1. Chapter 10 Organizational Structure and the Implementation of Strategy
Strategic
Management
Bourgeois, Duhaime,
& Stimpert
Chapter 10 Organizational Structure and the Implementation of Strategy
Copyright © 1999 by Harcourt Brace & Company
All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida

2. Chapter Objectives
Define structure and describe its role in the implementation of strategy.
Identify and describe the different components of organizational structure.
Identify some of the problems associated with organizing.
Describe how the various components of organizational structure can be used to overcome these problems that are common to all firms and businesses.

3. Chapter Objectives (cont.)
Discuss some of the emerging issues that are likely to have an impact on organizing and organizational structures in the future.

4. Historical Overview
Large, complex business organizations began to emerge in USA in mid-1800s.
Railroad construction projects required large organizations.
New administrative and organizational structures needed to handle decision-making and resource allocation tasks.

5. Characteristics of Business Organizations
Division of labor
Employee specialists
Hierarchy
“Tall” or “flat”
Span of control: number of subordinates reporting to a manager.

6. Characteristics of Business Organizations (cont.)
Decisions based on rules, policies, and standard operating procedures that seek to promote efficiency.
Employees may not do whatever they want in any way they wish.
Organizations tend to become inflexible and resist change.
Rigid adherence to rules and policies.
Most are hostile to innovation and tend to resist change.

7. Definition of Organizational Structure
Includes any mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business.
Hierarchical reporting relationships.
Policies, standard operating procedures, and control systems.
Information systems and flows of information moving through organizations.
Culture.

8. Definition of Organizational Structure (cont.)
Challenge confronting general managers is to combine these mechanisms into organizational structures that:
Effectively implement chosen strategies; and
Make their firms responsive to leadership of owners and managers, as well as to changes in the larger competitive environments in which firms operate.

9. Exhibit 10.1: Model of Strategic Management

10. Components of Organizational Structure
Hierarchy
Functional structure
Organizes activities around functional departments.
Advantage is that it allows employees to specialize and become increasingly adept at what they do.
Problems
Communication and motivation can be problematic (information must flow up before it can flow across).
Profit centers without revenue-generating responsibility.
Tend to overload top managers.

12. Components of Organizational Structure (cont.)
Multidivisional (product, geographical) structure
based on reality that many firms consist of several distinct operating segments.
This structure divides those segments into autonomous units or divisions.
Advantages
Decentralizes decision-making so top managers can focus on strategic issues.
Improves accountability -- corporate staff holds division managers responsible for their units.
Can improve allocation of resources (ROA, ROS).

13. Components of Organizational Structure (cont.)
Multidivisional (product, geographical) structure (cont.)
Disadvantages
Duplication of functional activities.
Top managers become very far removed from divisional activities.
Transfer pricing dilemma.
Can result in short-term focus and an undesirable level of competition for resources among divisions.

14. Exhibit 10.3: Multidivisional Structure (Product)

16. Components of Organizational Structure (cont.)
Matrix structure
Functional structure is overlaid or placed on top of a multidivisional structure.
Major advantage: Information distributed more efficiently throughout organization.
Disadvantages
“Two boss problem”
Tendency for cross-functional team members to believe that every decision needs to be made as a group.
Specialist working on a product team become so involved in working on that product that they lose touch with their specialty area.

17. Exhibit 10.5: Matrix Structure Small Car Large Car Minivan Jeep/Truck
Engineering
Sales &
Marketing
Production

18. Components of Organizational Structure (cont.)
Policies, standard operating procedures, and control systems.
Organizations strive to standardize many activities and functions in order to increase efficiency and reduce variability.
High performance is almost always associated with an effective set of policies, procedures, or systems.
At the same time, highly routinized policies and procedures can limit organizational flexibility and can increase resistance to change.

19. Components of Organizational Structure (cont.)
Policies and procedures can also reward the wrong types of behaviors.
Dexter Corp. was growing at 20% annually while market was growing at v30% -- they were losing market share and didn’t know it because (1) they had no system for gauging company performance against the competitive environment, and (2) their compensation incentives were not geared for higher growth rates.

20. Components of Organizational Structure (cont.)
Information systems and information flows.
Implementation of strategy is becoming increasingly dependent on acquisition, storage, distribution, and application of information.
Can be source of competitive advantage.
Wal-Mart: inventory management.
IT can handle flow of materials and labor through manufacturing process.
Airlines: yield management.

21. Components of Organizational Structure (cont.)
Organizational culture
More informal than policies and procedures.
Transmitted to new employees through stories and myths from veteran employees, company signs, and training programs.
Can be source of competitive advantage.
Provide employees with sense of meaning and purposefulness.
Motivates types of behaviors that are important to organizational success.

22. Components of Organizational Structure (cont.)
Organizational culture (cont.)
Negative aspects of culture
Can retard organizational adaptation to change.

23. Central Issues/Problems in Organizing
Centralization vs. decentralization
Centralized decision-making facilitate rapid implementation of strategies, improves coordination, and provides effective management of related diversification strategies.
Decentralization allows lower-level managers/employees more opportunities to participate in decision-making, generally leads to better decisions and can improve organizational flexibility and responsiveness to environmental change.

24. Central Issues/Problems in Organizing (cont.)
Communication and language problems.
Organizations rarely have more than eight hierarchical levels due to limits imposed by problems of communication.
These problems intensify as organizational size and diversity increase.
It has not enabled firms to overcome these problems.
Self-interested employees will alter or slow-down bad news or news that adversely affects that employee.

25. Central Issues/Problems in Organizing (cont.)
Many firms have adopted matrix structures to improve communication, coordination, and information flows.
Conflict
Inevitable part of all organizations.
Functional rivalries
Evidence suggests that “superordinate goals” will alleviate this problem.
Compensation plan designed to motivate employees to work to achieve overall organizational objectives.

26. Central Issues/Problems in Organizing (cont.)
Conflict is not entirely negative.
Fosters different opinions.
Subordination of owners’ and managers’ interests and problems of motivation.
“Agency problem:” tendency for interests of principals (owners) and their agents (managers) to diverge.
Employees naturally work harder on those tasks which benefit them.
Firms must develop a sense of ownership among employees.

27. Emerging Issues Changing nature of work
Shift toward more knowledge-intensive products/services requires a more educated and knowledgeable workforce.
Workers are increasingly becoming important for the knowledge and expertise they possess.

28. Emerging Issues (cont.)
Human resource management issues.
How jobs are designed, how work is organized, and how knowledge will be accumulated, stored, and shared with other employees, customers, and suppliers.
Organize work in such a way that employees become managers of their own processes, that they take responsibility for developing their skills, and that they have opportunities for sharing their knowledge.

29. Emerging Issues (cont.)
Human resource management issues (cont.)
Employees become 3 times more productive after 10 years with the same employer than when they started work.
Their knowledge is key to keeping customers -- whose longevity is source of repeat sales and referrals.

30. New Types of Organizational Structure
New structures need to meet the information requirements of the new work.
More cross-functional team and matrix structures.
Outsource many activities now performed by today’s workers.
Resulting virtual or modular organizations will focus on the few activities which are critical to the firm’s success, while outsourcing nearly all other functional activities.

31. New Types of Organizational Structure (cont.)
Rationale for outsourcing:
Service activities now occupy critical spots in most companies’ value chains, and if they are not “best in world” at these activities, then they are sacrificing competitive advantage by performing those activities internally.
Each company should focus its investments and attention on those activities where it can achieve and maintain “best in world” status.
Strategically approached, outsourcing can decrease internal bureaucracies, flatten organizations, and improve competitive responsiveness.

32. Conclusions
Optimal organizational structure involves balancing conflict, employee motivation, degree of centralization, and communication and language problems.
Managers will place ever greater pressure on their firms’ structures to acquire and disseminate information and to facilitate individual and organizational learning.
Managers will continue to rethink their value chains and respond to changes in their competitive environments.

33. Key Points Introduced in Chapter 10
Organizational structure includes the mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business enterprise.
The objectives of structure are:
To implement strategies; and
To make organizations responsive to their owners (shareholders), managers, and the competitive environment.

34. Key Points Introduced in Chapter 10 (cont.)
Structure includes hierarchical reporting relationships, formal organizational control systems, flows of information, and organizational culture.
Three traditional types of hierarchical structures are the functional, multidivisional, and matrix forms, each having some advantage as well as disadvantages and limitations.

35. Key Points Introduced in Chapter 10 (cont.)
Though less visible than hierarchical structures, organizational control system, flows of information, and organizational culture are important components of organizational structure.
Any structure will face a number of issues and problems, including communication and motivational problems, control loss, and the danger that owners’ interests will be subordinated to managers’ interests.
Effective organizational structures can mitigate, but not completely eliminate, these problems.

36. Key Points Introduced in Chapter 10 (cont.)
The competitive environment and the changing nature of work will lead companies to adapt new human resource management practices and to develop new structures, including virtual forms of organization.

37. Multidivisional Structure for Hypothetical Global Company
Exhibit 10.6:
Multidivisional Structure for
Hypothetical Global Company
Mfg
R&D
Mkt
CEO
New York
Far East
Hong Kong
Europe
London
North
America
Corporate
Staff

38. Matrix Structure Adopted by One Global Company
Exhibit 10.7:
Matrix Structure Adopted
by One Global Company
Canada
Latin
America
Far East
Europe
United
States
Consumer
Products
Scientific
Electronics
Medical
Television
Opthalmic
Refractory
Lighting