Organizational Structure and Controls © 2 0 0 9 Chapter Twelve: Organizational Structure and Controls Chapter Three: The External Environment Chapter Three: The External Environment Hitt, Ireland, Hoskission, Rowe & Sheppard Strategic Management N o t e s Competitiveness & Globalization

The Strategic Management Process Ch. 1: Strat. Mgmt. & Com-petitiveness Ch. 2: Strat. Mgmt . & Performance Chapter 3: The External Environment Chapter 4: The Internal Environment Strategic Competitiveness Strategic Mission & Strategic Intent Strategic Objectives & Inputs Chapter 11: Corporate Governance Ch. 12: Org. Structure & Controls Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Implementation Strategic Actions Chapter 5: Bus.-Level Strategy Chapter 6: Competitive Dynamics Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategy Formulation Ch. 12: Org. Structure & Controls

Organizational Structure & Controls Knowledge objectives: Discuss organizational structure & controls & the difference between the two. Note the relationship between strategy & structure. Discuss the functional structures used to implement business-level strategies. See how 3 kinds of multidivisional (M-Form structure help implement different diversification strategies. Discuss the organizational structures used to implement three international strategies. Define strategic networks & strategic centre firms.

(With David Lee Roth as your guide) B O N U S Van Halen (With David Lee Roth as your guide) Audio source is a cover at: http://www.youtube.com/watch?v=YAm562ljcm4 Van Halen's contract contained a provision calling for them to be provided with a bowl of M&Ms with all the brown ones removed. First Mover / Blue Ocean Strategy: “Van Halen was the first band to take huge productions into tertiary, third-level markets.” Implementation Problems: “We'd pull up with nine 18-wheeler trucks, full of gear, where the standard was 3 trucks… there were many technical errors - whether it was the girders couldn't support the weight, or the flooring would sink in, or the doors weren’t big enough…” Solution: Test to see if compliments spotted details: “…if I saw a brown M&M… line-check the entire production. Guaranteed you're going to arrive at a technical error. They didn't read the contract. Guaranteed you'd run into a problem. Sometimes… literally, life-threatening.”

Organizational Structure Organizational structure & the controls that are a part of it affect firm’s performance. When strategy is not matched with appropriate structure & controls, performance declines. Structure specifies formal reporting relationships, procedures & authority decision making process. Influences how managers work & the decisions resulting from that work. Specifies the work to be done & how to do it given the firm’s strategy or strategies. Provides stability needed to successfully implement its strategies & maintain its competitive advantage. Organization Structure

Organizational Structure Structural Stability: Provides the capacity the firm needs to consistently & predictably manage daily work routines. Structural Flexibility: Provides the opportunity to explore competitive possibilities & allocate resources These go into activities that shape the competitive advantages of the firm that it will need to be successful in the future. Organization Structure

Organizational Controls Guide the use of strategy. Indicate how to compare actual with expected results. Suggest corrective action when the difference between actual & expected results are unacceptable. Concerned with examining the fit between what the firm might do and what it can do. Evaluate the degree to which the firm focuses on the requirements to implement its strategies. Controls

Strategic Controls The conditions in the external environment & The company’s competitive advantages. Subjective criteria to verify a firm is using appropriate strategies for: Conditions in the external environment & System to monitor product market / operational data with open communication among corp. & divisional managers. A high level of interaction among divisions & evaluation by corp. managers with an in-depth knowledge of divisions. Long-term view willing to accept risk, & share resources, capabilities, core competencies & info among divisions. Employees evaluated on a basis of open, subjective appraisal of what was done to achieve results. More spending on R&D, personnel & market research. Controls

Financial Controls Largely objective financial criteria used to measure the firm’s performance against previously established quantitative standards. Least-cost behaviour approach with capital funds going to divisions that yield higher financial returns. Competition among divisions & evaluation by corp. managers with superficial knowledge of operations. A short-term focus on cash flow, revenue growth, ROI, market share & risk avoidance used for evaluation. Relatively less spending on R&D, personnel training, equipment, market research. Controls

Structure Types 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: Functional Structure; Multi-divisional Structure (M-form). Simple Structure; Structural Types 5

Strategy & Structure Growth Patterns Simple Structure Efficient implementation of formulated strategy. Sales Growth / Coordination & Control Problems Functional Structure Efficient implementation of formulated strategy. Sales Growth / Coordination & Control Problems Multidivisional Structure Structural Types 5

Simple Structure Owner / Manager Owner/Manager makes all major decisions directly and monitors all activities. Difficult to maintain this structure as the firm grows in size and complexity. Simple Structure 6

Functional Structure * Production * Finance * Engineering * Accounting First stage beyond a Simple Structure. Fine for single or dominant-business firms. Allows specialization of tasks: * Production * Finance * Engineering * Accounting * Sales & Marketing * Human Resources Functional department heads report to Chief Executive Officer who integrates decisions & actions from a company-wide point of view. Overcomes information processing limits of single owner/manager. Risks conflict between myopic functional managers. Functional Structure 17

Chief Executive Officer Functional Structure Chief Executive Officer Production Finance Engineering Accounting Sales & Marketing Human Resources Corporate Finance Corporate R&D Corporate Marketing Corporate Human Resources Strategic Planning Functional Structure 18

Office of the President Functional Structure for a Cost Leadership Strategy Office of the President Operations are the main function. Formalized procedures allow for low-cost culture. Structure is mechanical; job roles are highly structured. Process engineering is stressed rather than new product R&D. Relatively large centralized staff coordinates functions. Centralized Staff Marketing Engineering Operations Personnel Accounting Functional Structure 10

for a Differentiation Strategy Functional Structure for a Differentiation Strategy President and Limited Staff Marketing New Product R&D Operations Human Resources Finance R&D Marketing is the main function for tracking new product ideas. Most functions are decentralized / New product R&D is emphasized. Limited formalization to foster change & promote new ideas. Overall structure is organic; job roles are less structured. Functional Structure 10

Multi-Divisional Structure Each div. operated as a separate business. Appropriate for related-diversified businesses. Key task of corporate managers is exploiting synergies among divisions. Managers use a combination of strategic controls and financial controls. Competing among divisions for scarce capital resources Creating opportunities for cooperation for synergies. Managers try to strike a balance between: and The goal is to maximize overall firm performance. Multi-Div. Structure 27

Multi-Divisional Structure The decision-making of managers in a Multi-Divisional structure may be: Centralized or Decentralized Bureaucratic or Non-bureaucratic Balance of these dimensions changes over time. Structure will evolve over time with: Changes in strategy, Degree of diversification, Geographic scope, Nature of competition. Multi-Div. Structure 34

Multi-Divisional Structure Corp. Head-quarters Chief Executive Officer Corporate Finance Corporate R&D Corporate Marketing Strategic Planning Corporate Human Resources Division Production Finance Engineering Accounting Sales & Marketing Human Resources Multi-Div. Structure 18

Three Variations of the Multi-Divisional Structure (M-form) Strategic Business Unit (SBU) Structure Competitive Form Cooperative Form Related-Constrained Strategy Related-Linked Strategy Unrelated /Holding Co. Strategy Multi-Div. Organization 21

Multi-Divisional Cooperative Form Related-Constrained Strategy President Corp. Headquarters Legal Affairs Government Strategic Planning Corporate R&D Lab Corp. Human Resources Corporate Marketing Corporate Finance Corporate R&D Lab Product Division Culture emphasizes cooperative sharing. Large corporate office with R&D likely to be emphasized. Structural integration devices create tight divisional links. Multi-Div. Organization 35

Multi-Divisional SBU Form Related-Linked Strategy Corporate Headquarters President Strat. Business Unit A Strat. Business Unit C Strat. Business Unit B Strat. Business Unit D Corporate Finance Corporate R&D Corporate Marketing Strategic Planning Corp. Human Resources Division Division Structural integration among divisions within but not across SBUs. Each SBU may have its own budget for staff to foster integration. Corporate staff serve as consultants to SBUs & divisions. Multi-Div. Organization 43

Multi-Divisional Competitive Form Unrelated /Holding Company Strategy President Legal Affairs Finance Auditing Division Corp. Headquarters Finance Auditing Corporate headquarters (HQ) has a small staff. Finance & auditing are the most prominent functions in the HQ. Divisions are independent & separate for financial evaluation. Divisions retain strategic control; cash is managed by corp. office. Divisions compete for corporate resources. Multi-Div. Organization 36

Multi-Divisional Attributes of Diversification Strategies Structural Characteristics Centralization Of Operations Use of Integrating Mechanisms Divisional Performance Appraisal Incentive Compensation Type of Strategy Cooperative M-Form SBU M-Form Competitive M-Form Related- Constrained Related Linked Unrelated Centralized at Corporate Office Centralized in SBUs Decentralized to Division Extensive Synergies Moderate Nonexistent Financial Criteria Strategic & Subjective/ Strategic Linked to Corporate Performance Corporation, Division & SBU Divisional Multi-Div. Organization 76

Worldwide Geographic Area Structure Products tailored to local tastes. Isolated from global competition: Multi- national H.Q.s Europe Latin America Asia North Japan China Multi-domestic Strategy Establish protected market positions in local industry. Segments shaped by variations among local countries. Prod.s standardized x-countries. Economies of scope & scale. Global Corporate Worldwide Products Division Global Strategy Outsource some activities to world’s best providers. Decision-making authority centralized global H.Q.s. Worldwide Product Divisional Structure Worldwide Geographic Area Structure Worldwide Product Divisional Structure Global Corporate H.Q.s Worldwide Products Division Global Strategy Multi- national H.Q.s Europe Latin America Asia North Japan China Multi-domestic Strategy Products tailored to local tastes. Isolated from global competition: Prod.s standardized x-countries. Economies of scope & scale. Establish protected market positions in local industry. Segments shaped by variations among local countries. Outsource some activities to world’s best providers. Decision-making authority centralized global H.Q.s. Multi-Div. Organization

Product & Functional Matrix Each Unit reports to Functional AND Project Managers Senior Management 2 Dimensions 1. 2. Product Functional Product & Functional Units Operations Marketing Finance People Manager Product A Product B Product C Operations Unit Marketing Finance People Operations Unit Marketing Finance People Operations Unit Marketing Finance People Multi-Div. Organization

Strategic Networks A Strategic Network is a grouping of organizations that has been formed to create value via participation in a set of cooperative arrangements (e.g. a strategic alliance). A Strategic Centre firm often manages the network. The Strategic Centre firm identifies actions to increase opportunities for each firm to achieve success via its participation in the network. The Strategic Centre firm creates incentives that reduce the probability of any single firm taking advantage of its network partners. Network Structures 82

A Strategic Network Centre firm is engaged in 4 primary tasks: Strategic Outsourcing: Outsourcing & partnering with more firms than the other network firms. Competencies: Seeks ways to support members efforts to develop core competencies that can benefit the network. Technology: Responsible for managing development & sharing of tech. based ideas among network members. Race to Learn: Guides participants in efforts to form network-specific competitive advantages. Network Structures 90

A Distributed Strategic Network Distributed Strategic Centre Firms A Distributed Strategic Network Main Strategic Centre Firm International Coop Strategies often require complex networks. Large multinationals form distributed strategic networks with multiple regional centres to manage cooperative partners. Breaking big networks into multiple manageably-sized ones helps manage complexity of so many relationships. Network Structures 107

The Strategic Management Process Ch. 1: Strat. Mgmt. & Com-petitiveness Ch. 2: Strat. Mgmt . & Performance Chapter 3: The External Environment Chapter 4: The Internal Environment Strategic Competitiveness Strategic Mission & Strategic Intent Strategic Objectives & Inputs Chapter 11: Corporate Governance Ch. 12: Org. Structure & Controls Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Implementation Strategic Actions Chapter 5: Bus.-Level Strategy Chapter 6: Competitive Dynamics Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategy Formulation Ch. 12: Org. Structure & Controls