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