Organisation Theory

Organisational Strategy

1 December 2022

© HÖGSKOLAN DALARNA | 2017-03-02

• Part One: What is strategy?

• Legstretch!

• Part Two: Organisational strategy through design

• The world around

• The organisation
inside
Gareth Jones:
• Strategy: The specific pattern of
decisions and actions that managers
take to use core competences to
achieve a competitive advantage and
outperform competitors
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‘...The determination of the long-run goals and objectives of

an enterprise and the adoption of courses of action and the
allocation of resources necessary for carrying out these goals’
Alfred D. Chandler (1963)

‘...a firm´s theory about how to gain

competitive advantages’
Peter Drucker (1994)
‘Competitive strategy is about being different. It means
deliberately choosing a different set of activities to deliver a
unique mix of value’
Michael Porter (1996)

‘ a pattern in a stream of decisions’

Henry Mintzberg (2007)
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• The Rational-Analytical View

• Intentions and Evaluation
• Plans and Organization
• Hierarchy
• Deliberate Choices and Linearity

• The Emergent Strategy View

• Incremental
• Dynamic
• Non-linear
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• A ”clear and motivating purpose for the organization”

• The direction in which the business might expand/change
• The appropriate methods of expansion/change.

Formulating organization strategy

• INTERNAL – Owners (shareholders/public organisation), employees
• EXTERNAL (stakeholders) – Suppliers, customers, alliance partners,
regulators and investors
Strategy has to include what is within the organisation and how to
manage important relationships with what is kept outside
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Gareth Jones:
• Core competences: The skills and
abilities in value creation activities
that allow a company to achieve
superior efficiency, quality,
innovation, or customer
responsiveness
• Functional resources: The skills possessed by an
organization’s functional personnel
• Easy to control: material resources, coordination
facilities, (culture)
• Hard to control: people, ideas, (culture)

• Threat: ‘back engineering’ of technical products

8-7
• Organizational resources:
• The attributes that give an organization a competitive
advantage such as the skills of the top-management
team or possession of valuable and scarce resources

• Threat:
• Strong centralized authority can discourage innovation
• Open (flat) structures can develop specialized expertise
but can encourage employees/teams to leave for start-
ups

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Coordination ability
• An organization’s ability to coordinate its functional and
organizational resources to create maximal value
• Differentiation, spans of control
• Taylor, Fayol, Follet
• Effective coordination of resources leads to
competitive advantage by means of:
• Control systems
• Centralization or decentralization of authority
• Development and promotion of shared cultural values

8-8
The strategic goal of each function is to create a core
competence that gives the organization a competitive
advantage
• (According to contingency theory): each function
should develop a structure that suits its human and
technical resources
• The strength of a function’s core competence depends
not only on the function’s resources, but on its ability to
coordinate the use of its resources
• To gain a competitive advantage, an organization must
design its functional structure and culture to provide a
setting in which core competences develop

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Focus of business-level strategy: Specialization in
one segment of a market, and focusing all of the
organization’s resources on that segment

• Selecting the domain in which the organization will

compete
• Positioning the organization so that it can use its resources
and abilities to manage its specific and general
environments to protect and enlarge that domain

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• Strategies to lower costs or differentiate products
• Low-cost business-level strategy: An organization
produces low priced goods and services for all customer
groups (Cost leadership)

• Differentiation business-level strategy: A plan whereby an

organization produces highpriced, quality products aimed
at particular market segments
• Differentiators must develop values of innovation, quality,
excellence, and uniqueness

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• Three factors affect an organization’s choice of a
structure to create a competitive advantage:
• As an organization produces a wider range of products,
it needs greater control over the development,
marketing, and production of these products
• As an organization seeks to find new customer groups
for its products, it needs a structure that allows it to
serve the needs of its customers
• As the pace of new product development in an industry
increases, an organization will need a structure that
increases coordination among its functions

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8-24
• 15 minute break.
• Design

• Levels of strategy
• As organizations grow, they produce more products
and serve many different types of customers
• A new structure is needed that will
• Increase manager’s control of individual subunits
• Integrate the operation of the whole company and ensure
subunits are meeting organizational goals
• Organizations most commonly adopt the divisional structure
to solve control problems that arise with too many products,
regions, or customers

6-12
• Product structure: A divisional structure in which
products (goods or services) are grouped into
separate divisions according to their similarities or
differences
• Organizations need to decide how to coordinate its
product activities with support functions

6-17
• Product division structure: A centralized set of
support functions service the needs of a number of
different product lines
• Each product division uses the services of the
central support function
• Support function is divided into product-oriented
teams who focus on the needs of one particular
product division

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 Liz Clairborne:
”Enormous complexity and expense”

Consolidate brand & structure (streamline)

New hierarchical tier of shared services, 2 clothing
divisions (retail and wholesale)
• Cost center: a unit (function/division) that only
counts its costs

• Revenue center: a unit (function/division) that only

counts its revenue (income)

• Profit center: a unit (function/division) that counts

its revenue minus cost
 “A division that has its own set of support functions and
controls its own value-creation activities”

• Two innovations that overcome the control problems

• Independence of each division
• Corporate headquarters staff: Responsible for overseeing the
activities of the managers heading each division

• Self-containment according to Jones includes support

functions in the divisional structure

• Self-containment can be seen as a profit center

6-21
• The prices paid within an organization between different ”self-
contained” units
• Priced according to costs?
• Priced according to markets?
• Priced according to strategy?
• Potential power games between units: organizational politics
6-22
Advantages Disadvantages
• Increased organizational • Managing the corporate-
effectiveness divisional relationship
• Increased control • Coordination problems
between divisions
• Profitable growth • (Transfer Pricing)
• Internal labor market • Bureaucratic Costs
• Communication Problems

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• Product team structure: Specialists from the support
functions are combined into product development
teams that specialize in the needs of a particular kind
of product
• Each team is a self-contained division headed by a
product team manager

6-26
• A divisional structure in which divisions are
organized according to the requirements of the
different locations in which an organization operates
• Allows the organization to adjust its structure to
align its core competences with the needs of
customers in different geographic regions
• Allows some functions to be centralized and others
decentralized

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• A market structure aligns functional skills and
activities with the needs of different customer
groups
• Each customer group has a different marketing
focus, and the job of each group is to develop
products to suit the needs of its specific customers
• Each customer group makes use of centralized
support function

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Matrix structure: People and resources are grouped in
more than one way simultaneously:
• By function
• By project or product

Two-boss employees: Employees who report to two

superiors: the product team manager and the
functional manager

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Advantages
• The use of cross-functional teams
reduces functional barriers and
subunit orientation
• Opens communication between
functional specialists
• The matrix enables an
organization to maximize its use
of skilled professionals, who
move from product to product as
needed
Disadvantages
• The absence of a clearly defined
hierarchy of authority and
responsibility
• lacks a control structure that
leads employees to develop
stable expectations
• The dual functional and
product focus promotes
concern for both cost and
quality
• Conflict between functions and
product teams over the use of
resources
6-34
• It is the structure of a large complex organizations
that has many divisions
• Uses many different types of organizational
structure

• Each product division’s manager selects the

structure (functional, product, geographic) that best
meets the needs of their particular environment and
strategy

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• A cluster of different organizations whose actions
are coordinated by contracts and agreements rather
than through a formal hierarchy of authority
• Very complex as companies form agreements with
many suppliers, manufacturers, and distributors
• The use of outsourcing and the development of
network organization are increasing rapidly as
organizations recognize the many opportunities they
offer to reduce costs and increase flexibility

6-40
• Central product design and
research
• All other functions outsourced
• Coordination through IT
• Allows competition and cost
cutting
• Less bureaucracy
• Organic change
• Lack of trust and possibility of
mutual adjustment
• Not possible to coordinate
through management
Advantages
• Avoids the high bureaucratic
costs of operating a complex
organizational structure
• Allows an organization to
act in an organic way
• Network partners can be
replaced if they do not
perform up to standards
• Learn from one another and
constantly improve
Disadvantages
• A considerable level of mutual
adjustment is needed to allow
the groups to interact
• Ability to control a complex
value- creation process is
difficult
• Managers lack the means to
effectively coordinate and
motivate the various network
partners
6-41
Gareth Jones:
• Corporate-level strategy: A plan to
use and develop core competences so
that the organization not only can
protect and enlarge its existing
domain but can also expand into new
domains
• Global (expansion) strategy: A plan
that involves choosing the best
strategy (to expand into) overseas
markets to obtain scarce resources and
develop core competences
• Involves a search for new domains in which to
exploit and defend the ability to create value from its
core competences
• Economies of Scale

• ‘Vertical’ integration: A strategy in which an organization

takes over and owns its suppliers (backward vertical
integration) or its distributors (forward vertical
integration)

8-27
Economies of Scope
• Related diversification: The entry into a new domain in
which it can exploit one or more of its existing
competences
• creates value by sharing resources or transferring skills from
one division to another
• requires lateral communication between divisions as well as
vertical communication between divisions and headquarters
• Integrating roles and teams of functional experts are needed to
coordinate skills and resource transfers
• Multidivisional structures or matrix allow for the coordination
needed

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• Multidivisional structure is appropriate for
organizations operating in more than one domain
• Honda: motor engine expertise

8-30
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Conglomerate structure and unrelated
diversification
• Different domains that have little/nothing in common
• each business is placed in a self-contained division and
there is no contact between divisions
• Corporate management has a buy-sell perspective and
mainly focuses on appointing the CEO
• List of Companies | Investors | Tata group
• Choice of structure and control systems for managing a
global business is a function of the decision of how to
distribute and allocate responsibility and authority between
managers at home and abroad

Four principal strategies

• Multidomestic strategy
• International strategy
• Global strategy
• Transnational strategy

8-35
• Generally operates with a global geographic
structure
• Duplication of value-creation activities in all countries
• Authority delegated to each overseas division
• Managers at global headquarters use market and output
controls

8-39
• Companies use a global product group structure and
create product group headquarters to coordinate the
activities of domestic and foreign divisions
• Product managers are responsible for organizing all
aspects of value creation on a global level
• Managers abroad are in the control of the international
division managers

8-41
• Manufacturing and other value-chain activities
placed at the global location that will allow it to
increase efficiency and quality
• Must find ways to reduce bureaucratic costs associated
with transfers between corporate headquarters and the
global divisions
• May establish a global product group structure

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• Global matrix structure
• Lowers global cost structures
• Differentiates activities through superior innovation and
responsiveness to global customers
• Managers at the regional or country level control local
operations
• Company’s corporate product groups are grouped by
world region
• Decentralizes control to overseas managers
• Corporate managers exert centralized control to coordinate
company’s global activities

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 Divisions in near self-
containment
Global activities • Little standardized
information
World region divisions • Different performance
scales(?)
• Quality problems
 • New strategy
• Drugs are a single
product division
Global activities
• Flatter vertical
World region divisions
differentiation
• Increased standardization
Another example:
• More products available
How Fred Hassan Rescued globally to increase
Pharmacia & Upjohn - Bloomberg economies of scale
• Managers facing the challenge of deciding how
and how much to differentiate and integrate
must:
• Carefully guide the process of differentiation
• Carefully integrate the organization by choosing
appropriate integrating mechanisms

4-31
Software for organizational efficiency
The SAP product
Excellence in Innovation (”root value of culture)
• Seamless registration of transaction at multiple
divisions/functions/units
• Large, often multinational corporations
• Long and complicated installation process
• Quick market growth
Focus
•Staff needed to develop the software
•Early turn to external consultants for
implementation
•Small revenue from training external
consultants
•Implementation became the skill of the
external consultants
(not) taking the competitive advantage
•Lost customer contact to the consultant
businesses
•Product-focused (1990, 30% on R&D)
•Understaffed sales organization
•New products connected to competitors
(Oracle)
•Even more need for technological leadership
Unique technology
•Developing for SMB (small medium
businesses)
•Specialized software (partially reducing
implementation needs)
•Building customers into the SAP system
•Extreme technical standardization
Decentralization:
• Local marketing, sales and installation to national
subsidiaries
• Regional divisions responsible for training
• BUT …customers dependent on quality of external
consultants
• BUT …. no implementation standardization between
different subsidiaries

(paradox: SAP’s software centralized and standardized

but SAP’s business practice and organisation design
decentralized)
• Functional differentiation in new functional departments
(HRM)
• Emphasis on organizational learning of best practices (and
stopping defectors)
• Some refocus of divisions from regions to client industries

• Changing technology (web-based marketing and software

solutions)
• cooperation with other firms
• new products and new versions of products
• less internal R&D focus