strategic management: concepts and cases

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Strategic Management: Concepts and Cases

Part III: Strategic Actions: Strategy Implementation

Chapter 11: Organizational Structure and Controls

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The Strategic Management Process

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GE: Strategy and Structure Changes?

Only company listed in the Dow Jones Industrial Index that was also in the original (1986) index

Mid-2005 Jeffrey Immelt (who replaced Jack Welch four years earlier) changed GE’s structure from eleven to six strategic business units (SBUs) Why? “…[to] accelerate GE’s growth in key industries” while

simultaneously helping the firm become more focused on emerging technologies with significant commercial potential

Even with this reorganization, GE continued using related-linked diversification strategy at the corporate level and SBU form of multidivisional structure

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GE: Strategy and Structure Changes? (Cont’d)

Mid-2007 call for GE to sell non-core businesses (i.e., NBC Universal and Money). This would change GE’s corporate-level strategy from related linked to related constrained, necessitating a change in structure from SBU form of the multidivisional to cooperative of multidivisional

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Introduction

All firm use at least one business-level strategy Once selected, strategies are NOT implemented

in a vacuum! Organizational structure and controls provide

framework within which strategies are used

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Chapter 11: Organizational Structure (OS) and Controls

Overview: Six content areas Define OS and controls and differences between

strategic and financial controls Describe relationship between strategy & structure Describe the functional structures for business-

level strategies Three versions of multi-divisional (M-form) structure for

different diversification strategies OS for implementation three international strategies Strategic networks and implementation of center firm

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Organizational Structure (OS) & Controls (OC)

Organizational Structure (OS) Specifies firm’s formal reporting relationships,

procedures, controls, authority & decision-making processes (i.e., work to be done and how to do it!)

Effective use of firm’s strategies facilitated when structure is properly aligned

Structural stability: Capacity firm requires to consistently and predictably manage its daily work routines

Structural flexibility: Opportunity to explore competitive advantages firm will need to be successful in the future

Pioneer Alfred Chandler found organizations change their structures when inefficiencies force them to do so

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Organizational Structure & Controls (Cont’d)

Organizational Controls (OC) Guide the use of strategy, indicate how to compare

actual results with expected results, and suggest corrective actions to take when the difference is unacceptable

Two types include strategic and financial

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Organizational Controls (OC) 1. Strategic controls: largely subjective criteria

intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages

Concerned with what firm might do vs. what it can do Used to evaluate degree to which firm focuses on the

requirement to implement strategies (i.e., SUB: primary and support activities; corporate level: knowledge, markets & technologies across businesses)

Focus on the content of strategic actions Encourage decisions that incorporate moderate and acceptable

levels of risk

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Organizational Controls (OC) (Cont’d)

2. Financial controls Objective criteria used to measure firm’s performance against

previously established quantitative standards (used for unrelated diversification)

Focus on short-term financial outcomes Produce risk-averse managerial decisions

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Strategy vs. Structure: Relationships

Reciprocal relationship Implies change to one causes change in the

other “Research shows strategy has a much more

important influence on structure than the reverse.”

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strategic and financial controls Describe relationship between strategy & structure Describe the functional structures for business-

level strategies Three versions of multi-divisional (M-form)

structure for different diversification strategies OS for implementation three international strategies Strategic networks and implementation of center firm

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Strategy vs. Structure: Evolutionary Patterns

Chandler found firms tend to grow in a predictable pattern, including the areas of volume, geography, integration (horizontal & vertical) & product/ business diversification Growth pattern implies structural changes!

Several structure forms, used to implement strategies, evolved including 1. Simple 2. Functional 3. Multidivisional

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Strategy and Structure

Growth Pattern

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Strategy vs. Structure: Evolutionary Patterns (Cont’d)

Three main structures 1. Simple

Owner-manager makes all major decisions and monitors all activities, staff acts as extension of manager's supervisory authority

Few rules, limited task specialization, unsophisticated technology system

As firm grows more complex, need to add layers and controls

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Three main structures 2. Functional

CEO and a limited corporate staff make all decisions, with functional line managers in dominant organizational areas

Allows functional specialization resulting in active knowledge sharing in each functional area

Can negatively affect communication and coordination among those representing different organizational functions

When changing from a simple to functional structure need to focus on value-destroying bureaucratic procedures

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Three main structures 3A. Multidivisional

Operating divisions each represent a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategies to division managers

3B. Multidivisional (M-form) structure Ties together several operating divisions, each representing

a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated

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Three main structures 3B. Multidivisional (M-form) structure (Cont’d)

It enables corporate officers to more accurately monitor the performance of each business, which simplifies the problem of control

It facilitates comparisons between divisions, which improves resource allocation process

It stimulates managers of poorly performing divisions to look for ways of improving performance

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No one structure (simple, functional or multidivisional) is superior to the others

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Business-level strategies & functional structure matches for implementing strategies (N=3): 1. Cost leadership (CL) 2. Differentiation (D) 3. CL/D strategy

Structural characteristics (N=3) drive different forms of organizational structures 1. Specialization 2. Centralization 3. Formalization

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Structural characteristics defined 1. Specialization

Type and number of jobs required to do work

2. Centralization Degree to which decision-making authority is retained at

higher managerial levels

3. Formalization Degree to which formal rules and procedures govern work

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Functional Structure for Implementing a Cost Leadership Strategy

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Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) & 5 Forces of Competition

Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices Costs leaders are in a position to absorb supplier price

increases and relationship demands, and to force suppliers to hold down their prices

Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors

Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

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Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) and the functional structure

Simple reporting relationships Few decision-making and authority layers Centralized corporate staff Strong operational focus on process improvements Low-cost culture Centralized staff decision-making authority Jobs specialization Highly formalized rules and procedures

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Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) strategy risks

Processes can become obsolete

Focus on cost reductions can come at the expense of understanding customer perceptions and needs

Strategy could be imitated, requiring the firm to increase the value offered to retain customers

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Functional Structure for Implementing a Differentiation Strategy

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Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) strategy

Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

Target customers – perceived product value

Customized products – differentiating on as many features as possible:

Unusual features, responsive customer service, rapid product innovations, technological leadership, perceived prestige and status, different tastes, engineering design, performance

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Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) & 5 Forces of Competition

Customer loyalty: the most valuable defense against rivals Unique products reduce customer sensitivity to raised prices High margins (for differentiated products) insulate firm from

supplier influence Significant entry barriers: customer loyalty & product

uniqueness Firms with customers loyal to their products are positioned

effectively against product substitutes

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Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) and functional structure

Complex and flexible reporting relationships Cross-functional product development teams Strong focus on marketing and product R&D Development-oriented culture Decentralized decision making Broad job descriptions Informal rules and procedures

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Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) strategy risks

Price differential for differentiated product may be perceived as too large

Firms’ means of differentiation may cease to provide value for which customers are willing to pay (successful rival imitation)

Experience can narrow customers' perceptions of the value of a product's differentiated features

Counterfeit goods might appear in the marketplace

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Matches between business-level strategies and functional structure to implement 3 strategies: 3. CL/D strategy

These firms may sell products that create value because of relatively low and and reasonable sources of differentiation

Difficult to implement, but frequently used in the global economy

Challenge due to primary/support activities Need to successfully combine specialization,

formalization and centralization

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Matches between corporate-level strategies and multidivisional structure 3 forms

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Three Variations of the Multidivisional Structure

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Cooperative Form of the Multidivisional Structure for Implementing a Related Constrained Strategy

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Matches between corporate-level strategies & multidivisional structure: Cooperative form/related constrained strategy Cooperative form: organizational structure using horizontal

integration to bring about interdivisional cooperation

Divisions formed around products, markets or both

All of the divisions share one or more corporate strengths

Interdivisional sharing depends on cooperation

Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources

Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies

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Matches between corporate-level strategies & multidivisional structure: Cooperative form/related constrained strategy (cont’d) Success influenced by how well information is

processed among divisions

Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy

Matrix organization may evolve organizational structure in which a dual structure combines both

functional specialization and business product or project specialization

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SBU Form of the Multidivisional Structure for Implementing a Related Linked Strategy

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Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy Related linked: Firms that share fewer resources and assets

among their businesses, concentrating on the transfer of knowledge and competencies among the businesses

Strategic Business-Unit (SBU) Form: multidivisional organization structure with three levels to support the implementation diversification strategy

1. Corporate headquarters

2. Strategic Business Units (SBUs)

3. SBU division

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Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy SBU Form (Cont’d)

Divisions within each SBU are related in terms of shared products and/or markets

Divisions of one SBU have little in common with divisions of other SBUs

Divisions within each SBU share product or market competencies to develop economies of scope

Integrations used in cooperative form are equally effective for the SBU form

Each SBU is a profit center

Financial controls are more vital for evaluating performance

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Competitive Form of the Multidivisional Structure for Implementing an Unrelated Strategy

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Matches between corporate-level strategies & multidivisional structure: Competitive form/unrelated diversification Competitive form defined: organizational structure in

which the firm's divisions are completely independent Divisions do not share common corporate strengths Integration devices not developed to coordinate

activities across divisions Efficient capital markets in unrelated strategies

require organizational arrangements that emphasize divisional competition rather than cooperation

Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources

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Matches between corporate-level strategies and multidivisional structure: Competitive form/unrelated diversification (Cont’d)

Headquarters maintains a distant relationship to avoid intervention in divisional affairs

Strategic controls are used to monitor performance relative to targeted returns

Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

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strategic and financial controls Describe relationship between strategy and structure Describe the functional structures for business-level

strategies Three versions of multi-divisional (M-form) structure

for different diversification strategies OS for implementation three international

strategies Strategic networks and implementation of center firm

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Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy

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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)

Three (3) Primary International Strategies: 1. WW geographic area structure to implement the

multidomestic strategy Multidomestic Strategy: international strategy in which strategic

and operating decisions are decentralized to the strategic business-unit (SBU) in each country to allow the units to tailor products to local markets

Worldwide (WW) Geographic Area Structure: organizational structure emphasizing national interests and facilitates efforts to satisfy local or cultural differences (used to implement the multidomestic strategy)

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Three (3) Primary International Strategies: 1. WW geographic area structure to implement the

multidomestic strategy (Cont’d)

Focuses on variations of competition within each country Customizes products to meet specific needs and preferences of

local customers Decentralizes the firm's strategic and operating decisions to

business units in each country Takes steps to isolate the firm from global competitive forces

Establish protected market positions Compete in industry segments most affected by differences among

local countries

Deals with uncertainty due to differences across markets

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Worldwide Product Divisional Structure for Implementing a Global Strategy

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Three (3) Primary International Strategies: 2. WW product divisional structure to implement global

strategy Global Strategy: International strategy whereby firm offers

standardized products across country markets, with the competitive strategy being dictated by the home office

Worldwide Product Divisional Structure: Organizational structure with centralized decision-making authority in the WW division headquarters to coordinate and integrate decisions and actions among divisional business units (used to implement the global strategy)

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Three (3) Primary International Strategies: 2. WW product divisional structure to implement global strategy (Cont’d)

Emphasizes economies of scale

Facilitated by improved global accounting and financial reporting standards

Centralizes the firm's strategic and operating decisions at the home office

Involves SBUs operating in each country that are interdependent

Home office attempts to achieve integration across SBUs, adding management complexity

Produces lower risk

Is less responsive to local market opportunities

Offers less effective learning processes due to the pressure to conform and standardize

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Hybrid Form of the Combination Structure for Implementing a Transnational Strategy

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Three (3) Primary International Strategies: 3. Combination structure to implement transnational strategy

Transnational Strategy: International strategy through which the firm seeks to achieve both global efficiency and local responsiveness; usually implemented through global matrix structure and hybrid global design

Flexible Coordination: Building a shared vision and individual commitment through an integrated network

Combination Structure: Organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement transnational strategy)

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Three (3) Primary International Strategies: 3. Combination structure to implement transnational strategy (Cont’d)

Assets and operations may be centralized/decentralized

Functions may be integrated/nonintegrated

Relationships may be formal/informal

Coordination mechanisms may leverage efficiency/flexibility

Mandates to subsidiaries may be global/specialized-contribution/ localized-implementation

There are competing objectives when a worldwide combination structure is used to implement a transnational strategy

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A Strategic Network

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Matches between cooperative strategies and network structures Network strategy: Partners form several alliances in

order to improve the performance of the alliance network itself through cooperative endeavors

Strategic network: Group of firms that form [around core] to create value to participating in multiple cooperative arrangements

At core: Strategic Center Firm which has 4 primary tasks

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Strategic Center Firm’s primary tasks 1. Strategic outsourcing 2. Competencies 3. Technology 4. Race to learn

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strategic and financial controls Describe relationship between strategy and structure Describe the functional structures for business-level

strategies Three versions of multi-divisional (M-form) structure

for different diversification strategies OS for implementation three international strategies Strategic networks & implementation of center

firm

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Implementing Business-level Cooperative Strategies

Business-level complementary alliances (N=2) Vertical: partnering firms share their resources and

capabilities from different stages of the value chain to create a competitive advantage.

Horizontal: partnering firms share resources and capabilities from the same stage of the value chain to create a competitive advantage - commonly used for long-term product development and distribution opportunities

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Implementing Corporate-level Cooperative Strategies

Used to facilitate product & market diversification i.e., Franchising: contractual relationship to describe

and control the sharing of its resources and capabilities with partners

Allows firms to use its competencies to extend or diversity product or market reach, without completing a merger or acquisition

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A Distributed Strategic Network

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Implementing International Cooperative Strategies

Strategic networks formed to implement cooperative strategies resulting in firm competing in several different countries Distributed strategic networks: Organizational

structure used to manage international cooperative strategies

Several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements

strategic management: concepts and cases

Documents

form structure

ges structure

strategic controls

structure changes

use of strategy

strategic actions

content of strategic

ges corporatelevel strategy