Strategic Management Ch.11

simple structure

a structure in which the owner-manager makes all major decisions and monitors all activities while the staff serves as an extension of the manager's supervisory authority. Typically, the owner-manager actively works in the business on a daily basis. Informal relationships, few rules, limited task specialization, and unsophisticated information systems characterize this structure. Frequent and informal communications between the owner-manager and employees make coordinating the work to be done relatively easy. The simple structure is matched with focus strategies and business-level strategies, as firms implementing these strategies commonly compete by offering a single product line in a single geographic market. Local restaurants, repair businesses, and other specialized enterprises are examples of firms using the simple structure. As the small firm grows larger and becomes more complex, managerial and structural challenges emerge. For example, the amount of competitively relevant information requiring analysis substantially increases, placing significant pressure on the owner-manager. Additional growth and success may cause the firm to change its strategy. Even if the strategy remains the same, the firm's larger size dictates the need for more sophisticated workflows and integrating mechanisms. At this evolutionary point, firms tend to move from the simple structure to a functional organizational structure

a corporation-wide emphasis on sharing among business units results in:

an emphasis on strategic controls, while financial controls are emphasized for strategies in which activities or capabilities are not shared (e.g., in an unrelated diversification strategy).

companies and business units of large diversified firms using the cost leadership strategy emphasize:

financial controls (such as quantitative cost goals)

Walmart Stores Inc. uses the:

functional structure to implement cost leadership strategies in each of its three segments (Walmart Stores, Sam's Clubs, and International Division). In the Walmart Stores segment (which generates the largest share of the firm's total sales), the cost leadership strategy is used in the firm's Supercenter, Discount, and Neighborhood Market retailing formats.75 The stated purpose of Walmart from the beginning has been "saving people money to help them live better."76 Although the slogan is relatively new, Walmart continues using the functional organizational structure in its divisions to drive costs lower. As discussed in Chapter 4, competitors' efforts to duplicate the success of Walmart's cost leadership strategies have generally failed, partly because of the effective strategy/structure matches in each of the firm's segments.

Organizational controls

guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. It is difficult for the company to successfully exploit its competitive advantages without this being effective. If properly designed it can provide clear insights regarding behaviors that enhance firm performance. Firms use both strategic controls and financial controls to support the implementation and use of their strategies.

To effectively use strategic controls when evaluating related diversification strategies, headquarter executives must:

have a deep understanding of each unit's business-level strategy. As we described in the Opening Case, Borders' significant strategic problems likely stemmed at least partly from the ineffective use of strategic controls.

Organizational Structure and control example GE

General Electric (GE) CEO Jeffrey Immelt pays close attention to the need to make certain that strategy and structure remain matched, as evidenced by restructuring alignments in GE Capital, GE's financial services group, during the economic downturn. Since the downturn, GE Capital has shrunk by over a third; it previously accounted for 46 percent of GE's earnings. Immelt wants to reduce that to 30 percent while increasing the focus on the industrial businesses

Financial controls

are largely objective criteria used to measure the firm's performance against previously established quantitative standards. Examples of financial controls: Accounting-based measures such as return on investment (ROI) and return on assets (ROA) as well as market-based measures such as economic value added. Partly because strategic controls are difficult to use with extensive diversification, financial controls are emphasized to evaluate the performance of the firm using the unrelated diversification strategy.

Strategic controls

are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages. These are concerned with examining the fit between what the firm might do (as suggested by opportunities in its external environment) and what it can do (as indicated by its competitive advantages). If they're effective it can help the firm understand what it takes to be successful, especially where significant strategic change is needed. They demand rich communications between managers responsible for using them to judge the firm's performance and those with primary responsibility for implementing the firm's strategies (such as middle and first-level managers). These frequent exchanges are both formal and informal in nature. They can also be used to evaluate the degree to which the firm focuses on the requirements to implement its strategies.

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.

multidivisional (M-form) 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.

Under Armour has used a:

differentiation strategy and matching structure to create success in the sports apparel market. Under Armour's objective is to create improved athletic performance through innovative design, testing, and marketing, especially to professional athletes and teams, and translate that perception to the broader market. With a strong match between strategy and structure, it has successfully created innovative sports performance products and challenged Nike and other sports apparel competitors.

handler's research shows that the firm's continuing success leads to product or market

diversification or both.81 The firm's level of diversification is a function of decisions about the number and type of businesses in which it will compete as well as how it will manage the businesses (see Chapter 6). Geared to managing individual organizational functions, increasing diversification eventually creates information processing, coordination, and control problems that the functional structure cannot handle. Thus, using a diversification strategy requires the firm to change from the functional structure to the multidivisional structure to develop an appropriate strategy/structure match.

An effectively flexible organizational structure allows the firm to Alternatively ineffective structure that is inflexible

effective/flexible = exploit current competitive advantages while developing new ones that can potentially be used in the future. Ineffective/inflexible= may drive good employees away because of frustration and an inability to complete their work in the best way possible. As such, it can lead to a loss of knowledge by the firm, sometimes referred to as a knowledge spillover, which benefits competitors.

overemphasizing one at the expense of the other can lead to:

performance declines. According to Michael Dell, an overemphasis on financial controls to produce attractive short term results contributed to performance difficulties at Dell Inc. In addressing this issue, Dell said the following: "The company was too focused on the short term, and the balance of priorities was way too leaning toward things that deliver shortterm results." However, although there later was some improvement, there are continuing problems as Dell has not improved its competitive position and is now seeking a takeover by a private equity company to facilitate its restructuring effort

Structural stability

provides the capacity the firm requires to consistently and predictably manage its daily work routines

structural flexibility

provides the opportunity to explore competitive possibilities and then allocate resources to activities that will shape the competitive advantages the firm will need to be successful in the future

Strategy and structure have a

reciprocal relationship, and if aligned properly, performance improves. This relationship highlights the interconnectedness between strategy formulation and strategy implementation. In general, this reciprocal relationship is caused by or follows the strategy. Once in place though, structure can influence current strategic actions as well as choices about future strategies. For example, the possible influences of Borders' structure and control system in influencing its strategy. The overly centralized approach that it pursued led to a lack of adaptability in its businesses as it sought to meet the challenge of a change to digital books and online distribution. The centralized structure did not provide information from local stores that might have been useful in changing its technology strategy much sooner than it did. The general nature of the strategy/structure relationship means that changes to the firm's strategy create the need to change how the organization completes its work.

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 cost of these products is low "relative" to the cost leader's prices while their differentiation is "reasonable" when compared with the clearly unique features of the differentiator's products.

Organizational structure

specifies the firm's formal reporting relationships, procedures, controls, and authority and decision making processes. When a structure's elements (e.g., reporting relationships, procedures, etc.) are properly aligned with one another, the structure facilitates effective use of the firm's strategies. Making this a critical component of effective strategy implementation processes. This also influences how managers work and the decisions resulting from that work. Supporting the implementation of strategies, structure is concerned with processes used to complete organizational tasks. Having the right structure and process is important. For example, many product-oriented firms have been moving to develop service businesses associated with those products. developing a separate division for such services in product-oriented companies, rather than managing the service business within the product divisions, leads to additional growth and profitability in the service business. GE developed a separate division for its financial services businesses. This helped facilitate GE's growth over the last two decades, although this business has been shrinking given the financial downturn

companies and business units using the differentiation strategy emphasize:

strategic controls (such as subjective measures of the effectiveness of product development teams).

For a business-level strategy, for example, the strategic controls are used to:

study value chain activities and support functions to verify that the critical value chain activities and support functions are being emphasized and properly executed. In fact, Nokia failed to employ effective strategic controls and is now fighting for survival due to its late response after the emergence of the smartphone. With related corporate-level strategies, strategic controls are used by corporate strategic leaders to verify the sharing of appropriate strategic factors such as knowledge, markets, and technologies across businesses.

When using financial controls, firms evaluate:

their current performance against previous outcomes as well as against competitors' performance and industry averages. In the global economy, technological advances are being used to develop highly sophisticated financial controls, making it possible for firms to more thoroughly analyze their performance results and to assure compliance with regulations. Companies such as Oracle and SAP sell software tools that automate processes firms use to meet the financial reporting requirements specified by the Sarbanes-Oxley Act in the United States - this act requires a firm's principal executive and financial officers to certify corporate financial and related information in quarterly and annual reports submitted to the Securities and Exchange Commission. These companies will likely develop software to help the financial services industry deal with the newest federal regulations on banking.

any structure's effectiveness is determined

using a combination of strategic and financial controls. However, the relative use of controls varies by type of strategy.

The unrelated diversification strategy's focus on financial outcomes requires:

using standardized financial controls to compare performances between business units and associated managers.