Organizational Organizational Structure & Structure &

ControlsControls

Organizational Organizational Structure & Structure &

ControlsControls

Chapter ElevenChapter Eleven

BA 495.009BA 495.009

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Today’s AgendaToday’s Agenda

• Organizational Structure & ControlsOrganizational Structure & Controls• Evolutionary Patterns of Strategy & StructureEvolutionary Patterns of Strategy & Structure

SimpleSimple FunctionalFunctional MultidivisionalMultidivisional

• Matching Domestic Structure to StrategyMatching Domestic Structure to Strategy• Matching International Structure to StrategyMatching International Structure to Strategy• Wrap-upWrap-up

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Organizational Structure and Controls

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Organizational Structure and ControlsOrganizational Structure and Controls

• Organizational structure specifies:Organizational structure specifies:

The firm’s formal reporting relationships, procedures, The firm’s formal reporting relationships, procedures, controls, and authority and decision-making controls, and authority and decision-making processesprocesses

The work to be done and how to do it, given the firm’s The work to be done and how to do it, given the firm’s strategy or strategiesstrategy or strategies

• It is critical to match organizational structure to It is critical to match organizational structure to the firm’s strategy.the firm’s strategy.

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Organizational StructureOrganizational Structure

• Effective structures provide:Effective structures provide: StabilityStability

FlexibilityFlexibility

• Structural stability provides: Structural stability provides: The capacity required to consistently and predictably The capacity required to consistently and predictably

manage daily work routinesmanage daily work routines

• Structural flexibility provides for:Structural flexibility provides for: The opportunity to explore competitive possibilitiesThe opportunity to explore competitive possibilities

The allocation of resources to activities that shape The allocation of resources to activities that shape needed competitive advantagesneeded competitive advantages

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Organizational ControlsOrganizational Controls

• Purposes of Organizational Controls:Purposes of Organizational Controls: Guide the use of strategy.Guide the use of strategy.

Indicate how to compare actual results with expected Indicate how to compare actual results with expected results.results.

Suggest corrective actions to take when the Suggest corrective actions to take when the difference between actual and expected results is difference between actual and expected results is unacceptable.unacceptable.

• Two Types of Organizational ControlsTwo Types of Organizational Controls Strategic controlsStrategic controls

Financial controlsFinancial controls

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Organizational ControlsOrganizational Controls

• Strategic Controls: Subjective criteriaStrategic Controls: Subjective criteria Are concerned with examining the fit between:Are concerned with examining the fit between:

• What the firm What the firm might domight do (opportunities in its external (opportunities in its external environment).environment).

• What the firm What the firm can docan do (competitive advantages). (competitive advantages).

Evaluate the degree to which the firm focuses on the Evaluate the degree to which the firm focuses on the requirements to implement its strategy.requirements to implement its strategy.

OrganizationalOrganizationalControlsControls

StrategicStrategicControlsControls

FinancialFinancialControlsControls

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Organizational ControlsOrganizational Controls

• Financial Controls: Objective criteriaFinancial Controls: Objective criteria Accounting-based measures include:Accounting-based measures include:

• Return on investmentReturn on investment

• Return on assetsReturn on assets

Market-based measures include:Market-based measures include:

• Stock priceStock price

• Market capMarket cap

OrganizationalOrganizationalControlsControls

StrategicStrategicControlsControls

FinancialFinancialControlsControls

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Matching Control to StrategyMatching Control to Strategy

• Relative use of controls varies by type of Relative use of controls varies by type of strategy:strategy:

Large diversified firms using a cost leadership Large diversified firms using a cost leadership strategy emphasize financial controls.strategy emphasize financial controls.

Companies and business units using a differentiation Companies and business units using a differentiation strategy emphasize strategic controls.strategy emphasize strategic controls.

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Relationships between Strategy and Relationships between Strategy and StructureStructure• Strategy and structure have a reciprocal Strategy and structure have a reciprocal

relationship:relationship:

Structure flows from or follows the selection of the Structure flows from or follows the selection of the firm’s strategy but …firm’s strategy but …

Once in place, structure can influence current Once in place, structure can influence current strategic actions as well as choices about future strategic actions as well as choices about future strategies.strategies.

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Evolutionary Patterns of Strategy & Organizational Structure

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Evolutionary Patterns of Structure and Evolutionary Patterns of Structure and Organizational StructureOrganizational Structure• All organizations require some form of All organizations require some form of

organizational structure to implement and organizational structure to implement and manage their strategiesmanage their strategies

• Firms frequently alter their structure as they grow Firms frequently alter their structure as they grow in size and complexityin size and complexity

• Three basic structure types:Three basic structure types: Simple structureSimple structure Functional structureFunctional structure Multidivisional structure (M-form)Multidivisional structure (M-form)

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Strategy Strategy and and Structure Structure Growth Growth PatternPattern

Sales GrowthSales GrowthCoordination and Control ProblemsCoordination and Control Problems

Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Simple StructureSimple Structure

Functional StructureFunctional Structure

Sales GrowthSales GrowthCoordination and Control ProblemsCoordination and Control Problems

Multidivisional StructureMultidivisional Structure

Efficient implementation Efficient implementation of formulated strategyof formulated strategy

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Strategy and Structure: Simple Strategy and Structure: Simple StructureStructure• Owner-managerOwner-manager

Makes all major decisions directly.Makes all major decisions directly. Monitors all activities.Monitors all activities.

• StaffStaff Serves as an extension of the manager’s supervisor Serves as an extension of the manager’s supervisor

authority.authority.

• Matches well with focus strategies or simple Matches well with focus strategies or simple business-level strategies (typically in small business-level strategies (typically in small companies)companies) Commonly compete by offering a single product line Commonly compete by offering a single product line

in a single geographic market.in a single geographic market.

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Simple StructureSimple Structure

• Growth creates:Growth creates: Complexity in relative competitive and external Complexity in relative competitive and external

analysisanalysis Managerial and structural challengesManagerial and structural challenges

• Owner-managersOwner-managers Commonly lack organizational skills and experience.Commonly lack organizational skills and experience. Become ineffective in managing the specialized and Become ineffective in managing the specialized and

complex tasks involved with multiple organizational complex tasks involved with multiple organizational functions.functions.

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Strategy and Structure: Functional Strategy and Structure: Functional StructureStructure• Chief Executive Officer (CEO)Chief Executive Officer (CEO)

Limited corporate staffLimited corporate staff

• Functional line managers in dominant Functional line managers in dominant organizational areas of:organizational areas of: ProductionProduction MarketingMarketing EngineeringEngineering

AccountingAccounting R&DR&D Human resourcesHuman resources

• Supports use of business-level strategies and Supports use of business-level strategies and some simple corporate-level strategiessome simple corporate-level strategies Single or dominant business with low levels of Single or dominant business with low levels of

diversificationdiversification

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Strategy and Structure: Multidivisional Strategy and Structure: Multidivisional StructureStructure• Operating divisions function as separate Operating divisions function as separate

businesses or profit centersbusinesses or profit centers• Appropriate for corporate-level strategies with Appropriate for corporate-level strategies with

moderate to high levels of diversificationmoderate to high levels of diversification• Three Major Benefits:Three Major Benefits:

Corporate officers are able to more accurately monitor Corporate officers are able to more accurately monitor the performance of each business, which simplifies the performance of each business, which simplifies the problem of control.the problem of control.

Facilitates comparisons between divisions, which Facilitates comparisons between divisions, which improves the resource allocation process.improves the resource allocation process.

Stimulates managers of poorly performing divisions to Stimulates managers of poorly performing divisions to look for ways of improving performance.look for ways of improving performance.

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Matching Domestic Strategy to the Organizational Structure

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Using the Functional Structure to Using the Functional Structure to Implement Implement a Cost Leadership Strategya Cost Leadership Strategy• Focus is typically on primary activities of the Focus is typically on primary activities of the

value chain.value chain.• Efficiency is key.Efficiency is key.• Formalized procedures guide actions.Formalized procedures guide actions.• Job roles are highly structured.Job roles are highly structured.

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Using the Functional Structure to Using the Functional Structure to Implement a Differentiation StrategyImplement a Differentiation Strategy• Marketing is the main function for tracking new Marketing is the main function for tracking new

product ideas.product ideas.• New product R&D is emphasized.New product R&D is emphasized.• Formalization is limited to foster change and Formalization is limited to foster change and

promote new ideas.promote new ideas.• Job roles are less structured.Job roles are less structured.

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Corporate-Level Strategies and the Corporate-Level Strategies and the Multidivisional StructureMultidivisional Structure• Diversification strategy requires firm to change Diversification strategy requires firm to change

from functional structure to a multidivisional from functional structure to a multidivisional structure.structure.

• Different levels of diversification create the need Different levels of diversification create the need for implementation of a unique form of the for implementation of a unique form of the multidivisional structure.multidivisional structure. Cooperative formCooperative form Strategic Business Unit (SBU) formStrategic Business Unit (SBU) form Competitive formCompetitive form

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• Sharing divisional competencies Sharing divisional competencies facilitates development of facilitates development of economies of scope.economies of scope. Leverage firm’s core competencies.Leverage firm’s core competencies. Centralization of some Centralization of some

organizational functionsorganizational functions

• Specific product or market Specific product or market divisions have their own divisions have their own business-level strategies.business-level strategies.

Cooperative form: Related Constrained Cooperative form: Related Constrained StrategyStrategy

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Cooperative form: Related Constrained Cooperative form: Related Constrained StrategyStrategy

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SBU form: Related Linked Strategy SBU form: Related Linked Strategy

• Strategic business unit (SBU) form is a structure Strategic business unit (SBU) form is a structure consisting of three levels:consisting of three levels: Corporate headquarters with shared support servicesCorporate headquarters with shared support services Strategic business units (SBUs)Strategic business units (SBUs) SBU divisionsSBU divisions

• Typically, used with larger firmsTypically, used with larger firms• Divisions within SBUs develop economies of Divisions within SBUs develop economies of

scope and/or scale by sharing product or market scope and/or scale by sharing product or market competencies.competencies.

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SBU form: Related Linked Strategy SBU form: Related Linked Strategy

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Competitive form: Unrelated strategyCompetitive form: Unrelated strategy• A structure in which there is complete A structure in which there is complete

independence among the firm’s divisionsindependence among the firm’s divisions Divisions do not share common corporate strengths. Divisions do not share common corporate strengths.

Limited shared corporate functions.Limited shared corporate functions.

Because strengths aren’t shared, integrating devices Because strengths aren’t shared, integrating devices aren’t developed.aren’t developed.

Organizational arrangements emphasize divisional Organizational arrangements emphasize divisional competition rather than cooperation.competition rather than cooperation.

• Creates specific profit performance expectations Creates specific profit performance expectations for each division to promote internal competition for each division to promote internal competition for resources.for resources.

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Competitive form: Unrelated strategyCompetitive form: Unrelated strategy

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Cooperative M-Form SBU M-Form Competitive M-Form

Structural (Related Constrained (Related Linked (Unrelated DiversificationCharacteristics Strategy)a Strategy)a Strategy)a

Centralization of Centralized at Partially centralized Decentralized tooperations corporate office (in SBUs) divisions

Use of integration Extensive Moderate Nonexistentmechanisms

Divisional Emphasize subjective Use a mixture of Emphasize objectiveperformance (strategic) criteria subjective (strategic) (financial) criteriaappraisals and objective

(financial) criteria

Divisional incentive Linked to overall Mixed linkage to Linked to divisionalcompensation corporate corporate, SBU, and performanceperformance divisional performance

Overall Structural Form

a Strategy implemented with structural form.

Summary of Organizational Structure Summary of Organizational Structure versus Corporate-level Strategyversus Corporate-level Strategy

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Matching International Strategy to the Organizational Structure

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Worldwide Geographic Area Structure: Worldwide Geographic Area Structure: Implementing a Multidomestic StrategyImplementing a Multidomestic Strategy• Multidomestic strategy decentralizes strategic Multidomestic strategy decentralizes strategic

and operating decisions to:and operating decisions to: Business units in each countryBusiness units in each country Product characteristics tailored to local preferencesProduct characteristics tailored to local preferences

• Firms counter global competitive forces by Firms counter global competitive forces by competing in industry segments most affected by competing in industry segments most affected by differences among local countries.differences among local countries.

• Requires little coordination between different Requires little coordination between different county markets: integrating mechanisms aren’t county markets: integrating mechanisms aren’t needed.needed.

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Worldwide Geographic Area Structure: Worldwide Geographic Area Structure: Implementing a Multidomestic StrategyImplementing a Multidomestic Strategy

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Worldwide Product Divisional Structure: Worldwide Product Divisional Structure: Implementing a Global StrategyImplementing a Global Strategy• Global StrategyGlobal Strategy

Allows firm to offer standardized products across Allows firm to offer standardized products across country markets.country markets.

Headquarters coordinates and integrates decisions Headquarters coordinates and integrates decisions and actions among divisional business units.and actions among divisional business units.

• Integrating mechanisms are important:Integrating mechanisms are important:

Direct contact between managersDirect contact between managers

Liaison roles between departmentsLiaison roles between departments

Temporary task forces as well as permanent teamsTemporary task forces as well as permanent teams

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Worldwide Product Divisional Structure: Worldwide Product Divisional Structure: Implementing a Global StrategyImplementing a Global Strategy

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Combination Structure: A Transnational Combination Structure: A Transnational StrategyStrategy

• Transnational StrategyTransnational Strategy Combines multidomestic strategy’s local Combines multidomestic strategy’s local

responsiveness with global strategy’s efficiency.responsiveness with global strategy’s efficiency.

• Combination structure draws characteristics and Combination structure draws characteristics and mechanisms from both:mechanisms from both: Worldwide geographic area structureWorldwide geographic area structure Worldwide product divisional structureWorldwide product divisional structure

• Appropriate integrating mechanisms for the Appropriate integrating mechanisms for the combination structure are less obvious.combination structure are less obvious.

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Combination Structure: A Transnational Combination Structure: A Transnational StrategyStrategy

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Wrap-up

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Wrap-upWrap-up

• Organizational Structure & ControlsOrganizational Structure & Controls• Evolutionary Patterns of Strategy & StructureEvolutionary Patterns of Strategy & Structure

SimpleSimple FunctionalFunctional MultidivisionalMultidivisional

• Matching Domestic Structure to StrategyMatching Domestic Structure to Strategy• Matching International Structure to StrategyMatching International Structure to Strategy• QuestionsQuestions