Hill 8e Basic Ch12

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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Twelve Corporate Single Industry Strategy


Implementing Strategy Through Organizational Design

Organizational Design: the process of selecting the right combination of organizational structure, control systems, and culture to pursue a business model successfully.

Organizational StructureAssigns employees to specific value creation tasks and roles To coordinate and integrate the efforts of all employees

Strategic Control SystemsA set of incentives to motivate employees To provides feedback on performance so corrective action

can be taken Organizational Culture

The collection of values, norms, beliefs, and attitudes shared within an organizations

To control interactions within and outside the organization


Implementing Strategy Through Organizational Design

Figure 12.1

Organizational structure, control, and culture shape people’s behaviors, values, and attitudes – and determine how they will implement an organization’s business model and strategies.


Building Blocks of Organizational Structure

Grouping tasks, functions, and divisions How best to group tasks into functions – and

functions into business units or divisions to create distinctive competencies and pursue a particular strategy

Allocating authority and responsibility How to allocate authority and responsibility to

these functions and divisions Integration and integrating mechanisms How to increase the level of coordination or

integration between functions and divisions as a structure evolves and becomes more complex


Grouping Tasks, Functions and Divisions

• Organizational structure – follows the range and variety of tasks that an organization pursues.

• Companies group people and tasks into functions, and then functions into divisions.

» A function is a collection of people who work together and perform similar tasks or hold similar positions.

» A division is a way of grouping functions to allow an organization to better serve its customers.

» Handoffs are the work exchanges between people, functions, and subunits.Bureaucratic costs result from the inefficiencies

surrounding these handoffs.

Choice of structure is made on ability to implement company’s business model and strategies successfully:


Allocating Authority and Responsibility

Organizational StructureDecision Making: Centralized versus

Decentralized• Delegating and empowering employees • Centralized decisions

To economize on bureaucratic costs and effectively coordinate the activities, company must develop a clear and unambiguous hierarchy of authority

Principle of the Minimum Chain of Command:Choose hierarchy with the fewest levels of authority necessary to use organizational

resources efficiently and effectively


Tall and Flat StructuresFigure 12.2


Integration and Integrating Mechanisms

Direct contact Liaison rolesTeams

Integration and integrating mechanisms are used to increase communication and coordination among functions and divisions

The greater the complexity of an organization’s structure, the greater the

need for formal coordination among people, functions, and divisions.


Strategic Control Systems

Characteristics of an effective control system:• Flexible • Provides accurate information• Timely

The formal target-setting, measurement, and feedback systems to evaluate whether a company is implementing its strategy successfully

Measures should be tied to the goals of developing distinctive competencies in efficiency, quality, innovativeness, and

responsiveness to customers.


Steps in Designing an Effective Control System

Figure 12.3


Levels of Organizational ControlFigure 12.4Controls at each level should provide

the basis on which managers at lower levels design their controls systems.


Personal Control• Managers question and probe to better understand

subordinates.• The result is more possibilities for learning to occur

and competencies to develop. Output Control

• Set appropriate performance goals for each division, department, and employee, then measure actual performance relative to these goals.

Behavior Control• Establish standardization, predictability, and

accuracy by creating a system of rules to direct actions and/or behaviors of divisions, functions, or individuals.

Types of Strategic Control Systems


Using Information Technology Behavior control

• IT standardizes behavior through the use of a consistent, cross-functional software platform.

Output control• IT allows all employees or functions to use

the same software platform to provide information on their activities.

Integrating mechanism• IT provides people at all levels and across

all functions with more information.


Building Distinctive Competencies at the Functional Level

Functional Structure – advantages:• People doing similar functions can learn from one another.• People can monitor each other and improve work processes.• Managers have greater control over organizational activities.• Managing is easier with separately managed specialized groups.

Role of Strategic Control• Managers and employees can monitor and improve operating

procedures.• Easier to apply output control.

Developing Culture• Managers must implement functional strategy and develop

incentive systems to allow each function to succeed.

Most companies group people and tasks around a functional structure on the basis of their common expertise or because they use the same resources.


Functional StructureFigure 12.5


Functional Structure and Bureaucratic Costs

Communication problems• Stem from differences in goal orientations and outlooks

Measurement problems• Difficulties measuring contribution as product range widens

Customer problems• Satisfying customer needs and coordinating value-chain functions

Location problems• Functional structure not the best way to handle regional diversity

when selling or producing in multiple locations Strategic problems

• These problems mean a company has outgrown its structureConsider a more complex structure or outsourcing options.

Whenever different functions work together, bureaucratic costs arise because of communication and measurement problems arising from the handoffs across the functions.


Implementing Strategy in a Single Industry

Effective strategy implementation and organization design at the business level:• Increases differentiation, adds value for customers,

allows for a premium price• Reduces bureaucratic costs associated with

measurement and communications problemsEffective organization design often means

moving to a more complex structure that:• Economizes on bureaucratic costs• Increase revenue from product differentiation• Lowers overall cost structure by obtaining economies of

scope or scale

Implementation begins at the functional level


Implementing Cost Leadership and Differentiation

Pursuing a cost leadership approach• The aim is to become the lowest cost producer in

the industry• Reducing costs across all functions• Lowering cost structure while preserving its ability

to attract customers• Continuously monitoring for effective operation

In practice, the functional structure is the most suitable for cost leadership.

Implementing a differentiation approach• Design organization structure around the source of

distinctive competency, differentiated products, and customer groups.


How Organizational Design Increases Profitability

Figure 12.6


Product Structure: Implementing a Wide Product

Line Implementing a broad product structure:

• Group the overall product line into product groups

• Centralize support value chain functions to lower costs

• Divide support functions into product-oriented teams who focus on the needs of one specific product group.

• Measure the performance of each product group separately from the others

• Closely link rewards to performance of product group


Nokia’s Product StructureFigure 12.7


Market Structure: Increasing Responsiveness to Customer Groups

Increasing responsiveness to customer groups:• Identify the needs of each customer group.• Group people and functions by customer or market

segments.• Make different managers responsible for

developing products for each group of customers.• Establish market structure brings managers and

employees closer to specific groups of customers.

Market structure focuses on the ability to meet the needs of distinct and important sets of customers or different customer groups.


Market StructureFigure 12.8


Geographic Structure: Expanding Nationally

Expanding nationally – geographic structure• More responsive to needs of regional customers• Can achieve a lower cost structure and economies

of scale• Provides more coordination and control than a

functional structure through the regional hierarchies

Geographic regions may become the basis for grouping organizational activities when companies expand nationally through internal expansion, horizontal integration, or mergers.


Geographic StructureFigure 12.9


Matrix and Product-Team Structures

Matrix structure• Value chain activities are grouped by

function and by product or project• Flat and decentralized• Promotes innovation and speed• Norms and values based on

innovation and product excellence Product-team structure

• Tasks divided along product or project lines• Functional specialists are part of permanent

cross-functional teams

In fast-changing, high-tech environments, competitive success depends on fast mobilization of company skills and resources to ensure that product development and implementation meet customer needs.


Matrix StructureFigure 12.10


Product-Team StructureFigure 12.11


Focusing on a Narrow Product Line

Focusing on a narrow product line:• Focusers tend to have higher production costs • Has to develop some form of distinctive

competency• Structure and controls systems need to be:

» Inexpensive to operate» Flexible enough to allow distinctive competencyFocuser normally adopts a functional structure

A focused company concentrates on developing a narrow range of products aimed at one or two market segments as defined by type of customer or location.


Restructuring• Streamlining hierarchy of and reducing number of

levels• Downsizing the workforce to lower operating costs• Reasons to restructure and downsize:

» Change in the business environment» Excess capacity» Bureaucratic costs: organization grew too tall and inflexible » To improve competitive advantage and stay on top

Reengineering• Fundamental rethinking and radical redesign of

business processes to achieve dramatic improvements

• Focuses on processes (which cut across functions), not on functions

Restructuring and Reengineering

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Hill 8e Basic Ch12