CHAPTER 5 – ORGANIZATION STRUCTURE and STRATEGY

Objectives:

Discuss the ways that communication and coordination can occur

in different organization structures.
Know the different types of organizational activities.
Determine types of issues and the critical dimensions of organization
structure.

An organization is a collection of resources that are linked together to transform inputs into
outputs, and an organization structure is the framework that evolves (or is designed) to
facilitate communication and coordination between organization members so that this
transformation can take place. The way an organization arranges its resources, including
its people, and the mechanisms that link these resources and make them cohesive, are
dimensions of an organization’s structure.

If organizations’ environments were unchanging, an ideal organization structure would

optimize the conversion of inputs to outputs and could be left to accomplish the task
unendingly. It is difficult to imagine such a scenario because organizations operate in
environments where consumers’ choices can be fickle, where raw materials become
scarce, where governments change laws and where shareholders expectations change.
This suggests that organizational members invariably undertake routine and non-routine
tasks.

Handy (l993) categorized four (4) different types of organizational activities:

1. Steady-state activities: These are routines that account for most of the work of
the organization, and are typical in manufacturing, sales and accounting.
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2. Innovation activities: Concerned with changing the things that the organization
does or the ways it does them. Exemplified in such activities as marketing,
product research and development, process development and innovative training.

3. Crisis activities: Associated with dealing with the unexpected and are likely to
be encountered by those departments and people who interface with the
organization’s environment.

4. Policy making activities: Concerned with the overall guidance of the

organization.

The activities of an operations department in a high-volume manufacturing plant are likely

to have different internal and external relationships and controls from those of a design
department. Although the organizational cultures are not homogenous, we would expect
the sub-cultures to be compatible. So, whilst the control mechanisms and motivation may
differ for senior managers, designers and assembly workers, the sub-cultures should be
compatible in that they share a common sense of purpose. Different sub-units should be
able to work separately but cohesively, so that they can be differentiated whilst remaining
integrated within the corporate whole. In addition to this, the organization should be able to
evolve so that its structure remains compatible with effective strategy creation and
implementation.

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These types of issues and the critical dimensions of organization structure that underpin them
are explored through the work of the following key authors:

Alfred Chandler.
Larry Greiner.
Henry Mintzberg.
Michael Goold and Andrew Campbell.

Alfred D. Chandler: Strategy and structure in large industrial enterprises.

He studied industrial enterprises and define it as a large private profit orientated

business firm involved in the handling of goods in some or all of the successive
processes from the procurement of raw materials to the sale to the ultimate customer.
He observed that as companies grew there is the possibility of an administration crisis
before appropriate structures were developed. He concluded that new strategies
created new administrative needs, but that executive could administer.

Figure 5.1 The Multi-divisional Structure

The general office or headquarters is responsible for planning, coordinating and

appraising the activities of the quasi-autonomous divisions. The division’s central office
administers a number of functional departments. The managers of the functional

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departments are responsible for the administration of the field offices. Chandler
distinguished between administrative and functional work.

Administrative work: The domain of the company executives and is concerned with two
kinds of tasks:

1. Those tasks that are concerned with the overall co-ordination and efficient
operation of the enterprise.
2. Those tasks that are concerned with ensuring the long-term health of the
organization.

Functional work: Involves the actual buying, selling, processing or transporting of

goods.

Chandler noted that as strategy developed, successful organizations developed

structures that supported its implementation. Chandler concluded that structural change
not only served to make strategy implementation more efficient but also created an
environment in which strategy would be made differently. The suggestion is that strategy
influences structure, and that structure influences the way strategy is formed, which
influences its content.

Larry Greiner: Strategy, structure organization growth

Greiner’s (l972) ideas were developed in the early 1970 before information technology
increased the possibilities for cross-and inter-organizational communication. Nonetheless,
the propositions that are implicit in his work are an important contribution to the
frameworks for understanding organization structures:

1. Organizations can and do fail if there is an inappropriate fit between

structure, strategy and environment.
2. Strategy structure misalignments occur when organization structure is rooted in
its history rather than its present situation.
3. Successful organizations overcome these problems by going through periods of
evolution and revolution.

A period of evolution is when the organization a long period of growth where no major
upheavals in organization practice. The model says that organizations require different
structures as they grow, and that organizations that survive are those that change their
structures.

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Phase 1: Foundation and early growth

In the beginning the organization is staffed by its founders, who subsequently recruit
employees as the company grows. It has a simple structure, with power resting with the
founders, and where control and decision-making is achieved through informal
communication. Handy (l993) has described the culture in embryonic organizations as a
power culture in which the leader sees the organization as an extension of him or
herself. As the organization grows the ability of the owners to maintain control is
reduced until there is a crisis of leadership. The informal manner in which the
organization is managed is no longer adequate because it cannot:

➢ cope with higher production volumes;

➢ co-ordinate increased employee numbers;
➢ Motivate employees who no longer identify with founding ideals;
➢ Manage both support and primary activities

The organization can survive this crisis by developing an organization structure that
facilitates control and communication and allows specialist managers to run the
company.

Phase 2: Direction

As a result of its growth the organization develops a functional structure (see Figure
5.2) that can support increased turnover in established and new product areas. The
senior management team now becomes responsible for the direction of the company
while those below it assumes responsibility for the control of the functional tasks of
production, distribution and marketing. As the organization continues to increase in
complexity through the growth in the number of inputs, processes and outputs, there
comes a stage when senior managers cannot cope with all the demands being made on
them, and as a consequence junior manager are torn between following procedures or
taking their own initiatives. The emerging crisis requires greater autonomy for junior
managers, with failure occurring when senior managers remain reluctant to delegate,
and when junior managers are unable to adjust to making non-routine decisions.

Phase 3: Delegation

At this stage the organization can survive by developing an organization structure that
pushes some elements of strategic decision-making down the organization. The
decentralization of responsibility and power also encourages the development of
relationships between middle managers, which can make senior executives
uncomfortable if they feel that the growing influence of functional and line managers
reduces their overall level of control within the diversified organizational structure. If

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managers do become parochial and run their own individual units as quasi-independent
businesses, then co-ordination and integration with the rest of the organization can be
inhibited.

Figure 5.2 Functional Organizational Structure

Phase 4: Coordination

The solution to these problems, according to Greiner, is to move to divisional structures

that are coordinated by formal planning procedures within and across central, divisional
and functional areas (see Figure 5.4). These structures can have activities that have
both a functional role within divisions and be centrally coordinated: accounting and
finance, for example, can have central and divisional arms. The danger with these
structures is that they can become over-bureaucratic and induce a crisis of red tape,
and in these circumstances, it is likely that organizations will have to progress co some
form of collaborative structure.

Phase 5: Collaboration

In this phase the emphasis is on collaboration between divisional groups and between
the center and these groups, which can be made possible through a move to a more
matrix style structure like the one shown in Figure 5.5. Greiner was optimistic that the
use of matrix structures and the development of managers with appropriate behavioral
skills would overcome ‘red tape crises’ in larger organizations even though it was not
specified how these ideas would be put into practice.

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Figure 5.4 Co-ordination through formal planning

Figure 5.5 Matrix organization structure

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Henry Mintzberg: Control and coordination in organizations

Mintzberg (2002) recognized that an organization’s structure is not only dependent upon
its age or size but is affected by other situational features, such as:

➢ the nature of the technology used in its transformation processes.

➢ the nature of the environment.
➢ the distribution of power inside and outside of the organization

All organizations have units whose task is to provide the service or produce the goods
that define the organization’s purpose. This is the operating core. The overall control of
the organization is in the hands of the strategic apex. However, as the operation grows
a hierarchical middle line is created between the strategic apex and the operating core.

As the organization becomes more complex two additional groups of people may be
required:

1. people who Mintzberg describes as analysts, who are responsible for

designing the way others do work; this is the technostructure and it exists
outside the hierarchy of line authority.

2. Those people who supply support services to the organization, such as

legal advice and canteen facilities.

Mintzberg also suggests that every ‘active’ organization has an ideology (analogous to
Johnson’s cultural web. Each of these six components (i.e. the operating core, the
strategic apex, the middle line, the technostructure, the support services and the
ideology) plays a role in the production of an organization’s outputs. For outputs to be
produced organizations also have to have mechanisms of coordination. Organizational
coordination, according to Mintzberg, is facilitated through six basic mechanisms:

1. Mutual adjustment.
2. Direct supervision.
3. Standardization of work processes.
4. Standardization of outputs.
5. Standardization of skills.
6. Standardization of norms.

By using Mintzberg’s model it is possible to discuss the ways that communication and
coordination can occur in different organization structures.

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Communication and coordination in simple structure

In simple structures the prime coordinating mechanism is direct supervision by the

strategic apex. The structure of a general score is shown in Figure 5.6, and in this
structure, coordination is through direct supervision, although mutual adjustment and
formal/informal work standardization are also present. The process is informal, with the
key driver being the owner manager.

Figure 5.6 Communication and coordination in a general store

Communication and coordination in machine organizations

(e.g. traditional manufacturing firms)

The biggest part of the organization is likely to be the operating core. The prime
coordinating mechanism in the operating core is work standardization, which means
that the technostructure is important (although other mechanisms are also likely to be
present).

Many traditional manufacturing firms have functional structures, which means

that there is a requirement for control and coordination within and across functions. The
coordination within functions will be significantly affected by the nature of the work done.

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Coordination in functions that are professionally staffed and involve the production of
variable and complex outputs, such as research laboratories or design offices, will differ
from coordination in functions that conduct routine repetitive tasks.

Communication and coordination in innovative organizations

In this kind of organization coordination will be characterized by mutual adjustment but

since many participants will have been through professional training there will also be
skills standardization. This suggests that there will be some supervision. In a group of 5
there will be 10 relationships. When the group size is 10 there are 45 relationships.
Groups will therefore require a different kind of coordination mechanism if they grow
beyond a certain size because simple mutual adjustment will not be possible. Large-
scale mutual adjustment could be possible however, if groups have leaders or
representatives who liaise with other groups. Mutual adjustment is then sustained by
having a hierarchy of groups.

Communication and co-ordination in divisional structures

Mintzberg (l995) observed that the role of the center in divisional structures is:

to develop corporate strategy.

to arrange the movement of funds between units.
to devise and operate a performance control system.
to appoint and replace divisional managers.

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Divisional structures were designed to allow the center to focus on decision-making in

specific business areas. The objective is not to free the units from central control, it is to
maximize the center’s ability to control units and to be able to communicate more
effectively with them.

Management Styles in Divisional Structures

Campbell and Goold (l988) looked at how corporate centers add value to business units,
and their findings suggest that corporate success depends on the style, the corporate
center adopts, how well it implements that style and the fit of that style with the
organizational situation. They suggest that there are three styles that can be successful:

➢ Strategic planning style.

➢ Financial control style.
➢ Strategic control style.

The Strategic Planning Style is characterized by:

strong central leadership.

an emphasis on co-ordination and co-operation (formalized mutual
adjustment).
mechanisms for thorough review and analysis.
the setting of long-term strategic objectives.
the willingness to change strategies to meet changing circumstances.

Organization structures in strategic planning companies are often of a matrix nature

because it allows the center to facilitate to-operation across a range of businesses.

Potential Strength of Strategic Planning Style

❖ The center is able to challenge ideas and attitudes more competently than
outside bankers and investors.
❖ By the process of interaction and leadership an effective central
management can lead the business unit into developing more creative and
ambitious strategies than would come out of single businesses.
❖ The center can buffer the business unit from short-term financial
pressures that stock markets and other investors may place on single
businesses.

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❖ The business unit can therefore adjust strategies in order to gain long-
term benefits rather than be forced to concentrate on short- term financial
targets.

Potential Weakness of the Strategic Planning Style

✓ Business managers have less clear-cut responsibilities and less autonomy,

which can lead to de-motivation.
✓ The decision-making processes can be slowed down. In the worst cases
the whole system can become unwieldy and bureaucratic.
✓ There is a risk that the center can be seen to be autocratic and ill-
informed, resulting in a perception, and sometimes a reality, that good
opportunities are missed through a lack of fit with the overall corporate
plan.
✓ An obsession with the long term can lead to the neglect of important
operational issues and the need to generate profits in the short term.
✓ The business environment can be over-protected from harsh competitive
realities, inducing complacency in business units.

The Financial Control Style is characterized by:

➢ autonomy of divisions and local leadership.

➢ an emphasis on control through budgets (control by output
standardization).
➢ strategy direction is sec locally.
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➢ the setting of financial objectives and allocation of resources based on the

historical ability to deliver chose objectives.
➢ tight financial control by the center.

Potential Strength of Financial Control Style

➢ Financial control organizations are more demanding of the business units

than banks or stock markets. They impose tight controls which are tightly
monitored, with under-achievement being quickly addressed. This can
motivate divisional managers to think about their strategies so that they
can deliver above average performance.

➢ The center reinforces the focus on performance by allocating investment on

the basis of performance. In a similar fashion, under- performing units will
be divested. Financial control organizations search for acquisition
candidates that are performing poorly with respect to return on assets,
with the intention of turning them around through the application of
financial control disciplines.

Potential Weakness of the Financial Control Style

Some critics claim that the focus on short-term financial measures

encourages revenue maximization at the expense of investment needs.
Evidence suggests that financial control companies can miss out on long
term and more speculative investments due to the desire to operate in
financially predictable environments.

The Strategic Control Style

Strategic control companies try to position themselves between financial control companies
and strategic planning companies. Businesses are grouped into divisions but the
center maintains a closer interest on strategy than financial control companies. The
intention of the intermediate position is to gain advantages that accrue to both financial
control and strategic planning companies.

Strategic control companies:

• Try to ensure that subsidiaries do not get crapped into inappropriate mind-
sets by allowing overlap of center and subsidiary management functions,

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and by implementing strategic review processes (control by formalized

mutual adjustment).
• Facilitate business unit collaboration without being over-active in the
coordination of that collaboration.
• Provide access to resources so that subsidiaries can finance long-term or
risky projects that would be difficult to finance through capital markets.
The investments are supported because the center has detailed and
‘expert’ knowledge of the subsidiary businesses. It also protects the
business units from the short-term expectations of capital markets.

Potential Strength of Strategic Control Style

❖ It allows the individual businesses to take a long-term view on investment

decisions and implementation performance.
❖ There is an awareness of the need to balance long-term goals and short-
term performance.

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Potential Weakness of Strategic Control Style

➢ It can become bureaucratic and there is confusion between strategic

control and financial control.
➢ The whole corporation may be unable to raise funds in situations where
the individual businesses could.
➢ Business can be over-protected from the disciplines of the markets.

The relationship between operating efficiency (strategy implementation), strategy

creation and organization structure require that strategic managers ask three important
questions:

❖ Is the present structure of the organization allowing the organization to

operate as efficiently as alternative possibilities?
❖ If we wish to make changes to the organization’s outputs, are our
choices constrained by our structure, and if we change strategy, can we
change structure?
❖ Does our structure constrain the way we develop strategy?

The underpinning economic logic is that organizations only grow to significant sizes
when inputs are turned into outputs more efficiently by large organizations than small
organizations (chough other factors, such as monopolistic practices and innovation,
are clearly important). Organizations that grow have to therefore ‘find’ structures that
allow this growth.

To know more information about Organizational Design and Structure

Please click the link: https://www.youtube.com/watch?v=gscyaGUjOcw

To know more information about Strategic Control: Model of Strategic Control

Please click the link: https://www.youtube.com/watch?v=ccPm1-ObWNs

To know more information about Organizational configuration Mintzberg

Please click the link:
https://www.youtube.com/watch?v=FGS1_jcBFiY

Strategic Management and Business Analysis / David Williamson, Wyn Jenkins,

Peter Cooke and Keith Moreton

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