnational Strategy
Combines multidomestic strategys local
responsiveness with global strategys efficiency
Combination structure draws characteristicsand mechanisms from both:
Worldwide geographic area structure
Worldwide product divisional structure
Appropriate integrating mechanisms for thecombination structure are less obvious
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Cooperative Strategies and NetworkStructures
Network strategy exists when:
Partners form several alliances in order toimprove performance of the alliance network
itself through cooperative endeavors
Strategic Network
A group of firms formed to create value by
participating in multiple cooperativearrangements such as alliances and jointventures
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Cooperative Strategies and NetworkStructures (contd)
Strategic networks are used to implement:
Business-level strategies
Corporate-level strategies
International cooperative strategies
Strategic center firm
The firm around which the networks cooperativerelationships revolve
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A Strategic Network
StrategicCenterFirm
Adapted fromFigure 11.10
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Strategic Center Firm
Is the foundation for the strategic networksstructure
Concerned with aspects of organizationalstructure such as formal reporting relationships.
Manages the complex, cooperative interactionsamong network partners
Engages in four primary tasks:
Strategic outsourcing Competencies
Technology Race to learn
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Implementing Business-Level CooperativeStrategies
Vertical complementary alliances
Firms have complementary competencies indifferent value chain stages that let them
cooperatively integrate their different skills Horizontal complementary alliances
Firms agree to combine competencies in order tocreate value in the same stage of the value chain
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Implementing Business-Level CooperativeStrategies (contd)
The strategic center firm is obvious invertical complementary strategic alliances,but not always in horizontal complementary
strategic alliances
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Implementing Business-Level CooperativeStrategies: International Franchising
Franchising
A common form of cooperative strategy used tofacilitate product and market diversification
Allows the firm to use its competencies to extendor diversify its product or market reach withoutcompleting a merger or acquisition
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Implementing Corporate-Level CooperativeStrategies: International
Strategic networks
Are used to implement international cooperativestrategies for competing in several countries
Differences in countries regulatory environmentsincrease the challenge of managing internationalnetworks
Distributed strategic networks
Are the organizational structure used to manageinternational cooperative strategies
Regional strategic center firms
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StrategicCenterFirm
MainStrategicCenterFirm
A Distributed Strategic Network
= Distributed Strategic Center Firms Adapted fromFigure 11.11