Chapter 10

Designing Organizations

for Competitive Advantage

Major Topics

• Why strategy implementation is important.• How strategy implementation contributes to a firm’s

competitive advantage.• Why organizational issues are a significant part of

strategy implementation.• The broad types of organizational structures that

companies are likely to use.• Why no single type of organizational structure is

likely to fit all companies.

Key Dimensions of Organizational Structure

• Specialization– Matching activities with people who are best able to

perform them.– Found at all levels within an organization.

• Standardization

– Practices, procedures, and guidelines that provide the basis for consistent performance.

– Focused on achieving internal order with a given structure.

• Centralization– Delegation of authority throughout the organization’s

ranks.

Typical Functional Structure

ServiceService

CorporateCorporate

MarketingMarketing SalesSalesResearch

andDevelopment

Researchand

Development

Production/Operations

Production/Operations

• Each function is responsible for its own set of tasks and activities.

• Each function has its own set of goals and objectives that require coordination with other functions.

Key Characteristics of aFunctional Structure

• Advantages– Economies of scale in administrative costs/activities– Good for small-sized firms– East to identify talent– Fosters high centralization of decision-making– Promotes high task and activity specialization– Supports a low-cost leadership strategy– Supports vertical integration in a business– Best for undiversified firms

Key Characteristics of aFunctional Structure

• Disadvantages– Coordination difficulties arise when firm diversifies– Difficult for each function to accommodate needs of

other functions– Divergent goals and objectives based on each function– Inflexible with broad-based global or multi-domestic

strategies– Needs extensive modification to support differentiation

strategies– Poor fit for highly-diversified firms

Typical Product Division Structure

• Each division is self-contained and responsible for its own products/markets that it serves.

• Each division contains its own set of functions.

CorporateCorporate

MarketingMarketingProduction/Operations

Production/OperationsR & DR & D SalesSales ServiceService

Product 2Product 2 Product 3Product 3Product 1Product 1

Key Characteristics of Product Division Structures

• Advantages– High autonomy of divisions for each product/business– Allows for specialization based on products/markets– Enhances and supports needed changes in products– Allows for easy measurement of financial performance– Standardizes performance measurement

– Cross-functional perspectives

– Supports highly diversified strategies (related and unrelated)

Key Characteristics of Product Division Structures

• Disadvantages– Duplicates functions within each product division– Duplicates administrative and staff functions– Leads to short-term thinking if not carefully monitored– Promotes high internal competition between divisional

managers– May under-invest in firm’s core competence and skills;

discourages company-wide “mega” projects

Strategic Business Unit Structure

CorporateCorporate

•The SBU Structure is a collection of product divisions that produce related or similar products.

•Supports related diversification because similar products that are grouped together share a common underlying technology, market, skill, or resource.

SBU 2SBU 2 SBU 3SBU 3SBU 1SBU 1

Product 2Product 2 Product 3Product 3Product 1Product 1

Sector/Group Structure

Sector or group structures tie together different SBUs that represent a common industry, technology, or critical skills.

Sectors help senior management get a handle on broad-based, related diversification. They are, however, costly to operate because of several layers of management

CorporateCorporate

Sector 3Sector 3Sector 2Sector 2Sector 1Sector 1

SBU 3SBU 3SBU 2SBU 2SBU 1SBU 1

Product 1Product 1 Product 3Product 3Product 2Product 2

Conglomerate/Holding Company Structure

•Each business unit is managed independently of the others. Each business unit is also a company that can easily be sold off.

•Extremely lean corporate and administrative staff means few overhead costs.

•Supports unrelated diversification very well.

CorporateCorporate

BusinessUnit 2

BusinessUnit 2

BusinessUnit 3

BusinessUnit 3

BusinessUnit 1

BusinessUnit 1

Geographic Structure

• Geographic structures are excellent in responding to the needs of local, regional markets.

• Geographic structures have their own self-contained product and/or functional structures to meet the needs of that region’s customers.

• Promotes a high level of decentralization.

CorporateCorporate

Region 1Region 1 Region 2Region 2 Region 3Region 3

Product orFunction

Product orFunction

Product orFunction

Product orFunction

Product or Function

Product or Function

Key Characteristics of Geographic Structures

• Advantages– High specialization according to market needs– High autonomy from other geographic units– Promotes a high degree of decentralization– Fast response to market needs– Highly flexible structure; easy to create smaller geographic

units– Allows for full use and development of local

talent/managers– Excellent support for multi-domestic strategies

Key Characteristics of Geographic Structures

• Disadvantages– Duplicate functions within each region– Places coordination demands on senior management– Needs other support measures to ensure high quality

and uniform image– May not work well in fast-changing, technologically-

intensive businesses or industries

Matrix Structure

• Each lower-level manager reports to two bosses -- one product division superior and one functional superior.

• Although it promotes technology sharing, matrix structures are extremely costly and difficult to manage.

• Matrix structures lost favor over the 1980’s; most companies that adopted them ultimately switched to another structure

Function 3Function 3 ManagerManager ManagerManager ManagerManager

Function 2Function 2 ManagerManager ManagerManager ManagerManager

Function 1Function 1 ManagerManager ManagerManager ManagerManager

Product 1Product 1 Product 2Product 2 Product 3Product 3

CorporateCorporate

Key Characteristics of Matrix Structures

• Advantages– Promotes sharing of key resources and skills– Enhances fast change and flexibility– Helps when resources are scarce– Allows for transfer and movement of people– High specialization along key activities and products

Key Characteristics of Matrix Structures

• Disadvantages– Very high cost structure– Slows down decision-making in practice– Lower-level managers often unable to feel comfortable

in this structure– High tension and stress– Could generate conflict between superiors that are the

“arms” of the matrix

International Division Structure

• International division structures are excellent to support a firm’s early global expansion efforts.

• Promotes a high level of specialization for overseas knowledge and activities.

CorporateCorporate

Product 1Product 1 Product 2Product 2 Product 3Product 3

Region 1Region 1 Region 3Region 3Region 2Region 2

InternationalDivision

InternationalDivision