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Strategy Implementation:
Organizational Structure and Controls
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Chapter 11: Organizational Structure (OS) andControls
Overview: Five content areas
Define OS and controls and differences betweenstrategic and financial controls
Describe relationship between strategy & structure
Describe the functional structures used to implementbusiness-level strategies
Three versions of multi-divisional (M-form) structure fordifferent diversification strategies
OS for implementation of three international strategies
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Introduction
All firms use at least one business-level strategy
Once selected, strategies are NOT implemented ina vacuum!
Organizational structure and controls provide
framework within which strategies are used
Top management has the responsibility fordesigning structures
The strategy and structure should match
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Strategy vs. Structure: Relationships
Strategy and structure have Reciprocal relationship
Implies change to one causes change in the other
Research shows strategy has a much moreimportant influence on structure than the reverse.
The structure should have stability for sustaining CAand flexibility to create new CA
Properly matching strategy and structure can createa CA
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Organizational Structure (OS) & Controls (OC)
Organizational Structure (OS)
Specifies firms formal reporting relationships,procedures, controls, authority & decision-makingprocesses (i.e., work to be done and how to do it!)
Effective use of firms strategies facilitated whenstructure is properly aligned
Structural stability: Capacity firm requires to consistently andpredictably manage its daily work routines
Structural flexibility: Opportunity to explore competitiveadvantages firm will need to be successful in the future
Pioneer Alfred Chandler found organizations changetheir structures when inefficiencies force them to do so-imposed by stakeholders-investors /customers
Otherwise inertia operates within firms
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Organizational Structure & Controls (Contd)
Organizational Controls (OC)
Guide the use of strategy, indicate how to compareactual results with expected results, and suggestcorrective actions to take when the difference is
unacceptable If differences are small the strategy is working-
otherwise need corrective action
Two types include strategic and financial
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Organizational Structure & Controls (Contd)
Organizational Controls (OC)
1. Strategic controls: largely subjective criteriaintended to verify that the firm is using appropriatestrategies for the conditions in the external
environment and the companys competitiveadvantages
Concerned with what firm might do vs. what it can do
Used to evaluate degree to which firm focuses on therequirement to implement strategies (i.e., SBU: primary andsupport activities; corporate level: knowledge, markets &
technologies across businesses) Focus on the content of strategic actions in above areas
Encourage decisions that incorporate moderate and acceptablelevels of risk
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Organizational Structure & Controls (Contd)
Organizational Controls (OC) (Contd)
2. Financial controls
Objective criteria used to measure firms performance againstpreviously established quantitative standards (used forunrelated diversification) ROI or ROA or EVA
Focus on short-term financial outcomes
Compare against own previous outcomes and those ofcompetitors
In global context highly sophisticated controls
SAP and Oracle sell software and services to automate control
systems Produce risk-averse managerial decisions
Companies using cost leadership emphasize financial controls,and differentiation emphasize strategic controls
Related diversification uses strategic controls, unrelatedstrategy uses financial controls
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Strategy vs. Structure: Evolutionary Patterns
Chandler found firms tend to grow in a predictablepattern, including the areas of volume, geography,integration (horizontal & vertical) & product/business diversification
Growth pattern implies structural changes! Several structure forms are used to implement
strategies, including:
1. Simple
2. Functional
3. Multidivisional
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Strategy and Structure Growth Pattern
SimpleStructure
Efficient implementation
Of formulated strategy
SalesGrowth-coordination
and ControlProblems
FunctionalStructure
Efficient implementation
Of formulated strategy
Sales
Growth-coordinationAnd controlproblems
MultidivisionalStructure
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Three main structures
1. Simple
Owner-manager makes all major decisions and monitors allactivities, staff acts as extension of manager's supervisoryauthority
Few rules, limited task specialization, unsophisticatedtechnology system, frequent and informal communication
The simple structure is matched with focus strategy andbusiness level strategies because of single business, singlegeography
Local restaurants and repair shops are examples As firm grows more complex, need to add layers and controls
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Three main structures (Contd)
2. Functional
CEO and a limited corporate staff make all decisions, withfunctional line managers in dominant organizational areas
Allows functional specialization resulting in active knowledgesharing in each functional area as marketing, manufacturing,R&D, engineering and human resources
It helps growth and development of specialists career
It supports business level and corporate strategies (single anddominant business)
Can negatively affect communication and coordination amongthose representing different organizational functions
When changing from a simple to functional structure need tofocus on value-destroying bureaucratic procedures- destroyscreativity and innovation across functions
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Three main structures (Contd)
3. Multidivisional (M-form) structure
Operating divisions each represent a separate business orprofit center in which the top corporate officer delegatesresponsibilities for day-to-day operations and business-unit
strategies to division managers Used when geographic and product diversification happens
Ties together several operating divisions, each representing aseparate business or profit center to which responsibility fordaily operations and business-unit strategy is delegated
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Three main structures
Multidivisional (M-form) structure (Contd)
It enables corporate officers to more accurately monitor theperformance of each business, which simplifies the problem ofcontrol
It facilitates comparisons between divisions, which improvesresource allocation process
It stimulates managers of poorly performing divisions to lookfor ways of improving performance
It is widely used to implement diversification strategy- bothrelated and unrelated
No single structure is superior to other. It should support thestrategy
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Business-level strategies & functional structurematches for implementing strategies:
1. Cost leadership
2. Differentiation
3. Integrated cost leadership/differentiation Structural characteristics drive different forms of
organizational structures
1. Specialization (type and no. of jobs required tocomplete work)
2. Centralization(the degree to which authority isretained at higher managerial levels)
3. Formalization (degree to which formal rules andprocedures govern work)
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Functional Structure for Implementing a CostLeadership Strategy
Office of the President
Centralized Staff
Engineering Marketing Operations Personnel Accounting
Ma
ybearelativelyflator
tallstructure
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between business-level strategies andfunctional structure to implement them:
1. Cost leadership and the functional structure
Simple reporting relationships
Few decision-making and authority layers Centralized corporate staff
Strong operational focus on process improvements
Low-cost culture
Centralized staff decision-making authority
Jobs specialization
Highly formalized rules and procedures
Wal-Mart uses functional structure to follow cost leadershipstrategy in all its formats and stores- Supercentres, Discountand Neighborhood Market retailing Save money, live better
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Functional Structure for Implementing aDifferentiation Strategy
President and
Limited Staff
R&D Marketing
New Product
R&D
Operations MarketingHuman
ResourcesFinance
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between business-level strategies andfunctional structure to implement them :
2. Differentiation strategy
Integrated set of actions designed by a firm to produce ordeliver goods or services at an acceptable cost that customersperceive as being different in ways that are important to them
Target customers perceived product value
Customized products differentiating on as many features aspossible:
Unusual features, responsive customer service, rapid productinnovations, technological leadership, perceived prestige and status,different tastes, engineering design, performance
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between business-level strategies andfunctional structure to implement them :
2. Differentiation and functional structure
Complex and flexible reporting relationships
Cross-functional product development teams Strong focus on marketing and product R&D
Development-oriented culture
Decentralized decision making
Broad job descriptions
Informal rules and procedures
Under Armour has used differentiation strategy in sportsapparels, leaving behind Nike and other apparel companies. Ituses functional structure that match with differentiationstrategy
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between business-level strategies andfunctional structure to implement them :
3. Integrated cost leadership/differentiation strategy
These firms may sell products that create value because ofrelatively low price and reasonable sources of differentiation
Difficult to implement, but frequently used in the globaleconomy
Challenge due to primary/support activities in the Value Chain
Need to successfully combine Partial specialization, partialformalization and partial centralization
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Three Variations of theMultidivisional Structure
Multidivisional
Structure
(M-form)
Cooperative
Form
Strategic Business Unit
(SBU) Form
Competitive
Form
Cooperative Form of the Multidivisional Structure for
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Cooperative Form of the Multidivisional Structure forImplementing a Related Constrained Strategy
President
Government
Affairs
Legal
Affairs
Corporate
R&D Lab
Strategic
Planning
Corporate
Human
Resources
Corporate
Finance
Corporate
Marketing
Headquarters Office
Product
Division
Product
Division
Product
Division
Product
Division
Product
Division
St t St t E l ti P tt
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies &multidivisional structure: Cooperative
form/related constrained strategy Cooperative form: organizational structure using horizontal
integration to bring about interdivisional cooperation
Divisions formed around products, markets or both
All of the divisions share one or more corporate strengths
Interdivisional sharing depends on cooperation Links resulting from effective integration mechanisms support
sharing of both tangible and intangible resources
Centralization is one integrating mechanism that can be used tolink activities among divisions, allowing firms to exploit commonstrengths and share competencies. Using this structure H-P has
implemented the related constrained strategy to sell integratedsolutions to corporate data centers
More relationships in servers, storage devices, mobile computingand high speed printers coordinated through value addedservices by using cooperative M-form
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies &multidivisional structure: Cooperativeform/related constrained strategy (contd)
Success influenced by how well information is
processed among divisionsSuccess can be influenced by managerial commitment
levels and the response to some lost managerialautonomy
Reward system can overcome the weaknesses
Matrix organization may evolve organizational structure in which a dual structure combines
both functional specialization and business product or projectspecialization
SBU F f h M l idi i i l S f
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SBU Form of the Multidivisional Structure forImplementing a Related Linked Strategy
President
Corporate
R&D
Corporate
Finance
Strategic
Planning
Corporate
Marketing
Corporate
Human
Resources
Strategic
Business
Unit
Strategic
Business
Unit
Strategic
Business
Unit
Division Division Division Division Division Division Division Division Division
Headquarters Office
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies &multidivisional structure: SBU form/related linkedstrategy
Related linked: Firms that share fewer resources and
assets among their businesses, concentrating on thetransfer of knowledge and competencies among thebusinesses
Strategic Business-Unit (SBU) Form: multidivisionalorganization structure with three levels to support theimplementation of diversification strategy
1. Corporate headquarters
2. Strategic Business Units (SBUs)
3. SBU division
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies &
multidivisional structure: SBU form/related linkedstrategy
SBU Form (Contd)
Divisions within each SBU are related in terms of shared productsand/or markets
Divisions of one SBU have little in common with divisions of otherSBUs
Strategy review takes place at headquarters-HQ staff as consultant
SBU has its own budget for staff to foster integration
Divisions within each SBU share product or market competencies todevelop economies of scope
Integrations used in cooperative form are equally effective for theSBU form
Each SBU is a profit center
Financial controls are more vital for evaluating performance
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Sears Holdings changed to SBU form in 2008 into 5 SBUs
-Brands, real estate, support, online and store operations
This allowed related business to work together to focus ontheir distinct customer group
Provided better control at headquarters to evaluateperformance at SBU and division levels
The cooperation between division is good but difficultacross SBUs
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Competitive Form of the Multidivisional Structure forImplementing an Unrelated Strategy
Headquarters Office
President
Finance AuditingLegal Affairs
Division Division Division Division Division Division
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies &multidivisional structure: Competitiveform/unrelated diversification
Competitive form defined: organizational structure inwhich the firm's divisions are completely independent
Divisions do not share common corporate strengths Integration devices not developed to coordinate
activities across divisions
Efficient capital markets in unrelated strategies requireorganizational arrangements that emphasize divisional
competition rather than cooperationSpecific performance expectations and accountability
for independent divisions stimulate internal competitionfor future resources
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Strategy vs. Structure: Evolutionary Patterns(Contd)
Matches between corporate-level strategies andmultidivisional structure: Competitiveform/unrelated diversification (Contd) Headquarters maintains a distant relationship to avoid
intervention in divisional affairs
Strategic controls are used to monitor performance relative totargeted returns
Headquarters remains responsible for cash flow allocation,performance appraisal, resource allocation, and the legal aspectsrelated to acquisitions
Textron has four divisions and follows this structure
ROIC criteria is used for resource allocation
HQ role is appraisal, resource allocation, and long range planning
1. Inter division competition creates flexibility
2. It challenges inertia and status quo
3. Strong competition generates motivation and high performance
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Summary of corporate structures
Structuralcharacteristics
Relatedconstrained
Related Linked Unrelatedstrategy
Centralization ofoperations
Centralization atcorporate office
Partiallycentralized inSBUs
Decentralized todivisions
Use ofintegrationmechanisms
Extensive Moderate nonexistent
Divisionalperformanceappraisal
Emphasizesubjective(strategic) criteria
Us a mixture ofsubjective andobjective criteria
Emphasizeobjective(financial) criteria
Divisionalincentivecompensation
Linked to overallcorporateperformance
Mixed linkage tocorporate , SBUand divisionperformance
Linked toDivisionalperformance
I t ti l St t i d ld id
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International Strategies and worldwidestructure
International strategies are important for long-termcompetitive success
It allows firms to search new markets, resources, corecompetencies, and technologies
Unique structures are required to implement international
strategies
It helps in effective coordination of efforts worldwide
Worldwide Geographic Area Structure for
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Worldwide Geographic Area Structure forImplementing a Multidomestic Strategy
AsiaUnited
States
Europe
Middle
East/
Africa
Australia
Latin
America
Multinational
Headquarters
International Strategy and Worldwide
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International Strategy and WorldwideStructure (Contd)
Three Primary International Strategies:
1. Worldwide geographic area structure toimplement the Multidomestic Strategy
Multidomestic Strategy: international strategy in which
strategic and operating decisions are decentralized tothe strategic business-unit (SBU) in each country toallow the units to tailor products to local markets
Worldwide Geographic Area Structure: organizationalstructure emphasizing national interests and facilitatesefforts to satisfy local or cultural differences (used toimplement the multidomestic strategy)
Focuses on variations of competition within eachcountry
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Worldwide Product Divisional Structure for
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Implementing a Global Strategy
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Worldwide
Products
Division
Global
Corporate
Headquarters
International Strategy and Worldwide
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International Strategy and WorldwideStructure (Contd)
Three Primary International Strategies:
2. Worldwide product divisional structure toimplement Global Strategy
Global Strategy: International strategy whereby firmoffers standardized products across country markets,
with the competitive strategy being dictated by thehome office
Worldwide Product Divisional Structure: Organizationalstructure with centralized decision-making authority inthe WW division headquarters to coordinate andintegrate decisions and actions among divisionalbusiness units (used to implement the global strategy)
Facilitated by improved global accounting and financialreporting standards
International Strategy and Worldwide
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International Strategy and WorldwideStructure (Contd)
Three Primary International Strategies:
2. Worldwide product divisional structure toimplement Global Strategy (Contd)
Emphasizes economies of scale
Centralizes the firm's strategic and operating decisions
at the home office Involves SBUs operating in each country that are
interdependent
Home office attempts to achieve integration acrossSBUs, adding management complexity
Produces lower risk Is less responsive to local market opportunities
Offers less effective learning processes due to thepressure to conform and standardize
Avon follow this structure
Hybrid Form of the Combination Structure forImplementing a Transnational Strategy
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Implementing a Transnational Strategy
Area 1 Area 2 Product A Product B Product A Product BArea 1 Area 2
Product
Division A
Geographic
Area
Division 1
Product
Division B
Geographic
Area
Division 2
Headquarters
International Strategy and Worldwide
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International Strategy and WorldwideStructure (Contd)
Three Primary International Strategies: 3. Combination structure to implement the
Transnational Strategy
Transnational Strategy: International strategy through
which the firm seeks to achieve both global efficiencyand local responsiveness; usually implemented throughglobal matrix structure and hybrid global design
Flexible Coordination: Building a shared vision andindividual commitment through an integrated network
Combination Structure: Organizational structure inwhich characteristics and mechanisms are drawn fromboth the worldwide geographic area structure and theworldwide product divisional structure (used toimplement transnational strategy)
International Strategy and Worldwide
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International Strategy and WorldwideStructure (Contd)
Three Primary International Strategies:
3. Combination structure to implement theTransnational Strategy (Contd)
Assets and operations may be centralized/decentralized
Functions may be integrated/nonintegrated
Relationships may be formal/informalCoordination mechanisms may leverage
efficiency/flexibility
Mandates to subsidiaries may be global/specialized-contribution/ localized-implementation
There are competing objectives when a worldwidecombination structure is used to implement atransnational strategy
Pepsico and IKEA use this form of structure