Chapter 11

Organizational Structure and Controls

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2000 South-Western College Publishing
Ch11-1

Structure Types
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)
Ch11-2

Strategy & Structure Growth Patterns

Multidivisional Structure Sales Growth Coordination and Control Problems

Efficient implementation of formulated strategy Functional Structure Sales Growth Coordination and Control Problems Efficient implementation of formulated strategy Simple Structure
Ch11-3

Simple Structure
Owner / Manager

Owner/Manager makes all major decisions directly and monitors all activities Difficult to maintain this structure as the firm grows in size and complexity

Ch11-4

Functional Structure
First stage beyond a Simple Structure Appropriate for single or dominant-business firms Allows specialization of tasks
* Production * Finance * Engineering * Accounting * Sales & Marketing * Human Resources

Overcomes information processing limits of single owner/manager Functional department heads report to Chief Executive Officer who integrates decisions and actions from a company-wide point of view Risks conflicts between myopic function managers
Ch11-5

Functional Structure
Chief Executive Officer
Corporate Human Resources

Corporate R&D

Corporate Finance

Strategic Planning

Corporate Marketing

Finance

Production Engineering

Accounting

Sales & Marketing

Human Resources

Ch11-6

Functional Structure for Cost Leadership Strategy

Office of the President
Operations is main function Process engineering is
emphasized rather than new product R&D Relatively large centralized staff coordinates functions

Formalized procedures allow

for low-cost culture

Centralized Staff

Structure is mechanical; job

roles are highly structured

Engineering Marketing

Operations

Personnel

Accounting
Ch11-7

Functional Structure for Differentiation Strategy

President and Limited Staff

R&D

Marketing

New Product Marketing R&D

Operations

Human Resources

Finance

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

Ch11-8

Multi-Divisional Structure
Each division is operated as a separate business Appropriate for related-diversified businesses Key task of corporate managers is exploiting synergies among divisions Managers use a combination of strategic controls and financial controls Managers try to strike a balance between:
Competing among divisions for scarce capital resources Creating opportunities for cooperation to develop synergies

The goal is to maximize overall firm performance

Ch11-9

Multi-Divisional Structure
The decision-making of managers in a MultiDivisional structure may be:
Centralized or Decentralized Bureaucratic or Non-bureaucratic

Balance on these dimensions may change over time Structure will evolve over time with:
Changes in strategy Degree of diversification Geographic scope
Nature of competition
Ch11-10

Multi-Divisional Structure
Chief Executive Officer
Corporate R&D Corporate Finance Strategic Planning Corporate Marketing Corporate Human Resources

Division

Division

Division

Division

Finance

Production Engineering

Accounting

Sales & Marketing

Human Resources

Ch11-11

SBU Form
Related-Linked Strategy President
Corporate R&D Corporate Finance Strategic Planning Corporate Marketing
Corporate Human Resources

Strategic Business Unit A

Division

Strategic Business Unit B

Division Division

Strategic Business Unit C

Division

Strategic Business Unit D

Division Division

Structural integration exists among divisions within SBUs, but not across SBUs Each SBU may have its own budget for staff to foster integration Corporate headquarters staff serve as consultants to SBUs and divisions
Ch11-12

Competitive Form
Unrelated /Holding Company Strategy President

Legal Affairs

Finance

Auditing

Division

Division

Division

Division

Division

Corporate headquarters has a small staff Finance and auditing are the most prominent functions in the headquarters Divisions are independent and separate for financial evolution purposes Divisions retain strategic control, but cash is managed by the corporate office Divisions compete for corporate resources Ch11-13

Multi-Divisional Structure
The choice between centralization and decentralization is frequently based on the business-level strategy implemented in each division
Differentiation Cost Leadership Decentralization Centralization

Complex Multi-Divisional structure firms may be simultaneously centralized and decentralized , depending upon the various business-level strategies employed throughout the firms individual businesses Multi-Divisional structure firms use a combination of:
Strategic Controls Financial Controls
Ch11-14

Evolution of Multi-Divisional Structure

Chief Executive Officer Corporate Office (Staff)

North America

Europe

Asia

Latin America

Africa

Australia

Product A

Product B

Product C

Product D

A Structural evolution based on Geographic lines usually implies a Multi-Domestic International Strategy
Ch11-15

Implementation of a Multidomestic Strategy

Worldwide Geographic Area Structure
Latin America Asia United States

Multinational Headquarters

Europe

Australia

Middle East/ Africa

Green circles indicate decentralization of operations Emphasis is on differentiation by local demand to fit a culture Corporate headquarters coordinates financial resources among
independent subsidiaries The organization is like a decentralized federation
Ch11-16

Evolution of Multi-Divisional Structure

Chief Executive Officer Corporate Office (Staff)

Product A

Product B

Product C

Product D

A Structural evolution based on Product lines usually implies a Global International Strategy

Ch11-17

Implementation of a Global Strategy

Worldwide Product Divisional Structure
Worldwide Products Division Worldwide Products Division

Worldwide Products Division

Multinational Headquarters

Worldwide Products Division

Worldwide Products Division

Worldwide Products Division

Green circle indicates centralization to coordinate information

flow among worldwide products Headquarters uses many intercoordination devices to facilitate global economies of scale and scope Headquarters also allocates financial resources cooperatively The organization is like a centralized federation

Ch11-18

Strategic Networks
A Strategic Network is a grouping of organizations that has been formed to create value through participation in an array of cooperative arrangements, such as a strategic alliance A Strategic Center Firm often manages the network
The Strategic Center Firm identifies actions that increase the opportunity for each firm to achieve success through its participation in the network The Strategic Center Firm creates incentives that reduce the probability of any single firm taking advantage of its network partners
Ch11-19

A Strategic Network

Network Firms

Strategic Center Firm

Ch11-20

Strategic Center Firms Critical Functions

Strategic Outsourcing
Capability Development Technology Sharing Building Linkages to Facilitate Learning
Ch11-21

Strategic Center Firm

Strategic Outsourcing

Strategic Center Firm

Center firm coordinates outsourcing among partners, initiates actions and coordinates problem solving
Ch11-22

Strategic Center Firms Critical Functions

Strategic Outsourcing
Capability Development Technology Sharing Building Linkages to Facilitate Learning
Ch11-23

Strategic Center Firm

Capability and Technology

Strategic Center Firm

Center firm attempts to develop each partners core competencies and provides incentives for network firms to share their capabilities and competencies with partners Strategic center firm manages the development and sharing technology-based ideas among network partners
Ch11-24

Strategic Center Firms Critical Functions

Strategic Outsourcing
Capability Development Technology Sharing Building Linkages to Facilitate Learning
Strategic Center Firm
Ch11-25

Building Linkages to Facilitate Learning

Strategic Center Firm

Strategic center firm emphasizes to partners the need to build linkages between value chains and networks of value chains. The strategic network seeks to develop a competitive advantage in primary or support activities
Ch11-26