10 Organizational Structure Control

© 2007 Prof. Dr. Bernd Venohr

Strategy Process

Organizational Structure and Control

Prof. Dr. Bernd VenohrBerlin, June 2007

10

2© 2007 Prof. Dr. Bernd Venohr

Agenda

Introduction to StrategyCourse Overview and Strategy ConceptEconomics of StrategyShareholder Value

Business StrategyExternal EnvironmentInternal EnvironmentCompetitive Positioning

Corporate StrategyDiversificationMergers & AcquisitionsGlobal Strategy

Strategy ProcessOrganizational Structure and ControlStrategic Leadership

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Overview

“Structure follows strategy“

Basics of structuring organizations

Example: managing the multibusiness organization


Alfred Chandler: Structure follows strategy

Alfred Chandler (business history professor at HarvardBusiness School) examined in Strategy and Structure:Chapters in the History of the Industrial Enterprise (1962)the organizational changes of several large US companies:Organization developed in response to changes in thecorporation's business strategy

An organization begins with a single product or line of business.Over time the organization begins to grow in size and complexity(more products ). Ultimately the structure of the organization hasto change from functional to divisional organization as a result ofthe strategy change: „unless structure follows strategy,inefficiency results“

This research has been a source of controversial discussionbecause, while strategy influences structure, so do many otherfactorsSource: Wikepedia


Evolution of the Modern Corporation: changes in environmentlead to changes in strategy and organizational structure

The businessenvironment

Organizationalconsequences

Strategic changes

Late19thcentury

Early19thcentury

Early20thcentury

Local markets Firms specialized & Small firmsTransport slow focused on local Simple manage-Limited mechanization markets ment structures

Introduction of Geographical and Functional structuresrailroads, telegraph vertical expansion Line/staff separation.industrialization Accounting systems

Excess capacity inProduct & Development ofdistribution. Growth multinational multidivisionalof financial institu - diversification corporationtions & world trade

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004); Ch. 6


Overview





The basic task of organizing

Every organized human activity gives rise to two fundamental andopposing requirements:– the division of labor into various tasks to be performed and– the coordination of those task to accomplish the activity

In small organizations, there is little reason to divide work– Everyone does the same thing and everything– As organizations grow, there is a need to divide work and the organization

The structure of an organization can be defined simply as the total of theways in which its labor is divided into distinct tasks and then its coordinationand integration is achieved among those task

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6


Division of labor tasks and integration/coordination

Division of labor–vertical: levels of authority–horizontal: specialization of tasks

Integration mechanism–IT/data management systems: controlling systems;

performance measurement systems; resource allocationprocedures; budgeting processes

–Manager control systems: selection of employees;reward/punishments; career path

–Coordination systems: decision responsibility assignments;committees; task forces


Pin factory example (Adam Smith): Somewherebetween a 240 and 4800 fold increase in productivitycan be achieved by division of labour

“To take an example (...) from (...) the trade of the pin-maker; a workman not educated tothis business (which the division of labor has rendered a distinct trade), nor acquainted with theuse of the machinery employed in it (.. .), could scarce, perhaps, with his utmost industry,make one pin in a day, and certainly could not make twenty. But in the way in which thisbusiness is now carried on, not only the whole work is a peculiar trade, but it is divided into "anumber of branches, of which the greater part are likewise peculiar trades. One man drawsout the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at thetop for receiving the head; to make the head requires two or three distinct operations; to put iton, is a peculiar business, (...) and the important business of making a pin is, in thismanner, divided into about eighteen distinct operations, which, in some manufactories,are all performed by distinct hands, though in others the same man will sometimes performtwo or three of them. I have seen a small manufactory of this kind where ten men only wereemployed (...). But (...) they could, when they exerted themselves, make among them abouttwelve pounds of pins in a day. There are in a pound upwards of four thousand pins of amiddling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, (...) might be considered asmaking four thousand eight hundred pins in a day. But if they had all wroughtseparately and independently, (...) they certainly could not each of them have madetwenty (...).”

Source: Adam SMITH,An Inquiry into the Nature & Causes of the Wealth of Nations, Ch1


Many classic dilemmas exist: How much authority todelegate to whom? Centralized structure: Top managers retain authority for most

decisions; managers are order-takers

In a decentralized structure: Managers and employees closest toproduct and customer are empowered to make decisions

Key context factors are:– strategy– Company size– Environment– technology

Changes in how companies organize work are typically triggered by– new strategic priorities– rapidly shifting competitive conditions

Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure


Centralisation and decentralisation: recent trends

Traditional, centralized structures problematic when– Market conditions are fluid– Customer preferences shift from standardized to customized products:

Customers want to be treated as individuals– Pace of technological change accelerates and product life-cycles grow

shorter– Flexible manufacturing replaces mass production

Trend in most companies: shift from “authoritarian” to decentralizedstructures stressing “empowerment”– Decisions are best made at the lowest organizational level capable to

make timely, informed, competent decisions– Empowering employees to exercise judgment on job-related matters

improves motivation and job performance


Functional organisation

Organized by departments performing separatebusiness functions such as marketing ormanufacturing

Works best when organization has- Few products- Few locations- Few types of customers- Stable environment- Routine technology

ChiefAccountant

BudgetAnalyst

Vice PresidentFinance

PlantSuperintendent

MaintenanceSuperintendent

Vice PresidentManufacturing

TrainingSpecialist

BenefitsAdministrator

DirectorHuman Resources

CEO


Strengths and Weaknesses offunctional organization structure

STRENGTHS:

– Allows economies of scalewithin functional departments

– Enables in-depth knowledgeand skill development andinnovation within functions

– Enables organization toaccomplish functional goals

WEAKNESSES:

– Slow response time to environmentalchanges

– May cause decisions to pile on top,hierarchy overload

– Leads to poor horizontal coordinationamong departments (Functionalegotism)

– Results in less product innovation– Involves restricted view of

organizational goals

Source: Adapted from Robert Duncan, “What Is the RightOrganization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.


Divisional organization:

President/CEO _R&D | Finance| Planning| Marketing | HR

Product Division Geographic Division

Source: Hatch, Neill; Business Management 499,Strategic Management: Organizational Structure

Customer/Market


Board of Directors

President Executive Committee

FinancialStaff

LegalDepartment

GeneralAdvisory Staff

GM AcceptanceCorporation

ChevroletDivision

SheridanDivision

CanadianDivision

OldsmobileDivision

GM TruckDivision

GM ExportCompany

CadillacDivision

BuickDivision

Inter-company

PartsDivision

OaklandDivision

SamsonTractorDivision

ScrippsBooth Corp.

Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.

Divisional organization was invented by Alfred Sloan:General Motors’ Organization Structure (1921)


Types of divisional structure

Product structure (“business”): departments or subunits based on different products.Product sufficiently unique to require s focused functional efforts (ensure minimum efficientscale)

Customer/market structure: departments or subunits based on different customer groups– Unique customer preferences: products tied to unique practices in each segment– Unique marketing requirements: knowledge of customer industry

Geographic/regional structure: departments or subunits based on geographic regionsIncreased focus on the competitive characteristics of geographical regions– Unique local competitors– Unique local suppliers– Unique local customer preferences

Divisions are in most cases self-standing and fully-integrated business units


Strengths and weaknesses ofdivisional organization structure

STRENGTHS:

– Suited to fast change in unstableenvironment

– Leads to customer satisfaction becauseproduct responsibility and contact pointsare clear

– Involves high coordination across functions– Allows units to adapt to differences in

products, regions, clients (heterogenousmarkets)

– Best in large organizations with severalproducts

– Decentralizes decision-making

WEAKNESSES:

– Eliminates economies of scale infunctional departments by splittingfunctions and allocating them tounits

– Leads to poor coordination acrossproduct lines

– Eliminates in-depth competenceand technical specialization

– Makes integration andstandardization across productlines difficult

Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 431.


BusinessUnit A

BusinessUnit B

BusinessUnit C

Business Unit D

Directorof ProductOperations

DesignVice

President

MfgVice

President

MarketingVice

PresidentController

Procure-ment

Manager

CEO

Matrix Organization with dual reporting lines:Managers report to both business unit and functionalexecutives who report to CEO

Regional Manager as potential third dimension


Royal Dutch/Shell Group Organization, 1994:A Matrix Structure



STRENGTHS:– Achieves coordination necessary to

meet dual demands from customers– Flexible sharing of human

resources across products– Suited to complex decisions and

frequent changes in unstableenvironment

– Provides opportunity for bothfunctional and product skilldevelopment

– Best in medium-sized organizationswith multiple products

WEAKNESSES:– Dual authority, which can be

frustrating and confusing– Means managers need good

interpersonal skills and extensivetraining

– Is time consuming; involves frequentmeetings and conflict resolutionsessions

– Will not work unless participantsunderstand it and adopt collegialrather than vertical-type relationships

– Requires great effort to maintainpower balance

Strengths and Weaknesses of matrix organization structure

Source: Adapted from Robert Duncan, “What Is the RightOrganization Structure? Decision Tree Analysis Provides theAnswer,”Organizational Dynamics (Winter 1979): 429.


Overview





Corporate Executive OfficeChairman & CEO

Corporate Staff

Finance Business R&D Human LegalDevelopment Resources

GE AircraftEngines

GE Trans-portation

GEIndustrialSystems

GEPlastics

GEAppliances

GESupply

GE PowerSystems

GE MedicalSystems

GELighting

GE SpecialtyMaterials

NBC GE Capital

26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty EquipmentServices Financing Financing Insurance Management

Service Divisions

Divisional Organization:General Electric’s Organization Structure, 2002



The Multidivisional Structure: Theory of the M-Form

Recognizes bounded rationality - top management has limited decision-making capacity

Divides decision-making according to frequency:

– high-frequency operating decisions at divisional level

– low-frequency strategic decisions at corporate level

Reduces costs of communication and coordination: business level decisions confined todivisional level (reduces decision making at the top)

Global, rather than local optimization:

– functional organizations encourage functional goals

– M-form structure encourages focus on profitability

Efficient allocation of resources through internal capital and labor markets

Resolves agency problem-- corporate management as interface between shareholdersand business-level managers

Efficiency advantages of the multidivisional firm:



The divisionalized firm in practice: typical problems

Constraints upon decentralization– Difficult to achieve clear division of decision making between corporate and

divisional levels.– On-going dialogue and conflict between corporate and divisional managers over

both strategic and operational issues

Standardization of divisional management– Despite potential for divisions to develop distinctive strategies and structures -

corporate systems may impose uniformity

Managing divisional inter-relationships– Requires more complex structures, e.g. matrix structures where functional and/or

geographical structure is imposed on top of a product / market structure– Added complexity undermines the efficiency advantages of the M-form



The Functions of corporate management to ensurethat its businesses perform better in aggregate thanthey would as a series of stand-alone units

Decisions over diversification, acquisition,divestment

Resource allocation between businesses

Monitoring and controlling business performance

Sharing and transferring resources and capabilities

Managinglinkagesbetweenbusinesses

Managing theindividualbusinesses

Managing theCorporatePortfolio



The Development of Strategic Planning Techniques:General Electric in the 1970’s

Late 1960’s: GE encounters problems of direction, coordination, control,and profitability

Corporate planning responses:

Portfolio Planning Models — matrix-based frameworks for evaluatingbusiness unit performance, formulating business strategies, and allocatingresources

Strategic Business Units — GE reorganized around SBUs (businesscomprising a strategically-distinct group of closely-related products)

PIMS — a database which quantifies the impact of strategy on performance.Used to appraise SBU performance and guide business strategy formulation



Portfolio Planning Models: Their Uses in Strategy Formulation

Allocating resources -- the analysis indicates both the investmentrequirements of different businesses and their likely returns

Formulating business-unit strategy -- the analysis yields simplestrategy recommendations (e.g..: “build”, “hold”, or “harvest”)

Setting performance targets -- the analysis indicates likelyperformance outcomes in terms of cash flow and ROI

Portfolios balance -- the analysis can assist in corporate goals suchas a balanced cash flow and balance of growing and decliningbusinesses.



HIGH

LO

W

LOW

Ann

ual r

eal r

ate

of m

arke

t gro

wth

(%)

Relative market share

Earnings: high stable

Cash flow: high stable

Strategy: milk

Earnings: low, unstable

Cash flow: neutral or negative

Strategy: divest

Earnings: high stable, growing

Cash flow: neutral

Strategy: invest for growth

Earnings: low, unstable, growing

Cash flow: negative

Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog

HIG

H ?Portfolio Planning Models: The BCG Growth-Share Matrix



Corporate Control over the Businesses

2 basic approaches

Inputcontrol

Monitoring & approving business level decisions

Output (or performance) control

Setting & monitoring the achievement ofperformance targets

Primarily through strategic planning system & capital expenditure approval system

Primarily through performance management system, including operating budgets and HR appraisals



Corporate management (“parenting” ) styles: the approachestaken to planning and control influence exerted by the centreon the businesses within the group

High

Low

CONTROL INFLUENCE

Strategicplanning

Centralized

Strategiccontrol

Holdingcompany

Financialcontrol

PLA

NN

ING

INFL

UEN

CE

Flexible strategic Tight strategic Tight financial

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch.;Goold and Campbell "Strategies and Styles“ and "Adding Value from Corporate Headquarters"


Each management style is different and has differentstrengths and weaknesses. Key is that a fit exist betweenthe way the “parent” operates and the improvement opportunitiesthat exist in particular businesses

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6;Goold and Campbell "Strategies and Styles“ and "Adding Value from Corporate Headquarters"

Approach Key features Advantages Dangers Examples

Strategicplanning

‘Masterplanner’Top-dow nHighlyprescribedDetailed controls

Co-ordination Centre out oftouchDivisions tactical

BOCCadburyLexSTCPublic sectorpre-1990s

Financialcontrol

‘Shareholder/banker’Financial targetsControl ofinvestmentBottom-up

Responsiveness Lose directionCentre does notadd value

BTRHanson plcTarmac

Strategiccontrol

‘Strategicshaper’Strategic andfinancial targetsBottom-upLess detailedcontrols

Centre/divisionscomplementaryAbility to co-ordinateMotivation

Too muchbargainingCulture changeneededNewbureaucracies

ICICourtauldsPublic sectorpost-1990

Centre dividion relationships


Managing linkages between businesses based on skills andresources that are helpful to its businesses

KEY ISSUE - How does the corporate center add value to the business?

BASIS OF BUSINESS LINKAGES - Sharing of resources and capabilitiesSHARING OCCURS AT TWO LEVELS: Corporate level - common corporate services Business level - sharing resources, transferring capabilities

PORTER’S ANALYSIS OF BUSINESS LINKAGES AND CORPORATESTRATEGY TYPES Portfolio management - Parent creates value by operating an internal capital market Restructuring - Parent create value by acquiring and restructuring Inefficiently-

managed businesses Transferring skills - Parent creates value by transferring capabilities between

businesses Sharing activities - Parent creates value by sharing resources between businesses

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6;Porter, Michael, From Competitive Advantage to Corporate Strategy, HBR, May-June 1987


Rethinking the Management of Multibusiness Corporations:Lessons from General Electric

Delayering - from 9 or 10 layers of hierarchy to 4 or 5 and decentralizing decisions

Hard-driving, results-oriented atmosphere prevails. All businesses are held to astandard of being #1 or #2 in their industries worldwide as well as achieving goodbusiness results.

Reformulating strategic planning - from formal, document-intensive analysis to directface-to-face discussion of key issues

Redefining the role of HQ - from checker, inquisitor, and authority to facilitator, helper,and supporter

Coordinating role of HQ - corporate HQ to lead in creating the “boundarylesscorporation” where innovations and ideas flow and where horizontal coordination occursto respond to new opportunities

HQ as change agent - corporate HQ driving force for continual organizational changeReliance upon “workout sessions” to identify, debate, and resolve “burning issues”;Commitment to Six Sigma Quality

Successful leaders spend time convincing organization members chosen strategy isright and competent strategy execution is top priority: Building and nurturing aculture promoting good strategy execution

Jack Welch’s transformation of GE’s structure and management systems:



Read slides on session 10 on ILIAS

Visit company web pages and prepare as team a brief descriptionof your companies organization chart

Topics of next session:

– Brief page presentation on each company; send in advance per e-mail or bringpresentation on usb stick

– Lecture: Strategic Leadership

New Assignment and Outlook next Session


Appendix


H A R V E S T

H O L D

B U I L D

Low

Medium

High

Low Medium High

Indu

stry

Attr

activ

enes

sPortfolio Planning Models: The GE / McKinsey Matrix

Industry Attractiveness Criteria Business Unit Position - Market size - Market share (domestic,- Market growth global, and relative)- Industry profitability - Competitive position- Inflation recovery - Relative profitability- Overseas sales ratio

Business Unit Position



Do Portfolio Planning Models Help or Hinder CorporateStrategy Formulation?

ADVANTAGES

Simplicity: Can be quickly prepared

Big picture: Permits one pagerepresentation of the corporateportfolio & the strategic positioningof each business

Analytically versatile: Applicableto businesses, products, countries,distribution channels

Can be augmented: A useful pointof departure for more sophisticatedanalysis

DISADVANTAGES

Simplicity: Oversimplifies thefactors determining industryattractiveness and competitiveadvantage

Ambiguous: The positioning of abusiness depends critically uponhow a market is defined

Ignores synergy: The analysistakes no account of anyinterdependencies betweenbusinesses


10 Organizational Structure Control

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