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

2. 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. 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

4. 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)

5. 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

6. Organizational Controls:
Financial Controls
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
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

11. 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

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

13. 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

14. 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

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. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

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

24. 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

25. 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

26. 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

27. 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.

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

29. 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

30. 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