Chapter 11 – Organizational Structure & Controls

Agenda Introduction to Organizational Structure Simple Structure Functional Structure Multidivisional Structure International

Organizational Structure Organizational structure specifies: The firm’s formal reporting relationships, procedures, controls, 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!

Organizational Controls guide strategy, compare actual with expected results, and suggest corrective actions if necessary. Strategic controls Subjective assessment of the fit between what the firm might do (opportunities) and what it can do (competitive advantage) Financial controls Objective assessment of firm performance

Burgelman’s “Rubber Band Model” What it Takes to Win Basis of Competitive Advantage in the Industry Official Corporate Strategy What We SAY What We DO Strategic Action Internal Selection Environment CULTURE The Rubber Band Model “focuses on the big picture. It helps examine strategy-making at the industry-company interface level of analysis, and the co-evolution of industry-level and company-level forces” (Strategy is Destiny pg. 8) This tool helps you broadly look at whether your organization in in “strategic balance” Does “What it takes to win” balance with “What We’ve Got”? Does “What we say” match with the reality of “what we do”? “During periods of strategic alignment, thre rubber bands are evenly stretched because the dynamic forces are in harmony. Over time, however, the dynamic forces tend to diverge. The rubber bands get stretched unevenly and harmony turns into disharmony.” (Strategy is Destiny pg. 364) Top management can create an internal selection environment – a culture – that will help prevent the rubber bands from snapping. Such an internal environment has the following four attributes: 1-Resource Allocation (regulate the company’s resources to strategic action) 2- Internal debate (must value dissent and controversy surrounding tough issues and strategic arguments) 3- Strategic recognition (the capacity of management to appreciate the strategic importance of new developments before unequivocal environment feedback about their strategic importance is available) 4- Strategic leadership (surmise how the new equilibrium of forces in the industry will look and what the new winning strategy will be) (Strategy is Destiny pg.366) Distinctive Competence of the Firm Source: Burgelman, Robert A., Strategy is Destiny: How Strategy Making Shapes a Company’s Future, The Free Press, 2002. What We’ve Got

Relationships between Strategy and Structure Strategy and structure have a reciprocal relationship: Structure 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

Evolutionary Patterns of Strategy and Structure Firms grow in predictable patterns: First by volume Then by geography Then integration (vertical, horizontal) And finally through product/business diversification A firm’s growth patterns determine its structural form

Evolutionary Patterns of Strategy and Structure – cont’d All organizations require some form of organizational structure to implement and manage their strategies Firms frequently alter their structure as they grow in size and complexity Three basic structure types: Simple structure Functional structure Multidivisional structure (M-form)

Agenda Introduction to Organizational Structure Simple Structure Functional Structure Multidivisional Structure International

Simple Structure Owner-manager Makes all major decisions directly Monitors all activities Staff Serves as an extension of the manager’s supervisor authority Matched with focus strategies and business-level strategies Commonly compete by offering a single product line in a single geographic market

Simple Structure: Growth Problems Growth creates: Complexity Managerial and structural challenges Owner-managers Commonly lack organizational skills and experience Become ineffective in managing the specialized and complex tasks involved with multiple organizational functions

Agenda Introduction to Organizational Structure Simple Structure Functional Structure Multidivisional Structure International

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

Functional Structure for Cost Leadership Strategy Notes: • Operations is the main function • Process engineering is emphasized rather than new product R&D • Relatively large centralized staff coordinates functions • Formalized procedures allow for emergence of a low-cost culture • Overall structure is mechanical; job roles are highly structured

Functional Structure: Assessment Differences in orientation among organizational functions can: Facilitate career paths and professional development in specialized functional areas Impede communication and coordination Cause functional-area managers to focus on local versus overall company strategic issues Increase the need for CEO to integrate decisions and actions of business functions

Agenda Introduction to Organizational Structure Simple Structure Functional Structure Multidivisional Structure International

Variations of Multidivisional Structure Synergies Competition between units

Multidivisional Structure: 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

Cooperative Form of Multidivisional Structure Related-constrained strategy!

SBU Form of Multidivisional Structure Related-linked strategy!

Competitive Form of Multidivisional Structure Unrelated strategy!

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)

Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy

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

Worldwide Product Divisional Structure for Implementing a Global Strategy

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

Hybrid Form of the Combination Structure for Implementing a Transnational Strategy