1. Strategy and Structure
Economics of Strategy
Besanko, Dranove, Shanley and Schaefer, 3rd Edition
Chapter 16
Strategy and Structure
Slide show prepared by
Richard PonArul
California State University, Chico
 John Wiley  Sons, Inc.

2. Structure Follows Strategy
According to Alfred Chandler, the choice of organizational structure depends on the business strategy being pursued
Structure of an organization affects
how division of labor is used to organize tasks
how information flow is facilitated
how agency problems are dealt with

3. Organizational Forms
A small group of employees within a firm can be organized in several ways
Each member may be treated as a unit and is rewarded based on his/her output
The group can be a self managed team and individual rewards will be wholly or partly based on team performance
Hierarchy of authority may be used with one member of the group coordinating and monitoring the activities of others

4. Nature of Tasks and Organizational Forms
Firms may use different forms in different situations depending on the nature of the tasks
When tasks do not require coordination employees can be treated as individuals
When coordination is essential and individual contribution is difficult to measure, team approach will be used

5. Nature of Tasks and Organizational Forms
Beyond a certain size, self managed teams may not perform well in coordination and hierarchy of authority may be needed
The same firm may use different approaches for different tasks
A given employee may perform certain tasks as an individual, others as part of self managed teams and yet others subject to hierarchical control

6. Coordination and Hierarchy
If a group has n members, the number of possible interactions is
As n increases, hierarchies can be created to keep the number of interactions within manageable limits
When the number of relations for a supervisor goes beyond the optimal span of control a new layer of hierarchy can be created

7. Coordination and Hierarchy

8. Complex Hierarchy
Large firms tend to have multiple groups and multiple levels of groupings
Complex hierarchies are designed to address the following two issues
Departmentalization
Coordination and control

9. Departmentalization
Formal groupings in large organizations can be based on functional areas, geography, products, types of customers and so on
A firm should decide on the organizing dimensions based on
economies of scale and scope
transactions costs and
agency costs

10. Firm Boundaries and Structure
A firm’s decisions regarding vertical and horizontal boundaries will influence its choice of organizing dimensions
Diversifying into a new business area will expand the set of formal groupings
Decision to outsource will contract a firm’s structure

11. Coordination and Control
Coordination involves the flow of information to facilitate decisions
Control involves the distribution of decision making rights and rule making authority within the organization

12. Coordination, Control and Technical Efficiency
Coordination affects the technical efficiency by the provision of information needed to exploit economies of scale and scope
To accomplish improvements in technical efficiency, decision making rights should be allocated to those who have the best and timely information

13. Coordination, Control and Agency Efficiency
Allocating decision rights to individuals will affect agency efficiency since the decision makers will have the opportunity for selfish behavior
A balance must be struck between technical and agency efficiencies in the allocation of decision rights

14. Approached to Coordination
When a firm consists of self contained units, information related to operating decisions are controlled by the manage of the unit
A firm may also organize itself into units that have strong lateral relationships
These lateral relationships can be formalized into structure (Matrix Organization) or remain informal

15. Centralization and Decentralization
Authority becomes more centralized (decentralized) as decision making moves to higher (lower) levels
It is possible for a firm to be centralized in some dimension while being decentralized in others
For example, a university’s administrative functions may be centralized while its teaching function is decentralized

16. Organizational Structure
Organizational structure of large businesses can be classified as follows:
The unitary functional structure (U-form)
The multidivisional structure (M-form)
The matrix structure
The network structure

17. The U-form structure

18. The U-form structure
Each department in the firm is responsible for a particular functional area such as finance or marketing
The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration

19. The M-form structure

20. The M-form structure
The multidivisional firm is organized along such dimensions as
product line
geography or
type of customers
Divisional managers will be responsible for operating decisions and the top management will handle strategic decisions

21. Advantages of the M-form
Measuring divisional performance is easier under M-form
Divisional managers compete for funds in the internal capital markets based on their operating performance in the past
Pay for performance schemes are easier to implement in managerial compensation

22. Matrix Structure

23. Matrix Structure
A firm that uses a matrix structure is organized along two (or more) dimensions - for example, product line and geography
In a two-dimensional matrix, an employee belongs to two hierarchies and has two bosses

24. Advantages of Matrix Structure
Matrix structure can help exploit economies of scale and scope
A firm may need national coordination to achieve economies of scale for manufacturing a particular product and regional coordination to negotiate with large buyers for different products

25. Advantages of Matrix Structure
Matrix structure allows a firm to economize on scarce human resources
Having a firm wide engineering department (or marketing department) will be more efficient than maintaining a separate engineering group for each product group

26. Network Structure

27. Network Structure
Workers or worker groups contribute to multiple organizational task
Work groups are reconfigured when the tasks change
Relationships among groups are governed by the requirements of the task

28. Network Structure
Coordination costs will be a major concern in Network Structure
The Japanese Keiretsu is a variety of network structure
In high technology companies, network structure facilitates information flows, leading to high level of product development

29. Modular Organization
Modular organization is a network structure with subunits that are relatively self contained
Subunits are tied together via standardized linkages
Modularity may sacrifice economies of scope
If may encourage innovations at the subunit level

30. Contingency Theory
Contingency theory suggests that a particular structure will not be the optimal structure for a firm under all circumstances
Contingency theory focuses on three factors that affect the efficiency of a structure
Technology and task interdependence
Information flows
Tension between differentiation and integration

31. Technology and Task Interdependence
There can be three modes of task interdependence
Reciprocal - when two workers (or work groups) depend on each other
Sequential - when one worker (or work group) has a one way dependence on another
Pooled - when there is no direct dependence, but indirect dependence exists because of common goals

32. Technology and Task Interdependence
Changes in technology will cause the nature of task independence to change
The organizational structure may need to be changed in response to the change in task interdependence
Example: Technology has weakened the sequential and reciprocal interdependencies in some industries and has made outsourcing attractive

33. Information Flows When work is routine, workers can be autonomous
When exceptions need to be handled, higher level hierarchies are involved and information flow becomes important
The firm’s organizational structure should enable the desired amount and speed of information flow to occur

34. Information Flows
Workers in the higher levels deal with more difficult exceptions that occur less frequently
Higher levels have fewer workers with larger human capital
Technological changes reduce the cost of information flow and increase the span of control (flatter organization)

35. Information Retrieval
According to Arthur Stinchcombe, the optimal structure should enable efficient information retrieval
Different levels of structure will deal with different types of information
To make information retrieval efficient, the firm should integrating into the firm activities that provide critical information

36. Balancing Differentiation and Integration
If the organizational structure does not sufficiently differentiate, the firm may inefficiently use a “one size fits all” approach to all products (and regions)
For integrated planning and control, too much differentiation can be an impediment
The optimal structure should balance differentiation and integration

37. Structure Follows Strategy
The U-form structure allowed firms to exploit the economies of scale in production, marketing and distribution
When firms began to diversify, the U-form became cumbersome and M-form emerged as a better alternative

38. Structure Follows Strategy
The M-form lead to duplication of activities when firms expanded globally and created “international divisions”
As firms try to balance local responsiveness with global economies, a mix of matrix form and network form help create flexible organizations

39. Structure, Strategy, Knowledge and Capabilities
Critical knowledge and decision capabilities are distributed throughout the firm in large firms
Structure determines the shortlist of alternatives that reach the top management
Organizations enable generation and manipulation of new knowledge for strategic uses (knowledge-based view of the firm)

40. Structure, Strategy Knowledge and Capabilities
Structure induces biases in the information reaching the top management
Structure also influences how strategies are implemented and how top management is informed regarding the implementation
Formal administrative control should be supplemental by informal means of winning the cooperation from lower levels

41. Evolutionary Economics and Structure-Strategy
Evolutionary economics offer two new views on structure-strategy relationship
Structure and strategy evolve over time through local external interactions rather than through top management initiative
Strategy and structure are higher level heuristics that enable the management to respond quickly to difficult and unusual problems

42. Implications of the Evolutionary Economics View
Strategy and structure changes will be evolutionary rather than revolutionary
Large scale strategy changes and comprehensive reorganizations will be rare
Current decision regarding strategy and structure will be constrained by past decisions