Organizational Structure and Controls Chapter 11 Organizational Structure and Controls 1

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 5

Strategy & Structure Growth Patterns Multidivisional Structure Sales Growth Coordination and Control Problems Efficient implementation of formulated strategy Functional Structure Sales Growth Coordination and Control Problems Efficient implementation of formulated strategy Simple Structure 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 6

Functional Structure First stage beyond a Simple Structure Appropriate for single or dominant-business firms Allows specialization of tasks * Production * Finance * Engineering * Accounting * Sales & Marketing * Human Resources Overcomes information processing limits of single owner/manager Functional department heads report to Chief Executive Officer who integrates decisions and actions from a company-wide point of view Risks conflicts between myopic function managers 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 18

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

Functional Structure for 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 New product R&D is emphasized Most functions are decentralized Formalization is limited to foster change and promote new ideas Overall structure is organic; job roles are less structured 10

Multi-Divisional Structure Each division is 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 Managers try to strike a balance between: Competing among divisions for scarce capital resources Creating opportunities for cooperation to develop synergies The goal is to maximize overall firm performance 27

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

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

SBU Form Related-Linked Strategy President Strategic Business Unit A Corporate Finance Corporate R&D Corporate Marketing Strategic Planning Corporate Human Resources Division Division Strategic Business Unit A Strategic Business Unit B Strategic Business Unit C Strategic Business Unit D Structural integration exists among divisions within SBUs, but not across SBUs Each SBU may have its own budget for staff to foster integration Corporate headquarters staff serve as consultants to SBUs and divisions 43

Unrelated /Holding Company Strategy Competitive Form Unrelated /Holding Company Strategy President Legal Affairs Finance Auditing Division Division Division Division Division Corporate headquarters has a small staff Finance and auditing are the most prominent functions in the headquarters Divisions are independent and separate for financial evolution purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources 36

Multi-Divisional Structure The choice between centralization and decentralization is frequently based on the business-level strategy implemented in each division Cost Leadership Decentralization Differentiation Centralization Complex Multi-Divisional structure firms may be simultaneously centralized and decentralized , depending upon the various business-level strategies employed throughout the firm’s individual businesses Multi-Divisional structure firms use a combination of: Financial Controls Strategic Controls 48

Evolution of Multi-Divisional Structure Chief Executive Officer Corporate Office (Staff) North America Latin America Europe Asia Africa Australia Product A Product B Product C Product D A Structural evolution based on Geographic lines usually implies a Multi-Domestic International Strategy 41

Implementation of a Multidomestic Strategy Worldwide Geographic Area Structure Multinational Headquarters Asia United States Latin America Europe Australia Middle East/ Africa Green circles indicate decentralization of operations Emphasis is on differentiation by local demand to fit a culture Corporate headquarters coordinates financial resources among independent subsidiaries The organization is like a decentralized federation 76

Evolution of Multi-Divisional Structure Chief Executive Officer Corporate Office (Staff) Product A Product B Product C Product D A Structural evolution based on Product lines usually implies a Global International Strategy 39

Implementation of a Global Strategy Worldwide Product Divisional Structure Multinational Headquarters Worldwide Products Division Green circle indicates centralization to coordinate information flow among worldwide products Headquarters uses many intercoordination devices to facilitate global economies of scale and scope Headquarters also allocates financial resources cooperatively The organization is like a centralized federation 76

Strategic Networks A Strategic Network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as a strategic alliance A Strategic Center Firm often manages the network The Strategic Center Firm identifies actions that increase the opportunity for each firm to achieve success through its participation in the network The Strategic Center Firm creates incentives that reduce the probability of any single firm taking advantage of its network partners 82

A Strategic Network Strategic Center Firm Network Firms 88

Strategic Center Firm’s Critical Functions Strategic Outsourcing Capability Development Technology Sharing Building Linkages to Facilitate Learning 83

Strategic Outsourcing Center Firm Center firm coordinates outsourcing among partners, initiates actions and coordinates problem solving 90

Strategic Center Firm’s Critical Functions Strategic Outsourcing Capability Development Strategic Center Firm Technology Sharing Building Linkages to Facilitate Learning 83

Capability and Technology Strategic Center Firm Center firm attempts to develop each partner’s core competencies and provides incentives for network firms to share their capabilities and competencies with partners Strategic center firm manages the development and sharing technology-based ideas among network partners 96

Strategic Center Firm’s Critical Functions Strategic Outsourcing Capability Development Technology Sharing Strategic Center Firm Building Linkages to Facilitate Learning 83

Building Linkages to Facilitate Learning Strategic Center Firm Strategic center firm emphasizes to partners the need to build linkages between value chains and networks of value chains. The strategic network seeks to develop a competitive advantage in primary or support activities 100