10 organizational structure control
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© 2007 Prof. Dr. Bernd Venohr
Strategy Process
Organizational Structure and Control
Prof. Dr. Bernd VenohrBerlin, June 2007
10
2© 2007 Prof. Dr. Bernd Venohr
Agenda
Introduction to StrategyCourse Overview and Strategy ConceptEconomics of StrategyShareholder Value
Business StrategyExternal EnvironmentInternal EnvironmentCompetitive Positioning
Corporate StrategyDiversificationMergers & AcquisitionsGlobal Strategy
Strategy ProcessOrganizational Structure and ControlStrategic Leadership
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3© 2007 Prof. Dr. Bernd Venohr
Overview
“Structure follows strategy“
Basics of structuring organizations
Example: managing the multibusiness organization
4© 2007 Prof. Dr. Bernd Venohr
Alfred Chandler: Structure follows strategy
Alfred Chandler (business history professor at HarvardBusiness School) examined in Strategy and Structure:Chapters in the History of the Industrial Enterprise (1962)the organizational changes of several large US companies:Organization developed in response to changes in thecorporation's business strategy
An organization begins with a single product or line of business.Over time the organization begins to grow in size and complexity(more products ). Ultimately the structure of the organization hasto change from functional to divisional organization as a result ofthe strategy change: „unless structure follows strategy,inefficiency results“
This research has been a source of controversial discussionbecause, while strategy influences structure, so do many otherfactorsSource: Wikepedia
© 2007 Prof. Dr. Bernd Venohr
Evolution of the Modern Corporation: changes in environmentlead to changes in strategy and organizational structure
The businessenvironment
Organizationalconsequences
Strategic changes
Late19thcentury
Early19thcentury
Early20thcentury
Local markets Firms specialized & Small firmsTransport slow focused on local Simple manage-Limited mechanization markets ment structures
Introduction of Geographical and Functional structuresrailroads, telegraph vertical expansion Line/staff separation.industrialization Accounting systems
Excess capacity inProduct & Development ofdistribution. Growth multinational multidivisionalof financial institu - diversification corporationtions & world trade
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004); Ch. 6
6© 2007 Prof. Dr. Bernd Venohr
Overview
“Structure follows strategy“
Basics of structuring organizations
Example: managing the multibusiness organization
7© 2007 Prof. Dr. Bernd Venohr
The basic task of organizing
Every organized human activity gives rise to two fundamental andopposing requirements:– the division of labor into various tasks to be performed and– the coordination of those task to accomplish the activity
In small organizations, there is little reason to divide work– Everyone does the same thing and everything– As organizations grow, there is a need to divide work and the organization
The structure of an organization can be defined simply as the total of theways in which its labor is divided into distinct tasks and then its coordinationand integration is achieved among those task
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
8© 2007 Prof. Dr. Bernd Venohr
Division of labor tasks and integration/coordination
Division of labor–vertical: levels of authority–horizontal: specialization of tasks
Integration mechanism–IT/data management systems: controlling systems;
performance measurement systems; resource allocationprocedures; budgeting processes
–Manager control systems: selection of employees;reward/punishments; career path
–Coordination systems: decision responsibility assignments;committees; task forces
9© 2007 Prof. Dr. Bernd Venohr
Pin factory example (Adam Smith): Somewherebetween a 240 and 4800 fold increase in productivitycan be achieved by division of labour
“To take an example (...) from (...) the trade of the pin-maker; a workman not educated tothis business (which the division of labor has rendered a distinct trade), nor acquainted with theuse of the machinery employed in it (.. .), could scarce, perhaps, with his utmost industry,make one pin in a day, and certainly could not make twenty. But in the way in which thisbusiness is now carried on, not only the whole work is a peculiar trade, but it is divided into "anumber of branches, of which the greater part are likewise peculiar trades. One man drawsout the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at thetop for receiving the head; to make the head requires two or three distinct operations; to put iton, is a peculiar business, (...) and the important business of making a pin is, in thismanner, divided into about eighteen distinct operations, which, in some manufactories,are all performed by distinct hands, though in others the same man will sometimes performtwo or three of them. I have seen a small manufactory of this kind where ten men only wereemployed (...). But (...) they could, when they exerted themselves, make among them abouttwelve pounds of pins in a day. There are in a pound upwards of four thousand pins of amiddling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, (...) might be considered asmaking four thousand eight hundred pins in a day. But if they had all wroughtseparately and independently, (...) they certainly could not each of them have madetwenty (...).”
Source: Adam SMITH,An Inquiry into the Nature & Causes of the Wealth of Nations, Ch1
10© 2007 Prof. Dr. Bernd Venohr
Many classic dilemmas exist: How much authority todelegate to whom? Centralized structure: Top managers retain authority for most
decisions; managers are order-takers
In a decentralized structure: Managers and employees closest toproduct and customer are empowered to make decisions
Key context factors are:– strategy– Company size– Environment– technology
Changes in how companies organize work are typically triggered by– new strategic priorities– rapidly shifting competitive conditions
Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure
11© 2007 Prof. Dr. Bernd Venohr
Centralisation and decentralisation: recent trends
Traditional, centralized structures problematic when– Market conditions are fluid– Customer preferences shift from standardized to customized products:
Customers want to be treated as individuals– Pace of technological change accelerates and product life-cycles grow
shorter– Flexible manufacturing replaces mass production
Trend in most companies: shift from “authoritarian” to decentralizedstructures stressing “empowerment”– Decisions are best made at the lowest organizational level capable to
make timely, informed, competent decisions– Empowering employees to exercise judgment on job-related matters
improves motivation and job performance
12© 2007 Prof. Dr. Bernd Venohr
Functional organisation
Organized by departments performing separatebusiness functions such as marketing ormanufacturing
Works best when organization has- Few products- Few locations- Few types of customers- Stable environment- Routine technology
ChiefAccountant
BudgetAnalyst
Vice PresidentFinance
PlantSuperintendent
MaintenanceSuperintendent
Vice PresidentManufacturing
TrainingSpecialist
BenefitsAdministrator
DirectorHuman Resources
CEO
13© 2007 Prof. Dr. Bernd Venohr
Strengths and Weaknesses offunctional organization structure
STRENGTHS:
– Allows economies of scalewithin functional departments
– Enables in-depth knowledgeand skill development andinnovation within functions
– Enables organization toaccomplish functional goals
WEAKNESSES:
– Slow response time to environmentalchanges
– May cause decisions to pile on top,hierarchy overload
– Leads to poor horizontal coordinationamong departments (Functionalegotism)
– Results in less product innovation– Involves restricted view of
organizational goals
Source: Adapted from Robert Duncan, “What Is the RightOrganization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.
14© 2007 Prof. Dr. Bernd Venohr
Divisional organization:
President/CEO _R&D | Finance| Planning| Marketing | HR
Product Division Geographic Division
Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure
Customer/Market
15© 2007 Prof. Dr. Bernd Venohr
Board of Directors
President Executive Committee
FinancialStaff
LegalDepartment
GeneralAdvisory Staff
GM AcceptanceCorporation
ChevroletDivision
SheridanDivision
CanadianDivision
OldsmobileDivision
GM TruckDivision
GM ExportCompany
CadillacDivision
BuickDivision
Inter-company
PartsDivision
OaklandDivision
SamsonTractorDivision
ScrippsBooth Corp.
Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
Divisional organization was invented by Alfred Sloan:General Motors’ Organization Structure (1921)
16© 2007 Prof. Dr. Bernd Venohr
Types of divisional structure
Product structure (“business”): departments or subunits based on different products.Product sufficiently unique to require s focused functional efforts (ensure minimum efficientscale)
Customer/market structure: departments or subunits based on different customer groups– Unique customer preferences: products tied to unique practices in each segment– Unique marketing requirements: knowledge of customer industry
Geographic/regional structure: departments or subunits based on geographic regionsIncreased focus on the competitive characteristics of geographical regions– Unique local competitors– Unique local suppliers– Unique local customer preferences
Divisions are in most cases self-standing and fully-integrated business units
17© 2007 Prof. Dr. Bernd Venohr
Strengths and weaknesses ofdivisional organization structure
STRENGTHS:
– Suited to fast change in unstableenvironment
– Leads to customer satisfaction becauseproduct responsibility and contact pointsare clear
– Involves high coordination across functions– Allows units to adapt to differences in
products, regions, clients (heterogenousmarkets)
– Best in large organizations with severalproducts
– Decentralizes decision-making
WEAKNESSES:
– Eliminates economies of scale infunctional departments by splittingfunctions and allocating them tounits
– Leads to poor coordination acrossproduct lines
– Eliminates in-depth competenceand technical specialization
– Makes integration andstandardization across productlines difficult
Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 431.
18© 2007 Prof. Dr. Bernd Venohr
BusinessUnit A
BusinessUnit B
BusinessUnit C
Business Unit D
Directorof ProductOperations
DesignVice
President
MfgVice
President
MarketingVice
PresidentController
Procure-ment
Manager
CEO
Matrix Organization with dual reporting lines:Managers report to both business unit and functionalexecutives who report to CEO
Regional Manager as potential third dimension
19© 2007 Prof. Dr. Bernd Venohr
Royal Dutch/Shell Group Organization, 1994:A Matrix Structure
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
20© 2007 Prof. Dr. Bernd Venohr
STRENGTHS:– Achieves coordination necessary to
meet dual demands from customers– Flexible sharing of human
resources across products– Suited to complex decisions and
frequent changes in unstableenvironment
– Provides opportunity for bothfunctional and product skilldevelopment
– Best in medium-sized organizationswith multiple products
WEAKNESSES:– Dual authority, which can be
frustrating and confusing– Means managers need good
interpersonal skills and extensivetraining
– Is time consuming; involves frequentmeetings and conflict resolutionsessions
– Will not work unless participantsunderstand it and adopt collegialrather than vertical-type relationships
– Requires great effort to maintainpower balance
Strengths and Weaknesses of matrix organization structure
Source: Adapted from Robert Duncan, “What Is the RightOrganization Structure? Decision Tree Analysis Provides theAnswer,”Organizational Dynamics (Winter 1979): 429.
21© 2007 Prof. Dr. Bernd Venohr
Overview
“Structure follows strategy“
Basics of structuring organizations
Example: managing the multibusiness organization
22© 2007 Prof. Dr. Bernd Venohr
Corporate Executive OfficeChairman & CEO
Corporate Staff
Finance Business R&D Human LegalDevelopment Resources
GE AircraftEngines
GE Trans-portation
GEIndustrialSystems
GEPlastics
GEAppliances
GESupply
GE PowerSystems
GE MedicalSystems
GELighting
GE SpecialtyMaterials
NBC GE Capital
26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty EquipmentServices Financing Financing Insurance Management
Service Divisions
Divisional Organization:General Electric’s Organization Structure, 2002
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
The Multidivisional Structure: Theory of the M-Form
Recognizes bounded rationality - top management has limited decision-making capacity
Divides decision-making according to frequency:
– high-frequency operating decisions at divisional level
– low-frequency strategic decisions at corporate level
Reduces costs of communication and coordination: business level decisions confined todivisional level (reduces decision making at the top)
Global, rather than local optimization:
– functional organizations encourage functional goals
– M-form structure encourages focus on profitability
Efficient allocation of resources through internal capital and labor markets
Resolves agency problem-- corporate management as interface between shareholdersand business-level managers
Efficiency advantages of the multidivisional firm:
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
The divisionalized firm in practice: typical problems
Constraints upon decentralization– Difficult to achieve clear division of decision making between corporate and
divisional levels.– On-going dialogue and conflict between corporate and divisional managers over
both strategic and operational issues
Standardization of divisional management– Despite potential for divisions to develop distinctive strategies and structures -
corporate systems may impose uniformity
Managing divisional inter-relationships– Requires more complex structures, e.g. matrix structures where functional and/or
geographical structure is imposed on top of a product / market structure– Added complexity undermines the efficiency advantages of the M-form
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
The Functions of corporate management to ensurethat its businesses perform better in aggregate thanthey would as a series of stand-alone units
Decisions over diversification, acquisition,divestment
Resource allocation between businesses
Monitoring and controlling business performance
Sharing and transferring resources and capabilities
Managinglinkagesbetweenbusinesses
Managing theindividualbusinesses
Managing theCorporatePortfolio
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
The Development of Strategic Planning Techniques:General Electric in the 1970’s
Late 1960’s: GE encounters problems of direction, coordination, control,and profitability
Corporate planning responses:
Portfolio Planning Models — matrix-based frameworks for evaluatingbusiness unit performance, formulating business strategies, and allocatingresources
Strategic Business Units — GE reorganized around SBUs (businesscomprising a strategically-distinct group of closely-related products)
PIMS — a database which quantifies the impact of strategy on performance.Used to appraise SBU performance and guide business strategy formulation
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Portfolio Planning Models: Their Uses in Strategy Formulation
Allocating resources -- the analysis indicates both the investmentrequirements of different businesses and their likely returns
Formulating business-unit strategy -- the analysis yields simplestrategy recommendations (e.g..: “build”, “hold”, or “harvest”)
Setting performance targets -- the analysis indicates likelyperformance outcomes in terms of cash flow and ROI
Portfolios balance -- the analysis can assist in corporate goals suchas a balanced cash flow and balance of growing and decliningbusinesses.
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
HIGH
LO
W
LOW
Ann
ual r
eal r
ate
of m
arke
t gro
wth
(%)
Relative market share
Earnings: high stable
Cash flow: high stable
Strategy: milk
Earnings: low, unstable
Cash flow: neutral or negative
Strategy: divest
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: low, unstable, growing
Cash flow: negative
Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog
HIG
H ?Portfolio Planning Models: The BCG Growth-Share Matrix
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Corporate Control over the Businesses
2 basic approaches
Inputcontrol
Monitoring & approving business level decisions
Output (or performance) control
Setting & monitoring the achievement ofperformance targets
Primarily through strategic planning system & capital expenditure approval system
Primarily through performance management system, including operating budgets and HR appraisals
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Corporate management (“parenting” ) styles: the approachestaken to planning and control influence exerted by the centreon the businesses within the group
High
Low
CONTROL INFLUENCE
Strategicplanning
Centralized
Strategiccontrol
Holdingcompany
Financialcontrol
PLA
NN
ING
INFL
UEN
CE
Flexible strategic Tight strategic Tight financial
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch.;Goold and Campbell "Strategies and Styles“ and "Adding Value from Corporate Headquarters"
31© 2007 Prof. Dr. Bernd Venohr
Each management style is different and has differentstrengths and weaknesses. Key is that a fit exist betweenthe way the “parent” operates and the improvement opportunitiesthat exist in particular businesses
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6;Goold and Campbell "Strategies and Styles“ and "Adding Value from Corporate Headquarters"
Approach Key features Advantages Dangers Examples
Strategicplanning
‘Masterplanner’Top-dow nHighlyprescribedDetailed controls
Co-ordination Centre out oftouchDivisions tactical
BOCCadburyLexSTCPublic sectorpre-1990s
Financialcontrol
‘Shareholder/banker’Financial targetsControl ofinvestmentBottom-up
Responsiveness Lose directionCentre does notadd value
BTRHanson plcTarmac
Strategiccontrol
‘Strategicshaper’Strategic andfinancial targetsBottom-upLess detailedcontrols
Centre/divisionscomplementaryAbility to co-ordinateMotivation
Too muchbargainingCulture changeneededNewbureaucracies
ICICourtauldsPublic sectorpost-1990
Centre dividion relationships
© 2007 Prof. Dr. Bernd Venohr
Managing linkages between businesses based on skills andresources that are helpful to its businesses
KEY ISSUE - How does the corporate center add value to the business?
BASIS OF BUSINESS LINKAGES - Sharing of resources and capabilitiesSHARING OCCURS AT TWO LEVELS: Corporate level - common corporate services Business level - sharing resources, transferring capabilities
PORTER’S ANALYSIS OF BUSINESS LINKAGES AND CORPORATESTRATEGY TYPES Portfolio management - Parent creates value by operating an internal capital market Restructuring - Parent create value by acquiring and restructuring Inefficiently-
managed businesses Transferring skills - Parent creates value by transferring capabilities between
businesses Sharing activities - Parent creates value by sharing resources between businesses
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6;Porter, Michael, From Competitive Advantage to Corporate Strategy, HBR, May-June 1987
© 2007 Prof. Dr. Bernd Venohr
Rethinking the Management of Multibusiness Corporations:Lessons from General Electric
Delayering - from 9 or 10 layers of hierarchy to 4 or 5 and decentralizing decisions
Hard-driving, results-oriented atmosphere prevails. All businesses are held to astandard of being #1 or #2 in their industries worldwide as well as achieving goodbusiness results.
Reformulating strategic planning - from formal, document-intensive analysis to directface-to-face discussion of key issues
Redefining the role of HQ - from checker, inquisitor, and authority to facilitator, helper,and supporter
Coordinating role of HQ - corporate HQ to lead in creating the “boundarylesscorporation” where innovations and ideas flow and where horizontal coordination occursto respond to new opportunities
HQ as change agent - corporate HQ driving force for continual organizational changeReliance upon “workout sessions” to identify, debate, and resolve “burning issues”;Commitment to Six Sigma Quality
Successful leaders spend time convincing organization members chosen strategy isright and competent strategy execution is top priority: Building and nurturing aculture promoting good strategy execution
Jack Welch’s transformation of GE’s structure and management systems:
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
34© 2007 Prof. Dr. Bernd Venohr
Read slides on session 10 on ILIAS
Visit company web pages and prepare as team a brief descriptionof your companies organization chart
Topics of next session:
– Brief page presentation on each company; send in advance per e-mail or bringpresentation on usb stick
– Lecture: Strategic Leadership
New Assignment and Outlook next Session
35© 2007 Prof. Dr. Bernd Venohr
Appendix
© 2007 Prof. Dr. Bernd Venohr
H A R V E S T
H O L D
B U I L D
Low
Medium
High
Low Medium High
Indu
stry
Attr
activ
enes
sPortfolio Planning Models: The GE / McKinsey Matrix
Industry Attractiveness Criteria Business Unit Position - Market size - Market share (domestic,- Market growth global, and relative)- Industry profitability - Competitive position- Inflation recovery - Relative profitability- Overseas sales ratio
Business Unit Position
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Do Portfolio Planning Models Help or Hinder CorporateStrategy Formulation?
ADVANTAGES
Simplicity: Can be quickly prepared
Big picture: Permits one pagerepresentation of the corporateportfolio & the strategic positioningof each business
Analytically versatile: Applicableto businesses, products, countries,distribution channels
Can be augmented: A useful pointof departure for more sophisticatedanalysis
DISADVANTAGES
Simplicity: Oversimplifies thefactors determining industryattractiveness and competitiveadvantage
Ambiguous: The positioning of abusiness depends critically uponhow a market is defined
Ignores synergy: The analysistakes no account of anyinterdependencies betweenbusinesses
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
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