Strategic Management: Concepts and Cases
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Transcript of Strategic Management: Concepts and Cases
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Strategic Management: Concepts and Cases
Part III: Strategic Actions: Strategy Implementation
Chapter 11: Organizational Structure and Controls
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The Strategic Management Process
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GE: Strategy and Structure Changes?
Only company listed in the Dow Jones Industrial Index that was also in the original (1986) index
Mid-2005 Jeffrey Immelt (who replaced Jack Welch four years earlier) changed GE’s structure from eleven to six strategic business units (SBUs) Why? “…[to] accelerate GE’s growth in key industries” while
simultaneously helping the firm become more focused on emerging technologies with significant commercial potential
Even with this reorganization, GE continued using related-linked diversification strategy at the corporate level and SBU form of multidivisional structure
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GE: Strategy and Structure Changes? (Cont’d)
Mid-2007 call for GE to sell non-core businesses (i.e., NBC Universal and Money). This would change GE’s corporate-level strategy from related linked to related constrained, necessitating a change in structure from SBU form of the multidivisional to cooperative of multidivisional
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Introduction
All firm use at least one business-level strategy Once selected, strategies are NOT implemented
in a vacuum! Organizational structure and controls provide
framework within which strategies are used
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Chapter 11: Organizational Structure (OS) and Controls
Overview: Six content areas Define OS and controls and differences between
strategic and financial controls Describe relationship between strategy & structure Describe the functional structures for business-
level strategies Three versions of multi-divisional (M-form) structure for
different diversification strategies OS for implementation three international strategies Strategic networks and implementation of center firm
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Organizational Structure (OS) & Controls (OC)
Organizational Structure (OS) Specifies firm’s formal reporting relationships,
procedures, controls, authority & decision-making processes (i.e., work to be done and how to do it!)
Effective use of firm’s strategies facilitated when structure is properly aligned
Structural stability: Capacity firm requires to consistently and predictably manage its daily work routines
Structural flexibility: Opportunity to explore competitive advantages firm will need to be successful in the future
Pioneer Alfred Chandler found organizations change their structures when inefficiencies force them to do so
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Organizational Structure & Controls (Cont’d)
Organizational Controls (OC) 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
Two types include strategic and financial
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Organizational Structure & Controls (Cont’d)
Organizational Controls (OC) 1. Strategic controls: largely subjective criteria
intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages
Concerned with what firm might do vs. what it can do Used to evaluate degree to which firm focuses on the
requirement to implement strategies (i.e., SUB: primary and support activities; corporate level: knowledge, markets & technologies across businesses)
Focus on the content of strategic actions Encourage decisions that incorporate moderate and acceptable
levels of risk
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Organizational Structure & Controls (Cont’d)
Organizational Controls (OC) (Cont’d)
2. Financial controls Objective criteria used to measure firm’s performance against
previously established quantitative standards (used for unrelated diversification)
Focus on short-term financial outcomes Produce risk-averse managerial decisions
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Strategy vs. Structure: Relationships
Reciprocal relationship Implies change to one causes change in the
other “Research shows strategy has a much more
important influence on structure than the reverse.”
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Chapter 11: Organizational Structure (OS) and Controls
Overview: Six content areas Define OS and controls and differences between
strategic and financial controls Describe relationship between strategy & structure Describe the functional structures for business-
level strategies Three versions of multi-divisional (M-form)
structure for different diversification strategies OS for implementation three international strategies Strategic networks and implementation of center firm
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Strategy vs. Structure: Evolutionary Patterns
Chandler found firms tend to grow in a predictable pattern, including the areas of volume, geography, integration (horizontal & vertical) & product/ business diversification Growth pattern implies structural changes!
Several structure forms, used to implement strategies, evolved including 1. Simple 2. Functional 3. Multidivisional
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Strategy and Structure
Growth Pattern
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Three main structures 1. Simple
Owner-manager makes all major decisions and monitors all activities, staff acts as extension of manager's supervisory authority
Few rules, limited task specialization, unsophisticated technology system
As firm grows more complex, need to add layers and controls
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Three main structures 2. Functional
CEO and a limited corporate staff make all decisions, with functional line managers in dominant organizational areas
Allows functional specialization resulting in active knowledge sharing in each functional area
Can negatively affect communication and coordination among those representing different organizational functions
When changing from a simple to functional structure need to focus on value-destroying bureaucratic procedures
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Three main structures 3A. Multidivisional
Operating divisions each represent a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategies to division managers
3B. Multidivisional (M-form) structure Ties together several operating divisions, each representing
a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Three main structures 3B. Multidivisional (M-form) structure (Cont’d)
It enables corporate officers to more accurately monitor the performance of each business, which simplifies the problem of control
It facilitates comparisons between divisions, which improves resource allocation process
It stimulates managers of poorly performing divisions to look for ways of improving performance
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
No one structure (simple, functional or multidivisional) is superior to the others
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Business-level strategies & functional structure matches for implementing strategies (N=3): 1. Cost leadership (CL) 2. Differentiation (D) 3. CL/D strategy
Structural characteristics (N=3) drive different forms of organizational structures 1. Specialization 2. Centralization 3. Formalization
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Structural characteristics defined 1. Specialization
Type and number of jobs required to do work
2. Centralization Degree to which decision-making authority is retained at
higher managerial levels
3. Formalization Degree to which formal rules and procedures govern work
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Functional Structure for Implementing a Cost Leadership Strategy
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) & 5 Forces of Competition
Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices Costs leaders are in a position to absorb supplier price
increases and relationship demands, and to force suppliers to hold down their prices
Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors
Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) 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
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 1. Cost leadership (CL) strategy risks
Processes can become obsolete
Focus on cost reductions can come at the expense of understanding customer perceptions and needs
Strategy could be imitated, requiring the firm to increase the value offered to retain customers
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Functional Structure for Implementing a Differentiation Strategy
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) strategy
Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them
Target customers – perceived product value
Customized products – differentiating on as many features as possible:
Unusual features, responsive customer service, rapid product innovations, technological leadership, perceived prestige and status, different tastes, engineering design, performance
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) & 5 Forces of Competition
Customer loyalty: the most valuable defense against rivals Unique products reduce customer sensitivity to raised prices High margins (for differentiated products) insulate firm from
supplier influence Significant entry barriers: customer loyalty & product
uniqueness Firms with customers loyal to their products are positioned
effectively against product substitutes
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) 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
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 2. Differentiation (D) strategy risks
Price differential for differentiated product may be perceived as too large
Firms’ means of differentiation may cease to provide value for which customers are willing to pay (successful rival imitation)
Experience can narrow customers' perceptions of the value of a product's differentiated features
Counterfeit goods might appear in the marketplace
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between business-level strategies and functional structure to implement 3 strategies: 3. CL/D strategy
These firms may sell products that create value because of relatively low and and reasonable sources of differentiation
Difficult to implement, but frequently used in the global economy
Challenge due to primary/support activities Need to successfully combine specialization,
formalization and centralization
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies and multidivisional structure 3 forms
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Three Variations of the Multidivisional Structure
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Cooperative Form of the Multidivisional Structure for Implementing a Related Constrained Strategy
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
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 to link activities among divisions, allowing firms to exploit common strengths and share competencies
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies & multidivisional structure: Cooperative form/related constrained strategy (cont’d) Success influenced by how well information is
processed among divisions
Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy
Matrix organization may evolve organizational structure in which a dual structure combines both
functional specialization and business product or project specialization
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SBU Form of the Multidivisional Structure for Implementing a Related Linked Strategy
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy Related linked: Firms that share fewer resources and assets
among their businesses, concentrating on the transfer of knowledge and competencies among the businesses
Strategic Business-Unit (SBU) Form: multidivisional organization structure with three levels to support the implementation diversification strategy
1. Corporate headquarters
2. Strategic Business Units (SBUs)
3. SBU division
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies & multidivisional structure: SBU form/related linked strategy SBU Form (Cont’d)
Divisions within each SBU are related in terms of shared products and/or markets
Divisions of one SBU have little in common with divisions of other SBUs
Divisions within each SBU share product or market competencies to develop economies of scope
Integrations used in cooperative form are equally effective for the SBU form
Each SBU is a profit center
Financial controls are more vital for evaluating performance
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Competitive Form of the Multidivisional Structure for Implementing an Unrelated Strategy
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies & multidivisional structure: Competitive form/unrelated diversification Competitive form defined: organizational structure in
which 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
require organizational arrangements that emphasize divisional competition rather than cooperation
Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources
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Strategy vs. Structure: Evolutionary Patterns (Cont’d)
Matches between corporate-level strategies and multidivisional structure: Competitive form/unrelated diversification (Cont’d)
Headquarters maintains a distant relationship to avoid intervention in divisional affairs
Strategic controls are used to monitor performance relative to targeted returns
Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions
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Chapter 11: Organizational Structure (OS) and Controls
Overview: Six content areas Define OS and controls and differences between
strategic and financial controls Describe relationship between strategy and structure Describe the functional structures for business-level
strategies Three versions of multi-divisional (M-form) structure
for different diversification strategies OS for implementation three international
strategies Strategic networks and implementation of center firm
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Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 1. WW geographic area structure to implement the
multidomestic strategy Multidomestic Strategy: international strategy in which strategic
and operating decisions are decentralized to the strategic business-unit (SBU) in each country to allow the units to tailor products to local markets
Worldwide (WW) Geographic Area Structure: organizational structure emphasizing national interests and facilitates efforts to satisfy local or cultural differences (used to implement the multidomestic strategy)
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 1. WW geographic area structure to implement the
multidomestic strategy (Cont’d)
Focuses on variations of competition within each country Customizes products to meet specific needs and preferences of
local customers Decentralizes the firm's strategic and operating decisions to
business units in each country Takes steps to isolate the firm from global competitive forces
Establish protected market positions Compete in industry segments most affected by differences among
local countries
Deals with uncertainty due to differences across markets
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Worldwide Product Divisional Structure for Implementing a Global Strategy
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 2. WW product divisional structure to implement global
strategy Global Strategy: International strategy whereby firm offers
standardized products across country markets, with the competitive strategy being dictated by the home office
Worldwide Product Divisional Structure: Organizational structure with centralized decision-making authority in the WW division headquarters to coordinate and integrate decisions and actions among divisional business units (used to implement the global strategy)
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 2. WW product divisional structure to implement global strategy (Cont’d)
Emphasizes economies of scale
Facilitated by improved global accounting and financial reporting standards
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 across SBUs, adding management complexity
Produces lower risk
Is less responsive to local market opportunities
Offers less effective learning processes due to the pressure to conform and standardize
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Hybrid Form of the Combination Structure for Implementing a Transnational Strategy
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 3. Combination structure to implement transnational strategy
Transnational Strategy: International strategy through which the firm seeks to achieve both global efficiency and local responsiveness; usually implemented through global matrix structure and hybrid global design
Flexible Coordination: Building a shared vision and individual commitment through an integrated network
Combination Structure: Organizational structure in which characteristics and mechanisms are drawn from both the worldwide geographic area structure and the worldwide product divisional structure (used to implement transnational strategy)
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Three (3) Primary International Strategies: 3. Combination structure to implement transnational strategy (Cont’d)
Assets and operations may be centralized/decentralized
Functions may be integrated/nonintegrated
Relationships may be formal/informal
Coordination mechanisms may leverage efficiency/flexibility
Mandates to subsidiaries may be global/specialized-contribution/ localized-implementation
There are competing objectives when a worldwide combination structure is used to implement a transnational strategy
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A Strategic Network
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Matches between cooperative strategies and network structures Network strategy: Partners form several alliances in
order to improve the performance of the alliance network itself through cooperative endeavors
Strategic network: Group of firms that form [around core] to create value to participating in multiple cooperative arrangements
At core: Strategic Center Firm which has 4 primary tasks
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International Strategy (IS) &Worldwide (WW) Structure (Cont’d)
Strategic Center Firm’s primary tasks 1. Strategic outsourcing 2. Competencies 3. Technology 4. Race to learn
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Chapter 11: Organizational Structure (OS) and Controls
Overview: Six content areas Define OS and controls and differences between
strategic and financial controls Describe relationship between strategy and structure Describe the functional structures for business-level
strategies Three versions of multi-divisional (M-form) structure
for different diversification strategies OS for implementation three international strategies Strategic networks & implementation of center
firm
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Implementing Business-level Cooperative Strategies
Business-level complementary alliances (N=2) Vertical: partnering firms share their resources and
capabilities from different stages of the value chain to create a competitive advantage.
Horizontal: partnering firms share resources and capabilities from the same stage of the value chain to create a competitive advantage - commonly used for long-term product development and distribution opportunities
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Implementing Corporate-level Cooperative Strategies
Used to facilitate product & market diversification i.e., Franchising: contractual relationship to describe
and control the sharing of its resources and capabilities with partners
Allows firms to use its competencies to extend or diversity product or market reach, without completing a merger or acquisition
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A Distributed Strategic Network
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Implementing International Cooperative Strategies
Strategic networks formed to implement cooperative strategies resulting in firm competing in several different countries Distributed strategic networks: Organizational
structure used to manage international cooperative strategies
Several regional strategic center firms are included in the distributed network to manage partner firms’ multiple cooperative arrangements