CHAPTER 11.

STRUCTURE AND CONTROLS WITH ORGANIZATIONS Firm need organizational structure and controls in the implementation of its strategies. In order to successfully implement different strategies, it is important to separate structures and controls. Organization structure and controls will affect to firm performance. Organizational structure specifies the firms formal reporting relationship, procedures, controls, and authority and decision-making processes. Because of the uncertainty about cause-effect relationships in the global economys rapidly changing and dynamic competitive environments, it is difficult to develop an organizational structure that effectively supports the firms strategy. Effective structures provide the stability to firm in implementing its strategies and flexibility to develop advantages it will need in the future. Modifications of current strategy or creating new strategy call for changes to its organizational structure. Appropriate timing of structural change happens when top-level management recognizes that the current organizational structure no longer provides the coordination and direction needed for the firm to successfully implement its strategies. Organizational controls guide the use of strategy, point toward how to compare actual results with expected results, and suggest corrective action to take when the difference is unacceptable. Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external and internal environment. Evolutionary Patterns of Strategy and Organizational Structure Alfred Chandler found that firms tend to grow in certain pattern: first by volume, then by geography, then integration (vertical, horizontal) and finally through product/ business diversification (Figure 1). As shown in Figure 1., sales growth creates coordination and control problems the existing organizational structure cannot efficiently handle. Organizational growth creates the opportunity for the firm to change its strategy to try to become even more successful. Firms choose from among three major types of organizational structures: 1. Simple structure is a structure in which the owner-manager makes all major decisions and monitors all activities while the staff serves as an extension of the managers supervisory

authority. Characteristics of this structure are informal relationships, few rules, limited task specialization, and unsophisticated information systems characterize this structure. 2. Functional structure consists of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas such as production, accounting, marketing, R&D, engineering, and human resources. When changing from a simple to a functional structure, firms want to avoid introducing value-destroying bureaucratic procedures such as failing to promote innovation and creativity. 3. Multidivisional structure consists of a corporate office and operating divisions, each operating division representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business unit strategy to division managers. It was thought to have three major benefits: (1) it enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control; (2) it facilitated comparisons between divisions, which improved the resource allocation process; and (3) it stimulated managers of poorly performing divisions to look for ways of improving performance. Matches between Business-Level Strategies and the Functional Structure Firms use different forms of the functional organizational structure to support implementing the cost leadership, differentiation, and integrated cost leadership/ differentiation strategies based on three important structural characteristics: specialization (the type and number of jobs required to complete work), centralization (the degree to which decision-making authority is retained at higher managerial levels), and formalization (the degree to which formal rules and procedures govern work). Firms using the cost leadership strategy sell large quantities of standardized products to an industrys typical customer. Simple reporting relationships, few layers in the decision making and authority structure, a centralized corporate staff, and a strong focus on process improvements through the manufacturing function rather than the development of new products by emphasizing product R&D characterize the cost leadership form of the functional. Firms using the differentiation strategy produce products customers perceive as being different in ways that create value for them. With this strategy, the firm wants to sell non-standardized

products to customers with unique needs. Relatively complex and flexible reporting relationships, frequent use of cross-functional product development teams, and a strong focus on marketing and product R&D rather than manufacturing and process R&D (as with the cost leadership form of the functional structure) characterize the differentiation form of the functional structure. Firms using the integrated cost leadership/differentiation strategy sell products that create value because of their relatively low cost and reasonable sources of differentiation. The challenge of using this structure is due largely to the fact that different primary and support activities are emphasized when using the cost leadership and differentiation strategies. Matches between Corporate-Level Strategies and the Multidivisional Structure The cooperative M-form, used to implement the related constrained corporate-level strategy, has a centralized corporate office and extensive integrating mechanisms. Divisional incentives are linked to overall corporate performance to foster cooperation among divisions. The related linked SBU M-form structure establishes separate profit centers within the diversified firm. Each profit center or SBU may have divisions offering similar products, but the SBUs are often unrelated to each other. The competitive M-form structure, used to implement the unrelated diversification strategy, is highly decentralized, lacks integrating mechanisms, and utilizes objective financial criteria to evaluate each units performance. Matches between International Strategies and Worldwide Structure The multidomestic strategy, implemented through the worldwide geographic area structure, emphasizes decentralization and locates all functional activities in the host country or geographic area. The worldwide product divisional structure is used to implement the global strategy. This structure is centralized in order to coordinate and integrate different functions activities so as to gain global economies of scope and economies of scale. Decision-making authority is centralized in the firms worldwide division headquarters. The transnational strategy is a strategy through which the firm seeks the local responsiveness of the multidomestic strategy and the global efficiency of the global strategy which is implemented through the combination structure. Because it must be simultaneously centralized and

decentralized, integrated and nonintegrated, and formalized and non-formalized, the combination structure is difficult to organize and successfully manage. However, two structural designs are suggested: the matrix and the hybrid structure with both geographic and product-oriented divisions. Important to competitive success, cooperative strategies are implemented through organizational structures framed around strategic networks. Strategic center firms play a critical role in managing strategic networks. Business level strategies are often employed in vertical and horizontal alliance networks. Corporate-level cooperative strategies are used to pursue product and market diversification. RM 12. THE MULTIUNIT ENTERPRISE There are some challenges that faced by multiunit enterprise: (1) maintaining consistency, because there are agglomeration of many branches, service centers, hotels, restaurants, or stores; (2) ensure some degree of customization even as they pursue standardization; (3) the sharp division of responsibilities between corporate headquarters and the field organizations causes many problems; (4) struggle to get the best out of field managers, who are surprisingly hard to classify. Multiunit enterprises try to define the roles of field managers and distribute responsibilities in a novel way. There are store managers, district managers, regional vice president, and divisional heads. Each manager in multiunit firms faces a number of potential pitfalls. Multiunit enterprises try to execute well by having managers at different tiers of the field organization focus on the same issues. This creates a multilayered net that prevents problems from slipping through. The art of organizational design involves assigning roles and responsibilities in ways that prevent breakdowns in policy formulation, communication, and delivery. As individuals and as groups, managers job is to tackle the breakdowns that interfere with employees efforts to get things done. Several approach that can be done to nurturing talent are: (1) allow overlapping roles and responsibilities; (2) use integrators at all levels; (3) set up information funnels and filters; (4) appoint translators to convert strategies into action; (5) share responsibility for talent development.

Figure 1. Strategy and Structure Growth Pattern