©2003 southwestern publishing company 1 organizational structure and controls michael a. hitt r....

©2003 Southwestern Publishing Company 1

Organizational Structure and Organizational Structure and ControlsControls

Michael A. Hitt

R. Duane Ireland

Robert E. Hoskisson

Chapter 11Chapter 11

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Strategy ImplementationStrategy Implementation

Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and

ControlsControls

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Strategy FormulationStrategy Formulation

StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average

ReturnsReturns

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment

Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment

The Strategic The Strategic Management Management ProcessProcess

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Chapter 6Chapter 6Corporate-Corporate-

Level StrategyLevel Strategy

Chapter 9Chapter 9CooperativeCooperative

StrategyStrategy

Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry

and Competitiveand CompetitiveDynamics Dynamics

Chapter 8Chapter 8InternationalInternational

StrategyStrategy

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Chapter 7Chapter 7Acquisition andAcquisition andRestructuringRestructuring

StrategiesStrategies

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Organizational StructureOrganizational Structure Organizational structure specifies the Organizational structure specifies the

firm’s formal reporting relationships, firm’s formal reporting relationships, procedures, controls, and authority and procedures, controls, and authority and decision-making processesdecision-making processes

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

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Stability and Flexibility in Stability and Flexibility in StructureStructure Structural stability provides the capacityStructural stability provides the capacity

– required to consistently and predictably required to consistently and predictably manage the firm’s daily work routinesmanage the firm’s daily work routines

Structural flexibility provides the Structural flexibility provides the opportunity toopportunity to– explore competitive possibilitiesexplore competitive possibilities– allocate resources to activities that shape allocate resources to activities that shape

competitive advantages needed by the firmcompetitive advantages needed by the firm

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Organizational ControlsOrganizational Controls

Organizational controlsOrganizational controls– guide the use of strategyguide the use of strategy– indicate how to compare actual results with indicate how to compare actual results with

expected resultsexpected results– suggest corrective actions to take when the suggest corrective actions to take when the

difference between actual and expected results difference between actual and expected results is unacceptableis unacceptable

Two types of organizational controlsTwo types of organizational controls– strategic controlsstrategic controls

– financial controlsfinancial controls

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Organizational Controls: Organizational Controls:

Concerned with examining Concerned with examining the fit betweenthe fit between– what the firm what the firm might domight do (as (as

suggested by opportunities in suggested by opportunities in its external environment)its external environment)

– what it what it can docan do (as indicated by (as indicated by

its competitive advantages)its competitive advantages) Used to evaluate the degree Used to evaluate the degree

to which the firm focuses on to which the firm focuses on the requirements to the requirements to implement its strategiesimplement its strategies

Strategic ControlsStrategic Controls


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Financial ControlsFinancial Controls

Organizational Controls: Organizational Controls:

Objective criteriaObjective criteria Accounting-based measures Accounting-based measures

includeinclude– return on investment return on investment

– return on assetsreturn on assets

Market-based measures Market-based measures includeinclude– economic value addedeconomic value added


Financial ControlsFinancial Controls

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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

strategystrategy– large diversified firms using the cost large diversified firms using the cost

leadership strategy emphasize financial leadership strategy emphasize financial controls controls

– companies and business units using the companies and business units using the differentiation strategy emphasize strategic differentiation strategy emphasize strategic controlscontrols

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Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational Structure Firms grow in predictable patternsFirms grow in predictable patterns

– by volumeby volume– by geographyby geography– integration (vertical, horizontal)integration (vertical, horizontal)– through product/business diversificationthrough product/business diversification

A firm’s growth patterns determine its A firm’s growth patterns determine its structural formstructural form

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Evolutionary Patterns of Strategy Evolutionary Patterns of Strategy and Organizational Structureand Organizational 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 Firms frequently alter their structure as they grow in size and complexitythey grow in size and complexity

Three basic structure types:Three basic structure types:– simple structuresimple structure– functional structurefunctional structure– multi-divisional structure (M-form)multi-divisional structure (M-form)

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:

SimpleSimpleStructureStructure

Simple StructureSimple Structure

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Organizational form in which the owner-Organizational form in which the owner-

managermanager– makes all major decisions directlymakes all major decisions directly– monitors all activitiesmonitors all activities

StaffStaff– serves as an extension of the manager’s serves as an extension of the manager’s

supervisory authoritysupervisory authority Matched with focus strategies and business-Matched with focus strategies and business-

level strategieslevel strategies– commonly compete by offering a single product commonly compete by offering a single product

line in a single geographic marketline in a single geographic market


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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Growth createsGrowth creates

– complexitycomplexity– managerial and structural challengesmanagerial and structural challenges

Owner-managersOwner-managers– commonly lack organizational skills and commonly lack organizational skills and

experienceexperience– become ineffective in managing the become ineffective in managing the

specialized and complex tasks involved with specialized and complex tasks involved with multiple organizational functionsmultiple organizational functions


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FunctionalFunctionalStructureStructure

Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems

Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Functional StructureFunctional Structure

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Chief Executive Officer (CEO)Chief Executive Officer (CEO)

– limited corporate stafflimited corporate staff Functional line managers in dominant Functional line managers in dominant

organizational areasorganizational areas– productionproduction – accounting– accounting– marketingmarketing – R&D– R&D– engineeringengineering – human resources– human resources

Supports use of business-level strategies and Supports use of business-level strategies and some corporate-level strategiessome 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 Growth Strategy and Structure Growth Pattern:Pattern: Differences in orientation among Differences in orientation among

organizational functions canorganizational functions can– impede communication and coordinationimpede communication and coordination– increase the need for CEO to integrate increase the need for CEO to integrate

decisions and actions of business functionsdecisions and actions of business functions– facilitate career paths and professional facilitate career paths and professional

development in specialized functional areasdevelopment in specialized functional areas– cause functional-area managers to focus on cause functional-area managers to focus on

local versus overall company strategic issueslocal versus overall company strategic issues


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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Strategic controlStrategic control

– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit

centercenter Top corporate officer delegates Top corporate officer delegates

responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy

Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification

Multidivisional StructureMultidivisional Structure

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Three major benefitsThree major benefits

– corporate officers able to more accurately corporate officers able to more accurately monitor the performance of each business, monitor the performance of each business, which simplifies the problem of controlwhich simplifies the problem of control

– facilitates comparisons between divisions, facilitates comparisons between divisions, which improves the resource allocation processwhich improves the resource allocation process

– stimulates managers of poorly performing stimulates managers of poorly performing divisions to look for ways of improving divisions to look for ways of improving performanceperformance


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FunctionalFunctionalStructureStructure

MultidivisionalMultidivisionalStructureStructure



Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Efficient Efficient implementation implementation of formulated of formulated strategystrategy


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Matching Structure and StrategyMatching Structure and Strategy Different forms of the functional Different forms of the functional

organizational structure are matched toorganizational structure are matched to– cost leadership strategycost leadership strategy– differentiation strategydifferentiation strategy– integrated cost leadership/differentiation integrated cost leadership/differentiation

strategystrategy

differences in these forms seen in three differences in these forms seen in three important structural characteristicsimportant structural characteristics– specializationspecialization– centralizationcentralization– formalizationformalization

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Structure for Cost Leadership Structure for Cost Leadership StrategyStrategy

Office of the PresidentOffice of the President

Centralized StaffCentralized Staff

MarketingMarketing PersonnelPersonnel

EngineeringEngineering OperationsOperations AccountingAccounting

• Operations is main functionOperations is main function

• Process engineering is Process engineering is emphasized over R&Demphasized over R&D

• Large centralized staffLarge centralized staff

• Formalized proceduresFormalized procedures

• Structure is mechanical, job Structure is mechanical, job roles highly structuredroles highly structured

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OperationsOperations HumanHumanResourcesResources

Structure for Differentiation Structure for Differentiation StrategyStrategy

President andPresident andLimited StaffLimited Staff

MarketingMarketing

New ProductNew ProductR&DR&D

• Marketing is the main function for tracking new product ideasMarketing is the main function for tracking new product ideas• New product R&D is emphasizedNew product R&D is emphasized• Most functions are decentralizedMost functions are decentralized• Formalization is limited to foster change and promote new ideasFormalization is limited to foster change and promote new ideas• Overall structure is organic; job roles are less structuredOverall structure is organic; job roles are less structured

R&DR&D

FinanceFinanceMarketingMarketing

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Multidivisional StructureMultidivisional Structure Each division is operated as a separate Each division is operated as a separate

businessbusiness Appropriate for related-diversified Appropriate for related-diversified

businessesbusinesses Key task of corporate managers is Key task of corporate managers is

exploiting synergies among divisionsexploiting synergies among divisions Managers use a combination of strategic Managers use a combination of strategic

controls and financial controlscontrols and financial controls

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Multidivisional StructureMultidivisional Structure Managers try to strike a balance between:Managers try to strike a balance between:

– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources

– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies

The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance

The decision-making of managers in a The decision-making of managers in a multi-divisional structure may be:multi-divisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic

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Multidivisional StructureMultidivisional Structure Balance on these dimensions may change Balance on these dimensions may change

over timeover time Structure will evolve over time with:Structure will evolve over time with:

– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition

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Three Variations of the Three Variations of the Multidivisional StructureMultidivisional Structure

MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)

Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form

CooperativeCooperativeFormForm

CompetitiveCompetitiveFormForm

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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman

ResourcesResources

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

ProductProductDivisionDivision





PresidentPresidentHeadquarters OfficeHeadquarters Office

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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Constrained StrategyRelated-Constrained Strategy

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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Related-Linked StrategyRelated-Linked Strategy

PresidentPresident

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHRMHRM

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

Headquarters OfficeHeadquarters Office

DivisionDivision

DivisionDivisionDivisionDivision

SBUSBU SBUSBU SBUSBU

DivisionDivision


DivisionDivision


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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Linked StrategyRelated-Linked Strategy

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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Unrelated Diversification StrategyUnrelated Diversification Strategy

PresidentPresident

LegalLegalAffairsAffairs

FinanceFinance AuditingAuditing

Headquarters OfficeHeadquarters Office

DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominent functions Finance and auditing are the most prominent functions

in the headquarters to manage cash flow and ensure in the headquarters to manage cash flow and ensure the accuracy of performance data coming from the accuracy of performance data coming from divisionsdivisions

The legal affairs function becomes important when the The legal affairs function becomes important when the firm acquires or divests assetsfirm acquires or divests assets

Divisions are independent and separate for financial Divisions are independent and separate for financial evaluation purposesevaluation purposes

Divisions retain strategic control, but cash is managed Divisions retain strategic control, but cash is managed by the corporate officeby the corporate office

Divisions compete for corporate resourcesDivisions compete for corporate resources

Unrelated Diversification StrategyUnrelated Diversification Strategy

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Multidivisional Structure: Other Multidivisional Structure: Other PointsPoints Complex multi-divisional structure firms Complex multi-divisional structure firms

may be simultaneouslymay be simultaneously– centralized and decentralizedcentralized and decentralized– depending upon the various business-level depending upon the various business-level

strategies employed throughout the firm’s strategies employed throughout the firm’s individual businessesindividual businesses

Multi-divisional structure firms use a Multi-divisional structure firms use a combination of:combination of:– strategic controlsstrategic controls– financial controlsfinancial controls

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Characteristics of Various Characteristics of Various Structural FormsStructural Forms

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

Degree ofDegree ofCentralizationCentralization

Centralized atCentralized atCorporate Corporate

OfficeOffice

Partially Partially CentralizedCentralized

in SBUsin SBUs

DecentralizedDecentralizedto Divisionsto Divisions

Use ofUse ofIntegratingIntegrating

MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent

Type ofType ofStrategyStrategy

Related-Related-ConstrainedConstrained

Related-Related-LinkedLinked

UnrelatedUnrelatedDiversificationDiversification

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Characteristics of Various Characteristics of Various Structural FormsStructural Forms

DivisionalDivisionalIncentiveIncentive

CompensationCompensation

Linked toLinked toCorporateCorporate

PerformancePerformance

Linked toLinked toCorporateCorporate

SBU & Division SBU & Division PerformancePerformance

Linked toLinked toDivisionalDivisional

PerformancePerformance

DivisionalDivisionalPerformancePerformance

AppraisalAppraisal

SubjectiveSubjectiveStrategicStrategicCriteriaCriteria

Strategic &Strategic &FinancialFinancialCriteriaCriteria

Objective Objective FinancialFinancialCriteriaCriteria

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

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• product characteristics product characteristics tailored to local tailored to local preferencespreferences

• isolation from global isolation from global competitiioncompetitiion

– establish protected establish protected market positionsmarket positions–compete in industry compete in industry segments most segments most affected by affected by differences among differences among local countrieslocal countries

Worldwide Geographic Area Worldwide Geographic Area Structure:Structure:

MultinationalMultinationalHeadquartersHeadquarters

EuropeEurope

UnitedUnitedStatesStates

MiddleMiddleEast/East/

AfricaAfrica

AsiaAsia

AustraliaAustralia

LatinLatinAmericaAmerica

Multidomestic StrategyMultidomestic Strategy

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• standardized products standardized products across countriesacross countries

• economies of scope economies of scope and scaleand scale

• outsource some outsource some primary or support primary or support activities to the activities to the world’s best providersworld’s best providers

• decision-making decision-making authority centralized authority centralized in worldwide division in worldwide division headquartersheadquarters

Worldwide Product Divisional Worldwide Product Divisional Structure:Structure:

GlobalGlobalCorporateCorporate

HeadquartersHeadquarters

WorldwideWorldwideProductsProductsDivisionDivision






Global StrategyGlobal Strategy

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Using the Combination Structure:Using the Combination Structure:

The combination structure has The combination structure has characteristics and mechanisms that characteristics and mechanisms that result in an emphasis on both geographic result in an emphasis on both geographic and product structuresand product structures– local responsiveness (multidomestic strategy) local responsiveness (multidomestic strategy) – global efficiency (global strategy)global efficiency (global strategy)

Transnational StrategyTransnational Strategy

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Strategic NetworkStrategic Network A strategic network is a grouping of A strategic network is a grouping of

organizations that has been formed to organizations that has been formed to create value through participation in an create value through participation in an array of cooperative arrangements, such array of cooperative arrangements, such as alliances and joint venturesas alliances and joint ventures

The strategic network seeks to develop a The strategic network seeks to develop a competitive advantage in primary or competitive advantage in primary or support activities support activities

A strategic center firm often manages the A strategic center firm often manages the networknetwork

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Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four

primary tasksprimary tasks– strategic outsourcing (outsources and strategic outsourcing (outsources and

partners with more firms than do other partners with more firms than do other network members)network members)

– competencies (supports each member’s competencies (supports each member’s efforts to develop core competencies that can efforts to develop core competencies that can benefit the network)benefit the network)

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Strategic NetworkStrategic Network strategic center firm engages in four strategic center firm engages in four

primary tasksprimary tasks– technology (manages the development and technology (manages the development and

sharing of technology-based ideas among sharing of technology-based ideas among network members)network members)

– race to learn (guides participants in efforts to race to learn (guides participants in efforts to form network-specific competitive advantages)form network-specific competitive advantages)

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Strategic NetworkStrategic Network

StrategicStrategicCenterCenterFirmFirm

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Distributed Strategic NetworkDistributed Strategic Network International cooperative strategies often International cooperative strategies often

require more complex networksrequire more complex networks Many large multinational firms form Many large multinational firms form

distributed strategic networks with distributed strategic networks with multiple regional strategic centers to multiple regional strategic centers to manage their array of cooperative manage their array of cooperative arrangements with partner firmsarrangements with partner firms

Breaking large networks into multiple Breaking large networks into multiple manageably-sized networks helps to manageably-sized networks helps to manage the complexity of maintaining manage the complexity of maintaining many relationshipsmany relationships

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StrategicStrategicCenterCenterFirmFirm

Distributed Strategic NetworkDistributed Strategic Network

= Distributed Strategic Center Firms= Distributed Strategic Center Firms

MainMainStrategicStrategicCenterCenterFirmFirm

©2003 southwestern publishing company 1 organizational structure and controls michael a. hitt r....

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