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STRATEGY AND

STRUCTURE

STRATEGY IMPERATIVE
1. The organization has a goal or goals
toward which it drives.
2. It moves toward its goals in a rational
manner.
3. The organization exists to transform
economic inputs to outputs.
4. The environment within which the
organization operates is a given.

STRATEGY-DEFINED
Strategy can be defined as the determination of
the basic long-term goals and objectives of an
enterprise, and the adoption of courses of
action and the allocation of resources necessary
for carrying out these goals.

TWO VIEWS OF STRATEGY


1. Planning Mode: strategy as a plan or explicit
set of guidelines developed in advance.
Managers identify where they want to go; then
they develop a systematic and structured plan to
get there.
2. Evolutionary Mode: strategy is not necessarily
a well-thought-out and systematic plan. Rather,
it evolves time as a pattern in a stream of
significant decisions.

STRATEGY HISTORY
Early writers assumed that the Planning Mode was
the proper way in which to view strategy. The
broader Evolutionary Mode has been gaining
acceptance in recent years. Due to the need to
cope with both static and dynamic strategies.

LEVELS OF STRATEGY

GENERAL MOTORS

THE STRATEGY
IMPERATIVE
Environmental
Factors and
Organizational
Capabilities

STRATEGY

STRUCTURE

CHANDLERS THESIS
1960s
Chandler studied almost 100 of Americas largest
firms from 1909 to 1959, including DuPont,
General Motors, Standard Oil of New Jersey, and
Sears, Roebuck.
He concluded that changes in corporate strategy
preceded and led to changes in an organizations
structure

CHANDLER, CONTD
Concluded that organization structures
follow the growth strategies of firms.
He also found that growth strategies
tended to follow certain patterns.

GROWTH STRATEGIES I
The initial stage typically involves plants,
sales offices, or warehouses in a single
industry, a single location, and performance
of a single function. If successful, they
follow a predictable path.

GROWTH STRATEGIES II
The first growth stage is VOLUME
EXPANSION, producing selling and
distributing more of their product or
service to customers.

GROWTH STRATEGIES III


The next stage of growth is
GEOGRAPHIC EXPANSION,
continuing what it was already doing in
new geographical areas, with new field
units.

GROWTH STRATEGIES IV
The third growth strategy is
VERTICAL INTEGRATION, as firms
either buy or create other functions.

GROWTH STRATEGIES V
The ultimate growth strategy,
PRODUCT DIVERSIFICATION,
involving the firm in new industries
either through merger, acquisition, or
creation (product development).

CHANDLER, CONTD
As a firm moves through each stage, it must
change its organization structure in successive
steps through System 1 to System 4 (Likert)
structural types. The initial System 1 structure is
appropriate because volume expansion of a single
product or service in a single industry stresses low
unit cost (efficiency) and maximum resource
utilization (production), with relatively low
concern for response to change and uncertainty.

CHANDLER, CONTD
The change to geographic expansion, and
ultimately, product diversification increases
the firms concern for adaptability and
flexibility in the face of diverse and
complex environments. Thus, the
organization structures of such firms are
characterized by product-based divisions
and departments, decentralized authority,
and relatively wide spans of control.

LIKERT SYSTEM 1
Also known as: Bureaucratic, Classical,
Formalistic, Mechanistic
Characteristics: high specialization of
labor, homogeneous departments,
narrow spans of control, centralized
authority

LIKERT SYSTEM 4
Also known as: Nonbureaucratic,
neoclassical, informalistic, organic
Characteristics: low specialization of
labor, heterogeneous departments,
wide spans of control, decentralized
authority

CHANDLER TIME-LINE

CHANDLER - PROGRESSION
TIME t
Simple Structure. Centralized.

Single Product Line

Simplicity of strategy is compatible with a loose and simple


structure. Decisions can be centralized. Is low in both
Complexity and Formalization.
(High Centralization, Low Formalization, Low Complexity)

CHANDLER PROGR. II
TIME t+1
As demand grows for products. Companies expand.
They increase product lines. Integrate vertically to
control sources of supply. Reducing dependency on
suppliers. To produce a greater variety of products.
They separate into product groups within the
organization.

t+1, continued
Strategies become more ambitious and elaborate.
Expand activities within their same industry.
Vertical integration requires more complex
coordination due to increased interdependence
between organizational units. Accomplished by
redesigning the structure to form specialized
units based on functions performed.
(Moderate Centralization, Moderate Formalization,
Moderate Complexity)

CHANDLER PROGR. III


TIME t+2
Growth and diversification give rise to the need for an
autonomous multi-divisional structure. The centralized
structure becomes inefficient and impractical for
dealing with significantly greater complexity.

t+2, continued
A product-diversification strategy requires a
structural form that allows for the efficient allocation
of resources. Accountability for performance, and
coordination between units. This can best be achieved
through the creation of a multiple set of independent
divisions, each responsible for a specified product
line.
(High Complexity, Low Centralization, Moderate
Formalization)

MILES AND SNOW 1970s


Classify organizations into four strategic types:
1. Defenders: seek stability by producing only a limited
set of products directed at a narrow segment of the
total potential market. Strive aggressively to prevent
competitors from entering their limited niche or domain.
They accomplish this by standard economic actions such
as competitive pricing or production of high-quality
products.

DEFENDERS, CONTD
Defenders tend to ignore developments outside their
product line areas. They do little environmental
scanning and limit product development. There is
intensive planning towards cost and efficiency
issues.
Example Soft Soap

MILES AND SNOW II


2. Prospectors: Almost the opposite of Defenders. They
find and exploit new-product and market opportunities.
Innovation is sometimes more important than profitability
after exploiting a new opportunity, they get out. Must
have high profit margins to cover high costs.
Examples - 3M, some Magazine publishers

MILES AND SNOW III


3. Analyzers: Capitalize on the best of both
Defenders
and Prospectors. Minimize risk and maximize
opportunities for profit. They move into new
innovations and new markets only after Prospectors
have proven the viability of the market. They live
by imitation. They take the ideas of Prospectors
and copy them.
Analyzers must have the ability to respond to
leading Prospectors, but maintain operating
efficiency. They tend to have smaller profit margins
than Prospectors, but are more efficient.

ANALYZERS CONTD
Analyzers seek both flexibility and stability. They develop
a structure made up of dual components. Parts have high
levels of standardization, routinization, and mechanization
for efficiency. Other parts are adaptive to maintain
flexibility.
Examples IBM, Catapillar, Digital Equipment Corp.

MILES AND SNOW IV


4. Reactors: A residual strategy. Inconsistent and unstable
patterns when one of the other three strategies is pursued
improperly.
In general, Reactors respond inappropriately, perform poorly,
and are reluctant to commit themselves aggressively to a
specific strategy.

ENVIRONMENT STRATEGY
CONTINUUM
Little Change
and Uncertainty

Defender

Reactor

Rapid Change
& High Uncertainty

Analyzer

Prospector

TWO-VARIABLE ANALYSIS
OF INDUSTRIES

MILES & SNOW:


INDUSTRY-STRUCTURE
TYPE A and C INDUSTRIES: The high capital
requirements tend to result in large organizations and a
limited number of competitors. Firms in Type A and C
industries will be highly structured and standardized, with
the Type As (text error) being more decentralized to
facilitate rapid response to innovations introduced by
competitors.

INDUSTRY-STRUCTURE II
TYPE B and D INDUSTRIES: Because of low capital
requirements. These industries tend to be made up of a large
number of small firms. Type D, however, will likely have
more division of labor and more formalization than Type Bs
because low innovation rates allow for greater standardization.
in the same way that capital requirements influence
organizational size and number of competitors. We should
expect high product-innovation rates to result in less
formalization and more decentralization of decision-making.

LIMITATIONS OF THE
STRATEGY IMPERATIVE
1. Some theorists claim that the impact of
strategy on structure is greater at the earliest
stages of organization development. Once
huge investments are made in plants,
equipment and personnel managers become
much more severely restricted in their ability
to alter structure.

LIMITATIONS, II
2. Another observation of theorists is that when
there is a major change in strategy there is
normally not any major change in structure
soon. Some claim because of this that there is a
lag between changes in structure and
changes in strategy, or vice-versa. Some feel
that this is a cop-out. Organizations that do
not face stiff competition are slower to change
their structures than others.

LIMITATIONS, III
3. A study of the upper half of the Fortune 500 firms
found that structure influences and constrains strategy,
rather than the other way around.

INDUSTRY-STRUCTURE
RELATIONSHIP

Industry

Strategy

Structure

PROPOSITIONS REGARDING
THE EFFECTS OF
STRUCTURE ON STRATEGY
1. Complexity
2. Formalization
3. Centralization

COMPLEXITY
As the level of complexity increases, so does the
probability that:
1. Members initially exposed to the decision stimulus will
not recognize it as being strategic or will ignore it
because of parochial preferences.
2. A decision must satisfy a large constraint set, which
decreases the likelihood that decisions will be made to
achieve organization-level goals;
3. Strategic action will be the result of an internal process of
political bargaining, and moves will be incremental; and

COMPLEXITY, CONTD
4. Biases induced by members parochial perceptions
will be the primary constraint on the
comprehensiveness of the strategic decision process. In
general, the integration of decisions will be low.

FORMALIZATION
As the level of formalization increases, so does the
probability that:
1. The strategic decision process will be initiated only in
response to problems or crises that appear in variables
monitored by the formal system;
2. Decisions will be made to achieve precise, yet remedial,
goals, and means will displace ends;
3. Strategic action will be the result of standardized
organizational processes, and moves will be incremental;
and

FORMALIZATION, CONTD
4. The level of detail achieved in the standardized
organizational processes will be the primary constraint
on the comprehensiveness of the strategic decision
process. The integration of decisions will be intermediate.

CENTRALIZATION
As the level of centralization increases, so does the
probability that:
1. The strategic decision process will be initiated only by
the dominant few, and it will be the result of proactive,
opportunity-seeking behavior;
2. The decision process will be oriented toward achieving
positive goals (i.e.- intended future domains) that will
persist in spite of significant changes in means;
3. Strategic action will be the result of intendedly rational
choices, and moves will be major departures from the
existing strategy; and

CENTRALIZATION,
CONTD
4. Top managements cognitive limitations will be the
primary constraint on the comprehensiveness of the
strategic process. The integration of decisions will
be relatively high.