Strategy and Structure

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Major kinds of organizational form

Simple tasks performed by a small group of people can be structured in several ways:

Individually

Self-managed team

Hierarchy of authority

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Complex Hierarchies

involve organizing large numbers of groups within extensive and potentially overlapping schemes

arises from the need not just to organize individuals into groups, but to organize groups into larger groups

Complex hierarchies are designed to address the following two issues :

- Departmentalization- Coordination of activities

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Departmentalization

Formal groupings in large organizations can be based on functional areas, geography, products, types of customers and so on

A firm should decide on the organizing dimensions based on

o economies of scale and scope o transactions costs o agency costs

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Coordination and Control Coordination involves the flow of information to facilitate decisions that

further the organization’s objectives and the distribution of decision making rights and rule

making authority within the organization.

Coordination and control choices will affect both technical efficiency and agency efficiency.

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Organizational Structure & Controls

Some structural characteristics defined Specialization Centralization Formalization

Other structural characteristics Authority, Responsibility, Degree of Integration, how

Coordination is achieved, Reporting relationships, Standardization

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The Relationship Between Strategy and Structure

Modifying current strategy or selecting a new one calls for changes to organizational structure

Reciprocal relationship - change to one causes change in the other

No one structure is superior to the others No best or optimal structure for all firms

Strategy-structure fit can lead to a competitive advantage and above average returns

Structure must match strategy Structural choice should be based on control, coordination,

and motivation issues Several structure forms can be used to implement

strategies

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Organizational Structure

Types of organizational structures

Unitary Functional Structure (U-form)

Multidivisional (M-form)

Matrix Structure

Network Structure

U-form Each department in the firm is responsible for a

particular functional area such as finance or marketing.

U-form promotes performance within the department

but makes coordination across departments difficult.

The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration.

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The Functional (U-form) Structure

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M-form

The multidivisional firm is organized along such dimensions as

- product line - geography or - type of customers Divisional managers will be responsible for

operating decisions and the top management will handle strategic decisions.

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The Multidivisional (M-form) Structure

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Advantages of the M-form

Measuring divisional performance is easier under M-form.

Pay for performance schemes are easier to implement in managerial compensation.

Divisional managers compete for funds in the internal capital markets based on their operating performance in the past.

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Matrix Structure

A firm that uses a matrix structure is organized along two (or more) dimensions - for example, product line and geography.

In a two-dimensional matrix, an employee belongs to two hierarchies and has two bosses.

The demands of competing dimensions should be roughly equal.

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Matrix Structure

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Advantages of Matrix Structure

Matrix structure can help exploit economies of scale and scope.

A firm may need national coordination to achieve economies of scale for manufacturing a particular product and regional coordination to negotiate with large buyers for different products.

Matrix structure allows a firm to economize on scarce human resources

Having a firm wide engineering department (or marketing department) will be more efficient than maintaining a separate engineering group for each product.

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Network Structure

Designed around the worker rather than the task.

Workers or worker groups contribute to multiple organizational tasks.

Work groups are reconfigured when the tasks change.

Network of autonomous firms can function as a virtual firm.

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Network Structure

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Network Structure

Preferred when coordination costs do not outweigh the gains in technical efficiency.

Facilitates the flow of diverse information, leading to high level of new product development in high technology companies

Becoming more popular as the cost of organizing has fallen.

Internet provides a less expensive infrastructure for network organizations than traditional means of data exchange.

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Organizational Structure & Controls

Organizational Controls Guide the use of strategy, indicate how to compare actual

results with expected results, and suggest corrective actions to take when the difference is unacceptable

Are an important aspect of structure Help managers recognize when it is time to adjust structure Firms use strategic, financial, and behavioral controls to

support their strategies

Contingency theory

Three factors that affect the relative efficiency of different structures

Technology and task interdependence Information flow The tension between integration and

differentiation Contingency factors are not sufficient for

understanding a firm structure.

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