Contingency Factors

Affecting Organization Design

Organization Direction, Design, and
Effectiveness
 Strategy

What is Strategy?
From where has the word come?
Why have a Strategy? Strategy to do what?
 Strategy
Goals & Strategies……same?

Goals = Ends
Strategy = Means + Ends

Goals – Long Term Objectives

Strategy – LTO + course of action + resource allocation

Environmen
tal Factors Strategy Structure
Organizatio
nal
Capabilities
Strategy

Organizational Strategy:
the specific pattern of decisions and actions
that managers take to use core competences
to achieve a competitive advantage and
outperform competitors

Core competences:
the skills and abilities in value creation
activities that allow a company to achieve
superior efficiency, quality, innovation, or
customer responsiveness

HLL = Branding, Distribution; Asian Paints = Supply Chain; Airtel

= Retailing; TATA Steel = Primary Steel Making
The Value Creation Cycle
 Sources of Core Competences

Specialized Resources Coordination Abilities

Functional Organizational Functional Organizational

Resources Resources Resources Resources
(Skills, People) (Brand, Captive
Sources, Top
Management)
Coordination Abilities
An organization’s ability to coordinate its functional and
organizational resources to create maximal value
– Effective coordination of resources leads to competitive advantage
by means of:
Control systems
Centralization or decentralization of authority
Development and promotion of shared cultural values
Basically, design and management of structure and culture
 Different Levels

Functional Level: Develop Core Competence

Business Level: Combine functional Core Competence to
position for competitive advantage in domain
Corporate Level: Leverage core competence not only to
protect and develop core competence in existing domain
but expand into new domains
Global Level (Or, Global Expansion)
 Functional-level Strategy

The strategic goal of each function

 Create a core competence
That will lead to a
 Competitive advantage

To gain a competitive advantage:

 Functional activities at a cost lower than that of its

rivals, or
 Functional activities in a way that clearly differentiates
its goods and services from those of its rivals
 Low-Cost and Differentiation Advantages Resulting from
Functional Level Strategy
Value Creation Function Source of Low-Cost
Advantage
Manufacturing Development of skills in
low cost manufacturing
technology
Human Resource Reduction of turnover and
Management absenteism
Materials Management Use of JIT inventory
system/warehousing
Development of long term
relationships with suppliers
and customers
Source of Differentiation
Advantage
Increase in product quality
and reliability
Hiring of highly skilled
personnel
Development of innovative
training programmes
Use of company reputation
with suppliers and
customers to provide high
quality inputs and efficient
distribution systems
 Low-Cost and Differentiation Advantages Resulting from
Functional Level Strategy (Cont’d)

Value Creation Function Source of Low-Cost Source of Differentiation

Advantage Advantage
Sales and Marketing Increased demand and Targeting of customer
lower production costs groups
Tailoring products to
customers
Promoting brand names
R&D Improve efficiency of Creation of new products
manufacturing technology Improvement of existing
products
 Functional-level strategy and structure

 The strength of a function’s core competence =

fn(function’s resources AND ability to coordinate the
use of these resources)
 Each function should develop a structure that suits its
skills and resources (contingency theory)
Structural Characteristics Associated with
Development of Core Competences
Functional-level Strategy and Culture

Product Development at 3M?

If culture is embedded in day to day work….difficult to
imitate
Property Rights, Ethics, People, Structure
 Business-level Strategy

The business-level strategy involves:

Selection: of domain in which to compete
Positioning: to manage its specific and general
environments in order to protect and enlarge that
domain
Porter’s Competitive Strategies
 Miles and Snow’s
Strategy Typology
Managers should seek to formulate strategy that matches the
demands of the external environment.
• Prospector
– Learning orientation; flexible, fluid, decentralized structure
– Values creativity, risk-taking, and innovation (Apple, Google)
• Defender
– Efficiency orientation; centralized authority and tight cost control
– Emphasis on production efficiency, low overhead (Continental Can)
• Analyzer
– Balances efficiency and learning; tight cost control with flexibility and
adaptability
– Emphasis on both efficiency, costs, creativity, research, risk-taking for
innovation (Micromax?)
• Reactor
– No clear organizational approach; design characteristics may shift
abruptly depending on current needs
 How Strategy Affects
Organization Design

Strategy impacts internal

organization characteristics
Managers must design the
organization to support the firm’s
competitive strategy.
Characteristics of Structure Associated with Business-Level
Differentiation and Low-Cost Strategy
 Business Level Strategy - Culture

Low Cost Strategy – Values of economy and frugality

(Acme, Continental Can)
Differentiators – Values of innovation, quality,
excellence, and uniqueness (3M, Apple, Google,
Maruti?, Indigo?)
 Corporate-level Strategy
 Involves a search for new domains in which to exploit and
defend the ability to create value from its core
competences
 Vertical integration: a strategy in which an organization
takes over and owns its suppliers (backward vertical
integration) or its distributors (forward vertical
integration)
 May be more profitable
 May lead to production cost savings
 May differentiate its products
 May avoid opportunistic behavior of suppliers
 Related diversification: the entry into a new domain in
which it can exploit one or more of its existing
competences
 Unrelated diversification: the entry into new domains
that have nothing in common with its core domain
Corporate-Level Strategies for Entering New Domains
 Corporate-level Strategy and Structure

For organizations operating in more than one domain, a

multidivisional structure is appropriate
Conglomerate structure and unrelated diversification
Conglomerate structure: a structure in which each
business is placed in a self-contained division and there
is no contact between divisions
 Corporate-level Strategy and Structure

 Structures for related diversification

 Related diversification creates value by sharing
resources or transferring skills from one division to
another
 Requires lateral communication between divisions as
well as vertical communication between divisions and
headquarters
 Integrating roles and teams of functional experts are
needed to coordinate skills and resource transfers
Motivations for Global Expansion

Economic, technological, and competitive

forces have combined to push companies
from a domestic to a global focus.

Motivation to Expand:
 Economies of Scale
 Economies of Scope
 Low-Cost Production Factors
 Global Expansion and Core Competences

 Transferring core competences abroad

 Microsoft, Macdonald’s
 Establishing a global network
 value creation activities in countries where economic,
political, and cultural conditions are likely to enhance
its low-cost or differentiation advantage
 Nike, TATA Steel, Auto Manufacturing
 Global Expansion and Core Competences

 Gaining access to global resources and skills

 Design competence in India, Lean Manufacturing in
Japan, Low cost manufacturing in China
 Using global learning to enhance core competences
 Japanese Auto Makers, learn-enhance-transfer
 Creation of value through global expansion

1. Transfer of core 2. Establishment of

competences abroad Global Network

4. Use of global 3. Gaining access to

learning to enhance global skills and
core competences resources
Stages of International Evolution

 Domestic
 International
 Multinational
 Global
 Global Organization Structure

 International Division
 Global Product Division
 Global Geographic Division
 Global Matrix Structure
 Model for Global vs. Local Opportunities

 Global standardization versus national responsiveness

 Globalization or multidomestic strategy
 Globalization strategy - products are standardized
throughout the world
 Multidomestic - competition is handled in each country
independently
Fitting Organization Structure to International
Advantages
 Strategy-Structure Relationship

Strategy Export Multi-domestic Globalisation MD+Global

Lo Need for Coordination Hi
Vertical
Differentiation
Choices
Levels in VH Lo Lo Hi Lo
Centralisation Hi Lo Hi Lo
Horizontal Functional Global Global Product Global Matrix
Differentiation Geographic Group
Need for Lo Lo Medium Hi
sophisticated
integrating
mechanisms like
CFT/Task forces
 Strategy-Structure Relationship

Strategy Export Multi-domestic Globalisation MD+Global

Need for electronic Lo Medium Hi Very Hi
integration
management
networks
Need for integration Lo Medium Hi Very Hi
through
international
organisational
culture
Lo Bureaucratic Cost Hi
 Four Stages of International Evolution
Domestic International Multinational Global
Strategic Domestically Export Multinational Global
Orientation oriented oriented
multi
domestic
Stage of Initial Foreign Competitive Explosion Global
Development Involvement positioning
Structure Domestic Domestic Worldwide Matrix,
structure, Structure plus geographical, transnational
plus export international product
department division

Market Moderate, Large, multi- Very large, Whole world

Potential mostly domestic Multinational
domestic
The Global Organizational Challenge
 Bosch Group in India: Transition to a Transnational
Organisation

 What was the ‘core competence’ of Bosch at the beginning?

 Examples of diversification in early days?
 Related or unrelated?
 What share of business of the Bosch Group comes outside of
Germany?
 R&D cost is what % of sales?
 What are some of the ‘stories’ that you could find in the case?
 Bosch Group in India: Transition to a Transnational
Organisation

 What is ‘verticalisation’? What are ‘verticals’?

 What is a ‘transnational’ strategy?
 What was the imperative for changing the structure of Bosch
in India?
 What benefits could Indian units derive from new
structure/strategy?
 What were some of the challenges faced by Bosch units in
India consequent upon structure/strategy changes?
 Phases of Growth
 Phase 1:
 Craft business
 Size = 40
 Simple (informal) structure (entrepreneurial), no need to differentiate
or integrate
 Core Competence?
 Phase 2: ‘Magneto Ignition’
 Magneto Ignition – fast growing automotive supplier
 Two factories
 Size = 1000
 From ‘craft’ to ‘industrial’ production
 Formalisation
 Mainly a functional structure (single product – magneto ignitions)
 Early ‘internationalisation’ (Functional Structure + International Sales
Division)
 Phases of Growth

 Phase 3:
 Diversification (reduce dependence on Automotive business)
 Related and unrelated products
 A multinational electrical engineering group
 Gradual movement from a functional structure to a geographical
division structure
 Phase 4:
 Restructuring into divisions along product lines (Power Tools,
Packaging Technology, Automation Technology) in Europe
 Elsewhere, Geographic Divisions
 Phases of Growth

 Phase 5:
 Eastern Europe, Asian Growth, Global networking
 A matrix structure with more power to geographical divisions
 Phase 6:
 Blur the distinction of national markets – one global market
 Transnational strategy
 Cost & Differentiation?
 Differentiation: Products, Regions, Markets….functions
 Global Divisions
 Corporate Departments
 Regional Organisations
 Global Sales & Marketing organisation

Challenges of Integration
 Phases of Growth

 Phase 6:

Challenges of Integration:
Targets
Discipline
Functional Coordination

A three way Global Matrix, with more power to Products over RBUs
 Matrix 1

Automotive Industrial Consumer Goods &

Technology Technology Building Technology
Region 1 Bosch Limited; Bosch Rexroth; MHB Filter India
Robert Bosch Bosch Electrical
Chassis Systems Drives
India Ltd;
Bosch Automotive
Electronics
Region 2
Region 3
 Matrix 2 (Sales)

Automotive Industrial Consumer Goods &

Technology Technology Building Technology
Key Customer Bosch Limited; Bosch Rexroth; MHB Filter India
Group 1 Robert Bosch Bosch Electrical
(Mercedez) Chassis Systems Drives
India Ltd;
Bosch
Automotive
Electronics
Key Customer
Group 2
(Industrial
Drives)
Japan and Korea
Auto
Manufacturers)