ROLE OF STRUCTURE IN
STRATEGY
By
NITHIN D RAJ
NITHIN VR
Organizational structure
Organizational structure is an established pattern of
relationship among the component parts of an organisation.
Structure is made up of three component parts
Complexity- Refers to horizontal differentiation, vertical
differentiation and locational differentiation.
Formalization – Degree to which the job inside an
organisation is standardized.
Centralization - Is the degree to which decision making is
concentrated at a single point in an organisation.
Horizontal Differentiation
Degree to which tasks C EO
are divided into distinct
homogeneous groups P ro d 1 P ro d 2 P ro d 3 P ro d 4
function-wise
geographic-wise
product-wise
CEO
production stage-
wise M kt M fg F in a n c e R&D L o g is t ic s
Vertical Differentiation
Number of levels within CEO
the organization
EVP EVP EVP
S r. V P S r. V P
VP VP VP
A s s t. V P A s s t. V P A s s t. V P
B ra n c h M g r. B ra n c h M g r.
A s s t. B ra n c h M g r
Locational Differentiation
Degree to which
activities are located
in different areas
HQ
US P a c ific E u r.
S u p p o rt M fg . M fg
F in a n c e R&D Legal P ro d 1 P ro d 2
Formalization
Degree to which rules, procedure, lines of
authority/responsibility are enunciated or specified
More formality: eliminates confusion and uncertainty, limits
creativity and innovation
Less formality: imbues flexibility, creative solutions.
Degree to which the job inside an organisation is
standardized
High standardization of job results in less freedom and
discretion.
Centralization
Degree to which authority and decision making is at higher
levels of the organization
Centralized: tight organisational control, managers are
order-takers
Decentralized: managers closest to product and/or
customer able to make decisions
Structure
Structure follows strategy
Organizational structure is a managerial tool in
the process of achievement of organizational
objectives
Approaches to organization structure
Functional organization structure
Product organization structure
Geographical organization structure
Decentralized business divisions
Strategic business units
Matrix organizational structure
Functional organization structure
Advantages
Promotes maximum utilization of up-to-date
technical skills and enables firm to capitalize on
specialization and efficiency
Promotes common goals and values among
employees of the department
Disadvantages
Departmental members may see activities from
narrow view point of the department rather than
the total organization
Interdepartmental policies further result in
conflicts
Product organization structure
Advantages
Since each department is independent most
decisions can be made at departmental level without
involving top management in process, which results
in fast decision making and enhanced organizational
competency in rapidly changing environment
Disadvantages
Unnecessary duplication of material and personnel
among various departments
Interdepartmental conflict arises regarding sharing
of common resources, allocation of common and
overhead expenses etc.
Geographical organizational structure
Managing director
General
Generalmanager
manager
Corporate
Corporatemanagers
managers
Production,
Production,Marketing,
Marketing,Finance,
Finance,Human
HumanResource
Resourceand
andResearch
Researchand
and
development
development
Manager Manager Manager Manager Manager
Manager
Manager Manager Manager Manager
Northern Southern Central Western Eastern
Eastern
Northern Southern Central Western
region region region region region
region
region region region region
Advantages
Products and services are better designed to the
climatic and cultural needs of specific
organization
Allows firm to respond to technical needs of
different international area
Disadvantages
Duplication of equipment and facilities
Coordination of company-wide activities would
be difficult
It is difficult to maintain consistent company
image or reputation
Decentralized business divisions
Advantages
Allows each business unit to organize around its
own set of key activities and functional
requirements
Puts clear profit/loss responsibility on shoulders
of business unit managers
Disadvantages
Absence of mechanism for coordinating related
activities across business units
General manager in charge of each business unit
functions independently. It makes coordination
a difficult task
Strategic business units
Advantages
Provides better coordination between divisions
with similar missions, products, markets and
technologies
Helps to allocate corporate resources to areas
with greater growth opportunities
Disadvantages
Corporate headquarters become more distant
from the division
Conflicts might arise among the SBU managers
for greater share of corporate resources
Matrix organizational structure
Advantages
Makes efficient use of functional expertise
Encourages cooperation, consensus-building,
conflict resolution and coordination of related
activities
Disadvantages
Greater administrative costs with its operation,
since personnel spend much of their time in
meetings and exchanging of information to
coordinate functional areas with projects
Conflicts may arise between functional managers
and project managers
Functional employees experience stress
Matching organisation structure to the
strategy
Organisation structure should be designed around the key
success factors and critical tasks.
Five sequence procedures
Pin point key functions and tasks necessary for successful strategy
execution.
Reflection on how strategy-critical functions and organizational units
relate to those that are routine and to those that provide staff support.
Make strategy-critical business units and function of the main
organizational building blocks.
Determine the degree of authority needed to manage each organizational
unit bearing in mind both the benefits and cost of decentralized decision
making.
Provide the coordination among the various organizational units.
Structure follows strategy theory
Proposed by Alfred Chandler
Changes in environment – changes in strategy – structural
changes
Sequence of steps adopted
New strategy is created
New administrative problems emerge
Economic performance declines
New appropriate structure is invented
Profit return to its previous level.
THREE STEP APPROACH
Chandlers three step approach to design an
organizational structure to match a defined strategy:
Select a basic organisation design
Modify the design as needed
Supplement it with coordinating mechanisms &
communication arrangements.
Cannons Stages of development model
5 Stages of development
Entrepreneurial stage
Functional development
Decentralisation
Staff proliferation
Recentralisation
Characteristics Entrepreneurial Functional Decentralisation Staff proliferation Recentralisation
development
Strategic decisions Made most by the top Made more and more May have lose of Corporate staff assist Corporate
person by other managers control in decisions management makes
decision
Organisational Informal operations Specialisation based To cope with Corporate staff assists Informal operations
structure on functions problems of chief executive
functionalisation
Communication and From leader down. Difficult internal Communication Conservatism may From leader down.
climate Mostly informal communication according to product result in slower Mostly informal
division communication
Control system Minimal need for Concerned with Difficulty in control Product line and Tightening of control
coordination and everyday operations staffing difficulty
control
Greiner's Growth Model
Larry E. Greiner proposed this six phase
Growth Model
Growth rates will vary between and even
within phases.
The duration of each phase depends almost
totally on the rate of growth of the market in
which the organization operates.
The longer a phase lasts, though, the harder it
will be to implement a transition.
Phase 1: Growth through Creativity
Busy creating products and opening up markets
There aren't many staff, so informal communication
works fine, and rewards for long hours are probably
through profit share or stock option
The founders may change their style and take on
this role, but often someone new will be brought in
This phase ends with a Leadership Crisis, where
professional management is needed
Phase 2: Growth through Direction
Growth continues in an environment of more formal
communications, budgets and focus on separate
activities like marketing and production
Incentive schemes replace stock as a financial
reward.
As more staff join, production expands and capital
is injected, there's a need for more formal
communication
This phase ends with an Autonomy Crisis: New
structures based on delegation are called for
Phase 3: Growth through Delegation
Mid-level managers freed up to react fast to
opportunities for new products or in new markets
Top management just monitor and deal with the big
issues ( starting to look at merger or acquisition
opportunities).
The manager whose directive approach solved the
problems at the end of phase 1 finds it hard to let go
Mid-level managers struggle with their new roles as
leaders
Phase 4: Growth through Coordination and Monitoring
Growth continues with the previously isolated business
units re-organized into product groups or service
practices
Investment finance is allocated centrally and managed
according to Return on Investment (ROI) and not just
profits
Incentives are shared through company-wide profit share
schemes aligned to corporate goals.
work becomes submerged under increasing amounts of
bureaucracy, and growth may become stifled
This phase ends on a Red-Tape Crisis: A new culture
and structure must be introduced.
Phase 5: Growth through Collaboration
Strives to enhance collaboration
Behavioural orientation, group working, project
teams and matrix structures are adopted to improve
problem solving.
Emphasis on behavioural skills and behavioural
modification.
This phase ends with a crisis of Internal Growth:
Further growth can only come by developing
partnerships with complementary organizations.
Phase 6: Growth through Extra-Organizational Solutions
Greiner's sixth phase suggests that growth may
continue through merger, outsourcing, networks and
other solutions involving other companies.
ASSESSMENT OF ORGANISATIONAL STRUCTURE
There are no hard and fast rules to evaluate the structure
Checklist for determining appropriateness of organisation structure
Is the structure compatible with corporate profile and corporate
strategy?
At the corporate level is the structure compatible with the firm’s
business units?
Are there too few or too many hierarchical levels at either the corporate
or business unit level of analysis?
Does the structure promote coordination among its parts?
Does the structure allow for appropriate centralisation or
decentralisation of authority?
Does the structure permit appropriate grouping of activities?
Perspectives on the methods of organising
There is no perfect or ideal organisational design.
There are no universally applicable rules for
matching strategy and structure.
“The simplest organisational structure that will do
the entire job is the best one. The best
organisational structure is the one that fits the firm’s
situation”
Peter Drucker
