Foundations of Strategy Realizing Strategy. Introduction Will learn of the ways in which strategy is realized in practice Learn of the 3 key factors (organizational.

Foundations of StrategyRealizing Strategy

Introduction• Will learn of the ways in which strategy is realized in practice

• Learn of the 3 key factors (organizational structure, culture, & systems) and how they shape strategy

• Learn of the challenges of organizing and how the 3 factors can help us overcome those

Specialization• Efficiency in production comes from specialization through the

division of labor into separate tasks

• Though too much division of labor between specialist, can lead to the challenges of integration

• There 2 challenges of integration of specialists, cooperation and coordination

The Cooperation Problem• The main problem in organizations is that different groups have

different goals

• The agency relationship can be a major reason for the cooperation problem

• Several mechanisms can be used to help align the groups and goals within the organization

Cooperation Mechanisms• Bureaucratic controls

Top management have to be careful not to exercise too much bureaucratic control, otherwise it could limit the way the workers lower down within the organization, can do there job.

• Performance incentives Have to be careful to not only reward desirable outcomes, but as well as

reward for how those outcomes are being achieved.

• Shared Values You want to make sure that your employees are “buying in” to the culture &

goals of the organization, but if that culture & goals are promoting unethical behavior, you have to change that as top management.

The Coordination Problem• Have to make sure that the entire organization is coordinating

all efforts correctly, otherwise production will not exist

• 3 mechanisms that exist in the coordination problem Rules & Instructions Routines Mutual Adjustment

Organizational Design • Two forms

Bureaucracy Hierarchy

Advantages of using hierarchies to achieve coordination as well as control

The different ways in which organizations can be structured along hierarchical lines

Hierarchy and Coordination• By introducing hierarchical structures can help reduce costs of

coordination

• One individual appointed leader

• Less number of interactions are needed to be managed, which lowers the cost of coordination

Hierarchy and Coordination Cont’d• When thinking about hierarchies within organizations, we think

about the way in which specialized units are coordinated and controlled by a superior unit

• Hierarchies are a flexible way of coordinating activities because they allow specialist units to act independently of each other

Organizational Units• Organizational Units can be grouped in the following forms

Common tasks Products Geography Process

Tasks• Employees are grouped together with others who do the same

job Ex: a firm might create a machine shop, maintenance

department, secretarial pool and a sales office

Products• This is where a company offers multiple products

Ex: In a department store, departments are defined by products: Kitchen goods, bedding, lingerie

Ex: PepsiCo has three main product groups: PepsiCo Beverages, Frito-Lay, and Quaker Foods

Geography• Where a company serves multiple local markets, organizational

units can be defined around these localities

• Ex: Wal-Mart is organized by individual stores, groups of stores within an area and groups of areas within a region.

• Ex: Catholic Church is organized in parishes, dioceses, and archdioceses

Process • A sequence of interlinked activities.

• An organization may be viewed as a set of processes: the product development process, the manufacturing process, the sales and distribution process

• A process may correspond closely with an individual product, or a process may be dominated by a single task

• Functional organizations tend to combine task-based and process-based grouping.

How do we decide which to use?• Fundamental issue is achieving the coordination necessary to

integrate the efforts of different individuals

• This implies grouping individuals according to the intensity of their coordination needs

• Individuals whose tasks require the most intensive coordination should work within the same organizational unit

How do we decide which to use Cont’d• In geographical dispersed organization where communication

across distance is difficult, it is advantageous to base the organization on local units

• Ex: consultancy companies are often organized on this basis

Undiversified Organizations• When an organization is not particularly diversified in relation

to products and doesn’t need to be differentiated by location but possesses strong functional specializations, then grouping around functional task is appropriate

• Ex: British Airways is organized primarily around functions: Flight operations, engineering, marketing, sales, customer service, HR, information, and finance

Diversified Organization• Where a company is diversified over many products and these

products are substantially different in terms of technology and markets, it is vital that individuals who work on the same product should interact closely – a product based organization is the appropriate structure

• Ex: GE, 3M, Sony, Siemens and Unilever

Alternative Structural Forms• There are three alternative approaches to grouping tasks and

activities The Functional Structure The Multidivisional Structure The Matrix Structure

Functional Structure• Single business firms tend to be organized along functional

lines

• Grouping together functionally similar tasks is conducive to exploiting scale economies, promoting learning and capability building and deploying standardized control systems

• Conducive to a high degree of centralized control by the CEO an top management

Problems with Functional Structure• Functional structures are subject to the problems of

cooperation and coordination

• Different functional departments develop their own goals, values, vocabularies and behavioral norms

• Pressure on top management to achieve effective integration as the size of the firm increases

Problems with Functional Structure Cont’d• This is because different functions of the firm tend to be tightly

coupled rather than loosely coupled and there is limited scope for decentralization

• The real problems arise when a firm grows its range of products and businesses When this happens coordination within each product area becomes difficult

Multidivisional Structure• Emerged during the 20th century in response to the

coordination problems caused by diversification

• Key advantage of divisionalized structures is the potential for decentralized decision making

• Classic example of a form or organization that allows business level strategies and operating decisions to be made at the divisional level, while corporate headquarters concentrates on corporate planning, budgeting and providing common services

Advantages to Multidivisional Structure• Efficiency advantages of the multidivisional corporation is the

ability to apply a common set of corporate management tools to a range of different businesses

• Divisional autonomy also fosters the development of top management leadership capability among divisional heads

3 Levels of a Divisionalized Organization• Large, divisionalized corporation is typically organized into 3

levels Corporate center Divisions Individual business units

• Each representing a distinct business for which financial accounts can be drawn up and strategies formulated

Matrix Structure• Organizational structure that formalize coordination and control

across multiple dimensions

• Many diversified, multinational companies adopted matrix structures during the 60s and 70s

• During the past tow decades, most large corporations have dismantled or reorganized their matrix structure

Matrix Structure Cont’d• In fast moving business environments companies have found

that the benefits from formally coordinating across multiple dimensions have been outweighed by excessive complexity, larger head office staffs, slower decision making and diffused authority

• Bartlett and Ghoshal observed that matrix structures “Led to conflict and confusion; the proliferation of channels

created informational logjams as a proliferation of committees and reports bogged down the organization; and overlapping responsibilities produced turf battles and a loss of accountability”

Problem with Matrix Organizations• Not that it attempts to coordinate across multiple dimensions

but that this multiple coordination is over formalized, resulting in excessive corporate staffs and over complex systems that slow decision making and dull entrepreneurial initiative

Beyond Hierarchical Structures• For several decades consultants and management scholars have

proclaimed the death of hierarchical structures in business firms

• In 1993, two scholars of organization announced “the new organizational revolution is sweeping one industry after another…

quantum changes in manufacturing and computer mediated communication technologies have given managers radical new options for designing organizations”

Beyond Hierarchical Structures Cont’d• New organizations featured

Flatter hierarchies, decentralized decision making, greater tolerance for ambiguity, permeable internal and external boundaries, empowerment of employees, capacity for renewal, self organizing units, self integrating coordination mechanisms

Alternative Organizational Forms• Adhocracies: type of organization characterized by the absence of

bureaucracy and hierarchy. Decision making authority is diffused and located within organizational members areas of specialization.

• Flexible, spontaneous coordination and collaboration around problem solving and other non routine activities

Alternative Organizational Forms Cont’d• Team based and project based: common in sectors such as

construction, consulting, oil exploration and engineering services

• This approach works well because every project is different and goes through a changing sequence of activities, each project needs to be undertaken by closely interacting team that relies on problem solving and mutual adjustment as well as rules and routines

Alternative Organizational Forms Cont’d• Networks: can be a viable alternative to industrial development where

large enterprises are lacking

Common Characteristics• All three different organizational forms share common characteristics

• Focus on coordination rather than control They focus almost wholly on achieving coordination

Financial incentives, culture and social controls take the place of hierarchical control

• Reliance on coordination by mutual adjustment Dependent on voluntaristic coordination through bilateral and multilateral

adjustment

• Individuals in multiple organizational roles

4 major Systems• Information

• Strategic Planning

• Financial Planning and Control

• Human Resource Management

Information System• Communication technology

telephone, computers

• Administrative hierarchies upward flow-managers downward flow- instructions

Strategic Planning System• Statement of the goals

• Set of assumptions or forecasts

• Specific action

• Set of financial projection

Financial Planning and Control System• Capital expenditure budgets are the overall financial plan that

deals with expenditure on assets such as equipment and facilities

• Operating budget is a detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period.

Human Resource System• How the organization work within the company

• Setting goals

• Creating incentives

• Monitoring performance

Organizational Culture• Organizational Culture: “A pattern of shared basic assumptions

that was learned by a group as it solved problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way you perceive, think and feel in relation to those problems.”

Edgar Schein

Organizational vs. Corporate Culture

• Corporate Culture refers to the values and ways of thinking that senior managers wish to encourage within their organization

• Organizational culture refers to the diverse cultural patterns that exist in the informal organization

Strong vs. Weak Cultures• A strong culture is one in which key values and attitudes are

widely shared and intensely held.

• A weak culture, in contrast, is one where people tend to hold different views, have different values and may interpret and respond to signals in very different ways.

Describing and Classifying Cultures• Johnson has identified a number of elements that can be used

to describe organizational cultures which he labels a “cultural web”. These include:

The organization’s paradigm Its control systems Organizational structures Power structures Rituals, routines, stories, and myths.

Schein’s Three Cultural Levels• First Level: Comprises the organizational attributes that an

outsider visiting the company for the first time might see, hear or feel.

• Second Level: The values and attitudes that organizational members express.

• Third Level: These are the “unspoken rules” and tacit beliefs of an organization. Schein considers this to be the most influential but also the most difficult to change.

Corporate Culture & Organizational Performance

• There is limited empirical evidence on the links between corporate culture and and organizational performance, in part because of the difficulties of measuring these broad concepts.

Summary • Learned of the ways in which strategy is realized in practice

• Learned of the 3 key factors (organizational structure, culture, & systems) and how they shape strategy

• Learned of the challenges of organizing and how the 3 factors can help us overcome those

Questions?