As we grow, what should our business look like? Chapters 11 Organizational Structure As we grow, what should our business look like?

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

Organizational Controls 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

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)

Organizational Controls: Financial Controls Strategic Controls Objective criteria Accounting-based measures include return on investment return on assets Market-based measures include economic value added Financial Controls

Organizational Controls: Financial Controls Economic Value Added

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

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

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)

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

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

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

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

Chief Executive Officer Functional Structure Chief Executive Officer Production Finance Engineering Accounting Sales & Marketing Human Resources Corporate Finance Corporate R&D Corporate Marketing Corporate Human Resources Strategic Planning 18

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

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

Structure for Cost Leadership Strategy Operations is main function Process engineering is emphasized over R&D Large centralized staff Formalized procedures Structure is mechanical, job roles highly structured Office of the President Centralized Staff Engineering Operations Accounting Marketing Personnel

Structure for Differentiation Strategy President and Limited Staff R&D Marketing New Product R&D Marketing Finance 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

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

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

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

Multi-Divisional Structure Chief Executive Officer Corporate Finance Corporate R&D Corporate Marketing Strategic Planning Corporate Human Resources Division Production Finance Engineering Accounting Sales & Marketing Human Resources 18

Three Variations of the Multidivisional Structure (M-form) Cooperative Form Competitive Form Strategic Business-Unit (SBU) Form

Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office President Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Corporate Marketing Corporate Finance Product Division Product Division Product Division Product Division Product Division

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

SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office President Corporate R&D Lab Strategic Planning Corporate HRM Corporate Marketing Corporate Finance SBU SBU SBU Division Division Division

SBU Form of Multidivisional Structure: Related-Linked Strategy The SBU M-form includes an additional layer—the strategic business unit—between the corporate headquarters and the product divisions. There may be integration and coordination between divisions in a specific SBU. There is independence among and between SBU’s. Headquarters manages approval of strategic of SBU’s for the president. Individual SBU’s may have budgets and staffs for within-SBU integrating mechanisms Corporate Headquarters staff serve as consultants to SBU’s and divisions on product strategy (rather than having direct input.

Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office President Legal Affairs Finance Auditing Division Division Division Division Division Division

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

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