Strategy implementation: role of

organizational structure
Session 17

1
 Issues in implementation
• How information flows
• Where and by whom are decisions made
• How to influence the behaviour of people
• How can the interests of employees be
aligned to the interests of the firm

2
 Organizational Structure (OS) & Controls
(OC)
• Organizational Structure (OS)
– Specifies firm’s formal reporting relationships, procedures,
controls, authority & decision-making processes (i.e., work to
be done and how to do it!)
– Effective use of firm’s strategies facilitated when structure is
properly aligned
• Structural stability: Capacity firm requires to consistently
and predictably manage its daily work routines
• Structural flexibility: Opportunity to explore competitive
advantages firm will need to be successful in the future
– Alfred Chandler found organizations change their structures
when inefficiencies force them to do so

3
 Implementation thus requires
• 1. Someone to carry out the task (who)-
structure and . A series of activities to be
taken care of – sequentially (what)- processes
• 2. Change in the work climate/work
relationships, activities
• 3. Change in the incentive structure-
encouraging members to do newer things
• 4. Measuring and monitoring the right things

4
Successful implementation is thus
• Appropriately breaking information into
manageable blocks
• Aligning the interests of owners and managers
• These can be accomplished through
– Organizational structure
– Management controls
– Compensation policies

5
 Structure is one of the key elements
• Organizational structure refers to the
formalized arrangement of interaction
between and responsibility for the tasks,
people, and resources in an organization
• It is most often seen as a chart, often a
pyramidal chart, with positions or titles and
roles in cascading fashion

6
 The need for organizational structure
• Information processing requirements
• As organizations become larger and more
complex, information processing
requirements exceed individual capacity
– Bounded rationality
– Satisficing
• Organization’s structure divides the
information processing into manageable
blocks (span of control)

7
 Organizational structure- generic
strategies
• Cost leadership- more of functional
• Differentiation-
– Multidivisional?,
– more cross functional linkages
– functional structure with dominance of marketing
and R&D
• Integrated cost leadership and differentiation
– Mixed structures, with integrating mechanisms

8
M-Form Structure
Board of Directors

Senior Executive

Corporate Corporate
Corporate Strategic Corporate
R&D Human
Finance Planning Marketing
Resources

Division Division Division

Finance Production Engineering Accounting

Sales & Human

Marketing Resources
9
 M Form structure and agency theory
• Divides Information Processing
Requirements Into Manageable Blocks
• Separates owners from managers

10
Managing the agency relationship

Principals Monitors Agents

Individual Division
Board of Senior General
Shareholders Directors Executives Managers

Shared
Institutional Corporate
Dual Role Activity
Shareholders Staff
Managers

11
 The office of the President
One Two Three
Chairman of the People People
Board Person
(Monitoring) Chairman
Chairman
Chairman CEO
Chief Executive CEO
CEO
Officer
COO
(Strategy COO CEO
Formulation)
Chief Operating
Officer Chairman COO
(Strategy
Implementation) CEO
COO

12
 The office of the president:
Information filtering
• Information about the division’s business is
filtered as it rises to the senior executive such
that the senior executive can manage the
information flow
– information flow should not exceed the bounded
rationality of managers at any level in the
organization
– Information flow should be matched by decision-
making authority

13
Division General Managers
Senior Executive

Corporate
Corporate Strategic Corporate
Corporate R&D Human
Finance Planning Marketing
Resources

Division Division Division

Finance Production Engineering Accounting

Sales & Human

Marketing Resources

14
 Shared Activity Managers
Division Division

Sales and Cost Centers

Marketing
Shared Activities
Human Resources Profit Centres

15
 International implementation: Global
Strategy
• Centralised hub
– Facilitates global integration
– Exploits a global product
– Exploits scale economies

16
 International implementation- multi-
domestic strategy
• Decentralized federation
– Very autonomous units
– Very responsive locally
• Coordinated federation
– Less autonomous
– Some shared activities between divisions

17
 International strategy: Transnational
structure
• Facilities both local responsiveness and global
integration
• Country managers are responsible for
exploiting economies of scope
• Corporate HQ constantly scans the globe
looking for best practices

18
 The
The Basic
Basic Tasks
Tasks of
of Organization
Organization
Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees == goals of owners

THE AGENCY PROBLEM

THE ORGANIZATIONAL CHALLENGE:

To design structure & systems that:
 Permit specialization
 Facilitate coordination by grouping individuals & link
groups with systems of communication, decision
making, & control
 Create incentives to align individual & firm goals 19
 Hierarchy
Hierarchy Economizes
Economizeson
onCoordination
Coordination

(a) Self Organizing Team: (b) Hierarchy:

10 interactions 4 interactions

But what about effectiveness of coordination?

--Depends upon the organization’s task
 Hierarchy
Hierarchyofof Loosely-Coupled
Loosely-Coupled
Modules
ModulesAllows
AllowsFlexible
FlexibleAdaptation
Adaptation

Tightly-coupled, integrated system: Loose-coupled, modular hierarchy:

Change in any part of the system partially-autonomous modules linked
requires system-wide adaptation by standardized interfaces permits
decentralized adaptation and
innovation
 Weber’s
Weber’s Principles
Principles of
of Bureaucracy
Bureaucracy

• Rational-legal authority
• Specialization of labor
• Hierarchical structure
• Coordination and control through rules and
standard operating procedures
• Standardization employment practices
• Separation of jobs and people
• Formalization of administrative acts, decisions
and rules

22
 Mechanistic
Mechanistic and
and Organic
Organic Forms
Forms
FEATURE MECHANISTIC ORGANIC

Task definition Rigid & highly Flexible; less

specialized specialized

Coordination Rules & directives Mutual adjustment.l

& control imposed from the top Cultural control

Communication Mainly vertical Horizontal & vertical

Commitment To immediate superior To the organization & its

& loyalty goals & values

Environmental Stable with low tech- Dynamic, ambiguous,

context nological uncertainty high technological
uncertainty

23
 Designing
Designingthe
the Hierarchy:
Hierarchy:The
TheBasis
Basisfor
for Defining
Defining
Organizational
Organizational Units
Units and
and their
theirRelationships
Relationships

Units may be defined on the basis of Common Tasks, Products,

Geographical Proximity, or Process/Function

Critical issue: Intensity of Coordination—Employees with the greatest

interdependence should be grouped into same organizational unit.

Additional criteria: Economies of Scale, Economies of Utilization,

Learning, Standardization of Control Systems
24
 Evolution of the Modern Corporation

The business Strategic Organizational

environment changes consequences

Early Local markets Firms specialized & Small firms.

19th Transport slow focused on local Simple manage-
century Limited mechanization markets ment structures

Late Introduction of Geographical and

19th railroads, Functional structures
century telegraph vertical expansion . Line/staff
industrialization separation. Accou-
nting systems
Early Excess capacity in Product & Development of
20th distribution. Growth multinational multidivisional
century of financial institut- diversification corporation
ions & world trade
25
 General Motor’s Organization Structure, 1921
Board of Directors

President Executive Committee

Financial GM Acceptance Legal General Advisory

Staff Corporation Department Staff

Chevrolet Sheridan Canadian Oldsmobile Buick Cadillac GM Export

Division Division Division Division Division Division Company

GM Truck Samson Oakland Inter- Scripps

Division Tractor Division company Booth Corp.
Division Parts
Division

Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
 General Motors’ Organization Structure, 1997
Board of Directors

President’s Council Corporate Functions

North Delphi GM Acceptance International Hughes

American Automotive Corporation Operations Electronics
Operations Systems

GM Europe
Midsize Small GM Vehicle Development
& Car Power Sales, & & Technical Asian &
Luxury Group Train Marketing Cooperation Pacific
Car Group Group Group Operations
Group
Latin American,
African, &
Middle East
Operation
 General Electric’s Organization Structure, 2002

Corporate Executive Office

Chairman & CEO

Corporate Staff
Service Divisions Finance Business R&D Human Legal
Development Resources

GE GE GE
GE Aircraft GE Trans- GE
Industrial Appliances Supply
Engines portation Plastics
Systems

GE
GE Power GE Medical GE GE
Specialty NBC
Systems Systems Lighting Capital
Materials

26 businesses organized into 5 segments:

Consumer Mid-market Specialized SpecialtyEquipment
Services Financing Financing Insurance Management

28
 Mobil Corporation, 1997
Board of Directors

CEO
Executive Office

Corporate Center Support Services

North New Worldwide Technology

America Exploration LNG & IPP

Asia/ Europe & Africa & South

Pacific CIS Middle America
East North
America Worldwide
Shipping M&R Chemicals
Royal Dutch/Shell Group, 1994: A Matrix Structure

30
 Management controls- 3 issues
• Evaluating divisional performance
• Allocating capital
• Transferring intermediate products

31
 Mechanisms of control
• For three types of corporate divisional
structure
– Strategic planning
– Strategic Control
– Financial control

32
 Compensation policies
• Aligning incentives-
– Not tied to performance- salary- short term
horizon
– Tied to performance- longer term horizon
• Cash Bonus
• Stock Grants
• Stock Options

33
 Appropriate structures for
different generic strategies
• Appropriate structure for differentiation
• Appropriate structure for cost leadership
• Appropriate structure for integrated cost
leadership and differentiation?

34
Galbraith’s star model

35
Functional structure

36
Product structure

37
Market structure

38
Geographical structure

39
Process structure

40
41
42
Booz Allen Hamilton (NBUs)

43
44
 Goold and Campbells design tests
• Market advantage test
• Parenting advantage test
• People test
• Feasibility test
• Specialist cultures test
• Difficult links test
• Redundant Hierarchy test
• Accountability test
• Flexibility test 45