Chapter 10 Designing Organizations for Competitive Advantage

Major Topics Why strategy implementation is important. How strategy implementation contributes to a firm’s competitive advantage. Why organizational issues are a significant part of strategy implementation. The broad types of organizational structures that companies are likely to use. Why no single type of organizational structure is likely to fit all companies.

Key Dimensions of Organizational Structure Specialization –Matching activities with people who are best able to perform them. –Found at all levels within an organization. Standardization –Practices, procedures, and guidelines that provide the basis for consistent performance. –Focused on achieving internal order with a given structure. Centralization –Delegation of authority throughout the organization’s ranks.

Typical Functional Structure Service Corporate Marketing Sales Research and Development Research and Development Production/ Operations Production/ Operations Each function is responsible for its own set of tasks and activities. Each function has its own set of goals and objectives that require coordination with other functions.

Key Characteristics of a Functional Structure Advantages –Economies of scale in administrative costs/activities –Good for small-sized firms –East to identify talent –Fosters high centralization of decision-making –Promotes high task and activity specialization –Supports a low-cost leadership strategy –Supports vertical integration in a business –Best for undiversified firms

Key Characteristics of a Functional Structure Disadvantages –Coordination difficulties arise when firm diversifies –Difficult for each function to accommodate needs of other functions –Divergent goals and objectives based on each function –Inflexible with broad-based global or multi-domestic strategies –Needs extensive modification to support differentiation strategies –Poor fit for highly-diversified firms

Typical Product Division Structure Each division is self-contained and responsible for its own products/markets that it serves. Each division contains its own set of functions. Corporate Marketing Production/ Operations Production/ Operations R & D Sales Service Product 2 Product 3 Product 1

Key Characteristics of Product Division Structures Advantages –High autonomy of divisions for each product/business –Allows for specialization based on products/markets –Enhances and supports needed changes in products –Allows for easy measurement of financial performance –Standardizes performance measurement –Cross-functional perspectives –Supports highly diversified strategies (related and unrelated)

Key Characteristics of Product Division Structures Disadvantages –Duplicates functions within each product division –Duplicates administrative and staff functions –Leads to short-term thinking if not carefully monitored –Promotes high internal competition between divisional managers –May under-invest in firm’s core competence and skills; discourages company-wide “mega” projects

Strategic Business Unit Structure Corporate The SBU Structure is a collection of product divisions that produce related or similar products. Supports related diversification because similar products that are grouped together share a common underlying technology, market, skill, or resource. SBU 2 SBU 3 SBU 1 Product 2 Product 3 Product 1

Sector/Group Structure Sector or group structures tie together different SBUs that represent a common industry, technology, or critical skills. Sectors help senior management get a handle on broad-based, related diversification. They are, however, costly to operate because of several layers of management Corporate Sector 3 Sector 2 Sector 1 SBU 3 SBU 2 SBU 1 Product 1 Product 3 Product 2

Conglomerate/Holding Company Structure Each business unit is managed independently of the others. Each business unit is also a company that can easily be sold off. Extremely lean corporate and administrative staff means few overhead costs. Supports unrelated diversification very well. Corporate Business Unit 2 Business Unit 2 Business Unit 3 Business Unit 3 Business Unit 1 Business Unit 1

Geographic Structure Geographic structures are excellent in responding to the needs of local, regional markets. Geographic structures have their own self-contained product and/or functional structures to meet the needs of that region’s customers. Promotes a high level of decentralization. Corporate Region 1 Region 2 Region 3 Product or Function Product or Function Product or Function Product or Function Product or Function Product or Function

Key Characteristics of Geographic Structures Advantages –High specialization according to market needs –High autonomy from other geographic units –Promotes a high degree of decentralization –Fast response to market needs –Highly flexible structure; easy to create smaller geographic units –Allows for full use and development of local talent/managers –Excellent support for multi-domestic strategies

Key Characteristics of Geographic Structures Disadvantages –Duplicate functions within each region –Places coordination demands on senior management –Needs other support measures to ensure high quality and uniform image –May not work well in fast-changing, technologically- intensive businesses or industries

Matrix Structure Each lower-level manager reports to two bosses -- one product division superior and one functional superior. Although it promotes technology sharing, matrix structures are extremely costly and difficult to manage. Matrix structures lost favor over the 1980’s; most companies that adopted them ultimately switched to another structure Function 3 Manager Function 2 Manager Function 1 Manager Product 1 Product 2 Product 3 Corporate

Key Characteristics of Matrix Structures Advantages –Promotes sharing of key resources and skills –Enhances fast change and flexibility –Helps when resources are scarce –Allows for transfer and movement of people –High specialization along key activities and products

Key Characteristics of Matrix Structures Disadvantages –Very high cost structure –Slows down decision-making in practice –Lower-level managers often unable to feel comfortable in this structure –High tension and stress –Could generate conflict between superiors that are the “arms” of the matrix

International Division Structure International division structures are excellent to support a firm’s early global expansion efforts. Promotes a high level of specialization for overseas knowledge and activities. Corporate Product 1 Product 2 Product 3 Region 1 Region 3 Region 2 International Division International Division