Matching Structure and Control to

Strategy

13-2

Preview
Structure and Control at the Functional

Level

Structure and Control at the Business

Level

Designing a Global Structure

Structure and Control at the Corporate

Level

Structure and Control at the Functional Level

(i) Manufacturing

-Functional strategy usually centres on improving

efficiency, quality & responsiveness to customers.
-Exercising of tight control over work activities and
employees through tall centralized hierarchies that squeeze
out costs wherever possible.
-Drive towards efficiency results in company making a great
use of behaviour & output controls to reduce costs
-However, following the lead of Japanese companies,orgs are
increasingly adopting flexible manufacturing practices

Structure and Control at the Functional Level

(ii) Research & Development
-The functional strategy for a R&D dept is to develop a
distinctive competency in innovation & to develop
technology that results in products that fits customer
needs.
-Consequently R & D structure and control systems should
be designed to provide the co-ordination necessary to
compress the NDP process
-Thus in practice,R&D depts. typically have flat,
decentralized structures that group scientists into teams
To enhance team peformance,rewards tied to individual,
team & company performance should be established

Structure and Control at the Functional Level

(iii) Sales
-Sales usually has a flat structure with sometimes as low
as three hierarchical levels
-Flat structures possible because orgs need not depend
on direct supervision for control but usually employ
output and behaviour controls
-Output controls include specific sales goals tied to
reward system & behaviour controls include detailed
reports that salespeople have to file relating to their
interactions with customers
* Similar design considerations apply to other functions

Structure & Control at Business Level

-Building competitive advantage through
organizational design start at the functional levels
-Beyond implementing the right structure & control
system for each function,org must implement the right
organizational arrangements so that all functions must
be managed together to achieve business level strategy
objectives.
-Because the focus is on managing cross-functional
relationships, the choice of horizontal differentiation &
integration for achieving business level strategies is very
important

Cost-Leadership Strategy & Structure

-Org must reduce costs not just in production but across
functions in the org
-Org opts for a structure & control system that has a low
level of bureaucratic costs
-In practice, a functional structure, which is relatively
inexpensive because of a low level of differentiation
and intergration
-Org competing on cost-leadership tries to keep its
structure as fat as possible
-Cost Leadership companies try to use the cheapest and
easiest forms of control output controls

Structure and Control at the

Business Level
Table 13.1: Generic Strategy, Structure, and Control
Cost
Leadership
Appropriate
Structure
Integrating
Mechanisms
Output
Control
Bureaucratic
Control
Organizational
Culture
f

Functional
Center on
Manufacturing
Great Use (e.g.,
cost control
Some Use (e.g.,
budgets,
standardization)
Little Use (e.g.,
quality control
circles)

STRATEGY
Differentiation

Focus

13

Differentiation Strategy & Structure

-An org whose competitiveness is driven by
differentiation, usually employs a more complex
structure, that is a structure with a higher level of
integration-than the cost-leader such that its
bureaucratic costs are higher.
-must design its structure & control system around its
particular source of competitive advantage.
-sometimes differentiation may obtained by from a less
expensive product-team structure where each time
focuses on the needs of a particular product market
-Org competing on differentiation relies more on input &
behaviour controls as well as shared values

Structure and Control at the

Business Level
Table 13.1: Generic Strategy, Structure, and Control
Cost
Leadership
Appropriate
Structure
Integrating
Mechanisms
Output
Control
Bureaucratic
Control
Organizational
Culture
f

Functional
Center on
Manufacturing
Great Use (e.g.,
cost control
Some Use (e.g.,
budgets,
standardization)
Little Use (e.g.,
quality control
circles)

STRATEGY
Differentiation
Product-team
or Matrix
Center on R&D
or Marketing
Some Use
(e.g., quality
goals)
Great Use
(e.g., rules,
budgets)
Great Use
(e.g., norms
and values)

Focus

13-5

Focus Strategy, Structure& Control

-Relative higher production costs compared to other
strategy options makes it imperative for the firm (that is
using focus strategy) to exercise cost control
-Because a company using a focus strategy has to develop
a unique competency, its structure & control system
must be inexpensive to operate but flexible but flexible
enough to allow a distinctive competency to emerge.
-Org using a focus strategy normally adopts a functional
structure.
-Given its size,an org using focus strategy relies less on
behaviour & output controls & more on culture to
develop a service competency

Structure and Control at the

Business Level
Table 13.1: Generic Strategy, Structure, and Control
STRATEGY
Cost
Leadership

Appropriate
Structure
Integrating
Mechanisms

Functional

Output
Control

Great Use (e.g.,

cost control

Bureaucratic
Control

Some Use (e.g.,

budgets,
standardization)
Little Use (e.g.,
quality control
circles)

Organizational
Culture
f

Center on
Manufacturing

Differentiation
Product-team
or Matrix
Center on R&D
or Marketing

Some Use
(e.g., quality
goals)
Great Use
(e.g., rules,
budgets)
Great Use
(e.g., norms
and values)

Focus
Functional
Center on
Product or
Customer
Some Use
(e.g., cost and
quality)
Some Use
(e.g., budgets)
Great Use
(e.g., norms
and values)

Structure & Control: Integrated Low

Cost & Differentiation
*Pursuing a combined differentiation and low cost strategy is the
most difficult challenge facing a company at the business level.
-Org has to co-ordinate its activities around manufacturing &
materials mngt to implement a cost-reduction strategy.
-On the other hand it must c0-ordinate its activities around its
source of differentiation such as R&D or mkting,to protect its
competency in innovation.
-Companies faced with such a strategic challenge usually
employ a product-team structure.
A product-team structure groups tasks by prdt, and each
product group is managed by a cross-functional product team
that has all the support services necessary to bring the prdt to
market

Global Structure & Control

*Companies can use four basic strategies as they begin to
market their products and establish production facilities
abroad:
(i)A localization (multi-domestic) strategy is oriented
toward local responsiveness, and a company decentralize
control to subsidiaries and divisions in each country in
which it operates to produce and customize products to
local markets.
-Subsidiary managers assessed on the basis of market &
output controls such as rate of return, growth in market
share & operation costs.
-No integrating mechanisms required
-Duplication of specialist activities raises costs

13-9

Figure 13.1: Global Area Structure

Corporate
Headquarters

North
American
Region

South
American
Region

European
Region

Pacific
Region

Global Structure & Control

*An international strategy is based on core
competencies being centralized at home and all the
other value creation functions being decentralized
to national units.
-In the foreign country, the org usually establishes a
subsidiary to handle all other activities not
centralized in the home country
-A system of behaviour controls is then established to
keep the home office informed of changes in
sales,spare parts reqiurements & so on.

13-13

Figure 13.3: Global Product Group Structure

Corporate
Headquarters

Division 1

Division 2

Division 3
International
Division

United
States

United
Kingdom

Japan

France

Global Structure & Control

(iii) A global standardization strategy when it starts to
locate manufacturing & all other value creating activities in
the lowest cost global location.
-Org has to cope with greater co-ordination & intergration
problems such that it has to create a structure that can coordinate resource transfers btwn corporate headquarters &
foreign divisions while simultaneosly providing the
centralized control that a global strategy requires.
-Org uses a group product structure where prdt group
headquarters (similar to an SBU headquaters) is created to
co-ordinate the activities of the domestic & foreign
divisions with the group.

13-11

Figure 13.2: International Division Structure

Corporate
Headquarters

Product
Group 1

United
States

Product
Group 2

United
Kingdom

Product
Group 3

Japan

France

Global Structure & Control

iv) A transnational strategy is focused so that it can achieve local
responsiveness and cost reduction. Some functions are centralized;
others are decentralized at the global location best suited to achieving
these objectives.
-In essence, companies that pursue a transnational strategy are trying to
achieve low costs & differentiation advantages simultaneously
-A transnational strategy relies on a Global-Matrix where on the vertical
axis are the org `s product groups which provide specialist services such
as R&D, product design, and marketing information to its overseas
divisions, which are often grouped by world region.
-On the horizontal axis are companys overseas divisions or SBUs in the
various countries or world regions in which it operates & these are
controlled by the managers at the regional or country level
-Through a system of output and behaviour controls, they then report to
managers in product-group headquarters

13-15

Figure 13.4: Global Matrix Structure

N. American
N. American
SBU
SBU

S. American
S. American
SBU
SBU

Product
Product
Group 11
Group
Product
Product
Group 22
Group
Product
Group 3
Individual Operating Companies

Pacific
Pacific
SBU
SBU

Structure & Control at Corporate Level

At corporate managers need to choose an

organizational structure that will allow them to

operate a number of different businesses efficiently
on the basis of whether the conglomerate grew by
vertical intergration,related diversification or
unrelated diversification.

Structure, Control, Culture, and Corporate-Level

Strategy
Unrelated diversification

Easiest and cheapest strategy to manage

Allows corporate managers to evaluate divisional performance
easily and accurately
Divisions have considerable autonomy
No integration among divisions is necessary

Structure and Control at the Corporate

Level
Table 13.3: Corporate Strategy and Structure and Control
Type of
Control
Corporate Appropriate Need for
Financial
Strategy
Structure
Integration
Unrelated MultiDiversifi- divisional
cation
Vertical
Integration

Multidivisional

Related
Diversification

Multidivisional

Low (No
Exchanges
Between
Divisions)
Medium
(Scheduling
Resource
Transfers)

Great Use
(e.g., ROI)
Great Use
(e.g., ROI,
Transfer
Pricing)

High
Little Use
(Achieve
Synergies
Between
Divisions by
Integrating
Roles)

Behavior

Organizational
Culture
Some
Little
Use (e.g., Use
Budgets)
Great
Use (e.g.,
Standardization,
Budgets)
Great use
(e.g.,
Rules,
Budgets)

Some Use
(e.g.,
Shared
Norms and
Values
Great use
(e.g.,
Norms,
Values,
Common
Language)

13-17

Structure, Control, Culture, and CorporateLevel Strategy (contd)

Vertical integration

More expensive than unrelated diversification

Multidivisional structure provides necessary controls to
achieve benefits from the control of resource transfers
Must strike balance between centralized and
decentralized control
Divisions must have input regarding resource transfer
Managed through a combination of corporate and
divisional controls

Structure and Control at the Corporate

Level
Table 13.3: Corporate Strategy and Structure and Control
Type of
Control
Corporate Appropriate Need for
Financial
Strategy
Structure
Integration
Unrelated MultiDiversifi- divisional
cation
Vertical
Integration

Multidivisional

Related
Diversification

Multidivisional

Low (No
Exchanges
Between
Divisions)
Medium
(Scheduling
Resource
Transfers)

Great Use
(e.g., ROI)
Great Use
(e.g., ROI,
Transfer
Pricing)

High
Little Use
(Achieve
Synergies
Between
Divisions by
Integrating
Roles)

Behavior

Organizational
Culture
Some
Little
Use (e.g., Use
Budgets)
Great
Use (e.g.,
Standardization,
Budgets)
Great use
(e.g.,
Rules,
Budgets)

Some Use
(e.g.,
Shared
Norms and
Values)
Great use
(e.g.,
Norms,
Values,
Common
Language)

13-18

Structure, Control, Culture, and CorporateLevel Strategy (contd)

Related diversification

Multidivisional structure allows gains from the transfer,

sharing, or leveraging of R&D knowledge, industry
information, and customer bases across divisions
Difficult to measure performance of individual divisions
High bureaucratic costs
Integration and control at divisional level is required
Incentives and rewards for cooperation are necessary

Structure and Control at the Corporate

Table 13.3: Corporate Strategy and Structure and Control
Type of
Control
Corporate Appropriate Need for
Financial
Strategy
Structure
Integration
Unrelated MultiDiversifi- divisional
cation
Vertical
Integration

Multidivisional

Related
Diversification

Multidivisional

Low (No
Exchanges
Between
Divisions)
Medium
(Scheduling
Resource
Transfers)

Great Use
(e.g., ROI)
Great Use
(e.g., ROI,
Transfer
Pricing)

High
Little Use
(Achieve
Synergies
Between
Divisions by
Integrating
Roles)

Behavior

Organizational
Culture
Some
Little
Use (e.g., Use
Budgets)
Great
Use (e.g.,
Standardization,
Budgets)
Great use
(e.g.,
Rules,
Budgets)

Some Use
(e.g.,
Shared
Norms and
Values)
Great use
(e.g.,
Norms,
Values,
Common
Language)

13-19

Agency Theory & Corporate Control

(ii) Agency Theory
Agency theory suggests that the firm can be viewed as a nexus of

contracts (loosely defined) between resource holders.

Principals (shareholders) delegate work to the agents
(managers),an arrangement in which conflict of interest is
inevitable.
Agency theory assumes that managers are likely to satisfice rather
than profit maximise on behalf of the principal.
Agency theory argues that there should be in built structural
controls to reduce the potential divergence of interest between
shareholders & management, minimizing agency costs and
protecting shareholders` investments.

Agency Theory Problem

The agency problem occurs when:

the desires or goals of the principal and agent conflict and

it is difficult or expensive for the principal to verify that
the agent has behaved inappropriately

Solution:

principals engage in incentive-based performance

contracts

monitoring mechanisms such as the board of directors

Corporate Control: Managerial Hegemony

Theory
(i) Managerial Hegemony Theory: Boards are a legal

fiction dominated by mngt because of:

Separation of ownership & control
Information Asymmetry
Mngt `s reduced dependence on shareholders for
capital