STRATEGIC FIT: MATCHING STRATEGY TO STRUCTURE AND THE SITUATION Payne (7)

Two Primary Types of Fit FIT WITH INDUSTRY OR MARKET CONDITIONS – external fit Strategies for Emerging Industries Strategies for High Velocity Markets Strategies for Maturing Industries Strategies for Declining Industries Strategies for Fragmented Industries FIT WITH ORGANOZATIONAL STRUCTURE – internal fit

The Industry Life Cycle Industry Sales Introduction Growth Maturity Decline Time

Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 250 200 150 No. of firms 100 50 1895 1905 1915 1925 1935 1945 1955 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

Strategy and Performance at across the Industry Life Cycle 12 10 8 Growth Maturity Decline 6 4 2 ROI Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle. Technical Change Product R&D/Sales New Products % Sales from New Products Age of Plant & Equip. Added/Revenue Value Investment/Sales Advertising/Sales

1. Features of an Emerging Industry New and unproven market Proprietary technology Low entry barriers Experience curve effects may permit cost reductions as volume builds Buyers are first-time users Marketing involves inducing initial purchase and overcoming customer concerns Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource capabilities for rapid growth

1. Options in an Emerging Industry Win early race for leadership by employing a bold, creative strategy Push hard to: Perfect technology Improve product quality Develop attractive performance features Move quickly when technological uncertainty clears and a dominant technology emerges Form strategic alliances Capture potential first-mover advantages Pursue: New customers and user applications Entry into new geographical areas Focus advertising emphasis on: Increasing frequency of use Creating brand loyalty Use price cuts to attract price-sensitive buyers Prepare for entry of established firms when industry future clears and risk lessens

2. Features of High Velocity Markets Rapid-fire technological change Short product life-cycles Rapidly evolving customer expectations Frequent launches of new competitive moves Entry of important new rivals Examples: Smart Phones Industry Biotechnology Industry Gaming Industry

2. Options in the High Velocity Markets Invest aggressively in R&D Develop quick response capabilities Match rivals Shift resources Adapt competencies Create new competitive capabilities Speed new products to market Use strategic partnerships to develop specialized expertise and capabilities Keys to success: Cutting-edge expertise Speed in responding to new developments Collaboration with others Agility Innovativeness Opportunism Resource flexibility First-to-market capabilities

3. Characteristics of Industry Maturity Slowing demand generates stiff competition More sophisticated buyers demand bargains Greater emphasis on cost and service “Topping out” problem in adding production capacity Product innovation and new end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce the number of industry rivals

3. Strategy Options for Competing in a Mature Industry Prune product line Emphasize process innovation Strong focus on cost reduction Increase sales to present customers Purchase rivals at bargain prices Expand internationally Build new, more flexible competitive capabilities

4. Characteristics of Stagnant or Declining Industries Demand grows more slowly than economy as whole (or even declines) Competitive pressures intensify--rivals battle for market share To grow and prosper, firm must take market share from rivals Industry consolidates to a smaller number of key players via mergers and acquisitions

4. Options for Competing in a Stagnant or Declining Industry Pursue focus strategy aimed at fastest growing market segments Stress differentiation based on quality improvement or product innovation Work diligently to drive costs down by Outsourcing Redesign internal processes Consolidate under-utilized production facilities Close low-volume, high-cost distribution outlets Cut marginal activities from value chain

5. Characteristics of a Fragmented Industry No seller has a sizable market share (sometimes because the industry is so new that no large firms have yet emerged) Exploding technologies force firms to specialize just to keep up in their area of expertise Low entry barriers Absence of scale economies Buyers require small quantities of customized products (a condition that allows small firms to serve the special needs of a few buyers) Market is so big or diverse that it requires many firms to satisfy buyer needs Examples: 1) Landscaping 2) Auto repair 3) Meat packing.

5. Options for a Fragmented Industry Construct and operate “formula” facilities Become a low-cost operator Increase customer value via backward or forward integration Specialize by product type Specialize by customer type Focus on limited geographic area

Strategy & Structure Fit Concepts: Strategy and Structure Relationship Structure Characteristics Dealing with Size Issues

Purposes of Structure Coordination Integration create activities towards a productive goal while still operating separately mechanisms for coordination include rules and procedures hierarchical referral liaison personnel Integration come together and create something new by combining knowledge and operating as a unit mechanisms for integration include teams and task forces

Structure and Strategy Old Strategy Structure Old Performance New Strategy New Structure New Performance *This is a cyclical process where the past informs the future.

Dimensions of Structure Complexity: Creation of distinct tasks and responsibilities within the organization Types of Complexity Degree of Specialization Levels of Hierarchy Geographic Spread or Dispersion Control: Design of hierarchy to supervise various differentiated elements of the organization Extent to which authority for decision making is held at higher levels of the organization Higher levels - Centralization Lower levels - Decentralization Formalization: Extent to which rules and procedure govern the actions of individuals and groups within the organization Balancing act Too Low - Uncertainty about authority and responsibility Too High - Limit innovation and creativity

Tall vs. Flat Organizations Tall Organization Flat Organization President / CEO Senior Vice President VP Director Governing Body Director President / CEO

Types of Structures Need to focus on task efficiency Functional Structure Matrix Structure Divisional Structure Multidivisional Structure Grouping by function Grouping by function and purpose Primary grouping by purpose; secondary grouping by function secondary grouping by purpose; lowest grouping by function Need to focus on task efficiency Need to focus on purpose

Growth Patterns of Large Corporations Phase 1 Strategy: Low revenue base; simple product-market scope Structure: Simple Phase 2 Strategy: Increase in revenues; engage in vertical integration (backward and/or forward) Structure: Functional Phase 3 Strategy: Expand into new, related product-markets and/or geographical areas Structure: Divisional Phase 4 Strategy: Expand into international markets Structure: International Division, Geographic Area, Worldwide Product Division, Worldwide Functional, or Worldwide Matrix

Functional Structure Chief Executive Officer or President Manager Production Manager Engineering Manager Marketing Manager R&D Manager Personnel Manager Accounting Lower-level managers, specialists, and operating personnel

Chief Executive Officer or President Organized similarly to Division 1 Divisional Structure Chief Executive Officer or President Corporate Staff Division A General Manager Division B Division C Manager Production Manager Engineering Manager Marketing Manager R&D Manager Personnel Manager Accounting Organized similarly to Division 1 Lower-level managers, specialists, and operating personnel

Matrix Structure Board of Trustees CEO Functional Managers Project D Design Functional Managers Program/Project Managers Project C Testing Project B Admin Project A Manufacturing

Functional, Divisional, and Matrix Structures: Advantages and Disadvantages Functional Structure Advantages Disadvantages Pooling of specialists enhances coordination and control Centralized decision making enhances an organizational perspective across functions Efficient use of managerial and technical talent Career paths and professional development in specialized areas are facilitated Differences in functional area orientation impede communication and coordination Tendency for specialists to develop short-term perspective and overly narrow functional orientation Functional area conflicts may overburden top level decision makers Difficult to establish uniform performance standards Divisional Structure Advantages Disadvantages Increases strategic and operational control, permitting corporate-level executives to address strategic issues Quick response to environmental changes Increased focus on products and markets Minimizes problems associated with sharing resources across functional areas Facilitates development of general managers Increased costs incurred through duplication of personnel, operations, and investment Dysfunctional competition among divisions may detract from overall corporate performance Difficulty in maintaining uniform corporate image Overemphasis on short-term performance Matrix Structure Advantages Disadvantages Increases market responsiveness through collaboration and synergies among professional colleagues Allows more efficient utilization of resources Improves flexibility, coordination, and communication Increases professional development through broader range of responsibility Dual reporting relationships can result in uncertainty regarding accountability Intense power struggles may lead to increased levels of conflict Working relationships may be more complicated and human resources duplicated Excessive reliance on group processes and teamwork may impede timely decision making