Strategy Process

10

Organizational Structure and Control

Prof. Dr. Bernd Venohr Berlin, June 2007

2007 Prof. Dr. Bernd Venohr

Agenda
Introduction to Strategy
1 2 3 4 5 6 7 8 9 Course Overview and Strategy Concept Economics of Strategy Shareholder Value External Environment Internal Environment Competitive Positioning Diversification Mergers & Acquisitions Global Strategy

Business Strategy

Corporate Strategy

Strategy Process
10 Organizational Structure and Control 11 Strategic Leadership
2007 Prof. Dr. Bernd Venohr

Overview

Structure follows strategy Basics of structuring organizations Example: managing the multibusiness organization

2007 Prof. Dr. Bernd Venohr

Alfred Chandler: Structure follows strategy

Alfred Chandler (business history professor at Harvard Business School) examined in Strategy and Structure: Chapters in the History of the Industrial Enterprise (1962) the organizational changes of several large US companies: Organization developed in response to changes in the corporation's business strategy An organization begins with a single product or line of business. Over time the organization begins to grow in size and complexity (more products ). Ultimately the structure of the organization has to change from functional to divisional organization as a result of the strategy change: unless structure follows strategy, inefficiency results This research has been a source of controversial discussion because, while strategy influences structure, so do many other factors Source: Wikepedia
2007 Prof. Dr. Bernd Venohr

Evolution of the Modern Corporation: changes in environment lead to changes in strategy and organizational structure
The business environment Early 19th century Local markets Transport slow Limited mechanization Strategic changes Firms specialized & focused on local markets Organizational consequences Small firms Simple management structures

Late 19th century

Introduction of railroads, telegraph industrialization

Geographical and vertical expansion

Functional structures Line/staff separation. Accounting systems

Early 20th century

Excess capacity inProduct & distribution. Growth of financial institu tions & world trade

Development of multinational multidivisional diversification corporation

2007 Prof. Dr. Bernd Venohr

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004); Ch. 6

Overview

Structure follows strategy Basics of structuring organizations Example: managing the multibusiness organization

2007 Prof. Dr. Bernd Venohr

The basic task of organizing

Every organized human activity gives rise to two fundamental and opposing requirements: the division of labor into various tasks to be performed and the coordination of those task to accomplish the activity In small organizations, there is little reason to divide work Everyone does the same thing and everything As organizations grow, there is a need to divide work and the organization The structure of an organization can be defined simply as the total of the ways in which its labor is divided into distinct tasks and then its coordination and integration is achieved among those task
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

Division of labor tasks and integration/coordination Division of labor vertical: levels of authority horizontal: specialization of tasks Integration mechanism IT/data management systems: controlling systems; performance measurement systems; resource allocation procedures; budgeting processes Manager control systems: selection of employees; reward/punishments; career path Coordination systems: decision responsibility assignments; committees; task forces
2007 Prof. Dr. Bernd Venohr

Pin factory example (Adam Smith): Somewhere between a 240 and 4800 fold increase in productivity can be achieved by division of labour
To take an example (...) from (...) the trade of the pin-maker; a workman not educated to this business (which the division of labor has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (.. .), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into "a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, (...) and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed (...). But (...) they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of fortyeight thousand pins in a day. Each person, therefore, (...) might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, (...) they certainly could not each of them have made twenty (...).
Source: Adam SMITH,An Inquiry into the Nature & Causes of the Wealth of Nations, Ch1
2007 Prof. Dr. Bernd Venohr

Many classic dilemmas exist: How much authority to delegate to whom?

Centralized structure: Top managers retain authority for most decisions; managers are order-takers In a decentralized structure: Managers and employees closest to product and customer are empowered to make decisions Key context factors are: strategy Company size Environment technology Changes in how companies organize work are typically triggered by new strategic priorities rapidly shifting competitive conditions
Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure
2007 Prof. Dr. Bernd Venohr

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Centralisation and decentralisation: recent trends

Traditional, centralized structures problematic when Market conditions are fluid Customer preferences shift from standardized to customized products: Customers want to be treated as individuals Pace of technological change accelerates and product life-cycles grow shorter Flexible manufacturing replaces mass production Trend in most companies: shift from authoritarian to decentralized structures stressing empowerment Decisions are best made at the lowest organizational level capable to make timely, informed, competent decisions Empowering employees to exercise judgment on job-related matters improves motivation and job performance
2007 Prof. Dr. Bernd Venohr

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Functional organisation
CEO Vice President Finance Chief Accountant Budget Analyst Vice President Manufacturing Plant Maintenance Superintendent Superintendent Director Human Resources Training Specialist Benefits Administrator

Organized by departments performing separate business functions such as marketing or manufacturing Works best when organization has - Few products - Few locations - Few types of customers - Stable environment - Routine technology
2007 Prof. Dr. Bernd Venohr

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Strengths and Weaknesses of functional organization structure

STRENGTHS: Allows economies of scale within functional departments Enables in-depth knowledge and skill development and innovation within functions Enables organization to accomplish functional goals WEAKNESSES: Slow response time to environmental changes May cause decisions to pile on top, hierarchy overload Leads to poor horizontal coordination among departments (Functional egotism) Results in less product innovation Involves restricted view of organizational goals

Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer, Organizational Dynamics (Winter 1979): 429.
2007 Prof. Dr. Bernd Venohr

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Divisional organization
:

President/CEO
R&D | Finance| Planning| Marketing | HR

Product Division

Geographic Division

Customer/Market

Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure

2007 Prof. Dr. Bernd Venohr

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Divisional organization was invented by Alfred Sloan: General Motors Organization Structure (1921)
Board of Directors President Executive Committee

Financial Staff

GM Acceptance Corporation

Legal Department

General Advisory Staff

Chevrolet Division

Sheridan Division

Canadian Division

Oldsmobile Division

Buick Division

Cadillac Division

GM Export Company

GM Truck Division

Samson Tractor Division

Oakland Division

Intercompany Parts Division

Scripps Booth Corp.

Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
2007 Prof. Dr. Bernd Venohr

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Types of divisional structure

Product structure (business): departments or subunits based on different products. Product sufficiently unique to require s focused functional efforts (ensure minimum efficient scale) Customer/market structure: departments or subunits based on different customer groups Unique customer preferences: products tied to unique practices in each segment Unique marketing requirements: knowledge of customer industry Geographic/regional structure: departments or subunits based on geographic regions Increased focus on the competitive characteristics of geographical regions Unique local competitors Unique local suppliers Unique local customer preferences

Divisions are in most cases self-standing and fully-integrated business units

2007 Prof. Dr. Bernd Venohr

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Strengths and weaknesses of divisional organization structure

STRENGTHS: Suited to fast change in unstable environment Leads to customer satisfaction because product responsibility and contact points are clear Involves high coordination across functions Allows units to adapt to differences in products, regions, clients (heterogenous markets) Best in large organizations with several products Decentralizes decision-making WEAKNESSES: Eliminates economies of scale in functional departments by splitting functions and allocating them to units Leads to poor coordination across product lines Eliminates in-depth competence and technical specialization Makes integration and standardization across product lines difficult

2007 Prof. Dr. Bernd Venohr

Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer, Organizational Dynamics (Winter 1979): 431.

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Matrix Organization with dual reporting lines: Managers report to both business unit and functional executives who report to CEO
CEO Director of Product Operations
Business Unit A Business Unit B Business Unit C Business Unit D

Design Vice President

Mfg Vice President

Marketing Vice President

Controller

Procurement Manager

Regional Manager as potential third dimension

2007 Prof. Dr. Bernd Venohr

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Royal Dutch/Shell Group Organization, 1994: A Matrix Structure

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

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Strengths and Weaknesses of matrix organization structure

WEAKNESSES: STRENGTHS: Achieves coordination necessary to Dual authority, which can be frustrating and confusing meet dual demands from customers Means managers need good Flexible sharing of human interpersonal skills and extensive resources across products training Suited to complex decisions and Is time consuming; involves frequent frequent changes in unstable meetings and conflict resolution environment sessions Provides opportunity for both Will not work unless participants understand it and adopt collegial functional and product skill rather than vertical-type relationships development Best in medium-sized organizations Requires great effort to maintain power balance with multiple products
Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,Organizational Dynamics (Winter 1979): 429.
2007 Prof. Dr. Bernd Venohr

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Overview

Structure follows strategy Basics of structuring organizations Example: managing the multibusiness organization

2007 Prof. Dr. Bernd Venohr

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Divisional Organization: General Electrics Organization Structure, 2002

Corporate Executive Office Chairman & CEO Service Divisions Corporate Staff Business R&D Development

Finance

Human Legal Resources

GE Aircraft Engines

GE Transportation

GE Industrial Systems

GE Plastics

GE Appliances

GE Supply

GE Power Systems

GE Medical Systems

GE Lighting

GE Specialty Materials

NBC

GE Capital

26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty Services Financing Financing Insurance
2007 Prof. Dr. Bernd Venohr

Equipment Management
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Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6

The Multidivisional Structure: Theory of the M-Form

Efficiency advantages of the multidivisional firm:
Recognizes bounded rationality - top management has limited decision-making capacity Divides decision-making according to frequency: high-frequency operating decisions at divisional level low-frequency strategic decisions at corporate level Reduces costs of communication and coordination: business level decisions confined to divisional level (reduces decision making at the top) Global, rather than local optimization: functional organizations encourage functional goals M-form structure encourages focus on profitability Efficient allocation of resources through internal capital and labor markets Resolves agency problem-- corporate management as interface between shareholders and business-level managers
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

The divisionalized firm in practice: typical problems

Constraints upon decentralization Difficult to achieve clear division of decision making between corporate and divisional levels. On-going dialogue and conflict between corporate and divisional managers over both strategic and operational issues Standardization of divisional management Despite potential for divisions to develop distinctive strategies and structures corporate systems may impose uniformity Managing divisional inter-relationships Requires more complex structures, e.g. matrix structures where functional and/or geographical structure is imposed on top of a product / market structure Added complexity undermines the efficiency advantages of the M-form
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

The Functions of corporate management to ensure that its businesses perform better in aggregate than they would as a series of stand-alone units
Managing the Corporate Portfolio Managing the individual businesses Decisions over diversification, acquisition, divestment Resource allocation between businesses

Monitoring and controlling business performance

Managing linkages between businesses

2007 Prof. Dr. Bernd Venohr

Sharing and transferring resources and capabilities

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6

The Development of Strategic Planning Techniques: General Electric in the 1970s

Late 1960s: GE encounters problems of direction, coordination, control, and profitability Corporate planning responses: Portfolio Planning Models matrix-based frameworks for evaluating business unit performance, formulating business strategies, and allocating resources Strategic Business Units GE reorganized around SBUs (business comprising a strategically-distinct group of closely-related products) PIMS a database which quantifies the impact of strategy on performance. Used to appraise SBU performance and guide business strategy formulation
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

Portfolio Planning Models: Their Uses in Strategy Formulation

Allocating resources -- the analysis indicates both the investment requirements of different businesses and their likely returns Formulating business-unit strategy -- the analysis yields simple strategy recommendations (e.g..: build, hold, or harvest) Setting performance targets -- the analysis indicates likely performance outcomes in terms of cash flow and ROI Portfolios balance -- the analysis can assist in corporate goals such as a balanced cash flow and balance of growing and declining businesses.
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

Portfolio Planning Models: The BCG Growth-Share Matrix

Earnings: low, unstable, growing analyze to determine whether business can be grown into a star, or will degenerate into a dog

Annual real rate of market growth (%)

Cash flow: negative

HIGH

Strategy:

Earnings: Cash flow: Strategy:

high stable, growing neutral invest for growth

Earnings: Cash flow:

low, unstable neutral or negative divest

Earnings: Strategy:

high stable milk

Cash flow: high stable

LOW

Strategy:

LOW
2007 Prof. Dr. Bernd Venohr

Relative market share

HIGH

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6

Corporate Control over the Businesses 2 basic approaches

Input control Output (or performance) control

Monitoring & approving business level decisions

Setting & monitoring the achievement of performance targets Primarily through performance management system, including operating budgets and HR appraisals

Primarily through strategic planning system & capital expenditure approval system
2007 Prof. Dr. Bernd Venohr

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6

Corporate management (parenting ) styles: the approaches taken to planning and control influence exerted by the centre on the businesses within the group
High Centralized

PLANNING INFLUENCE

Strategic planning Strategic control Holding company Flexible strategic Tight strategic CONTROL INFLUENCE Financial control

Low

Tight financial

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch.; Goold and Campbell "Strategies and Styles and "Adding Value from Corporate Headquarters" 2007 Prof. Dr. Bernd Venohr

Each management style is different and has different strengths and weaknesses. Key is that a fit exist between the way the parent operates and the improvement opportunities that exist in particular businesses
Centre dividion relationships
Approach Strategic planning Key features Masterplanner Top-dow n Highly prescribed Detailed controls Advantages Co-ordination Dangers Centre out of touch Divisions tactical Examples BOC Cadbury Lex STC Public sector pre-1990s BTR Hanson plc Tarmac

Financial control

Shareholder/ banker Financial targets Control of investment Bottom-up

Responsiveness

Lose direction Centre does not add value

Strategic Centre/divisions Too much ICI shaper complementary bargaining Courtaulds Strategic and Ability to coCulture change Public sector financial targets ordinate needed post-1990 Bottom-up Motivation New Less detailed bureaucracies controls Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6; Goold and Campbell "Strategies and Styles and "Adding Value from Corporate Headquarters"
2007 Prof. Dr. Bernd Venohr

Strategic control

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Managing linkages between businesses based on skills and resources that are helpful to its businesses
KEY ISSUE - How does the corporate center add value to the business? BASIS OF BUSINESS LINKAGES - Sharing of resources and capabilities SHARING OCCURS AT TWO LEVELS: Corporate level - common corporate services Business level - sharing resources, transferring capabilities PORTERS ANALYSIS OF BUSINESS LINKAGES AND CORPORATE STRATEGY TYPES Portfolio management - Parent creates value by operating an internal capital market Restructuring - Parent create value by acquiring and restructuring Inefficientlymanaged businesses Transferring skills - Parent creates value by transferring capabilities between businesses Sharing activities - Parent creates value by sharing resources between businesses

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6; Porter, Michael, From Competitive Advantage to Corporate Strategy, HBR, May-June 1987
2007 Prof. Dr. Bernd Venohr

Rethinking the Management of Multibusiness Corporations: Lessons from General Electric

Jack Welchs transformation of GEs structure and management systems:
Delayering - from 9 or 10 layers of hierarchy to 4 or 5 and decentralizing decisions Hard-driving, results-oriented atmosphere prevails. All businesses are held to a standard of being #1 or #2 in their industries worldwide as well as achieving good business results. Reformulating strategic planning - from formal, document-intensive analysis to direct face-to-face discussion of key issues Redefining the role of HQ - from checker, inquisitor, and authority to facilitator, helper, and supporter Coordinating role of HQ - corporate HQ to lead in creating the boundaryless corporation where innovations and ideas flow and where horizontal coordination occurs to respond to new opportunities HQ as change agent - corporate HQ driving force for continual organizational change Reliance upon workout sessions to identify, debate, and resolve burning issues; Commitment to Six Sigma Quality Successful leaders spend time convincing organization members chosen strategy is right and competent strategy execution is top priority: Building and nurturing a culture promoting good strategy execution
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr

New Assignment and Outlook next Session

Read slides on session 10 on ILIAS Visit company web pages and prepare as team a brief description of your companies organization chart

Topics of next session: Brief page presentation on each company; send in advance per e-mail or bring presentation on usb stick Lecture: Strategic Leadership

2007 Prof. Dr. Bernd Venohr

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Appendix

2007 Prof. Dr. Bernd Venohr

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Portfolio Planning Models: The GE / McKinsey Matrix

Industry Attractiveness

High

B
H O L D

I L D

Medium Low

T
High

Low

Medium Business Unit Position

Industry Attractiveness Criteria

- Market size - Market growth - Industry profitability - Inflation recovery - Overseas sales ratio
2007 Prof. Dr. Bernd Venohr

Business Unit Position

- Market share (domestic, global, and relative) - Competitive position - Relative profitability

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6

Do Portfolio Planning Models Help or Hinder Corporate Strategy Formulation?

ADVANTAGES Simplicity: Can be quickly prepared Big picture: Permits one page representation of the corporate portfolio & the strategic positioning of each business Analytically versatile: Applicable to businesses, products, countries, distribution channels Can be augmented: A useful point of departure for more sophisticated analysis DISADVANTAGES Simplicity: Oversimplifies the factors determining industry attractiveness and competitive advantage Ambiguous: The positioning of a business depends critically upon how a market is defined Ignores synergy: The analysis takes no account of any interdependencies between businesses

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
2007 Prof. Dr. Bernd Venohr