Module 9
Strategy, Structure, and Control (continued)
Chapter Outline
Successful organizations must ensure that they have the proper type of organizational structure. Furthermore, they must ensure that their firms incorporate the necessary integrating mechanisms and processes so that the internal and external boundaries of the firm are flexible and permeable. Such a need is increasingly important, as the environments of firms become more complex, rapidly changing, and unpredictable.
Although most organizations remain small or die, some firms continue to grow in terms of revenues, vertical integration, and diversity of products and services. In addition, their geographical scope may increase to include international operations. The dominant pattern of growth is first from a simple structure to a functional structure as sales and volume increase. A functional structure enhances efficiency and effectiveness by structuring according to specialized functions. When firms grow beyond existing markets or regions, the decision-making burden is too great and a divisional structure is needed to organize around products, projects, or markets. As firms grow into international markets and/or enjoy expanding sales revenues, international structures are needed.
Because most organizations are very small, they need only a simple structure. Simple structures are usually highly centralized because the founder or a top executive makes nearly all of the decisions. The simple structure is the oldest and most common. It also tends to be the most informal with little specialization. This may enhance creativity since employees are often not bound by many rules, but may lead to management problems if employees do not understand their responsibilities. In addition, simple organizations often offer few chances for career advancement.
As firms grow, excessive demands may be placed on the owner-manager in order to process all the information necessary to run the business. Specialists are needed in various functional areas (such as accounting, marketing, and engineering). Thus, a functional structure often develops in which functions are managed by specialists. Then, the chief executive’s job shifts to coordinating and managing the departments.
Functional structures are generally found in organizations in which there are single or closely related products or services, high production volume, and some vertical integration. In these areas, which correspond to the dominant pattern of growth (i.e., into new markets, new product lines, or via vertical integration), centralized decision-making is still needed to coordinate activities. Sharp Corporation is an example of a major corporation that successfully uses a functional structure.
Functional organizations have advantages and disadvantages. One advantage is enhanced coordination and control. Also, managerial and technical talent is used more efficiently. In a functional structure, there are more opportunities for professional development and career advancement. A disadvantage of functional organizations is that the beliefs, assumptions, and goals associated with different functional activities may vary across functions. MIT Professor Edgar Schein suggests that such different orientations may even cause certain words to hold different meanings in different groups. This, in turn, leads to functional biases or “silo” thinking that may impede communication and coordination. Other disadvantages of a functional structure include short-term thinking due to excessive concern for the function rather than the whole organization, a heavier burden for top management who must resolve conflicts between functions, and difficulty establishing policies that apply uniformly to all functional areas.
As a firm continues to grow and become more complex, they often adopt a divisional form of organizational structure. The divisional structure is organized around products, projects, or markets. Each division has its own functional specialists organized into departments. Divisions are independent units managed by a central corporate office. Divisional executives manage divisional performance to achieve corporate financial objectives.
Advantages of a divisional structure include separation of strategic and operational control. That is, the divisions focus on managing operations and the corporate office addresses strategic issues. Also, a divisional structure makes it easier to respond quickly to changes in the business environment. Multiple management levels means that rewards and career paths are linked to the development of general management talent.
Disadvantages include a tendency to duplicate activities such as personnel management which makes overall costs higher, dysfunctional competition between divisions, conflicting goals, and uneven performance comparisons that inhibit resource sharing. Another potential disadvantage is that with many divisions providing different products and services, there is the chance that differences in image and quality may occur across divisions. Finally, since financial success is valued so highly, there may be too much focus on short-term performance.
Highly diversified corporations often combine similar divisions into strategic business units (SBUs). This helps coordinate activities and attain synergies. ConAgra is an example of a company with dozens of divisions grouped into three SBUs -- food service, retail, and agricultural products. SBUs are typically run as profit centers.
The primary advantage of the SBU structure is that it makes planning and control more manageable. The disadvantages include it may be difficult to realize synergies even among similar divisions and the additional hierarchical level of an SBU adds personnel and overhead expenses.
The holding company structure (also referred to as a conglomerate) is another type of divisional structure. Whereas SBUs are used to group similar divisions, the holding company structure is used to manage a portfolio of unrelated businesses. Since the businesses are unrelated, most management decisions, controls, and incentives are left to the operating divisions. As a result, corporate staffs are small.
An advantage of the holding company structure is the cost savings from having a small corporate office. Additionally, autonomy at the division level enhances motivation. The disadvantage relates to the dependence that corporate executives have on divisional executives to achieve financial goals.
A matrix structure is, in essence, a combination of a divisional and functional structure. Most commonly, functional departments are combined with product groups on a project basis. As a result, personnel from functional departments work under a product group manager for the duration of a project. Multinational corporations combine product groups and geographical units -- an alternative to the product/function matrix. In both cases, personnel become responsible to two managers.
An advantage of the matrix structure is that it facilitates the use of specialized personnel, equipment, and facilities. This reduces duplication and allows individuals with a high level of expertise to divide their efforts among multiple projects at one time. Such sharing and collaboration leads to more efficient use of resources. It also provides professionals with greater responsibilities and enhances the use of their skills. Disadvantages of a matrix structure are related to dual reporting requirements. This can lead to power struggles and conflict. Further, matrix structures are often used in situations that are complex which may lead to excessive reliance on group processes and teamwork, and erode timely decision making.
Consistency between strategy and structure is required to be successful in global markets. As firms expand into foreign markets, changes in structure follow changes in strategy. For example, firms that pursue multidomestic strategies (as discussed in Chapter 7) would most likely use international division or geographic-area division structures. With these, local managers have high autonomy to manage within the demands and constraints of the local market. If product diversity becomes large, firms may benefit from a worldwide matrix structure.
Global strategies, by contrast, typically have more centralized operations in order to manage for overall efficiency. Here, worldwide functional and worldwide product division structures are more likely because the market is more homogeneous and require less local attention. Once firms with global strategies become highly diversified, they are likely to shift to a worldwide holding company structure.
New organizational forms are becoming more common as managers attempt to cope with increased levels of environmental uncertainty. These new forms are often referred to as “boundaryless” organizations. Organizations that become boundaryless become more open and permeable, not “chaotic.” Boundaryless approaches should be considered a complement to, not a replacement for, traditional forms of organizing. Several types of structure can be used to make organizations more boundaryless. Barrier-free approaches involve removing internal boundaries to encourage teamwork and widespread sharing of information. Virtual and modular organizational forms are used to make external relations more permeable and create seamless knowledge systems across organizations
Traditional organizations had boundaries intended to maintain order by making the role of managers and employees clearly defined. But these boundaries also stifled communication and created a “not my job” mindset. A barrier free organization enables a firm to bridge differences in culture, function, and goals to find common ground that facilitates information sharing and cooperation.
Teams are an important part of barrier-free structures because they 1) substitute peer-based for hierarchical control; 2) often develop more creative solutions via brainstorming and other group problem solving techniques; and 3) absorb administrative tasks previously handled by specialists. Barrier-free relationships must also extend to other divisions of a corporation and to external stakeholders. To promote interdivisional coordination and resource sharing, firms often use interdivisional task forces and common training programs, and create reward and incentive systems that foster cooperation. Boundaries between organizations and external constituencies such as customers also need to be more flexible and porous.
The modular organization type is actually a central hub surrounded by networks of outside suppliers and specialists that perform non-vital functions. Such outsourcing allows the firm to tap into the knowledge and expertise of “best in class” suppliers but retain full strategic control. For modular companies, outsourcing the non-core functions offers three advantages:
1. It can decrease overall costs, quicken new product development by hiring suppliers whose talent may be superior to that of in-house personnel, avoid idle capacity, realize inventory savings, and avoid becoming locked into a particular technology.
2. It enables a company to focus scarce resources on the areas where they hold a competitive advantage. These benefits can translate into more funding for research and development, hiring the best engineers, and providing continuous training for sales and service staff.
3. By enabling an organization to tap into the knowledge and expertise of its specialized supply chain partners, it adds critical skills and accelerates organization learning.
The modular type of organization allows a company to leverage relatively small amounts of capital and a small management team. By minimizing the need to make big investments, it can promote rapid growth. Firms taking this approach, however, must 1) identify the best suppliers and establish mutually beneficial working relationships; and 2) avoid outsourcing critical components of its business in ways that compromise it long-term competitive advantage.
Potential disadvantages of the modular form include 1) loss of critical skills or developing the wrong skills; 2) loss of cross-functional skills; and 3) loss of control over a supplier.
The virtual organization is an evolving network of independent companies -- suppliers, customers, even competitors -- linked together to share skills, costs, and access to one another’s markets. By pooling and sharing resources and working together in a cooperative effort, each gains in the long run. Virtual organizations are a type of strategic alliance in which complementary skills are used to pursue common objectives. Virtual organizations may not be permanent. And, participating firms may be involved in multiple alliances at once. Unlike the modular type, virtual organization firms give up part of their control and participate in a collective strategy that enhances their own capacity, makes them better able to cope with uncertainty, and enhances their competitive advantages.
Despite their many advantages, alliances often fail to meet expectations. One reason is that unique managerial skills are required -- managers who can find good partners, build win-win relationships, and achieve the right balance of freedom and control. Some alliances are short-term only and may be dissolved once the objective is fulfilled. Others may have long-term objectives. The key to managing both is to be clear about the overall strategic objectives at the time the alliance is being formed.
The virtual organization is the culmination of joint venture strategies of the past. To form effective virtual organizations, strategic planning is needed to determine what synergies exist and how to capitalize on them by combining core competencies. As such, the virtual form may work better for some types of organizations than others.
Many times, the most effective way to design an organization is by using a combination of organizational types. Often, when firms face external pressures, resource scarcity, and declining performance, they tend to become more internally focused. This may actually be the best time to reexamine value chain activities and determine how to better manage relationships both internally and externally. By so doing, organizations may find that they can solve some of their problems by turning to boundary less forms of organizing.
Key Concepts and Terms
Simple Structure – the most basic organizational structure. It is most frequently used by small firms in which the owner/manager maintains authority.
Functional Structure - simultaneous combination of similar activities and the separation of dissimilar activities on the basis of function (e.g., marketing, manufacturing, finance, etc.).
Divisional Structure - essentially semi-autonomous businesses organized around products, projects, or markets.
Strategic Business Unit (SBU) - form of organizational structure in which related divisions are grouped into larger entities.
Matrix Structure –organizational structure that combines a functional structure with some form of divisional structure containing a dual chain of command in which the functional manager and the divisional manager exercise authority over the same employees.
Barrier-free Organization - traditional conventions are replaced by fluid, ambiguous, and deliberately ill-defined tasks and roles.
Modular Organization - a company that focuses on its core functional activities and outsources it component and business service requirements to outside specialists.
Virtual Organization - a company that is part of a continually evolving network of independent businesses – suppliers, customers, and even competitors – that share skills, costs, and access to each other’s markets.