GARETH R. JONES /CHARLES W. L. HILL Theory of Strategic Management 10th ed. Implementing Strategy in Companies that Compete in a Single Industry Chapter 12 Student Version © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

IMPLEMENTING STRATEGY THROUGH ORGANIZATIONAL DESIGN Learning Objective: After reading this chapter you should be able to understand how organizational design requires strategic managers to select the right combination of organizational structure, control, and culture. IMPLEMENTING STRATEGY THROUGH ORGANIZATIONAL DESIGN Strategy implementation involves the use of organizational design, the process of deciding how a company should create, use, and combine organizational structure control systems, and culture to be successful. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY THROUGH ORGANIZATIONAL DESIGN Organizational structure assigns employees to specific value creation tasks and roles and specifies how these tasks and roles are to work together. A control system provides managers with: a set of incentives to motivate employees to work toward increasing efficiency, quality, innovation, responsiveness to customers, and specific feedback on its members’ performance. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

BUILDING BLOCKS OF ORGANIZATIONAL STRUCTURE Grouping Tasks, Functions, and Divisions A function is a collection of people who work together and perform the same types of tasks. As organizations grow and produce a wider range of products, the amount and complexity of the work exchanges of transfers among people, functions, and subunits, increase. A division is a way of grouping functions to allow an organization to better produce and transfer its goods and services to customers. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ALLOCATING AUTHORITY AND RESPONSIBILITY Learning Objective: After reading this chapter you should be able to explain why it is so important that strategic managers keep the organizational hierarchy as flat as possible and what factors determine the way they decide to centralize or decentralize authority. ALLOCATING AUTHORITY AND RESPONSIBILITY A hierarchy of authority, or chain of command, defines each manager’s relative authority. A span of control refers to the number of subordinates who report directly to a manager. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ALLOCATING AUTHORITY AND RESPONSIBILITY A tall organizational structure has many levels of authority relative to the company’s size. A flat organizational structure has fewer levels relative to a company’s size. The taller the organizational structure, the more problems that are encountered. It can take a long time for decisions from top managers to reach lower management and reverse problems with feedback. There is a higher chance for distortion of commands. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ALLOCATING AUTHORITY AND RESPONSIBILITY Top managers might follow the principle of the minimum chain of command which states that a company should choose the hierarchy with the fewest levels of authority necessary. An important way to reduce the problems associated with too-tall hierarchies and reduce bureaucratic costs is to decentralize authority. Top managers should delegate authority to middle- and first-level managers. Allowing managers in bottom layers to implement strategies is motivating and accountability increases. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INTEGRATION AND INTEGRATING MECHANISMS As a structure becomes complex, top managers need to use various integration mechanisms to increase communication and coordination among functions and divisions. Direct contact among managers creates a context within which managers from different functions or divisions can work together to solve mutual problems. When the volume of contact between two functions or divisions increases, create a liaison role for one of the managers. When more than one function or division share a common problem, a team may be appropriate. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC CONTROL SYSTEMS Strategic control systems are tools that top managers use to monitor and evaluate whether, in fact, their strategy and structure are working as intended. Strategic control helps managers obtain the four basic building blocks of competitive advantage. To determine production efficiency (how well the company is using resources), managers must be able to accurately measure how many units of inputs are required to produce a unit of output. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC CONTROL SYSTEMS An effective strategic control system should have the following three characteristics: It should be flexible enough to allow managers to respond as necessary to unexpected events. It should provide accurate information, thus giving a true picture of organization performance. It should supply managers with the information in a timely manner because making decisions on the basis of outdated information is a recipe for failure. Strategic control systems are developed to measure performance at four levels: corporate, divisional, functional, and individual. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC CONTROL SYSTEMS Types of Strategic Control Systems Personal control is the desire to shape and influence the behavior of a person in a face-to-face interaction in the pursuit of a company’s goals. Output control is a system in which strategic managers estimate or forecast appropriate performance goals for each division. Behavior control is control through the establishment of a comprehensive system of rules and procedures to direct the actions or behavior of divisions, functions, and individuals. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC CONTROL SYSTEMS Types of Strategic Control Systems An operating budget is a blueprint that outlines how managers intend to use the organizational resources to efficiently achieve organizational goals. Standardization refers to the degree to which a company specifies how decisions are to be made so that employees’ behavior becomes predictable. In practice, there are three things an organization can standardize: inputs, conversion activities, and outputs. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ORGANIZATIONAL CULTURE Another element of successful strategy implementation is managing organizational culture, the specific collection of values and norms shared by people and groups in an organization. An adaptive culture is one that is innovative and that encourages and rewards middle- and lower-level managers for taking initiative. Successful companies have values promoting a bias for action. The company must do what it does best and develop a business model focused on its mission.

Learning Objective: After reading this chapter you should be able to explain the many advantages of a functional structure and why and when it becomes necessary to utilize a more complex form of organization structure. BUILDING DISTINCTIVE COMPETENCIES AT THE FUNCTIONAL LEVEL Functional Structure: Grouping by Function In the quest to deliver a final product to the customer, two problems arise: the range of value chain activities that must be performed expands, and it quickly becomes clear that the company lacks expertise to perform these activities effectively. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Functional structures have several advantages: BUILDING DISTINCTIVE COMPETENCIES AT THE FUNCTIONAL LEVEL Functional Structure: Grouping by Function Functional structures group people on the basis of their common expertise and experience or because they use the same resources. Functional structures have several advantages: If people who perform similar tasks are grouped together, they can learn from one another. They can monitor each other to make sure that all are performing their tasks effectively. They give managers greater control over activities. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

BUILDING DISTINCTIVE COMPETENCIES AT THE FUNCTIONAL LEVEL Developing Culture at the Functional Level In manufacturing, functional strategy usually centers upon improving efficiency and quality. Pursuing TQM (total quality management), the inputs and involvement of all employees in the decision-making process are necessary to improve efficiency and quality. In TQM, work teams are created and given the responsibility and authority to discover and implement improved work procedures. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

BUILDING DISTINCTIVE COMPETENCIES AT THE FUNCTIONAL LEVEL Developing Culture at the Functional Level The functional strategy for an R&D department is to develop distinctive competencies in innovation and quality as excellence that result in products that fit customer needs. The cost-effective way to monitor the behavior of salespeople is to develop sophisticated output and behavior controls. Set specific sales goals or goals for increasing responsiveness to customers. Require reports describing interaction with customers. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY Learning Objective: After reading this chapter you should be able to differentiate between the more complex forms of organizational structure managers adopt to implement specific kinds of business-level strategies. IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY To pursue its business model successfully, managers must find the right combination of structure, control, and culture that links and combines the competencies in a company’s value chain functions so that it enhances its ability to differentiate products or lower costs. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY Effective organizational design: Improves the way in which people and groups choose business-level strategies that lead to increasing differentiation, thus providing more value to customers, and the opportunity to charge a higher price. Reduces the bureaucratic costs associated with solving the measurement and communication problems, such as transferring a product in process between functions. A more-complex structure will cost more to operate because additional and experienced managers will be needed. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY Implementing Cost Leadership The aim of a company pursuing cost leadership is to become the lowest-cost producer in the industry, and this involves reducing costs across all functions in the organization. Cost leadership requires that managers continuously monitor their structures and control systems to find ways to restructure or streamline them so that they operate more effectively. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY Implementing Differentiation Effective strategy implementation can improve a company’s ability to add value and to differentiate its products. To make its products unique, a company must design its structure, control, and culture around the particular source of competitive advantage. Companies pursuing differentiation often have a markedly different kind of culture than those pursuing cost leadership. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPLEMENTING STRATEGY IN A SINGLE INDUSTRY Product Structure: Implementing a Wide Product Line An organization that chooses a product structure first divides its overall product line into product groups or categories. Each product group focuses on satisfying the needs of a particular customer group and is managed by its own team of managers. Because all of the R&D teams belong to the same centralized function, they can share information. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MARKET STRUCTURE: INCREASING RESPONSIVENESS TO CUSTOMER GROUPS Suppose the source of competitive advantage depends upon the ability to meet the needs of distinct and important sets of customers. Many companies develop a market structure that is similar to the product structure except it focuses on customer groups instead of product groups. A market structure brings customer group managers and employees closer to specific groups of customers. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

GEOGRAPHIC STRUCTURE: EXPANDED BY LOCATION A company that begins to expand locally, regionally, or nationally through internal expansion or horizontal integration frequently moves to a geographic structure in which geographic regions become the basis for grouping activities. This structure allows the company to be responsive to the needs of regional customers and reduce transportation costs. A geographic structure provides more coordination and control than a function structure does. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

In a matrix system, value chain activities are grouped in two ways. MATRIX AND PRODUCT-TEAM STRUCTURES: COMPETING IN FAST-CHANGING, HIGH-TECH ENVIRONMENTS In a matrix system, value chain activities are grouped in two ways. Activities are grouped vertically by function so there is a familiar differentiation of tasks into functions. Superimposed upon this vertical pattern is a horizontal pattern based on grouping by product or project in which people and resources are grouped to meet ongoing product development needs. Implementing a matrix structure permits intensive cross-functional integration. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

RESTRUCTURING AND REENGINEERING Restructuring a company involves two steps: Streamlining the hierarchy of authority and reducing the number of levels in the hierarchy to a minimum. Reducing the number of employees to lower operating costs. A company may operating more effectively using reengineering, which involves the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance. Reengineering and TQM are highly interrelated and complementary. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.