Strategy Execution:Structure10BENChapter OutlineT Organizational Structure10-1O 10-1a Vertical Growt

Strategy Execution:Structure10BENChapter OutlineT Organizational Structure10-1O 10-1a Vertical GrowthN 10-1b Horizontal Growth10-2 Structural Forms, 10-2a Functional Structure10-2b Product Divisional Structure10-2c Geographic Divisional StructureJ 10-2d Matrix StructureO 10-2e Assessing Organizational Structure10-3 Corporate Involvement in Business Unit OperationsS Corporate Restructuring10-410-5 SummaryH TermsKeyU Questions and ExercisesReviewPracticeA QuizNotesReading 10-1BRIAN3529781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning220Chapter 10The best conceived strategic plans often fail from a lack of planningfor their execution. Effective strategy implementation requires managers to consider many issues, including structural, cultural, and leadership concerns.1 These considerations should be made before a strategicalternative is selected and then detailed after strategy formulation. This chapteremphasizes the relationship between strategy and structure, especially within thecontext of strategy execution. Leadership and cultural concerns are addressedin Chapter 11.OrganizationalStructureThe formal means bywhich work is coordinated in an organization.Simple StructureAn organizationalform whereby eachemployee often performs multiple tasks,and the owner-manager is involved in allaspects of the business.B10-1 Organizational StructureOrganizational structure is the formal means by which work is coordinated inEan organization. As the focus of this chapter, an organization’s structure dictatesreporting relationships and defines where and how the firm’s work will be done.NIt establishes a framework for identifying levels in the organization where decisions will be made. In many respects, the structure sets the stage for strategyTexecution. A given structure might be appropriate for one particular strategy,Obut not another.The long-standing debate among scholars is whether a firm’s strategy shouldNfollow its structure or vice versa. Most practitioners, however, recognize that eachis influenced by the other. In the short term, strategic managers should evaluate,and consider the firm’s structure when crafting the strategy, recognizing thatmodifying the structure is rarely easy or inexpensive. In addition, they shouldbe willing to modify the firm’s structure as required to fit with any necessarystrategic change. In the long term, because a firm’s strategy is a key driver ofits performance, the structure should be built around the strategy to ensure itseffectiveness.Although some new businesses are launched on a large scale, many startsmall with an owner-manager and a few employees. Neither an organizationalchart nor a formal assignment of responsibilities is necessary. Each employeeoften performs multiple tasks and the owner-manager is involved in all aspectsof the business, a form of organization often called a simple structure. Thisstructure may remain intact for only a few months in a fast growing organization or for years in a small family business such as a rural convenience or hardware store.In organizations with a simple structure, early survival depends on an increasein demand for the company’s products or services. As the organization grows tomeet this demand, however, a more permanent division of labor tends to form.The owner-manager, who once was nearly involved in all functions of the enterprise, begins to play more of a leadership role and therefore assigns additionalemployees to more specialized functions. Growth of the firm reaches a certainpoint, however, where top managers must evaluate the effectiveness of the evolving system of coordinating tasks and consider modifying it if necessary, so thatthe structure evolves along with the strategy.Because the simple structure is inappropriate when a firm grows beyond acertain point, other alternatives must be considered. For such organizations,the structure exists to provide control and coordination for the organization.As such, the structure designates formal reporting relationships and defines thenumber of levels in the hierarchy.2 (See Figure 10-1.) There are logical reasonsfor organizing work along various lines. For example, work can be organizedalong function so employees can work only in their areas of specialty, by productJOSHUABRIAN3529781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage LearningStrategy Execution: StructureFIGURE10-1221S e c u r i t y B a n k O rga n iza tion Cha r tBENTON,JOSHUAso decisions about products can be made in an integrated fashion, and alonggeographical lines so decisions can be tailored to unique needs of various geographical regions. It is also reasonable to assume that individuals can and shouldwork across the structure when necessary. Nonetheless, there is no single beststructure, and the one selected for any organization will have its own set of benefits and challenges. Interestingly, many large, well-known companies changestructures frequently as their environments change.The extent to which organizational activities are appropriately groupedaffects how well strategy is implemented. For instance, customers may be confused when they are contacted by multiple sales representatives for the samecompany, each representing a different product line. In addition, it is difficultto hold a product divisional manager fully responsible for product sales if thisperson has little or no control over either the development or the productionof the product.In addition, firms with multiple related businesses usually require greatercoordination of their business units’ activities than those operating in onlyone business. However, as an organization becomes more complex, coordinating activities becomes more difficult, especially in organizations with relatedbusinesses.10-1a Vertical GrowthBRIANVertical GrowthAn increase in thelength of the organization’s hierarchical chainof command.Span of ControlThe number of employees reporting directly toa given manager.Tall OrganizationThe growth of the organization expands its structure, both vertically and horizontally. Vertical growth refers to an increase in the length of the organization’shierarchy (i.e., levels of management). The number of employees reporting toeach manager represents that manager’s span of control. A tall organization has352An organization characterized by manyhierarchical levels and anarrow span of control.9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning222Chapter 10Flat OrganizationAn organization characterized by relatively fewhierarchical levels and awide span of control.CentralizationAn organizationaldecision-makingapproach whereby moststrategic and operating decisions are madeby managers at thetop of the organizationstructure (at corporateheadquarters).DecentralizationAn organizationaldecision-makingapproach in which moststrategic and operatingdecisions are made bymanagers at thebusiness unit level.many hierarchical levels and narrow spans of control; a flat organization has fewlevels in its hierarchy and a wide span of control from top to bottom. In reality,organizations fall somewhere in between the two extremes. Hence, organizationsare seen as being either relatively tall or relatively flat.When a structure is marked by centralization, most strategic and operating decisions are made by managers at the top of the organization structure.Centralized structures push decisions to managers at higher levels who are presumed to have greater experience and expertise. Although clear lines of responsibility and accountability exist, top managers may lack the hands-on experiencethat managers have at middle and lower levels. Decision making occurs slowlyand the lower-level managers may be less committed to those decisions made athigher levels.Alternatively, when a structure is characterized by decentralization, moststrategic and operating decisions are made by managers at lower levels of theorganization structure. Decentralized firms seek to overcome the difficulties ofcentralization by pushing each decision to the lowest level where it can be madeeffectively. Decentralization can take advantage of the intellectual capital thatan organization develops across managerial ranks. Decisions are made morerapidly by managers with direct knowledge about a situation. Decentralizationcan cloud lines of accountability when poor decisions are made and can oftenresult in poor coordination across units in the organization. These potentialdisadvantages notwithstanding, it is not difficult to see why many progressive organizations have moved toward greater decentralization in the last twodecades.The extent to which decision making should be decentralized depends onseveral factors, one of which is organizational size. In general, very large organizations tend to be more decentralized than very small ones, simply becauseit is difficult for the CEO of a very large company to stay abreast of all of theorganization’s operations. In addition, firms with large numbers of unrelatedbusinesses tend to be relatively decentralized, whereby corporate-level management determines the overall corporation’s mission, goals, and strategy, andlower-level managers make the actual operating decisions. Finally, organizationsin dynamic environments must be relatively decentralized so that decisions canbe made quickly, whereas organizations in relatively stable environments can bemanaged more systematically and centrally because change is rather slow andfairly predictable. In such cases, most decisions are routine, and procedures canoften be established in advance.John Child has studied extensively the link between firm size and numberof management levels. According to Child, the average number of hierarchical levels for an organization with three thousand employees is seven levels.3Consequently, one might consider such an organization with fewer than sevenhierarchical levels to be relatively flat, and one with more than seven to berelatively tall. Because tall organizations have a narrow span of control, managers in such organizations exercise a relatively high degree of control overtheir subordinates, and authority tends to be relatively centralized. Conversely,authority is more decentralized in relatively flat structures because managers have broad spans of control and must therefore grant more flexibility totheir employees. Because decisions are more likely to be made at lower levelsin flat organizations, it is advisable for employees to have a more generalistorientation.From a strategic perspective, both organizational types possess certain advantages. Tall, centralized organizations foster more effective coordination andBENTON,JOSHUABRIAN3529781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage LearningStrategy Execution: Structure223communication of the business’s mission and goals to all employees. Planningand its execution are relatively easy to accomplish because all employees arecentrally directed. As such, tall organizational structures may be best suited forenvironments that are relatively stable and predictable, although experts havebegun to suggest that tall structures do not yield the same advantages today asthey once did.Flat structures also have advantages. Administrative costs tend to be less thanthose in taller organizations because fewer hierarchical levels require fewer managers and support personnel. Decentralized decision making also gives managersat various levels more authority, which may increase their satisfaction and motivation.4 The greater freedom in decision making also encourages innovation.Hence, flat structures are best suited to more dynamic environments, such asthose in which most Internet businesses operate. Quality tends to improve whendecision making is decentralized closest to the level at which the decisions willbe implemented.Flatter organizations, with relatively few hierarchical levels and wide spans ofcontrol, tend to work more effectively in dynamic environments, whereas tallerorganizations may operate more effectively in stable, predictable environments.Not all of a firm’s business units need to adopt the same structure. If some business units operate in relatively dynamic environments while others compete inrelatively stable environments, then structural differences may be necessary.Other factors can also influence the appropriate structure for an organization.Heavy involvement in outsourcing and offshoring is one such factor. Becauseoutsourcing reduces internal activities, it can flatten the structure and increasedecision-making speed.5 Outsourcing can stifle the bureaucracy, enabling firmsto concentrate on key strategic concerns such as shortening the cycle time fornew products or new models of existing ones.BENTON,JO10-1b Horizontal GrowthHorizontal growth refers to an increase inS breadth of an organization’s structheture. The owner-manager and a few employees may perform all of the functionsHin a new business. With growth, however, each function expands so that no oneindividual can be involved in all of the company’s functions, and the structureUof the organization is broadened to accommodate the development of more specialized functions. Owner-managers who are unable to let go of former realms ofAresponsibility as their new duties increase are often referred to disparagingly asmicromanagers.Increases in organizational size usually lead to additional organizationallayers and bureaucracy. Although large organizations are often presumed tobenefit from economies of scale and therefore be more efficient, a large firmmay actually become both less efficient and less capable of meeting the needsand expectations of its customers over time. Top management often addressesthe burgeoning bureaucracy by instituting a more horizontal structure, whichhas fewer hierarchies. The organizational restructuring so pervasive throughout the 1980s and 1990s has often involved forming a more horizontal structurethrough downsizing, whereby one or more hierarchical levels—typically middlemanagers—are eliminated. Additionally, employee layoffs often occur in orderto cut costs and eliminate some of the bureaucracy that invariably accompaniesmultiple organizational layers. As layers are reduced, decision making becomesdecentralized.Interestingly, downsizing often fails to achieve desired results, especially inthe long term. Studies suggest that approximately 50 percent of downsizedBRIAN352Horizontal GrowthAn increase in thebreadth of anorganization’s structure.Horizontal StructureAn organizationalstructure with fewerhierarchies designed toimprove efficiency byreducing layers in thebureaucracy.DownsizingA means of organizational restructuring thatoften eliminates one ormore hierarchical levelsfrom the organizationand pushes decisionmaking downward in theorganization.9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning224Chapter 10firms actually lower costs, and many of these firms also suffer declines in productivity. When cuts are applied equally to all departments, both efficient andinefficient ones lose employees without regard to performance level. Whenbuyouts are offered to relatively high-paid, longtime employees, the firm canbe faced with a drastic loss of critical experience. In addition, the positivechanges in the formal organization created by downsizing often lead to dysfunctional consequences in the informal organization. Survivors (i.e., employees who remain after the cuts) are typically less loyal to the organization andwonder if they will be cut next. Hence, downsizing is a viable strategic alternative, but one whose long-term ramifications must be seriously consideredbefore it is adopted.6Firms occasionally seek to downsize for the specific purpose of eliminatingpart of the workforce so that it can be rebuilt in a different manner. Downsizingmay occur after an acquisition if there are substantial cultural differencesbetween the two firms and the acquiring firm wishes to reorient the new combined workforce.BENTO10-2 Structural FormsThis section describesN general alternative structures that may be adoptedfourto meet the strategic needs of the organization. Some structures tend to fit with,a certain firm level of competitive strategies, although this relationship is notalways clear.1 0-2a Functional JStructureFunctional StructureA form of organizationalstructure whereby eachsubunit of the organization engages in firmwide activities relatedto a particular function,such as marketing,human resources,finance, or production.FIGUREOSHUAThe initial growth of an enterprise often requires that it be organized alongfunctional areas. In the functional structure, each subunit of the organizationengages in firm-wide activities related to a particular function, such as marketing,human resources, finance, or production. (Figure 10-2 illustrates one exampleof a functional structure.) Managers are grouped according to their expertiseand the resources they use in their jobs. A functional structure has certain strategic advantages. Most notably, it can improve specialization and productivity bygrouping people who perform similar tasks. When functional specialists interact frequently, improvements and innovations for their functional areas evolve,which may not have otherwise occurred without a mass of specialists organizedwithin the same unit. Working closely on a daily basis with others who share one’sfunctional interests also tends to increase job satisfaction and lower turnover. Inaddition, the functional structure can foster economies of scale by centralizingfunctional activities.BRIA10-2 A P a r t i al E x am p le o f Fun ction a l S tr uctureN3529781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage LearningStrategy Execution: Structure225Because of its ability to group specialists and foster economies of scale, thisform tends to address cost and quality concerns well. However, the functionalstructure also has its disadvantages. Because the business is organized aroundfunctions rather than around products or geographic regions, pinpointing theresponsibility for profits or losses can be difficult. For example, a decline in salescould be directly linked to problems in any number of departments, such as marketing, production, or purchasing. Members of these departments may blameother departments when firm performance declines.In addition, a functional structure is prone to interdepartmental conflict byfostering a narrow perspective of the organization among its members. Managersin functional organizations tend to view the firm totally from the perspective oftheir field of expertise. The marketing department might see a company problem as sales related, whereas the human resource department might view thesame challenge as a training and development concern. In addition, communication and coordination across functional areas are often difficult because eachfunction tends to have its own perspective and vernacular. R&D, for example,tends to focus on long-term issues, whereas the production department generally emphasizes the short run. Grouping individuals along function minimizescommunication across functions and can foster these types of communicationproblems.In sum, the functional structure can serve as a relatively effective and efficient means of controlling and coordinating activities. For this reason, it maybe appropriate for defenders and low-cost businesses that emphasize efficiencyin established markets. The current emphasis, however, is on customer service and speed, challenges that the functional structure may not be as wellequipped to address. Depending on the specific issues facing an organization, adivision along product or geographical lines may be more appropriate to otherbusinesses.BENTON,JOS10-2b Product Divisional StructureThe product divisional structure dividesH organization’s activities into selfthecontained entities, each responsible for producing, distributing, and selling itsown products or services. This structure Uoften adopted when a business hasisseveral distinct product lines. For example, a software developer may organizeAalong three product lines: business, productivity, and educational applications.Each division would have its own functional areas, such as R&D, marketing, andfinance. For this reason, the product divisional structure may be most appropriate for diversified firms. This structure is used both in manufacturing andservice organizations.The product divisional structure has certain advantages. Rather than emphasizing functions, the structure emphasizes product lines, resulting in a clear focuson each product category and a greater orientation toward customer service.Pinpointing the responsibility for profits or losses is also easier because eachproduct division becomes a profit center, which is a well-defined organizationalunit headed by a manager who is accountable for its revenues and expenditures.The product divisional structure is also ideal for training and developing managers because each product manager is, in effect, running his or her own business.Hence, product managers develop general management skills—an end that canbe accomplished in a functional structure only by rotating managers from onefunctional area to another.7The product divisional structure also has its disadvantages. Because product divisional firms generally have multiple departments performing the sameBRIAN352Product DivisionalStructureA form of organizationalstructure whereby theorganization’s activities are divided intoself-contained entities,each responsible forproducing, distributing, and selling its ownproducts.Profit CenterA well-defined organizational unit headed bya manager accountablefor its revenues andexpenditures.9781111219802, Strategic Management: Theory and Practice, John Parnell – © Cengage Learning226Chapter 10function, the total personnel expense for manufacturing is likely to be higherthan if only one department were necessary. The coordination of activities atheadquarters also becomes more difficult, as top management finds it harder toensure consistency among the various departments. This problem can becomesubstantial in large organizations with forty or more product divisions. Finally,because product managers emphasize their own product area, they tend tocompete for resources instead of working together in the best interest of thecompany.10-2c Geographic Divisional StructureBGeographicDivisional StructureA form of organizationalstructure in whichjobs and activities aregrouped on the basis ofgeographic location .When a firm’s operations are dispersed through various locations, top executives often employ a geographic divisional structure, whereby activities andpersonnel are grouped by specific geographic locations (see Figure 10-3).This structure may be used on a local basis (i.e., a city may be divided intosales regions), on a national basis (i.e., southern region, mid-Atlantic region,Midwest region), or even on an international basis (i.e., North Americanregion, Asian Region, Western European region). The primary impetus forthe geographic divisional structure is the existence of two or more distinctmarkets that can be segmented easily along geographical lines. For this reason,differentiated businesses or those unable to standardize product or servicelines because of geographical market differences may implement a geographicdivisional structure.There are two key advantages to organizing geographically. First, products andservices may be tailored more effectively to the legal, social, technical, or climaticdifferences of specific regions. For example, relatively small 220-volt appliancesmay be appropriate for parts of Asia where living quarters tend to be limitedand the American 110-volt system is not used. In addition, insurance companiesare often organized along state and national boundaries because of legal differences. Second, producing or distributing products in different locations maygive the organization a competitive advantage. Many firms, for example, producecomponents in countries that have a labor cost advantage and assemble them incountries with an adequate supply of skilled labor.The disadvantages of a geographic divisional structure are similar to those ofthe product divisional structure. Often, more functional personnel ar…