ch11 hitt lecture

7/30/2019 Ch11 Hitt Lecture

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PowerPoint slides by:

R. Dennis MiddlemistColorado State University

Copyright 2004 South-Western

All rights reserved.

Chapter 11

OrganizationalStructure andControls


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Copyright 2004 South-Western. All rights reserved. 112

Knowledge Objectives

Studying this chapter should provide you with thestrategic management knowledge needed to:

Define organizational structure and controls and discussthe difference between strategic and financial controls.

Describe the relationship between strategy and structure. Discuss the functional structures used to implement

business-level strategies.

Explain the use of three versions of the multidivisional (M-form) structure to implement different diversification

strategies. Discuss the organizational structures used to implement

three international strategies.

Define strategic networks and strategic center firms.


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Organizational Structure

Organizational structure specifies:The firms formal reporting relationships,

procedures, controls, and authority and decision-making processes

The work to be done and how to do it, given thefirms strategy or strategies

It is critical to match organizationalstructure to the firms strategy


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Organizational Controls

Purposes of Organizational Controls:Guide the use of strategy

Indicate how to compare actual results withexpected results

Suggest corrective actions to take when thedifference between actual and expected results isunacceptable

Two types of organizational controlsStrategic controls

Financial controls


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Subjective CriteriaAre concerned with examining the fit between:

What the firm might do (opportunities in its externalenvironment

What the firm can do (competitive advantages)

Evaluate the degree to which the firm focuses onthe requirements to implement its strategy

OrganizationalControls

StrategicControls


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Objective criteriaAccounting-based measures include:

Return on investment

Return on assets

Market-based measures include:

Economic Value Added (EVA)

OrganizationalControls

StrategicControls

FinancialControls


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Matching Control to Strategy

Relative use of controls varies by type ofstrategy

Large diversified firms using a cost leadershipstrategy emphasize financial controls

Companies and business units using adifferentiation strategy emphasize strategiccontrols


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Relationships between Strategy andStructure

Strategy and structure have a reciprocalrelationship:

Structure flows from or follows the selection of

the firms strategybut

Once in place, structure can influence currentstrategic actions as well as choices about future

strategies


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Evolutionary Patterns of Strategy andOrganizational Structure

Firms grow in predictable patterns:

First by volume

Then by geographyThen integration (vertical, horizontal)

And finally through product/businessdiversification

A firms growth patterns determine its

structural form


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Evolutionary Patterns of Strategy andOrganizational Structure

All organizations require some form oforganizational structure to implement andmanage their strategies

Firms frequently alter their structure as theygrow in size and complexity

Three basic structure types:

Simple structureFunctional structure

Multidivisional structure (M-form)


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Strategy and StructureGrowth Pattern

Figure 11.1

Efficient implementationof formulated strategy

Efficient implementation

of formulated strategy

As firms grow larger andbecome more complex,structural challengesemerge

Firms larger sizes dictate

the need for moresophisticated workflows andintegrating mechanisms

Simple

Functional

Multidivisional


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Strategy and Structure: Simple Structure

Owner-managerMakes all major decisions directly

Monitors all activities

Staff

Serves as an extension of the managers

supervisor authority

Matched with focus strategies and business-

level strategiesCommonly compete by offering a single product

line in a single geographic market


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Simple Structure (contd)

Growth creates:Complexity

Managerial and structural challenges

Owner-managersCommonly lack organizational skills and

experience

Become ineffective in managing the specialized

and complex tasks involved with multipleorganizational functions


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Strategy and Structure: Functional Structure

Chief Executive Officer (CEO)Limited corporate staff

Functional line managers in dominantorganizational areas of:

Manufacturing Marketing EngineeringAccounting R&D Human

resources

Supports use of business-level strategies

and some corporate-level strategiesSingle or dominant business with low levels of

diversification


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Functional Structure (contd)

Differences in orientation amongorganizational functions can:

Impede communication and coordination

Increase the need for CEO to integrate decisionsand actions of business functions

Facilitate career paths and professionaldevelopment in specialized functional areas

Cause functional-area managers to focus onlocal versus overall company strategic issues


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Strategy and Structure: MultidivisionalStructure

Strategic Control

Operating divisions function as separatebusinesses or profit centers

Top corporate officer delegatesresponsibilities to division managers

For day-to-day operations

For business-unit strategy Appropriate as firm grows through

diversification


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Multidivisional Structure (contd)

Three Major BenefitsCorporate officers are able to more accurately

monitor the performance of each business,which simplifies the problem of control

Facilitates comparisons between divisions,which improves the resource allocation process

Stimulates managers of poorly performing

divisions to look for ways of improvingperformance


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Matching Strategy and Functional Structure

Different forms of the functionalorganizational structure are matched to:

Cost leadership strategy

Differentiation strategy

Integrated cost leadership/differentiation strategy

Differences in these forms are seen in threeimportant structural characteristics:

Specialization (number and types of jobs)

Centralization (decision-making authority)

Formalization (formal rules and work procedures)


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Functional Structure for Cost Leadership Strategy

Notes: Operations is the main function Process engineering is emphasized rather than new product R&D Relatively large centralized staff coordinates functions Formalized procedures allow for emergence of a low-cost culture Overall structure is mechanical; job roles are highly structured Figure 11.2


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Functional Structure undera Cost Leadership Strategy

Operations is the main function

Process engineering is emphasized overresearch and development

Large centralized staff oversees activities

Formalized procedures guide actions

Structure is mechanical

Job roles are highly structured


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Functional Structure for Implementation ofa Differentiation Strategy

Figure 11.3

Notes: Marketing is the main function for keeping track of new product ideas New product R&D is emphasized Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished Overall structure is organic; job roles are less structured


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Functional Structure undera Differentiation Strategy

Marketing is the main function for trackingnew product ideas

New product R&D is emphasized

Most functions are decentralized

Formalization is limited to foster change andpromote new ideas

Overall structure is organic

Job roles are less structured


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Implementing an Integrated CostLeadership/ Differentiation Strategy

Selling products that create customer valuedue to:

Their relatively low product cost through anemphasis on manufacturing and processengineering, with infrequent product changes

Reasonable sources of differentiation based onnew-product R&D are emphasized whilemanufacturing and process engineering are not

Used frequently in global economy


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Implementing an Integrated CostLeadership/Differentiation Strategy (contd)

The integrated form of the functionalstructure must have:

Decision-making patterns that are partiallycentralized and partially decentralized

Semi-specialized jobs

Rules and procedures that allow both formal andinformal job behaviors


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Corporate-Level Strategies and theMultidivisional Structure

A firms continuing success that leads to:

Product diversification, or

Market diversification, or

Both product and market diversification

Increasing diversification creates controlproblems that the functional structure cant

handle Information processing, coordination

Control


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Corporate-Level Strategies and theMultidivisional Structure (contd)

Diversification strategy requires firm tochange from functional structure to amultidivisional structure

Different levels of diversification create theneed for implementation of a unique form ofthe multidivisional structure


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Variations of the Multidivisional Structure

Figure 11.4


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Cooperative Form of Multidivisional Structure: Related-Constrained Strategy

Notes Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions

R&D is likely to be centralized

Rewards are subjective and tend to emphasize overall corporateperformance in addition to divisional performance

Culture emphasizes cooperative sharing

Figure 11.5


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Multidivisional Structure: Cooperative Form

Horizontal integration is used to bring aboutinterdivisional cooperation

Sharing divisional competencies facilitatesdevelopment of economies of scope

To foster divisional cooperation, thecorporate office emphasizes centralization:

Strategic planning

Human resources

Marketing

Related-Constrained Strategy


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Cooperative Form (contd)

R&D is likely to be centralized Frequent, direct contact between division

managers encourages and supportscooperation and sharing of competenciesand resources

Use of liaison roles

Rewards are subjective, emphasizing overallcorporate performance in addition todivisional performance

Related-Constrained Strategy


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SBU Form of Multidivisional Structure: Related-Linked Strategy

Notes: Structural integration among divisions within SBUs, but independenceacross SBUs

Strategic planning may be the most prominent function in headquartersfor managing the strategic planning approval process of SBUs for thepresident Figure 11.6

Each SBU may have its own budget for staff to foster integration Corporate headquarters staff serve as consultants to SBUs and divisions,

rather than having direct input to product strategy, as in the cooperative form


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Multidivisional Structure: SBU Form

Strategic business unit (SBU) form is astructure consisting of three levels:

Corporate headquarters

Strategic business units (SBUs)SBU divisions

Divisions within SBUs share

Products, or markets, or both

Related-Linked Strategy


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Multidivisional Structure: SBU Form

Divisions within SBUs develop economies ofscope and/or scale by sharing product ormarket competencies

Each SBU is a profit center controlled and

evaluated by the headquarters office

Used by large firms

Can be complex due to an organizations size

and diversity in products and markets

Related-Linked Strategy


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Competitive Form of Multidivisional Structure:Unrelated Strategy

Figure 11.7

Notes Corporate headquarters has a small staff Finance and auditing are the most prominent functions

in the headquarters office to manage cash flow andassure the accuracy of performance data coming fromdivisions

The legal affairs function becomes important when the firm acquires or

divests assets Divisions are independent and separate for financial evaluation purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources


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Multidivisional Structure: Competitive Form

A structure in which there is completeindependence among the firms divisions

Divisions do not share common corporatestrengths

Because strengths arent shared, integrating

devices arent developed

Organizational arrangements emphasize

divisional competition rather than cooperation

Unrelated Strategy


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Competitive Form (contd)

Three benefits from the internal competitionFlexibilitycorporate headquarters can have

divisions working on different technologies toidentify those with greatest future potential

Challenges the status quo and inertia

Motivates effort

Creates specific profit performance

expectations for each division to promoteinternal competition for resources

Unrelated Strategy


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Characteristics of Structures to ImplementDiversification Strategies (contd)

a Strategy implemented with structural form.Table 11.1


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International Strategies and WorldwideStructures

Allow the firm to search for new:

Markets

Resources Core competencies

Technologies


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Worldwide Geographic Area Structure:Multidomestic Strategy

Notes: The perimeter circles indicate decentralization ofoperations

Emphasis is on differentiation by local demand to fit

an area or country culture Corporate headquarters coordinates financial

resources among independent subsidiaries The organization is like a decentralized federation

Figure 11.8


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Worldwide Geographic Area Structure:Implementing a Multidomestic Strategy

Multidomestic strategy decentralizesstrategic and operating decisions to:

Business units in each country

Product characteristics tailored to localpreferences

Firms counter global competitive forces by:

Establishing protected market positions, orCompeting in industry segments most affected

by differences among local countries


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Worldwide Geographic Area Structure

Worldwide geographic area structureEmphasizes national interests

Facilitates the firms efforts to satisfy local or

cultural differences

Multidomestic strategyRequires little coordination between different

county markets: integrating mechanisms arent

needed

Key disadvantage is inability to create globalefficiencies


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Worldwide Product Divisional Structure:Implementing a Global Strategy

Global strategy

Allows firm to offer standardized productsacross country market

Effects on Firm

Success depends on firms ability to develop and

take advantage of economies of scope and scaleon global level

Firm tends to outsource some primary or supportactivities to the worlds best providers


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Worldwide Product Divisional Structure

Centralizes decision-making authority in theworldwide division headquarters

Headquarters coordinates and integratesdecisions and actions among divisional business

units

Integrating mechanisms are important:

Direct contact between managers

Liaison roles between departmentsTemporary task forces as well as permanent

teams


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Combination Structure: A TransnationalStrategy

Transnational Strategy

Combines multidomestic strategys local

responsiveness with global strategys efficiency

Combination structure draws characteristicsand mechanisms from both:

Worldwide geographic area structure

Worldwide product divisional structure

Appropriate integrating mechanisms for thecombination structure are less obvious


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Cooperative Strategies and NetworkStructures

Network strategy exists when:

Partners form several alliances in order toimprove performance of the alliance network

itself through cooperative endeavors

Strategic Network

A group of firms formed to create value by

participating in multiple cooperativearrangements such as alliances and jointventures


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Cooperative Strategies and NetworkStructures (contd)

Strategic networks are used to implement:

Business-level strategies

Corporate-level strategies

International cooperative strategies

Strategic center firm

The firm around which the networks cooperativerelationships revolve


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A Strategic Network

StrategicCenterFirm

Adapted fromFigure 11.10


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Strategic Center Firm

Is the foundation for the strategic networksstructure

Concerned with aspects of organizationalstructure such as formal reporting relationships.

Manages the complex, cooperative interactionsamong network partners

Engages in four primary tasks:

Strategic outsourcing Competencies

Technology Race to learn


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Implementing Business-Level CooperativeStrategies

Vertical complementary alliances

Firms have complementary competencies indifferent value chain stages that let them

cooperatively integrate their different skills Horizontal complementary alliances

Firms agree to combine competencies in order tocreate value in the same stage of the value chain


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Implementing Business-Level CooperativeStrategies (contd)

The strategic center firm is obvious invertical complementary strategic alliances,but not always in horizontal complementary

strategic alliances


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Implementing Business-Level CooperativeStrategies: International Franchising

Franchising

A common form of cooperative strategy used tofacilitate product and market diversification

Allows the firm to use its competencies to extendor diversify its product or market reach withoutcompleting a merger or acquisition


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Implementing Corporate-Level CooperativeStrategies: International

Strategic networks

Are used to implement international cooperativestrategies for competing in several countries

Differences in countries regulatory environmentsincrease the challenge of managing internationalnetworks

Distributed strategic networks

Are the organizational structure used to manageinternational cooperative strategies

Regional strategic center firms


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StrategicCenterFirm

MainStrategicCenterFirm

A Distributed Strategic Network

= Distributed Strategic Center Firms Adapted fromFigure 11.11

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