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CHAPTER 12
TEACHING OBJECTIVES
1.
Introduce the main elements of strategy implementationstructure, control systems, and cultureand their
relationships to each other.
2.
Demonstrate how structure, control, and culture can build distinctive competencies at the functional level.
3.
Describe the use of structure, control, and culture in implementing a single-business firms generic business
strategy.
4.
Discuss the use of restructuring and reengineering in improving the performance of a single-business firm.
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interrelatedness of structure, control systems, and culture, which is shown in Dells centralization and subsequent
decentralization, its taller then flatter structure, and so on.
LECTURE OUTLINE
I.
II.
Overview
A. A well thought-out strategy can lead to success only if it is properly implemented, thus the study of
implementation is critical to an understanding of strategy.
B.
This chapter introduces concepts related to implementation, with a focus on functional- and businesslevel strategy implementation. Strategy implementation refers to the ways a firm creates, uses, and
combines organizational structure, control systems, and culture to pursue strategies that lead to a
competitive advantage and superior performance.
Implementing Strategy Through Organizational Structure, Control, and Culture
A. The first component of strategy implementation is organizational structure, which assigns
employees to specific tasks and specifies how those tasks link together to realize a competitive
advantage. The purpose of organizational structure is to coordinate and integrate the efforts of all
employees at the corporate, business, and functional levels, and across functions and business units,
so that they work together to help the firm achieve its strategies successfully.
B.
Another component of implementation is a strategic control system, which provides the incentives
that motivate employees to help the firm achieve its strategies. Control systems also provide
performance feedback to managers so that corrective action can be taken if needed.
C.
Organizational culture is another important component of strategy implementation, and it consists
of the values, norms, beliefs, and attitudes that are shared by people in an organization. Culture guides
the way that employees interact with each other and with stakeholders outside the organization, and
thus will have an important impact on the implementation of an organizations strategies.
Show Transparency 71
Figure 12.1: Implementing Strategy
III.
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b.
5.
6.
Another reason for communication problems is that the large number of levels leads to
differing perceptions of the meaning of the messages.
c.
Another problem is that a tall organization has more managers, and managers are very
expensive.
To avoid these problems, managers should follow the principle of the minimum chain of
command, that is, they should use the minimum number of hierarchical levels required for
implementing a strategy successfully. Too many levels in the hierarchy cause a variety of
problems.
Decentralization of decision-making authority is one tactic for overcoming the disadvantages
associated with a tall organizational structure. Decentralization delegates authority to lowerlevel employees.
a.
Decentralization reduces information overload because managers spend time making only
those decisions that must be made at their organizational level.
b.
Decentralization gives lower level employees autonomy, increasing flexibility,
motivation, and accountability.
c.
Decentralization reduces the need for expensive, high-level managers, because lower
level employees can make their own decisions with little supervision.
E.
On the other hand, centralization also offers some advantages. Therefore, organizations must
balance the advantages and disadvantages of differing levels of centralization as they design
their organizational structure.
a.
Centralization implies a coordinated strategy and quicker decision making when needed.
b.
Centralization ensures that decisions reflect the organizations overall strategy.
c.
Centralization fosters strong leadership because authority is centered on one person or
group.
In large, complex organizations, coordination through the hierarchy of command isnt enough, and
organizations turn to other integrating mechanisms. Companies can choose from various integrating
mechanisms to increase coordination and communication. These mechanisms fall on a continuum
from single to complex. In general, the more complex the organization, the more need for complex
forms of integration.
1.
Direct contact is a simple integrating mechanism that asks managers in different functions to
work together to solve mutual problems. However, when managers in different functions
disagree, it is hard to achieve coordination because they all have equal authority.
2.
When the volume of contacts between two departments increases, one person in each
department is given the responsibility of coordinating activities between the two. This is called
interdepartmental liaison roles. They meet to solve problems and then feed the outcomes of
their discussion back to their respective departments.
3.
When two or more functions share many common, on-going problems, a permanent integrating
mechanism is needed, such as a team. A team consists of members who are managers of the
various functions, and they meet to make decisions jointly.
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IV.
E.
F.
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(1)
G.
Inputs can be standardized by screening them so that only high-quality inputs enter
the company.
(2) Conversion activities are standardized so that tasks are done in the same way time
and time again. This improves predictability.
(3) Organizational outputs are standardized by specifying performance characteristics
of the final product. Only goods and services that meet these criteria are allowed to
leave the organization.
c.
Managers must periodically review behavior controls to ensure they are still effective.
Companies tend to accumulate rules over time, reducing flexibility and ultimately
reducing effectiveness.
Information technology (IT) is playing an increasing role in strategy implementation at many firms.
1.
ITs ability to provide better and faster information aids managers as they use control systems.
2.
IT can provide standardization, which can be used to control behavior or to perform output
control.
3.
IT is an integration mechanism, because of information sharing.
V.
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VI.
Organizational structure also affects organizational culture. The way an organization designs its
structure affects the cultural norms and values that develop within the organization.
G. Adaptive cultures are those that are innovative and encourage initiative-taking by middle- and lowerlevel managers. Inert cultures are those that are more cautious and conservative, and do not value
initiative and innovation as highly.
1.
Organizations with adaptive cultures adapt more readily to environmental changes.
2.
Adaptive cultures share several traits.
a.
Adaptive cultures have a bias toward action, which emphasizes autonomy and
entrepreneurship and encourages people to take risks and adopt a hands-on approach.
b.
Adaptive cultures promote the organizations mission and protect the source of its
competitive advantage. Companies should stick to what they do best and stay close to
their customers. This is called stick to the knitting.
c.
Adaptive cultures help organizations improve the way they operate. They help to
motivate employees, increase coordination and integration, and reward employees for
good performance.
Building Distinctive Competencies at the Functional Level
A. There are three important components of implementing strategy at the functional level.
1.
Organizational structure is an important component of implementing strategy at the functional
level.
a.
As the organization grows, the range of value chain activities to be performed expands. It
becomes clear that each person can only effectively perform one value chain activity.
b.
A functional organizational structure groups people together if they perform similar
tasks or if they use the same skills or equipment.
Show Transparency 75
Figure 12.5: Functional Structure
c.
2.
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c.
3.
Output control is easy with a functional structure because each function can clearly see its
contribution to the performance of the organization.
d.
Strategic control facilitates implementation of a fair, objective system of rewards.
Functional structures make it easy to build a cohesive culture, which also supports effective
control.
Even large companies usually retain some elements of a functional structure because of its benefits,
but a functional structure does entail some bureaucratic costs.
1.
Functions can become increasingly remote from one another because they each develop a
unique perspective over time, leading to communication problems.
2.
As the number of its products grows, a company struggles to measure the contribution of one
product to overall profitability.
3.
Growth in products also causes interaction with more varied types of customers. Firms have a
difficult time coping with the expanded product range that results.
4.
A functional structure is too centralized for controlling production or sales in many different
regions, because managers cannot be sensitive to the needs of their diverse customers.
5.
Finally, as managers spend more and more time and resources coping with the above problems,
long-term strategic considerations may be ignored.
C.
If a firm is growing too complex to use an exclusively functional structure, one way that the firm may
respond is to switch to the use of outsourcing in one or more functions.
1.
A firm should not outsource in an area in which it has an important distinctive competency.
2.
However, use of outsourcing can free up managerial and other resources to focus on the truly
important functions.
VII. Implementing Strategy in a Single Industry
A. To pursue its business-level strategy successfully, managers must find the right combination of
structure, control, and culture that links and combines the competencies in a companys value chain
functions.
B.
Effective strategy implementation allows the company to be more successful in pursuing a cost leader
or differentiation strategy.
Show Transparency 76
Figure 12.6: How Organizational Design Increases Profitability
C.
Strategy implementation aids firms in pursuing a cost leader strategy, because it can help them reduce
expenses in all functions through improved coordination and control.
1.
Managers must choose the combination of structure, control, and culture that will lead to the
lowest costs.
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E.
Managers must continuously monitor their structure, control, and culture to ensure that costs are
continuously driven down.
Strategy implementation aids firms that are pursuing a differentiation strategy, because it helps the
company to add value and uniqueness to its products.
1.
A differentiation strategy requires a broad product line, leading to high bureaucratic costs. Thus
an effective coordination mechanism is especially important.
2.
To successfully pursue a differentiation strategy, a companys functions must work
cooperatively together. Behavior controls and culture are more effective than output controls in
a cooperative situation, because its hard to measure the relative contribution of different groups
when they are cooperating.
3.
Thus, differentiators tend to have a very different culture than cost leaders. Differentiators tend
to have a collegial or professional culture, based on expertise and cooperation.
As companies try to both increase differentiation and reduce costs simultaneously, strategy
implementation becomes much more complex. This leads to new forms of structure and control
systems.
1.
To cope with the complexity of producing many products for many market segments,
companies can adopt a product structure.
a.
To implement a product structure, a company must first group its products into categories
targeted at specific groups of customers and managed by one set of managers.
b.
Support activities from the value chain are centralized to keep costs low. However, subgroups within each function specialize in meeting the needs of a particular product group.
c.
The organization then develops a control system that examines each product group
separately. This creates an ability to rapidly spot problem areas, and also a way to give
rewards for high performance.
d.
However, rewards still are closely tied to organizational, and not group, performance, to
ensure that managers work together across units as needed.
Companies that are focused on meeting the needs of many different groups of customers can
use the market structure.
Show Transparency 78
Figure 12.7: Market Structure
a.
b.
To group people into units based on the customers they serve, it is first important to
clearly understand the needs of each customer group.
Employees then become close to each customer segment, while support functions are
centralized.
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Geographic structures are appropriate for firms that are attempting to expand their geographic
reach.
Show Transparency 79
Figure 12.8: Geographic Structure
a.
b.
4.
d.
The product-team structure is very similar to the matrix structure, except that the
teams are permanent, rather than the temporary teams of the matrix design.
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F.
Product teams are formed at the beginning of the process, so that every function is
involved in a project from the start.
(3) Product teams also have decentralized authority and are ultimately responsible for
new product development.
(4) Product teams differ from the product structure, because support functions are not
centralized, but are distributed to each team.
(5) The costs of coordinating the teams activities are lower in a product team than in a
matrix structure, but a company still obtains the gains from close cooperation
across functional boundaries.
Companies that compete with a focus strategy often use a functional structure, which both increases
differentiation and reduces costs.
1.
Focusers tend to be smaller firms, and therefore the functional structure may be sufficient for
their integration and coordination needs.
2.
A functional structure is also very flexible, which is important to focusers, who must adapt to
customers constantly-changing requirements.
What is the relationship of organizational structure, control, and culture? Give some examples of when and
under what conditions a mismatch between these components might arise.
These three elements are the three main tools used in strategy implementation, therefore each must be in
harmony with the others. For example, if an organizations culture were informal and collegial, then a
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highly centralized and bureaucratic organizational structure would be inappropriate. When each is in
harmony with the others, organizational effectiveness will be greatly enhanced.
As an organization grows and experiences change, mismatch between these three elements can occur. For
example, Time Warner purchased Turner Broadcasting in 1996, and then experienced postacquisition
integration problems because Turners entrepreneurial culture didnt mesh with Time Warners more
conservative culture. Mismatch might also result from a change in societal expectations, such as the way in
which many firms have changed their culture to embrace diversity. In summary, virtually any type of
change may lead to a need to realign the companys structure, control, and/or culture.
2.
What kind of structure best describes the way your (a) business school and (b) university operate? Why is
the structure appropriate? Would another structure fit better?
You may need to give students information about organizational structure, as well as the schools and
universitys strategic goals, resources, and external pressure, in order to equip them to answer this question
properly. As they answer the questions, encourage them to think about the relationship between strategy and
structure.
3.
Why would a company choose a matrix structure? What are the problems associated with managing this
structure, and why might a product-team structure be preferable?
Companies use a matrix structure because they need a high level of coordination and communication, in
order to effectively deal with a fast-changing high-tech environment. The benefits include a simultaneous
emphasis on functions and products, a flat organization structure, strong cross-functional integration leading
to speed and flexibility, and employee autonomy.
Disadvantages of the matrix structure include the time and effort needed to repeatedly formulate teams, the
potential for conflict between functional and product managers, and the difficulty of monitoring
performance when workers report to two supervisors.
Because of the matrix structures disadvantages, companies might instead opt for a product-team structure,
in which teams are permanent, rather than the temporary teams of the matrix design. The product-team
structure has advantages over the matrix structure, especially in reduced time spent formulating and
launching teams.
4.
For each of the structures discussed in the chapter, outline the most suitable control systems.
The most suitable control systems for each structure can be found in the table below:
Functional structure
Product structure
Geographic structure
Matrix structure
Product-team structure
5.
What kind of structure, controls, and culture would you would be likely to find in (a) a small manufacturing
company, (b) a chain store, (c) a high-tech company, and (d) a Big Four accounting firm?
A small manufacturing company would be likely to use a functional structure, which is simple and allows
for task specialization. Because this company is small, its need for coordination is relatively low, and thus
the functional structure would be best. Control is likely to be personal supervision, because the top
managers of the firm can have personal contact with every employee. Organizational culture would
probably tend to focus on friendly, informal relationships between workers and managers.
A chain store would most likely use a geographic structure. This allows the stores to customize product
offerings for regional tastes, selling bathing suits in the South and ice skates in the North, for example.
Control is likely to be output control, focused on setting challenging goals. Culture would probably
emphasize rule compliance and be more formal and bureaucratic in style.
A high-tech company would probably use a product-team structure, because that allows flexibility,
innovation, and knowledge sharing, while still supporting functional specialization. Controls are likely to be
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ARTICLE FILE 12
Students should find a single-business company that has recently implemented a strategic change, and then
describe the change, the reasons for it, and the impact it had on the firm.
Teaching Note: Students will not have a hard time finding examples of firms that have recently changed their
structure, controls, or culture. If they need guidance, suggest they look for firms that have recently entered or
exited an industry, recently undergone a merger or acquisition, or experienced some other radical shift in their
plans.
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What were the main elements of the control system that Sam Walton created?
The Closing Case describes how Wal-Mart has established a sophisticated set of controls to monitor its
performance. First, the company has developed a state-of-the-art financial control system that provides upto-the-minute feedback about ongoing operations and allows top managers to intervene quickly when
problems seem to be arising. Second, Wal-Mart links performance to rewards and also has implemented an
elaborate system of rules and standard operating procedures to guide employees. Finally, Wal-Mart has a
strong culture in large part because Sam Walton wanted to create a motivated and committed workforce
who would focus on providing customers with high-quality customer service.
2.
In what ways will this control system facilitate Wal-Marts strategy of global expansion?
There are benefits and drawbacks to Wal-Marts control system when considering global expansion. The
greatest benefit is that its control system is very standardized and thus is transferable to other locations. One
major challenge is, however, the question whether the unique Wal-Mart culture as part of its successful
control system will mesh with the local culture. One of the authors recently completed a field study of WalMart stores overseas and found significant differences in the way customers are treated in the U.S. and
Germany, for example. This is a challenge that the Wal-Mart executives need to work on.