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Strategy Process

10 Organizational Structure and Control

Prof. Dr. Bernd Venohr


Berlin, June 2007

© 2007 Prof. Dr. Bernd Venohr


Agenda
Introduction to Strategy
1 Course Overview and Strategy Concept
2 Economics of Strategy
3 Shareholder Value

Business Strategy
4 External Environment
5 Internal Environment
6 Competitive Positioning

Corporate Strategy
7 Diversification
8 Mergers & Acquisitions
9 Global Strategy

Strategy Process
10 Organizational Structure and Control
11 Strategic Leadership
© 2007 Prof. Dr. Bernd Venohr 2
Overview

 “Structure follows strategy“

 Basics of structuring organizations

 Example: managing the multibusiness organization

© 2007 Prof. Dr. Bernd Venohr 3


Alfred Chandler: Structure follows strategy
 Alfred Chandler (business history professor at Harvard
Business 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 the
corporation'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 has
to change from functional to divisional organization as a result of
the strategy change: „unless structure follows strategy,
inefficiency results“

 This research has been a source of controversial discussion


because, while strategy influences structure, so do many other
factors
Source: Wikepedia
© 2007 Prof. Dr. Bernd Venohr 4
Evolution of the Modern Corporation: changes in environment
lead to changes in strategy and organizational structure

The business Strategic Organizational


environment changes consequences

Early Local markets Firms specialized & Small firms


19th Transport slow focused on local Simple manage-
century Limited mechanization markets ment structures

Late Introduction of Geographical and Functional structures


19th railroads, telegraph vertical expansion Line/staff separation.
century industrialization Accounting systems

Early Excess capacity inProduct & Development of


20th distribution. Growth multinational multidivisional
century of financial institu - diversification corporation
tions & world trade
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004); Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Overview

 “Structure follows strategy“

 Basics of structuring organizations

 Example: managing the multibusiness organization

© 2007 Prof. Dr. Bernd Venohr 6


The basic task of organizing

 Every organized human activity gives rise to two fundamental and


opposing 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 the


ways in which its labor is divided into distinct tasks and then its coordination
and integration is achieved among those task

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr 7
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 allocation
procedures; budgeting processes
–Manager control systems: selection of employees;
reward/punishments; career path
–Coordination systems: decision responsibility assignments;
committees; task forces

© 2007 Prof. Dr. Bernd Venohr 8


Pin factory example (Adam Smith): Somewhere
between a 240 and 4800 fold increase in productivity
can be achieved by division of labour
“To take an example (...) from (...) the trade of the pin-maker; a workman not educated to
this business (which the division of labor has rendered a distinct trade), nor acquainted with the
use 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 this
business is now carried on, not only the whole work is a peculiar trade, but it is divided into "a
number of branches, of which the greater part are likewise peculiar trades. One man draws
out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the
top for receiving the head; to make the head requires two or three distinct operations; to put it
on, is a peculiar business, (...) and the important business of making a pin is, in this
manner, divided into about eighteen distinct operations, which, in some manufactories,
are all performed by distinct hands, though in others the same man will sometimes perform
two or three of them. I have seen a small manufactory of this kind where ten men only were
employed (...). But (...) they could, when they exerted themselves, make among them about
twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a
middling size. Those ten persons, therefore, could make among them upwards of forty-
eight thousand pins in a day. Each person, therefore, (...) might be considered as
making four thousand eight hundred pins in a day. But if they had all wrought
separately and independently, (...) they certainly could not each of them have made
twenty (...).”
Source: Adam SMITH,An Inquiry into the Nature & Causes of the Wealth of Nations, Ch1
© 2007 Prof. Dr. Bernd Venohr 9
Many classic dilemmas exist: How much authority to
delegate to whom?
 Centralized structure: Top managers retain authority for most
decisions; managers are order-takers

 In a decentralized structure: Managers and employees closest to


product 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
© 2007 Prof. Dr. Bernd Venohr 10
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 decentralized


structures 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

© 2007 Prof. Dr. Bernd Venohr 11


Functional organisation

CEO

Vice President Vice President Director


Finance Manufacturing Human Resources

Chief Budget Plant Maintenance Training Benefits


Accountant Analyst Superintendent Superintendent Specialist Administrator

 Organized by departments performing separate


business functions such as marketing or
manufacturing
 Works best when organization has
- Few products
- Few locations
- Few types of customers
- Stable environment
- Routine technology
© 2007 Prof. Dr. Bernd Venohr 12
Strengths and Weaknesses of
functional organization structure

 STRENGTHS:  WEAKNESSES:

– Allows economies of scale – Slow response time to environmental


within functional departments changes
– May cause decisions to pile on top,
– Enables in-depth knowledge
hierarchy overload
and skill development and
– Leads to poor horizontal coordination
innovation within functions
among departments (Functional
– Enables organization to egotism)
accomplish functional goals – Results in less product innovation
– Involves restricted view of
organizational goals

Source: Adapted from Robert Duncan, “What Is the Right


Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429.
© 2007 Prof. Dr. Bernd Venohr 13
Divisional organization
:

President/CEO _
R&D | Finance| Planning| Marketing | HR

Product Division Geographic Division Customer/Market

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


© 2007 Prof. Dr. Bernd Venohr 14
Divisional organization was invented by Alfred Sloan:
General Motors’ Organization Structure (1921)
Board of Directors
President Executive Committee

Financial GM Acceptance Legal General


Staff Corporation Department Advisory Staff

Chevrolet Sheridan Canadian Oldsmobile Buick Cadillac GM Export


Division Division Division Division Division Division Company

GM Truck Samson Oakland Inter- Scripps


Division Tractor Division company Booth Corp.
Division Parts
Division
Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
© 2007 Prof. Dr. Bernd Venohr 15
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 efficient
scale)

 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 regions


Increased 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


© 2007 Prof. Dr. Bernd Venohr 16
Strengths and weaknesses of
divisional organization structure

 STRENGTHS:  WEAKNESSES:

– Eliminates economies of scale in


– Suited to fast change in unstable functional departments by splitting
environment functions and allocating them to
– Leads to customer satisfaction because units
product responsibility and contact points – Leads to poor coordination across
product lines
are clear – Eliminates in-depth competence
– Involves high coordination across functions and technical specialization
– Allows units to adapt to differences in – Makes integration and
products, regions, clients (heterogenous standardization across product
lines difficult
markets)
– Best in large organizations with several
products
– Decentralizes decision-making

Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 431.
© 2007 Prof. Dr. Bernd Venohr 17
Matrix Organization with dual reporting lines:
Managers report to both business unit and functional
executives who report to CEO

CEO

Director Design Mfg Marketing Procure-


of Product Vice Vice Vice Controller ment
Operations President President President Manager

Business
Unit A

Business
Unit B

Business
Unit C

Business
Unit D

Regional Manager as potential third dimension

© 2007 Prof. Dr. Bernd Venohr 18


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

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr 19
Strengths and Weaknesses of matrix organization structure

 STRENGTHS:  WEAKNESSES:
– Achieves coordination necessary to – Dual authority, which can be
meet dual demands from customers frustrating and confusing
– Flexible sharing of human – Means managers need good
interpersonal skills and extensive
resources across products
training
– Suited to complex decisions and – Is time consuming; involves frequent
frequent changes in unstable meetings and conflict resolution
environment sessions
– Provides opportunity for both – Will not work unless participants
functional and product skill understand it and adopt collegial
development rather than vertical-type relationships
– Best in medium-sized organizations – Requires great effort to maintain
with multiple products power balance
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the
Answer,”Organizational Dynamics (Winter 1979): 429.
© 2007 Prof. Dr. Bernd Venohr 20
Overview

 “Structure follows strategy“

 Basics of structuring organizations

 Example: managing the multibusiness organization

© 2007 Prof. Dr. Bernd Venohr 21


Divisional Organization:
General Electric’s Organization Structure, 2002
Corporate Executive Office
Chairman & CEO

Corporate Staff
Service Divisions Finance Business R&D Human Legal
Development Resources

GE GE GE
GE Aircraft GE Trans- GE
Industrial Appliances Supply
Engines portation Plastics
Systems

GE
GE Power GE Medical GE GE
Specialty NBC
Systems Systems Lighting Capital
Materials

26 businesses organized into 5 segments:


Consumer Mid-market Specialized Specialty Equipment
Services Financing Financing Insurance Management
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr 22
The Multidivisional Structure: Theory of the M-Form
Efficiency advantages of the multidivisional firm:

 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 to
divisional 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 shareholders
and business-level managers
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
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
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
The Functions of corporate management to ensure
that its businesses perform better in aggregate than
they would as a series of stand-alone units

Managing the Decisions over diversification, acquisition,


Corporate divestment
Portfolio Resource allocation between businesses

Managing the
individual Monitoring and controlling business
businesses performance

Managing
linkages Sharing and transferring resources and
between capabilities
businesses
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
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 evaluating


business unit performance, formulating business strategies, and allocating
resources

 Strategic Business Units — GE reorganized around SBUs (business


comprising 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

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Portfolio Planning Models: Their Uses in Strategy Formulation

 Allocating resources -- the analysis indicates both the investment


requirements of different businesses and their likely returns

 Formulating business-unit strategy -- the analysis yields simple


strategy recommendations (e.g..: “build”, “hold”, or “harvest”)

 Setting performance targets -- the analysis indicates likely


performance outcomes in terms of cash flow and ROI

 Portfolios balance -- the analysis can assist in corporate goals such


as a balanced cash flow and balance of growing and declining
businesses.

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Portfolio Planning Models: The BCG Growth-Share Matrix
Earnings: low, unstable, growing
Cash flow: negative Earnings: high stable, growing
Annual real rate of market growth (%)

?
Strategy: analyze to determine Cash flow: neutral
HIGH

whether business can


be grown into a Strategy: invest for growth
star, or
will degenerate
into a dog

Earnings: low, unstable Earnings: high stable

Cash flow: neutral or negative Cash flow: high stable


Strategy: milk
LOW

Strategy: divest

LOW HIGH
Relative market share
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Corporate Control over the Businesses

2 basic approaches

Input Output (or performance)


control control

Monitoring & approving Setting & monitoring


business level decisions the achievement of
performance targets

Primarily through strategic Primarily through performance


planning system & capital management system,
expenditure approval including operating budgets
system and HR appraisals
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Corporate management (“parenting” ) styles: the approaches
taken to planning and control influence exerted by the centre
on the businesses within the group

High
Centralized
PLANNING INFLUENCE

Strategic
planning

Strategic
control

Holding Financial
company control
Low

Flexible strategic Tight strategic Tight financial

CONTROL INFLUENCE

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"
© 2007 Prof. Dr. Bernd Venohr
Each management style is different and has different
strengths and weaknesses. Key is that a fit exist between
the way the “parent” operates and the improvement opportunities
that exist in particular businesses
Centre dividion relationships
Approach Key features Advantages Dangers Examples

Strategic ‘Masterplanner’ Co-ordination Centre out of BOC


planning Top-dow n touch Cadbury
Highly Divisions tactical Lex
prescribed STC
Detailed controls Public sector
pre-1990s

Financial ‘Shareholder/ Responsiveness Lose direction BTR


control banker’ Centre does not Hanson plc
Financial targets add value Tarmac
Control of
investment
Bottom-up

Strategic ‘Strategic Centre/divisions Too much ICI


control shaper’ complementary bargaining Courtaulds
Strategic and Ability to co- Culture change Public sector
financial targets ordinate needed post-1990
Bottom-up Motivation New
Less detailed bureaucracies
controls
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"
© 2007 Prof. Dr. Bernd Venohr 31
Managing linkages between businesses based on skills and
resources 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 capabilities


SHARING OCCURS AT TWO LEVELS:
 Corporate level - common corporate services
 Business level - sharing resources, transferring capabilities

PORTER’S ANALYSIS OF BUSINESS LINKAGES AND CORPORATE


STRATEGY 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
© 2007 Prof. Dr. Bernd Venohr
Rethinking the Management of Multibusiness Corporations:
Lessons from General Electric
Jack Welch’s transformation of GE’s structure and management systems:
 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 a
standard of being #1 or #2 in their industries worldwide as well as achieving good
business results.
 Reformulating strategic planning - from formal, document-intensive analysis to direct
face-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 “boundaryless
corporation” where innovations and ideas flow and where horizontal coordination occurs
to respond to new opportunities
 HQ as change agent - corporate HQ driving force for continual organizational change
Reliance upon “workout sessions” to identify, debate, and resolve “burning issues”;
Commitment to Six Sigma Quality
 Successful leaders spend time convincing organization members chosen strategy is
right and competent strategy execution is top priority: Building and nurturing a
culture promoting good strategy execution
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
New Assignment and Outlook next Session

 Read slides on session 10 on ILIAS

 Visit company web pages and prepare as team a brief description


of your companies organization chart

 Topics of next session:

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

– Lecture: Strategic Leadership

© 2007 Prof. Dr. Bernd Venohr 34


Appendix

© 2007 Prof. Dr. Bernd Venohr 35


Portfolio Planning Models: The GE / McKinsey Matrix
Industry Attractiveness

High B
U
I L
H D
O
Medium L
H D
A
R
V
Low E
S
T
Low Medium High
Business Unit Position
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
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr
Do Portfolio Planning Models Help or Hinder Corporate
Strategy Formulation?
ADVANTAGES DISADVANTAGES

 Simplicity: Can be quickly prepared  Simplicity: Oversimplifies the


factors determining industry
 Big picture: Permits one page attractiveness and competitive
representation of the corporate advantage
portfolio & the strategic positioning
of each business  Ambiguous: The positioning of a
business depends critically upon
 Analytically versatile: Applicable how a market is defined
to businesses, products, countries,
distribution channels  Ignores synergy: The analysis
takes no account of any
 Can be augmented: A useful point interdependencies between
of departure for more sophisticated businesses
analysis

Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004), Ch. 6
© 2007 Prof. Dr. Bernd Venohr