Chapter 11

Organizational Structure and

Controls

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson

©2003 Southwestern Publishing Company 1

Strategic Inputs
Chapter 2
The External
The Strategic
Environment
Strategic Intent
Strategic Mission
Management
Chapter 3
The Internal
Environment
Process
Strategy Formulation Strategy Implementation
Chapter 5 Chapter 11
Chapter 4 Chapter 6 Chapter 10
Competitive Rivalry Organizational
Strategic Actions

Business-Level Corporate- Corporate

and Competitive Structure and
Strategy Level Strategy Governance
Dynamics Controls

Chapter 7
Chapter 8 Chapter 9
Acquisition and
International Cooperative
Restructuring
Strategy Strategy
Strategies
es
m
Strategic
O Competitiveness
ut Above-Average
co
ci Returns
2
te Feedback
g
Organizational Structure
 Organizational structure specifies the
firm’s formal reporting relationships,
procedures, controls, and authority and
decision-making processes
 It is critical to match organizational
structure to the firm’s strategy

3
Stability and Flexibility in
Structure
 Structural stability provides the capacity
– required to consistently and predictably
manage the firm’s daily work routines
 Structural flexibility provides the
opportunity to
– explore competitive possibilities
– allocate resources to activities that shape
competitive advantages needed by the firm

4
Organizational Controls

 Organizational controls
– guide the use of strategy
– indicate how to compare actual results with
expected results
– suggest corrective actions to take when the
difference between actual and expected results
is unacceptable
 Two types of organizational controls
– strategic controls
– financial controls
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Organizational Controls:
Strategic Controls
Strategic Controls  Concerned with examining
the fit between
– what the firm might do (as
suggested by opportunities in
its external environment)
– what it can do (as indicated by
its competitive advantages)
 Used to evaluate the degree
to which the firm focuses on
the requirements to
implement its strategies 6
Organizational Controls:
Financial Controls
Strategic Controls  Objective criteria
 Accounting-based measures
Financial Controls include
– return on investment
– return on assets
 Market-based measures
include
– economic value added

7
Matching Control to Strategy
 Relative use of controls varies by type of
strategy
– large diversified firms using the cost
leadership strategy emphasize financial
controls
– companies and business units using the
differentiation strategy emphasize strategic
controls

8
Evolutionary Patterns of Strategy
and Organizational Structure
 Firms grow in predictable patterns
– by volume
– by geography
– integration (vertical, horizontal)
– through product/business diversification
 A firm’s growth patterns determine its
structural form

9
Evolutionary Patterns of Strategy
and Organizational Structure
 All organizations require some form of
organizational structure to implement and
manage their strategies
 Firms frequently alter their structure as
they grow in size and complexity
 Three basic structure types:
– simple structure
– functional structure
– multi-divisional structure (M-form)

10
Strategy and Structure Growth
Pattern: Simple Structure
Simple
Structure

11
Strategy and Structure Growth
Pattern: Simple Structure
 Organizational form in which the owner-
manager
– makes all major decisions directly
– monitors all activities
 Staff
– serves as an extension of the manager’s
supervisory authority
 Matched with focus strategies and
business-level strategies
– commonly compete by offering a single
product line in a single geographic market 12
Strategy and Structure Growth
Pattern: Simple Structure
 Growth creates
– complexity
– managerial and structural challenges
 Owner-managers
– commonly lack organizational skills and
experience
– become ineffective in managing the
specialized and complex tasks involved with
multiple organizational functions

13
Strategy and Structure Growth
Pattern: Functional Structure
Simple
Structure
Efficient implementation
of formulated strategy
Sales Growth-
Coordination and
Control Problems

Functional
Structure
14
Strategy and Structure Growth
Pattern: Functional Structure
 Chief Executive Officer (CEO)
– limited corporate staff
 Functional line managers in dominant
organizational areas
– production – accounting
– marketing – R&D
– engineering – human resources
 Supports use of business-level strategies
and some corporate-level strategies
– single or dominant business with low levels of
diversification 15
Strategy and Structure Growth
Pattern: Functional Structure
 Differences in orientation among
organizational functions can
– impede communication and coordination
– increase the need for CEO to integrate
decisions and actions of business functions
– facilitate career paths and professional
development in specialized functional areas
– cause functional-area managers to focus on
local versus overall company strategic issues

16
Strategy and Structure Growth
Pattern: Multidivisional Structure
 Strategic control
– operating divisions
– each division is separate business or profit
center
 Top corporate officer delegates
responsibilities to division managers
– for day-to-day operations
– for business-unit strategy
 Appropriate when the firm grows through
diversification
17
Strategy and Structure Growth
Pattern: Multidivisional Structure
 Three major benefits
– corporate officers able to more accurately
monitor the performance of each business,
which simplifies the problem of control
– facilitates comparisons between divisions,
which improves the resource allocation process
– stimulates managers of poorly performing
divisions to look for ways of improving
performance

18
Strategy and Structure Growth
Pattern: Multidivisional Structure
Simple
Structure
Efficient implementation
of formulated strategy
Sales Growth- Multidivisional
Coordination and Structure
Control Problems

Efficient
implementation Sales Growth-
Functional
of formulated Coordination and
Structure
strategy Control Problems
19
Matching Structure and Strategy
 Different forms of the functional
organizational structure are matched to
– cost leadership strategy
– differentiation strategy
– integrated cost leadership/differentiation
strategy
 differences in these forms seen in three
important structural characteristics
– specialization
– centralization
– formalization 20
 Structure for Cost Leadership
Strategy
• Operations is main function Office of the President
• Process engineering is
emphasized over R&D
• Large centralized staff
• Formalized procedures Centralized Staff
• Structure is mechanical, job
roles highly structured

Engineering Operations Accounting

Marketing Personnel
21
 Structure for Differentiation
Strategy
President and
Limited Staff
R&D Marketing

New Product Marketing Finance

R&D
Operations Human
Resources
• Marketing is the main function for tracking new product ideas
• New product R&D is emphasized
• Most functions are decentralized
• Formalization is limited to foster change and promote new ideas
• Overall structure is organic; job roles are less structured 22
Multidivisional Structure
 Each division is operated as a separate
business
 Appropriate for related-diversified
businesses
 Key task of corporate managers is
exploiting synergies among divisions
 Managers use a combination of strategic
controls and financial controls

23
Multidivisional Structure
 Managers try to strike a balance between:
– competing among divisions for scarce capital
resources
– creating opportunities for cooperation to
develop synergies
 The goal is to maximize overall firm
performance
 The decision-making of managers in a
multi-divisional structure may be:
– centralized or decentralized
– bureaucratic or non-bureaucratic 24
Multidivisional Structure
 Balance on these dimensions may change
over time
 Structure will evolve over time with:
– changes in strategy
– degree of diversification
– geographic scope
– nature of competition

25
Three Variations of the
Multidivisional Structure
Multidivisional
Structure
(M-form)

Cooperative Competitive
Form Form

Strategic Business-Unit
(SBU) Form
26
 Cooperative Form of Multidivisional
Structure: Related-Constrained Strategy
Headquarters Office
President
Government Legal
Affairs Affairs

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

Product Product Product Product Product

Division Division Division Division Division
27
Cooperative Form of Multidivisional
Structure: Related-Constrained Strategy
 Structural integration devices create tight links
among all divisions
 Corporate office emphasizes centralized strategic
planning, human resources, and marketing to
foster cooperation between divisions
 R&D is likely to be centralized
 Rewards are subjective and tend to emphasize
overall corporate performance, in addition to
divisional performance
 Culture emphasizes cooperative sharing

28
 SBU Form of Multidivisional
Structure: Related-Linked Strategy
Headquarters Office President

Corporate Strategic Corporate Corporate Corporate

R&D Lab Planning HRM Marketing Finance

SBU SBU SBU

Division Division Division Division Division Division

Division Division Division

29
SBU Form of Multidivisional
Structure: Related-Linked Strategy
 Structural integration devices create tight links
among all divisions
 Corporate office emphasizes centralized strategic
planning, human resources, and marketing to
foster cooperation between divisions
 R&D is likely to be centralized
 Rewards are subjective and tend to emphasize
overall corporate performance, in addition to
divisional performance
 Culture emphasizes cooperative sharing

30
 Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy
Headquarters Office President

Legal
Finance Auditing
Affairs

Division Division Division Division Division Division

31
Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy
 Corporate headquarters has a small staff
 Finance and auditing are the most prominent
functions in the headquarters to manage cash
flow and ensure the accuracy of performance
data coming from divisions
 The legal affairs function becomes important
when the firm acquires or divests assets
 Divisions are independent and separate for
financial evaluation purposes
 Divisions retain strategic control, but cash is
managed by the corporate office
 Divisions compete for corporate resources 32
Multidivisional Structure: Other
Points
 Complex multi-divisional structure firms
may be simultaneously
– centralized and decentralized
– depending upon the various business-level
strategies employed throughout the firm’s
individual businesses
 Multi-divisional structure firms use a
combination of:
– strategic controls
– financial controls

33
 Characteristics of Various
Structural Forms
Structural Cooperative SBU Competitive
Characteristics M-Form M-Form M-Form

Type of Related- Related- Unrelated

Strategy Constrained Linked Diversification

Degree of Centralized at Partially Decentralized

Centralization Corporate Centralized to Divisions
Office in SBUs
Use of
Integrating Extensive Moderate Nonexistent
Mechanisms 34
 Characteristics of Various
Structural Forms
Structural Cooperative SBU Competitive
Characteristics M-Form M-Form M-Form

Divisional Subjective Strategic & Objective

Performance Strategic Financial Financial
Appraisal Criteria Criteria Criteria

Divisional Linked to Linked to Linked to

Incentive Corporate Corporate Divisional
Compensation Performance SBU & Division Performance
Performance

35
 Worldwide Geographic Area
Structure: Multidomestic Strategy
United • product characteristics
Asia tailored to local
States
preferences
• isolation from global
competitiion
Latin Multinational – establish protected
Europe
America Headquarters market positions
–compete in industry
segments most
Middle affected by
Australia East/ differences among
Africa local countries
36
 Worldwide Product Divisional
Structure: Global Strategy
Worldwide Worldwide • standardized products
Products Products across countries
Division Division
• economies of scope
and scale
• outsource some
Worldwide Global Worldwide primary or support
Products Corporate Products
Division Division activities to the
Headquarters
world’s best providers
• decision-making
Worldwide Worldwide authority centralized
Products Products in worldwide division
Division Division
headquarters
37
Using the Combination Structure:
Transnational Strategy
 The combination structure has
characteristics and mechanisms that
result in an emphasis on both geographic
and product structures
– local responsiveness (multidomestic strategy)
– global efficiency (global strategy)

38
Strategic Network
 A strategic network is a grouping of
organizations that has been formed to
create value through participation in an
array of cooperative arrangements, such
as alliances and joint ventures
 The strategic network seeks to develop a
competitive advantage in primary or
support activities
 A strategic center firm often manages the
network
39
Strategic Network
 strategic center firm engages in four
primary tasks
– strategic outsourcing (outsources and
partners with more firms than do other
network members)
– competencies (supports each member’s
efforts to develop core competencies that can
benefit the network)

40
Strategic Network
 strategic center firm engages in four
primary tasks
– technology (manages the development and
sharing of technology-based ideas among
network members)
– race to learn (guides participants in efforts to
form network-specific competitive advantages)

41
Strategic Network

Strategic
Center
Firm

42
Distributed Strategic Network
 International cooperative strategies often
require more complex networks
 Many large multinational firms form
distributed strategic networks with
multiple regional strategic centers to
manage their array of cooperative
arrangements with partner firms
 Breaking large networks into multiple
manageably-sized networks helps to
manage the complexity of maintaining
many relationships
43
Distributed Strategic Network

Main
Strategic
Strategic
Center
Center
Firm
Firm

= Distributed Strategic Center Firms 44