Organizational Structure & Controls Chapter Eleven BA

11–2 Today’s Agenda Organizational Structure & ControlsOrganizational Structure & Controls Evolutionary Patterns of Strategy & StructureEvolutionary Patterns of Strategy & Structure  Simple  Functional  Multidivisional Matching Domestic Structure to StrategyMatching Domestic Structure to Strategy Matching International Structure to StrategyMatching International Structure to Strategy Wrap-upWrap-up

11–3 Organizational Structure and Controls

11–4 Organizational Structure and Controls Organizational structure specifies:Organizational structure specifies:  The firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes  The work to be done and how to do it, given the firm’s strategy or strategies It is critical to match organizational structure to the firm’s strategy.It is critical to match organizational structure to the firm’s strategy.

11–5 Organizational Structure Effective structures provide:Effective structures provide:  Stability  Flexibility Structural stability provides:Structural stability provides:  The capacity required to consistently and predictably manage daily work routines Structural flexibility provides for:Structural flexibility provides for:  The opportunity to explore competitive possibilities  The allocation of resources to activities that shape needed competitive advantages

11–6 Organizational Controls Purposes of Organizational Controls:Purposes of Organizational Controls:  Guide the use of strategy.  Indicate how to compare actual results with expected results.  Suggest corrective actions to take when the difference between actual and expected results is unacceptable. Two Types of Organizational ControlsTwo Types of Organizational Controls  Strategic controls  Financial controls

11–7 Organizational Controls Strategic Controls: Subjective criteriaStrategic Controls: Subjective criteria  Are concerned with examining the fit between: What the firm might do (opportunities in its external environment).What the firm might do (opportunities in its external environment). What the firm can do (competitive advantages).What the firm can do (competitive advantages).  Evaluate the degree to which the firm focuses on the requirements to implement its strategy. OrganizationalControlsStrategicControlsFinancialControls

11–8 Organizational Controls Financial Controls: Objective criteriaFinancial Controls: Objective criteria  Accounting-based measures include: Return on investmentReturn on investment Return on assetsReturn on assets  Market-based measures include: Stock priceStock price Market capMarket cap OrganizationalControlsStrategicControlsFinancialControls

11–9 Matching Control to Strategy Relative use of controls varies by type of strategy:Relative use of controls varies by type of strategy:  Large diversified firms using a cost leadership strategy emphasize financial controls.  Companies and business units using a differentiation strategy emphasize strategic controls.

11–10 Relationships between Strategy and Structure Strategy and structure have a reciprocal relationship:Strategy and structure have a reciprocal relationship:  Structure flows from or follows the selection of the firm’s strategy but …  Once in place, structure can influence current strategic actions as well as choices about future strategies.

11–11 Evolutionary Patterns of Strategy & Organizational Structure

11–12 Evolutionary Patterns of Structure and Organizational Structure All organizations require some form of organizational structure to implement and manage their strategiesAll organizations require some form of organizational structure to implement and manage their strategies Firms frequently alter their structure as they grow in size and complexityFirms frequently alter their structure as they grow in size and complexity Three basic structure types:Three basic structure types:  Simple structure  Functional structure  Multidivisional structure (M-form)

11–13 Strategy and Structure Growth Pattern Sales Growth Coordination and Control Problems Efficient implementation of formulated strategy Simple Structure Functional Structure Sales Growth Coordination and Control Problems Multidivisional Structure Efficient implementation of formulated strategy

11–14 Strategy and Structure: Simple Structure Owner-managerOwner-manager  Makes all major decisions directly.  Monitors all activities. StaffStaff  Serves as an extension of the manager’s supervisor authority. Matches well with focus strategies or simple business-level strategies (typically in small companies)Matches well with focus strategies or simple business-level strategies (typically in small companies)  Commonly compete by offering a single product line in a single geographic market.

11–15 Simple Structure Growth creates:Growth creates:  Complexity in relative competitive and external analysis  Managerial and structural challenges Owner-managersOwner-managers  Commonly lack organizational skills and experience.  Become ineffective in managing the specialized and complex tasks involved with multiple organizational functions.

11–16 Strategy and Structure: Functional Structure Chief Executive Officer (CEO)Chief Executive Officer (CEO)  Limited corporate staff Functional line managers in dominant organizational areas of:Functional line managers in dominant organizational areas of:  Production  Marketing  Engineering  Accounting  R&D  Human resources Supports use of business-level strategies and some simple corporate-level strategiesSupports use of business-level strategies and some simple corporate-level strategies  Single or dominant business with low levels of diversification

11–17 Strategy and Structure: Multidivisional Structure Operating divisions function as separate businesses or profit centersOperating divisions function as separate businesses or profit centers Appropriate for corporate-level strategies with moderate to high levels of diversificationAppropriate for corporate-level strategies with moderate to high levels of diversification Three Major Benefits:Three Major Benefits:  Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control.  Facilitates comparisons between divisions, which improves the resource allocation process.  Stimulates managers of poorly performing divisions to look for ways of improving performance.

11–18 Matching Domestic Strategy to the Organizational Structure

11–19 Using the Functional Structure to Implement a Cost Leadership Strategy Focus is typically on primary activities of the value chain.Focus is typically on primary activities of the 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.

11–20 Using the Functional Structure to Implement a Differentiation Strategy Marketing is the main function for tracking new product ideas.Marketing is the main function for tracking new product ideas. New product R&D is emphasized.New product R&D is emphasized. Formalization is limited to foster change and promote new ideas.Formalization is limited to foster change and promote new ideas. Job roles are less structured.Job roles are less structured.

11–21 Corporate-Level Strategies and the Multidivisional Structure Diversification strategy requires firm to change from functional structure to a multidivisional structure.Diversification strategy requires firm to change from functional structure to a multidivisional structure. Different levels of diversification create the need for implementation of a unique form of the multidivisional structure.Different levels of diversification create the need for implementation of a unique form of the multidivisional structure.  Cooperative form  Strategic Business Unit (SBU) form  Competitive form

11–22 Sharing divisional competencies facilitates development of economies of scope.Sharing divisional competencies facilitates development of economies of scope.  Leverage firm’s core competencies.  Centralization of some organizational functions Specific product or market divisions have their own business-level strategies.Specific product or market divisions have their own business-level strategies. Cooperative form: Related Constrained Strategy

11–23 Cooperative form: Related Constrained Strategy

11–24 SBU form: Related Linked Strategy Strategic business unit (SBU) form is a structure consisting of three levels:Strategic business unit (SBU) form is a structure consisting of three levels:  Corporate headquarters with shared support services  Strategic business units (SBUs)  SBU divisions Typically, used with larger firmsTypically, used with larger firms Divisions within SBUs develop economies of scope and/or scale by sharing product or market competencies.Divisions within SBUs develop economies of scope and/or scale by sharing product or market competencies.

11–25 SBU form: Related Linked Strategy

11–26 Competitive form: Unrelated strategy A structure in which there is complete independence among the firm’s divisionsA structure in which there is complete independence among the firm’s divisions  Divisions do not share common corporate strengths. Limited shared corporate functions.  Because strengths aren’t shared, integrating devices aren’t developed.  Organizational arrangements emphasize divisional competition rather than cooperation. Creates specific profit performance expectations for each division to promote internal competition for resources.Creates specific profit performance expectations for each division to promote internal competition for resources.

11–27 Competitive form: Unrelated strategy

11–28 Cooperative M-Form SBU M-FormCompetitive M-Form Structural (Related Constrained (Related Linked (Unrelated Diversification Characteristics Strategy) a Strategy) a Strategy) a Centralization of Centralized at Partially centralizedDecentralized to operations corporate office(in SBUs)divisions Use of integrationExtensiveModerateNonexistent mechanisms DivisionalEmphasize subjectiveUse a mixture ofEmphasize objective performance(strategic) criteria subjective (strategic)(financial) criteria appraisalsand objective (financial) criteria Divisional incentiveLinked to overallMixed linkage toLinked to divisional compensationcorporate corporate, SBU, andperformance performancedivisional performance Overall Structural Form a Strategy implemented with structural form. Summary of Organizational Structure versus Corporate-level Strategy

11–29 Matching International Strategy to the Organizational Structure

11–30 Worldwide Geographic Area Structure: Implementing a Multidomestic Strategy Multidomestic strategy decentralizes strategic and operating decisions to:Multidomestic strategy decentralizes strategic and operating decisions to:  Business units in each country  Product characteristics tailored to local preferences Firms counter global competitive forces by competing in industry segments most affected by differences among local countries.Firms counter global competitive forces by competing in industry segments most affected by differences among local countries. Requires little coordination between different county markets: integrating mechanisms aren’t needed.Requires little coordination between different county markets: integrating mechanisms aren’t needed.

11–31 Worldwide Geographic Area Structure: Implementing a Multidomestic Strategy

11–32 Worldwide Product Divisional Structure: Implementing a Global Strategy Global StrategyGlobal Strategy  Allows firm to offer standardized products across country markets.  Headquarters coordinates and integrates decisions and actions among divisional business units. Integrating mechanisms are important:Integrating mechanisms are important:  Direct contact between managers  Liaison roles between departments  Temporary task forces as well as permanent teams

11–33 Worldwide Product Divisional Structure: Implementing a Global Strategy

11–34 Combination Structure: A Transnational Strategy Transnational StrategyTransnational Strategy  Combines multidomestic strategy’s local responsiveness with global strategy’s efficiency. Combination structure draws characteristics and mechanisms from both:Combination structure draws characteristics and mechanisms from both:  Worldwide geographic area structure  Worldwide product divisional structure Appropriate integrating mechanisms for the combination structure are less obvious.Appropriate integrating mechanisms for the combination structure are less obvious.

11–35 Combination Structure: A Transnational Strategy

11–36 Wrap-up

11–37 Wrap-up Organizational Structure & ControlsOrganizational Structure & Controls Evolutionary Patterns of Strategy & StructureEvolutionary Patterns of Strategy & Structure  Simple  Functional  Multidivisional Matching Domestic Structure to StrategyMatching Domestic Structure to Strategy Matching International Structure to StrategyMatching International Structure to Strategy QuestionsQuestions