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Strategic Management: Theory and Practice

Strategy Execution: Structure

Contributors: By: John A. Parnell

Book Title: Strategic Management: Theory and Practice

Chapter Title: "Strategy Execution: Structure"

Pub. Date: 2014

Access Date: March 24, 2018

Publishing Company: SAGE Publications, Ltd

City: 55 City Road

Print ISBN: 9781452234984

Online ISBN: 9781506374598

DOI: http://dx.doi.org/10.4135/9781506374598.n10

Print pages: 270-291

©2014 SAGE Publications, Ltd. All Rights Reserved.

This PDF has been generated from SAGE Knowledge. Please note that the pagination of

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Strategy Execution: Structure

Chapter Outline

Organizational Structure Vertical Growth

Horizontal Growth

Structural Forms Functional Structure

Product Divisional Structure

Geographic Divisional Structure

Matrix Structure

Assessing Organizational Structure

Corporate Involvement in Business Unit Operations

Corporate Restructuring

Summary

Key Terms

Review Questions and Exercises

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Practice Quiz

Student Study Site

Notes

The best conceived strategic plans often fail from a lack of planning for their execution. Effective strategy implementation requires managers to consider a number of issues,

including structural, cultural, and leadership concerns.1. These considerations should be made before a strategic alternative is selected and then detailed after a strategy is formulated.

This chapter emphasizes the relationship between strategy and the firm's structure—the formal side of the organization—especially within the context of strategy execution. Leadership and culture are addressed in the following chapter.

Organizational Structure

Organizational structure—the formal means by which work is coordinated in an organization — is the focus of this chapter. An organization's structure dictates reporting relationships and defines where and how the firm's work will be done. It establishes a framework for identifying the levels in the organization where decisions will be made. In many respects, the structure sets the stage for strategy execution. A given structure might be appropriate for one particular strategy but not another. For example, tight and well-defined job responsibilities and reporting relationships might work best in a firm like McDonald's, whose strategy emphasizes the delivery of very consistent, standardized service. A loose, more flexible approach might make sense for a firm like 3M, whose strategy emphasizes innovation. Although there are a number of possible organizational structures, this chapter focuses on the primary alternatives and their implications for strategy execution.

There is a long-standing debate among scholars as to whether a firm's strategy should follow its structure or vice versa. Most practitioners, however, recognize that strategy and structure are interdependent. In the short term, strategic managers should evaluate and consider the firm's structure when crafting the strategy, recognizing that modifying the structure is rarely easy or cost-free. In addition, they should be willing to modify the firm's structure as required to fit with any necessary strategic change. In the long term, because a firm's strategy is a key driver of its performance, the structure should be built around the strategy to ensure its effectiveness.

Although some new businesses are launched on a large scale, many start small with an owner/ manager and a few employees. Neither an organizational chart nor a formal assignment of responsibilities is necessary. Each employee often performs multiple tasks and the owner/manager is involved in all aspects of the business, a form of organization often called a simple structure. This structure may remain intact for only a few months in a fast- growing organization or for years in a small family business such as a rural convenience or hardware store. The owner/manager is able to communicate the strategic priorities directly with most members of the organization.

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In organizations with a simple structure, early survival depends on an increase in demand for the company's products or services. As the organization grows to meet this demand, however, a more permanent division of labor tends to form. The owner/manager who once was nearly involved in all functions of the enterprise begins to play more of a leadership role, and additional employees are assigned to more specialized functions. At some point, however, growth of the firm reaches a certain point where top managers must evaluate the effectiveness of the evolving system of coordinating tasks and consider modifying it—if necessary—so that the structure evolves as the strategy evolves.

Because the simple structure is inappropriate when a firm grows beyond a certain point, other alternatives must be considered. For such organizations, the structure exists to provide control and coordination for the organization. The structure designates formal reporting

relationships and defines the number of levels in the hierarchy2. (see the sample chart in Figure 10.1). There are logical reasons for organizing work along various lines. For example, work can be organized along function so employees can work only in their areas of specialty, by product so decisions about products can be made in an integrated fashion, and along geographical lines so decisions can be tailored to unique needs of various geographical regions. It is also reasonable to assume that individuals can and should work across the structure when necessary.

Figure 10.1 Security Bank Organization Chart

There is no single best structure, and the one selected for any organization will have its own set of benefits and challenges. The key is to select a structure that supports the execution of the strategy and to reassess and modify both as required. Interestingly, many large, well- known companies change structures frequently as their environments change.

The extent to which organizational activities are appropriately grouped affects how well strategy is implemented. For instance, customers may be confused when they are contacted by multiple sales representatives for the same company with each representing a different product line. In addition, it is difficult to hold a product divisional manager fully responsible for product sales when he or she has no control over either the development or the production of the product.

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In addition, firms with multiple related businesses usually require greater coordination of their business units’ activities than those operating in only one business. However, as an organization becomes more complex, coordinating activities becomes more difficult, especially in organizations with related businesses.

Vertical Growth

Growth in the organization expands its structure, both vertically and horizontally. Vertical growth refers to an increase in the length of the organization's hierarchy (i.e., levels of management). The number of employees reporting to each manager represents that manager's span of control. A tall organization is composed of many hierarchical levels and narrow spans of control whereas a flat organization (or steep organization) has few levels in its hierarchy and a wide span of control from top to bottom. In reality, organizations fall somewhere in between the two extremes. Hence, organizations are seen as being “relatively tall” or “relatively flat.”

When a structure is marked by centralization, most strategic and operating decisions are made at the top because managers at higher levels are presumed to have greater experience and expertise. Although there are clear lines of responsibility and accountability, top managers may lack the hands-on experience that managers at middle and lower levels have. Decision making occurs slowly, and the lower level managers may be less committed to those

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decisions made at higher levels.

Alternatively, when a structure is characterized by decentralization, most strategic and operating decisions are made by managers at lower levels of the organization. Decentralized firms seek to overcome the difficulties of centralization by pushing each decision to the lowest level where it can be made effectively. Decentralization enables a firm to take advantage of the intellectual capital that an organization develops across managerial ranks by empowering managers with direct knowledge about a situation to make rapid decisions. When customer service is a key component of an organization's strategy, a decentralized structure can be beneficial because managers in direct contact with customers can address problems quickly and decisively. However, decentralization can cloud lines of accountability when poor decisions are made and can often result in poor coordination across units in the organization. These potential disadvantages notwithstanding, it is not difficult to see why many progressive organizations have moved toward greater decentralization in the past two decades.

The extent to which decision making should be decentralized depends on a number of factors —one of which is organizational size. In general, very large organizations tend to be more decentralized than very small ones, simply because it is difficult for the chief executive officer (CEO) of a very large company to stay abreast of all of the organization's operations. In addition, firms with large numbers of unrelated businesses tend to be relatively decentralized whereby corporate-level management determines the overall corporation's mission, goals, and strategy, and lower-level managers make the actual operating decisions. Finally, organizations in dynamic environments must be relatively decentralized so that decisions can be made quickly whereas organizations in relatively stable environments can be managed more systematically and centrally because change is relatively slow and fairly predictable. In such cases, most decisions are routine, and procedures can often be established in advance.

John Child studied the link between firm size and number of management levels. According to Child, the average number of hierarchical levels for an organization with 3,000 employees is

seven.3. Consequently, one might consider such an organization with fewer than seven hierarchical levels to be relatively flat and one with more than seven to be relatively tall. Because tall organizations have a narrow span of control, managers in such organizations exercise a relatively high degree of control over their subordinates, and authority tends to be relatively centralized. Conversely, authority is more decentralized in relatively flat structures because managers have broad spans of control and must therefore grant more flexibility to their employees. Because decisions are more likely to be made at lower levels in flat organizations, it is advisable for employees to have a more generalist orientation.

From a strategic perspective, both organizational types possess certain advantages. Tall, centralized organizations foster more effective coordination and communication of the business's mission and goals to all employees. Planning and its execution are relatively easy to accomplish because all employees are centrally directed. As such, tall organizational structures may be best suited for environments that are relatively stable and predictable although a number of experts have begun to suggest that tall structures do not yield the advantages today that they once did.

Flat structures also have their advantages. Administrative costs tend to be lower than those in taller organizations because fewer hierarchical levels require fewer managers and support personnel. Decentralized decision making also gives managers at various levels more

authority, which may increase their satisfaction and motivation.4. The greater freedom in decision making also encourages innovation. Hence, flat structures are best suited for more

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dynamic environments, such as those in which most Internet businesses operate. Quality tends to improve when decision making is decentralized closest to the level at which the decisions will be implemented although this is not always the case.

Flatter organizations, with relatively fewer hierarchical levels and wider spans of control, tend to work more effectively in dynamic environments whereas taller organizations may operate more effectively in stable, more predictable environments. Not all of a firm's business units need to adopt the same structure. If some business units operate in relatively dynamic environments while others compete in relatively stable environments, structural differences may be necessary.

Other factors can also influence the appropriate structure for an organization. Heavy involvement in outsourcing and/or offshoring is one such factor. Because outsourcing reduces

internal activities, it can flatten the structure and increase decision-making speed.5.

Outsourcing can stifle the bureaucracy, enabling firms to concentrate on key strategic concerns such as shortening the cycle time for new products or new models of existing ones.

Horizontal Growth

Horizontal growth refers to an increase in the breadth of an organization's structure. The owner/manager and a few employees may perform all of the functions in a new business. With growth, however, each function expands so that no one individual can be involved in all of the company's functions, and the structure of the organization is broadened to accommodate the development of more specialized functions. Owners and managers who are unable to “let go” of former realms of responsibility as their responsibilities increase are often referred to disparagingly as “micromanagers.”

Increases in organizational size usually lead to additional organizational layers and bureaucracy. Although large organizations are often presumed to benefit from economies of scale and therefore be more efficient, a large firm may actually become both less efficient and less capable of meeting the needs and expectations of its customers over time. Top management often addresses the burgeoning bureaucracy by instituting a more horizontal structure—one with fewer hierarchies. The organizational restructuring and retrenchment strategies so pervasive throughout the 1980s and 1990s has often involved forming a more horizontal structure through downsizing, whereby part or all of one or more hierarchical levels—typically middle managers—are eliminated. Additionally, employee layoffs often occur in order to cut costs and eliminate some of the bureaucracy that invariably accompanies multiple organizational layers. As layers are reduced, decision making becomes more decentralized.

Interestingly, downsizing often does not achieve desired results, especially in the long term. Studies suggest that on average, firms enjoy a slight and short-term rise in stock price after

downsizing, followed by significant declines over the intermediate term.6. When cuts are applied equally to all departments, both efficient and inefficient ones lose employees without regard to performance level. When buyouts are offered to relatively high-paid, longtime employees, the firm can be faced with a drastic loss of critical experience. In addition, the positive changes in the formal organization created by downsizing often lead to dysfunctional consequences in the informal organization. Survivors (i.e., employees who remain after the cuts) are typically less loyal to the organization and wonder if they will be cut next. Hence, downsizing is a worthy strategic alternative, but one whose long-term ramifications must be

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seriously considered before it is adopted.7.

Firms occasionally seek to downsize for the specific purpose of eliminating part of the workforce so that it can be rebuilt in a different manner. Downsizing may occur after an acquisition if there are substantial cultural differences between the two firms and the acquiring firm wishes to reorient the new combined workforce.

Structural Forms

The following section describes four general alternative structures that may be adopted to meet the strategic needs of the organization. Some of these structures tend to fit with certain firm level competitive strategies although this relationship is not always clear.

Functional Structure

The initial growth of an enterprise often requires that it be organized along functional areas. In the functional structure, each subunit of the organization engages in firm-wide activities related to a particular function, such as marketing, human resources (HR), finance, or production. The chart in Figure 10.2 illustrates one example of a functional structure. Managers are grouped according to their expertise and the resources they use in their jobs. A functional structure has a number of strategic advantages. Most notably, it can improve specialization and productivity by grouping together people who perform similar tasks. When functional specialists interact frequently, improvements and innovations for their functional areas may evolve that may not have otherwise occurred without a mass of specialists organized within the same unit. Working closely on a daily basis with others who share one's functional interests also tends to increase job satisfaction and lower turnover. In addition, the functional structure can also foster economies of scale by centralizing functional activities.

Because of its ability to group specialists and foster economies of scale, the functional structure form tends to address cost and quality concerns effectively. However, this form also has its disadvantages. Because the business is organized around functions rather than around products or geographic regions, pinpointing the responsibility for profits or losses can be difficult. For example, a decline in sales could be directly linked to problems in any of a number of departments, such as marketing, production, or purchasing. Members of these departments may point at other departments when firm performance declines.

Figure 10.2 A Partial Example of Functional Structure

In addition, a functional structure is prone to interdepartmental conflict by fostering a narrow perspective of the organization among its members. Managers in functional organizations tend to view the firm totally from the perspective of their field of expertise. The marketing department might see a company problem as sales-related whereas the human resource department might view the same challenge as a training and development concern. In

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addition, communication and coordination across functional areas are often difficult because each function tends to have its own perspective and vernacular. Research and development (R & D), for example, tends to focus on long-term issues whereas the production department generally emphasizes the short run. Grouping individuals along function minimizes communication across functions and can foster these types of communication problems.

In sum, the functional structure can serve as a relatively effective and efficient means of controlling and coordinating activities. For this reason, it may be appropriate for defenders and low-cost businesses that emphasize efficiency in established markets. However, there has been a growing emphasis on customer service and speed in recent years, challenges that the functional structure may not be as well equipped to address. Depending on the specific issues facing an organization, a division along product or geographical lines may be more appropriate.

Product Divisional Structure

Some firms “outgrow” the functional structure as they expand product lines and geographies. To better coordinate their activities, such firms implement a multidivisional structure (or M- form structure). The product divisional structure divides the organization's activities into self-contained entities, each responsible for producing, distributing, and selling its own products. This structure is often adopted when a business has several distinct product lines. For example, a software developer may organize along three product lines: (1) business, (2) productivity, and (3) educational applications. Each division would have its own functional areas, such as R & D, marketing, and finance. For this reason, the product divisional structure may be most appropriate for diversified firms. The product divisional structure is used both in manufacturing and service organizations.

The product divisional structure has a number of advantages. Rather than emphasizing functions, the structure emphasizes product lines, resulting in a clear focus on each product category and a greater orientation toward customer service. Pinpointing the responsibility for profits or losses is also easier because each product division becomes a profit center—a well-defined organizational unit headed by a manager accountable for its revenues and expenditures. As such, the product divisional structure can be an attractive alternative for businesses pursuing prospector and differentiation strategies.

The product divisional structure is also ideal for training and developing managers because each product manager is, in effect, running his or her “own business.” Hence, product managers develop general management skills—an end that can be accomplished in a

functional structure only by rotating managers from one functional area to another.8.

The product divisional structure also has its disadvantages. Because product divisional firms generally have multiple departments performing the same function, the total personnel expense for manufacturing is likely to be higher than if only one department were necessary. The coordination of activities at headquarters also becomes more difficult, as top management finds it harder to ensure consistency among the various departments. This problem can become substantial in large organizations with 40 or more product divisions. Finally, because each product manager emphasizes his or her own product area, product managers tend to compete for resources instead of working together in the best interest of the company.

Geographic Divisional Structure

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When a firm's operations are dispersed through various locations, top executives often employ a geographic divisional structure, whereby activities and personnel are grouped by specific geographic locations (see Figure 10.3). This multidivisional structure may be used on a local basis (i.e., a city may be divided into sales regions), on a national basis (i.e., southern region, mid-Atlantic region, Midwest region), or even on an international basis (i.e., North American region, Latin American region, Asian region, Western European region). The primary impetus for the geographic divisional structure is the existence of two or more distinct markets that can be segmented easily along geographical lines. For this reason, differentiated businesses or those unable to standardize product or service lines because of geographical market differences may implement a geographic divisional structure.

Figure 10.3 A Partial Example of Geographic Divisional Structure

There are two key advantages to organizing geographically. First, products and services may be tailored more effectively to the legal, social, technical, or climatic differences of specific regions. For example, relatively small 220-volt appliances may be appropriate for parts of Asia where living quarters tend to be limited and the American 110-volt system is not used. In addition, insurance companies are often organized along state and national boundaries because of legal differences. Second, producing or distributing products in different locations may give the organization a competitive advantage. Many firms, for example, produce components in countries that have a labor cost advantage and assemble them in countries with an adequate supply of skilled labor. Hence, like the product divisional structure, the geographic divisional approach may also be appropriate for businesses embarking on a prospector or differentiation strategy. Porter's notion of a focus strategy can also fit well with geographic divisions if the focus is based on nations, states, or regions.

The disadvantages of a geographic divisional structure are similar to those of the product divisional structure. Often, more functional personnel are required because each region has its own functional departments. Coordination of company-wide functions is often more difficult, and area managers may emphasize their own geographic regions to the exclusion of a company-wide viewpoint.

Matrix Structure

In a general sense, the functional and divisional structures—both product and geographical— can be viewed as opposites on ends of a continuum. The traditional demands for quality and price may pull an organization toward the functional end whereas demands for service and speed may pull the organization toward the divisional end. To address these demands, top managers may settle on one of the two poles or may attempt to position the organization

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between the extremes. One such approach that has gained considerable popularity in recent years is the matrix structure.

Unlike the other structures that are characterized by a single chain of command, the matrix structure is a combination of the functional and product divisional structures (see Figure 10.4). Hence, personnel within the matrix have two (or more) supervisors: (1) a “functional boss” and (2) a “project boss.” In one project, a project manager might pull together some members of the organization's functional departments. After the project is completed, the personnel in the project return to their functional departments. Hence, some individuals may be assigned to more than one team at the same time.

Consider that many common organizational tasks require expertise from a variety of backgrounds. Effective new product development requires contributions from such areas as R & D, marketing, and production. Enhancing a consumer product firm's e-commerce capability requires contributions from information technology, marketing, supply chain management, and merchandising. An initiative to improve customer satisfaction requires expertise in sales, inventory management, and production. The matrix structure is designed to address these multifaceted problems because it pools together the necessary expertise required.