Strategic Management Journal, Vol.

I , 149-163 (1980)

Strategy Follows Structure!

DAVID J. HALL
MAURICE A. SAIAS
lnstitut dAdministration des Entreprises, Aix-en- Provence, France

SUMMARY

Researchers have for some time been interested in the relationship between the strategy and
structure of an organization. In this article the authors discuss the most widely-held view on the
nature of this relationship, and then suggest an alternative explanation. For them strategy,
structure, and environment are closely linked. Whereas men may build the structure of an
organization,in practice it is this very structure which later constrainsthe strategic choices they
may make.

INTRODUCTION

One of the difficulties of a theory of organizations is the richness of the reality it

attempts to describe. Nowhere is this seen more clearly than when one tries to define the
links which exist between strategy and structure, the topic of this article.
Since the work of Chandler (1962) the relationship between strategy and structure
has been the subject of a number of conceptual and empirical studies. The intention has
been either to show the direct or indirect links from strategy to structure. Direct links
are where structure can be explained by the nature and diversity of the products and
markets of the organization (Chandler, 1962; Channon 1973; Rumelt, 1974). Indirect
links are where structure is determined by the characteristics of the technology
employed (Woodward, 1958; Harvey, 1968; Perrow, 1967; Newman, 1971-72), by the
nature of and variations in the environment (Emery and Trist, 1965; Lawrence and
Lorsch, 1967), and by size (Pugh et al., 1969; Child and Mansfield, 1972).
Whilst not denying that an organization is influenced by all these variables, we want
to concentrate on the difference between the influence on structure of strategy after it
has been formulated, and the influence of the existing structure on strategy at the time it
is formulated. Our argument will have three steps. First of all we shall examine the most
widespread belief-that structure follows strategy. Then we shall specify what is meant
by the terms organization, structure, and strategy. Finally we shall try to show how
structure may determine strategy.
0143-2O95/80/0201-0149$01 .OO Received 9 October 1979
0 1980 by John Wiley & Sons, Ltd. Revised 2 January 1980
150 D. J . Hall and M. A . Saias
STRUCTURE FOLLOWS STRATEGY

Chandler, the pioneer, tested the general model depicted in Figure 1 by examining the
historicai development of American corporations. The results of his research generated
the basic propositions of the dynamic model of strategy and structure illustrated in
Figure 1.

Et
I’
R:
I
\ sf’
I ’?I,
I I I
I I I
I
I
I
E:2 b \
t t
I I S -St‘2
I I 12 I
Et‘3 4 1 S1
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Figure 1 . Dynamic relationships between strategy and structure in the ‘classical’ model.
E = Environment, R = Resource (Capabilities), S = Strategy, St = Structure, ti = time

The nature of the environment ( E , , ) and the resources (R,,)of the organization
influence the strategy (S,,) chosen at time r,, and this, in turn, determines the
organizational structure (St,,). Then the evolution of the environment and/or of the
resources of the organization brings about a new strategy (S,,) and a new structure
(St,,).This is what Chandler expressed in his general thesis (1962: 15):
‘Strategic growth resulted from an awareness of the opportunities and needs
-created by changing population, income, and technology-to employ
existing or expanding resources more profitably. A new strategy required a
new or at least refashioned structure if the enlarged enterprise was to be
operated efficiently.’
Much later (p. 314) he confirms it:
‘Unless structure follows strategy, inefficiency results. This certainly appears
to be the lesson to be learned from the experience of our four companies.’’
These direct effects are indicated by solid arrows in the ‘classical’model. Dotted arrows
reflect the influence of previous on subsequent periods.
What is not fully considered in this approach is the effect of the dotted arrows. These
provide constraints on choice which are compounded by the nature of the human and
organizational phenomena involved. Very often firms will try to meet environmental
and structural demands without realising that they have implicitly adopted a new
strategy. Only later-and sometimes much later-will the resulting organizational
strains lead to a modification of the structure itself and an explicit recognition of the
strategy. We shall argue therefore that strategy grows out of structure and in turn may
lead to its modification.
Chandler himself points out that more often than not long delays took place between

In fact Chandkr studied seventy firms, but only considers four in detail in his book.
 Strategy Follows Structure! 151

the introduction of a new strategy and the modifications of organizational structure

which should follow (1962: 171):

‘To carry out this fundamental policy of vertical integration and to meet the
demands of the fuel oil and gasoline market, Jersey Standard was forced to
add new and to expand existing resources of equipment, plant, and
personnel. . .Yet, despite these steadily mounting pressures, many years were
to pass before Teagle and his associates paid serious attention to their
company’s management structure.’

In fact the structure conceived in 1927 was not finally put into effect until after the
Second World War. It was the same with Sears, Roebuck & Co. (p. 241)

‘Then, in 1940, influenced by the unplanned growth of local administrative

units and also by the renewed and energetic expansion of Sears’s business, the
General and his associates began to put into effect a structural design based
on the Frazer Committee’s original report .’

This report dated from 1929.

We suggest therefore that Chandler’s comment (p. 315) is significant:

‘Yet, structure often failed to follow strategy. In each of the four companies,
there was a time lag between the appearance of the administrative needs and
their satisfaction.’

Before illustrating the ways in which we think structure may pre-determine strategy,
we should like to clarify the concepts that we shall use.

STRATEGY, STRUCTURE, ORGANIZATION

The terms organization, structure, and strategy have frequently been defined in the
literature. We do not propose to add new definitions, simply to choose those which will
best serve our argument.
Strategy may bedescribed as a statement of the vital missions of an organization, the
goals which must be attained, and the principal ways in which the resources available
are to be used.
Structure for Chandler (1962: 14):

‘whether formally or informally defined, has two aspects. It includes, first, the
lines of authority and communication between the different administrative
offices and officers and, second, the information and data that flow through
these lines of communication and authority.’

For organization theorists structure is at once the formal distribution of roles, and the
administrativemechanisms which facilitate the control and integration of the different
activities performed.
Consequently,structure is more than just a planned network; it is also what happens
152 D. J. Hall and M. A. Saias

in the network, or the process that takes place within and between the constituent parts.
The result of this process is the organizational culture, which is reflected in the ideas,
beliefs, and values of its participant members. The process can be thought of as having
three elements.
First, organization members belong to more than one society and bring with them
values and beliefs from these external allegiances. For example it is well-known that
scientists in a research department will think and judge in ways which are strongly
influenced by their professional values. The same can be said for engineers, salesmen.
production men, and accountants. Moreover wide social allegiances-such as
nationality, social class, and community-all play a part in directing the opinions of
organization members.
Secondly, any organization is a structure within a structure since the collaboration of
others-suppliers, customers, competitors, and government-is required if it is to
function and survive. So structure is also a political hierarchy, defining relationships of
power and dependency. This hierarchy, even if its origins are external, has to be
internalised and so becomes part of the organization structure. This internalisation
process is well described by Thompson (1967).
Finally, the working experience of organizational members, in terms of their personal
success and failure with the tasks for which they are responsible, will lead to convictions
that represent their image of the real world. The actual structure of an organization
consists of formal and informal elements, as with law and custom in society. Where the
two become decoupled, then the formal structure becomes increasingly ideational-or
myth and ceremony. They are decoupled, or slip out of gear:

‘when conformity to institutionalized rules . . .conflicts sharply with efficiency

criteria.’ (Meyer and Rowan, 1977).

Any study of the relationship between strategy and structure must concern itself with
the real rather than the formal structure.
The interaction of all these variables, in the process of accomplishing the
organizational task, generates the culture which is an integral part of an organization’s
structure. To sum up our point-of-view, structure is the conceptual and functional
framework of an organization, as well as the configuration of its resources.
An organization is an ordered set of activities and relationships between at least two
people. The emotional consequences of these activities and relationships, what we shall
call feelings, are an important part of this network and a product of its functioning
(Nightingale and Toulouse, 1977).
These feelings stem from initial expectations, the process of collaboration in the
organization, and an evaluation of the results achieved. They can themselves become
strongly-held objectives such as ‘saving face’ for an individual, or ‘protecting the
company’s name’ for an organization. Collective feelings, just like individual feelings,
may or may not correspond with external reality. Whether they d o or not, it is certain
that they direct attention, and so play an important part in what is noticed or done.
This influence on attention and action is retrospective, as pointed out by Weick
(1969: 8):

‘It is as if the persons acted so that theycouldeventuallydeterminewhat it was

that they had done. This sequence in which actionsprecede goals may well be
 Strategy Follows Structure! 153

a more accurate portrait of organizational functioning. The common

assertion that goal consensus must occur prior to action obscuresthe fact that
consensus is impossible unless there is something tangible around which it
can &cur. And this “something tangible” may well turn out to be actions
already completed. Thus it is entirely possible that goals statements are
retrospective rather than prospective.’

An organization, therefore, is not only an ordered set of activities and relationships,

but also an image of what it has been in the past.
Now that we have specified what we mean by the concepts of strategy,structure, and
organization, we can begin to consider a new kind of relationship where structure
determines strategy.

STRUCTURE DETERMINES STRATEGY

Our claim that structure partly determines strategy does not rely upon any empirical
research, and for the time being is only of a hypothetical nature. It is founded upon the
personal observationsof the authors, their knowledge of a number of organizations, an
analysis of the literature, and common sense.
Although Chandler was primarily concerned with the relationship between strategy
and structure once strategy had been formulated, he nevertheless writes (1962: 45):
‘The multidivisional structure at General Motors did not come as a response
to administrativeneeds resulting from a strategy of diversification.Rather, its
innovators saw it as a new way of administeringa combination or federation
of enterprises.’
and (p. 46):
‘Furthermore,because of its administrative structure, it was able to execute
brilliantly a broad strategy of diversificationinto the making and selling of all
types ofengines, and products using engines, in the years after the automobile
market fell off in the late 1920s.’
Indeed one might say that structure often precedes strategy. Strategists accept this
when they take structural phenomena explicitly into account in their internal diagnosis.
With the inside/out approach they admit that strategicchoices are directly determined
by the condition of the structure, and with the outside/in approach that they are
influenced by the structural elements of the diagnosis.
It is precisely this impact of structureupon strategy that we now wish to consider.We
shall first examine how structure can predetermine the introduction and subsequent
development of strategic planning in an organization. Then we shall look at the ways in
which structure can affect the organization’s perception of internal and external events.
Lastly we shall try to understand how it can sway the strength, speed, and character of
strategic decisions.

Structure determines the introduction and subsequent development of strategic planning

Chandler was not interested in the process of strategy formulation, which he took as
154 D . J . Hall and M . A . Saias

given. Such an interest reveals that the introduction of strategic planning in an

organization depends upon the presence of a person or a group of persons who
advocate long-term thinking. As Weick remarks (1969: 1 I):

'A recurrent finding is that groups seldom plan, even when given the
opportunity to do so.. .. It has repeatedly been found that when groups are
assigned a task, they immediately start to perform it and spend little time
considering alternative performance strategies. Furthermore, in discussion
groups, members tend to evaluate immediately any solution that is offered.
As soon as a solution is presented (even if it is incomplete), it isjudged as good
or bad and then used or discarded.'

Moreover, in practice the effort required to draft the first strategic plan is so heavy
that there is little chance of it being spon!aneous. If the effort is spontaneous it is
unlikely that it will continue. Often a strategic plan remains unique, is never put into
effect and/or is never revised. One can therefore talk about the failure of strategic
planning, or in other words its neglect just after its introduction or later on. If strategic
planning is to succeed and grow, a constant pressure is required. This requirement is
only fulfilled if both the organizational structure and the attitude of top management
are favourable.

The role of top management

Our observations indicate that the concern of top management is fundamental to the
sunhal of planning. This concern can show itself in several ways. First, top
management publicly declares the importance it attaches to the process of planning,
and its determination to guide and control the future of the organization. Second, it
specifiesthe objectivesand overall missions of the organization and then sticks to them,
other things being equal. Third, it is realistic and does not vaunt the merits of planning
beyond what can be accomplished; for it is indeed dangerous to generate expectations
which have little chance of being satisfied.
In addition, the willing collaboration of organization members is needed. Keeping
them in the dark deprivesthe organization of the contributions which they could make.
But once a genuine communication policy is established, then the continued existence
of strategic planning depends upon the reaction of top management to suggestions for
change, and the wish for greater involvement by organization members. It is therefore
sometimes necessary to have the courage to realise that the organization-or even top
management itself-is not yet ready for the process of planning or the contents of the
plan. All this implies a high degree of realism and self-knowledge on the part of top
management. Care is needed not to let structural features of the organization get in the
way of the development of planning. In other words the organizational structure may
sometimes have to be modified before strategic planning can be introduced.

Structural characteristics and the growth of planning

It has been known for top management to have such faith in decentralisation that it
abdicates responsibility, all decisions becoming the responsibility of the divisions.
Where this happens the initiative for the launch or revision of a plan will not come from
top management-and probably not from the divisions. Even if the latter do feel the
 Strategy Follows Structure! 155

need to initiate the process, the probability of reaching a satisfactory conclusion

remains slight because of the harrowing audits an overall plan would entail. This kind
of firm is generally to be found with a series of divisional plans which, when added
together in a more or lesscoherent fashion, serve as the overall strategic plan. Proactive
strategy leading to an anticipatory attitude for the total organization is often
suppressed; strategy no longer exists as a coherent and integrated whole. Thus overall
strategy becomes the lackey of the structure.
An excess of centralisation leads to similar mistakes. In this case every important
decision is made by top management, and little room for manoeuvre is left to their
subordinates. Those who have the best knowledge of the environment cannot decide or
act; many errors are inevitably made, and this leads first to a lack of confidence in the
plan and then later to its abandonment.
Bureaucratic structures also possess a culture which is unfavourable to the birth and
development of strategic planning. In this kind of structure a very formal and
procedural system of planning is most frequently chosen. Those in charge attach more
weight to form than substance (Meyer and Rowan, 1977); they fill out long and useless
forms, and devote themselves to calculations of little interest or real value. They forget
that the essential merit of a strategic plan is to think about the future in a creative and
non-extrapolative way. Where top management is not fundamentally attached to the
planning process, and where division heads enjoy a certain degree of autonomy, the
plan is frequently abandoned. If, on the other hand, autonomy in the divisions is slight
or top management cherishes the planning process, then the plan itself may generate
internal conflicts. Here too strategic planning will probably be abandoned in order to
resolve or reduce these conflicts.
Three more reasons for the failure of strategic planning can be attributed to
bureaucratic structures. First, operational plans and the strategic plan may be
inconsistent with each other because of too much detail or excessive specialization in
their preparation. Second, with the laudable intention of being thorough from the
beginning, an important group of planners is appointed. This group then tries to place
itself at the centre of decisions and other senior managers, to protect their power, resist
and reject the planning. Lastly, it often happens that the organization structure is too
rigid to permit the adaptation of salary and promotion systems to the strategic plan.
Short-run performance continues to be rewarded, rather than systematic efforts to
achieve planned results.
Finally, planning fails or is only introduced with difficulty when the organization has
an insufficient number of well-educated managers. The construction of the plan
appears needlessly complex, and is therefore rejected since its value is not fully
understood. If it is not rejected the contributions can be so mediocre that the plan
becomes dangerous, and so top management itself puts an end to the experiment.
Failure isjust as obvious in those situations where the organizational structure does not
possess any slack. The additional work-load caused by planning is too heavy and so,
consciously or not, the managers reject it.
We have just presented some of the reasons why structure can make it difficult to
introduce and develop strategic planning in an organization. If these barriers do not
exist, or if they are overcome, can one then conclude that structure no longer has any
role to play? Not at all, for what goes into the strategic plan is also directly influenced
by the structure. The latter affects the orgahization’s perception of its environment and
its own capabilities, as well as of the kind of responses which can be made.
156 D . J . Hall and M.A . Saias

Strategic perceptions are conditioned by structure

An organization decides and acts in accordance with its perception of changes in the
environment or in its own capabilities:

‘Important organizational environments are those which are enacted or

created through a process of attention.’ (Miles, Snow & Pfeffer, 1974: 249).

The structure can make an organization more or less short-sighted or blind:

‘The organization whose managerial talent is fully employed in the operation

of the existing technology and process is unlikely to perceive new
environmental threats or opportunities’ (Miles, Snow and Pfeffer: 261).

Structural characteristics act like filters and limit what the organization can see
(Weick, 1969; Miles, Snow, and Pfeffer, 1974; Leifer and Huber, 1977).
This role of structure is portrayed in Figure 2.

Information
k-Structure
Strategic plan

Figure 2. Structure as filter

Incoming information is paid greater or less attention by various structural elements.

When the information is judged interesting, it is subsequently transmitted to other
elements. Note that the transfer process itself is not neutral. Information is often
interpreted and changed by the way in which it is transmitted. The sensorial capacity of
the structure in large part governs the quality of information received and the speed of
its transmission. Research tells us that decentralized structures tend to respond rapidly
to events, whilst bureaucratic structures restrict the perceptual ability of the
organization as well as the flow and speed of communications within it (Dill, 1958;
Bums and Stalker, 1962; Thompson, 1967; Lawrence and Lorsch, 1967; Scott, 1971;
Duncan, 1972).
In other words, important delays can sometimes occur between the appearance of an
event and its recognition by the organization. Such inadequate perceptions and the
delays observed may be explained by the existence in all organizations of programmes
of behaviour designed to produce standard responses to certain classified signals. If an
event does not correspond to one of these signals, it may either be judged unimportant,
or not even be seen at all. Any organization that coordinates resources does so
according to certain rules-or yardsticks-which are then used to monitor
performance. In an anthropological sense these rules form the culture of the
organization, and so limit the imagination of its members. Over time and with success,
 Strategy Follous Structure! 157

this constraint or limitation becomes extremely powerful. It is for this reason that
countless large and powerful organizations refuse to change and may indeed collapse.
They have come to see the environment as it ought to be and not as it is (Meyer and
Rowan, 1977).
As Starbuck and Hedberg (1977: 253) observe:

‘An organization’s top management develops a characteristic world view that

is shared by many lower-level personnel: this world view dictates what
phenomena the organization will try to perceive and what phenomena it will
ignore; then, when happenings are perceived, the world view determines
how they are interpreted.’

Although most of the research cited has been concerned with the effect of structure
on perceptions of the environment, the conclusions reached could equally well be
extended to perceptions of the internal reality of an organization and its resources. For
example, Murray (1978: 969) reports that in an electric utility:

‘The high degree of commonality of membership between the Coal Estimates

Committee and the Expenditure Control Committee left relatively little room
for the infusion of fresh ideas, dissenting views or new approaches. As a
consequence, the way was paved for consensual decision-makingbased partly
on past routines and a perceived need for consistency.’

Once an organization begins to operate, the nature of its structure limits its
perception-both of itself and of its environment. An organization is designed for
action, not for reflection.

The influence of structure on strategic decisions

From the preceding discussion one can infer that few organizations succeed in
identifying the problems with which they are faced in a realistic manner. An
organisation only attaches importance to the threats, opportunities, strengths or
weaknesses which make sense in the light of what it is accustomed to perceive, which
often coincides with the world view of top management. It would be illusory to believe
that an organization can spontaneously identify its problems, create a set of potential
actions to resolve them, and select those which correspond to the best or even to a
satisfactory solution. An organization acts, not because it has problems to solve, but
because it has been conceived for action. Engaging in activity is,more natural for an
organization than solving problems, and the two processes are largely independent
(Starbuck and Hedberg, 1977).
Precisely these considerations persuaded strategists to select an analytical frame-
work which would help them perceive and solve problems and at the same time
guarantee logical and consistent choices. In so doing, they disregarded the critical
influence of an organization’s culture on the decisions which its members are able to
make. By culture we mean the perceived world which members have in their heads; the
beliefs and norms which they have developed in working together. Structure affects
strategy not only on a rational level, but also on an emotional and moral level through
the felt imperatives of a particular ideology or corporate identity. We propose to
examine some of these effects on the constituent parts of strategy.
158 D. J. Hall and M . A . Saias

Structure and strategic business areas

An organization can only succeed by asserting itself in some field of its environment
(task environment in the sense of Thompson, 1967). The choice of a business area is
crucial and constitutes the first strategic manoeuvre. Most plans assume a cognitive
content to this choice, as though it were sufficient to find the best fit between the
capabilities of the organization and the opportunities presented by the environment.
This is both naive and dangerous, for the background of power and internal processes
against which such choices are made are ignored. These elements in their turn are
founded in the organization's structure and history.
It is essential that the power centres in the organization approve and defend the
choice of a business area if it is to develop. Where such a choice involves a real
innovation, it is very likely that the area will be considered illegitimate, at least in part.
and that it will not get enough support to grow. Standard operating procedures,
internal and external communication channels, salary and promotion systems, budget
and control systems, all of which give expression to the existing power structure and
social system, will let certain ideas flourish and dash all hope for others. The more
change in the elements of the structure required by the choice of a strategic area, the less
likely it is that this activity will be accepted or put into effect.
The fields of activity in which an organization chooses to develop and grow are
therefore often subject to the effects of structure.

Structure and growth vector

First let us agree with Normann (1977) that there are two processes going on in an
organization, an exchange process and a development process. The former consists of
transforming inputs (raw materials. different kinds of energy, etc.) into outputs
(products and systems); the latter is that of growth, including amongst other things the
discovery of opportunities for new activities, internal technological advances, and the
learning of new methods. He remarks (1977: 16):
'. . .it is a well-known problem that those features of the organizational
structure that encourage an efficient development process are not always the
same as those that support an efficient exchange process.'
The examples of Ford in the 1920s and Volkswagen more recently provide strong
support for Normann's argument, illustrating the role that structure plays as a moving
or restraining force on the exchange and development processes. But let us single out
the impact of structure on expansion and diversification, the strategic choices which are
inherent in these two processes.
One can infer from Normann's (1977) research that any strategy leading to the
acquisition of new businesses, the use of a new technology, or the search for a new
market, will clash with the systems already in place in the organization. In particular, a
rigid centralized structure, which is perfectly suited to situations where cost reductions
and productivity gains are essential, may prevent any adjustment to economic and
technical changes, so tautly is it stretched towards a single objective. This kind of
structurecannot toleratechange,whereas others, on thecontrary, allow and encourage
it. As Bruce Scott (1971) writes:
'(Profit Centre Structures) can accommodate entry into businesses with
minimum internal disruption via the addition of a new division.'
 Strategy Follons Structure! 159

The combination of certain elements of structure may even be found associated with
the beginning of innovation and diversification.Thus, Becker and Stafford ( I 967) have
shown how the growth of an organization generates an increase in assets and the
number of administrativeemployees.A slowing down of business does not necessarily
lead to a reduction in the labour force; it often leads to new strategies, such as product
or market development. This development justifies keeping the assets and
administrative personnel much more than it improves the efficiency of the
organization. Becker and Stafford (1967) found that assets and number of
administrative personnel are positively correlated, as are administrative personnel,
assets, and rate of innovation. On the other hand, adoption of innovation and
efficiency are negatively correlated.
Chandler himself (1962) had already noted the influence of structure on
diversification. With regard to Dupont de Nemours he writes (p. 90):

‘The strategy of product diversificationwas a direct response to the threat of

having unused resources.’

and with regard to Sears (p. 233):

‘The entrance into direct retailing, the most significant single step in Sears’s
history, was the work of a group of new top managers.’

Structure, therefore, does influence the way organizations grow. It is however

equally important to analyse the source of that growth, whether it is internal or
external, and to take into account the way in which the existing structure can affect it.

Structure and ‘make or buy’

Expansion and diversification can result from internal growth as well as from mergers
and acquisitions. Yet the success of a strategy of internal growth or merger and
acquisition is strongly dependent on the prevalent culture of the organization. The role
of structureis readily seen in expandingfirms, and becomes fundamental in those which
are diversifying.
Berg (1973) and Pitts (1977) have described the relationships between structure and
internal or external diversification. They indicate that internal diversification is
accompanied by substantial resource-sharing between divisions, whereas external
diversification is not. In firms which diversify internally, the numbers of top
management and their staff are substantial, the responsibilities concerning
technological development (research and development, methods, etc.) are centralized,
senior managers pass easily from one division to another, and performanceis evaluated
subjectively.By contrast, firms diversifyingexternally have very small top management
teams, divisions which are themselves responsible for technological development, few
transfers between divisions, and performance measures based on more objective
criteria.
These findings, if they are confirmed by further research, show how difficult it is for a
firm to pursue both internal and external diversification at one and the same time.
Internal diversification, if it is to succeed, depends upon the mobilization of all the
firm’s resources in support of the new business. On the other hand, the success of
external diversificationrequires an organizational culture which allows a great deal of
 160 D. J . Hall and M . A. Saias

autonomy to each business. This enables the organization to attract and keep new
teams of managers who are competent in these business areas. Managers who have
been accustomed to manage their own business want to keep their independence. Any
attempt to integrate them after a merger or an acquisition stands little chance of success
if it means abandoning their own culture and adopting new values. Such pressure leads
to rejection on both sides, and a reputation which makes it difficult in future to acquire
other firms.
Thus it seems clear that a structure which is not accustomed to share resources often
has difficulty in adapting to a strategy of internal diversification. In both cases the
prevailing structure constrains the strategic choices available. The relative failure of
diversification strategies and the reservations encountered in business circles today can
partly be explained by an underestimation of the role of structure, and partly by the
belief that structure can rapidly adapt to new strategies. Firms which succeed in
diversifying risk great disappointment if they manage their diversity like a business
portfolio, without explicitly taking into account structural constraints and their
consequences on employee behaviour and the organizational culture.

Structure and business portjolios

The intense period of diversification which took place in the 1960s created new
management problems which the ‘business portfolio’ technique set out to solve. This
technique, popularized by the Boston Consulting Group (B.C.G.) under the name
market share/market growth matrix, was later refined by some large multinational
corporations (General Electric, Shell) who describe it as the ‘stop light’ or ‘directional
pAicy’ matrix, and now forms part of the methodology currently used in strategic
planning. The technique groups businesses according to certain characteristics. The
BCG matrix enables us to classify businesses into four categories according to their
market growth rate and market share. The directional policy matrix groups businesses
in nine categoriesor more as a function of the attractivenessof their environment and
the competitive position of the firm. Each distinct cell in the matrix lends itself to a
particular strategic treatment which it is not our intention to describe here. Simply let
us note that each category requires an information system, a reward and control
system, a manager profile and a culture that may differ the one from another.
In the BCG matrix for example the managers of a business in the dilemma cell are
required to act as entrepreneurs. This means being open to new ideas, concerned
essentiallywith improving market share, and ready and willing to take risks. They need
accurate and abundant R & D marketing information; in other words systems that are
essentially outward-looking.If on the other hand the manager’s reward system is linked
to the firm’s return on investment, he may tend to jeopardize long-term growth by
concentratingon short-term results. Managers of a business in the star cell need both a
good marketing and financial information system. Their main concern is to maintain or
increase their market share whilst carefully monitoring their net cash flow. Pricing
strategy is fundamental and may be endangered by too much concern with
profitability. At this stage of development in a business it is easy to increase margins
substantiallyand to pay insufficientattention to asset turnover. This kind of behaviour
may lead to serious difficulties later on, and if the business fails dramatic write-offs may
have to be made.
The managers of a cash cow are primarily responsible for the generation ofcash, and
they should in principle be willing to give cash away to those other businesses in the
 Strategy Follows Structure! 161

portfolio which need it most. Their natural tendency of course is t o reinvest the cash
surplus into their own business. But this means investing in a business without a future,
and jeopardizes that of the other businesses. Therefore an appropriate reward system is
based-both on return on investment and cash made available to other businesses. The
cash generator is not an entrepreneur. His information system is primarily internal-cost
control, improvements in production techniques, etc. Finally managers of businesses in
the’dog’cell need t o bediplomatic, political, and understanding. Their role is to get rid
of a business without creating trouble. It is easy to imagine the effect on such managers
of a reward system stressing return on investment or increases in market share.
The portfolio technique assumes that an organization’s corporate structure is
sufficiently flexible to allow different kinds of businesses to exist and even more t o
flourish simultaneously. It is not hard to imagine the potential conflicts of such a
situation, which becomes more violent when it is a question of launching or abandoning
a business.
In practice these difficulties have been met by the superposition of strategic business
units on a divisional structure. But the fit of these two structures is only possible to the
degree that the original structure accepts it. More often than not one must be able to
manage two different kinds of business and it is still too early to assess the results of this
superposition of structure.

Structure and synergy

Strategic success and the level of performance are a function of the synergy existing
between the different businesses of an organization. Synergy is the result, positive or
negative, of the combination of several elements of the same system. Our earlier
definition of structure (p. 152) enables us to grasp the impact it will have on the nature
and intensity of synergy.
Everyone can bring to mind cases of merger or acquisition where the initially
promising combination of complementary resources resulted in a clash of structures
and disappointment. Similarly everyone can think of cases where plans to attack new
markets or new technologies, by firms which in principle enjoyed positive synergies of
marketing and R & D and thus potential mastery, have failed because the structure
could not integrate them.
In all these cases positive synergies did not achieve their potential on account of the
structure, and indeed sometimes became negative.

CONCLUSION

In this paperwe have tried to show that the relationship between strategy and structure
is complex and iterative.
I t is necessary to recognize that in reality structure is the result of a complex play of
variables other than strategy; culture, values, the past and present functioning of the
organization, its history of success and failure, the psychological and sociological
consequences of technological development, and so on. Structure, then, assumes a
political content in the same way as strategy, and there is no reason to subordinate one
to the other.
In practice, we have tried to show that the hypothesis of a dependent relationship
between strategy and structure could be made in both directions; one can in fact accept
162 D . J . Hall and hi. A . Saias

that structure follows strategy but equally that strategy follows structure. It is therefore
reasonable to understand Chandler’s position (1962: 314): ‘Unless structure follows
strategy, inefficiency results.’ as meaning: ‘Unless structure matches strategy,
inefficiency results.’
The idea of a match between strategy and structurewithout reference to a sequence is
nearer to the intention of Chandler and his followers. It must still be accepted that this
match and the efficiency which may result seems for the time being to be limited to
competitive environments. As Galbraith and Nathanson (1978: 139) point out:
‘If a firm has power over its environment so that it can control prices because
of monopoly position, tariffs, or close ties to government, it can maintain
effective economic performance even if there is a mismatch between strategy
and structure.’

Over the long term however, we believe that a mismatch between strategy and
structure will lead to inefficiency in a// cases, that is to say a less than optimal
input/output ratio. This is precisely the reason why strategists must pay close attention
to structure when elaborating strategic plans; not to take structure into account is to
condemn the firm to inefficiencyand to fall into the error of believing that it will follow.
In the present state of the evolution of the environment, it would be dangerous to rely
upon the sequential propositions of the more traditional model. The latter needs to be
revised in the simplest possible way by recognizing that the relationships between
strategy, structure, and the environment are symmetric; the environment conditions
strategies and structures whilst they in their turn shape the environment through the
weight of the organization’s resources.

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