Module :V Chapter:9

Organizing-ii) Strategy

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Learning Objectives: 1.Define strategy. 2.Compare business-level with Corporatelevel strategy. 3. Describe Chandlers Structure follows strategy thesis. 4. List and define Miles and Snows four strategic types.
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5. Explain the structural implications from porters competitive strategies. 6. Describe Millers integrative strategystructure framework. 7. Explain the industry-structure relationship.

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1. What is strategy?
Goals and Strategy are interrelated but not the same. Goals refers to ends. Strategy refers to both means and ends. As such goals are part of an organization strategy.
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Strategy can be defined as the determination of the basic long- term goals and objectives, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. Decisions to expand the volume of activities, to set up distant plants and offices, to move in to economic functions, or to become diversified along many lines of business involve the defining of new basic goals.
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New courses of action must be devised and resources allocated and reallocated in order to achieve these goals and to maintain and expand firms activities in the new areas in response to shifting demands, changing sources of supply, fluctuating economic conditions, new technological developments, and the actions of competitors.
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There are two views on strategy One view can be called a planning mode. This view describes strategy as a plan or explicit guidelines developed in advance. Managers identify where they want to go, then they develop a systematic and structured plan to get there. Second view which is current perspective is what we can call an evolutionary mode.
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Strategy is not necessarily a well-thought out and systematic plan. Rather it develops over time as a pattern in a stream of significant decisions. The broader evolutionary perspective of strategy has been gaining acceptance in recent years owing to its advantage of being able to cope with both static and dynamic strategies.
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2.Types of Strategy: 1.Corporate-level strategy: If an Organization is in more than one line of business, it will need a corporate level strategy. This strategy seeks to answer the question, In what set of businesses should we be? Corporate-level strategy determines the roles that each business in the organization will play.
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2.Business-level strategy: seeks to answer question- how should we compete in each of our business? To the degree that strategy actually determines structure, strategy level is an important point to keep in mind.

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3. Classifying Strategic Dimensions: The followings are four dimensions of strategy that influence the organization structure. 1. Innovation strategy: To what extent does an organization introduce major new products or services. Appropriate strategy for Apple Computer but not for Readers Digest.
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2. Marketing differentiation strategy : strives to create customer loyalty by uniquely meeting a particular need. Appropriate strategy for premium beer producers and designer-label apparel manufacturers.

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3. Breadth strategy: refers to the scope of the market to which the business caters: the variety of customers, their geographic range, and the number of products. Appropriate strategy for grocery chains. 4. Cost control strategy: considers the extent to which the organization tightly controls costs, refrains from incurring unnecessary innovation or marketing expenses, and cuts prices in selling a basic product. Appropriate strategy by generic grocery products.
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4. Chandlers Strategy-structure theory: This is also known as classic theory on organization strategy and structure. All the current work on the strategy-structure relationship has been influenced by Chandlers research. Chandler studied close to one hundred of Americas largest firms tracing the development from 1909 to 1959 which included companies such as Du pont, General Motors, Standard Oil of New jersey and Seas.
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According to Chandler a new strategy required a new or at least refashioned structure if enlarged enterprise is to be operated efficiently. Unless structure follows strategy, inefficiency results Chandler concluded that changes in corporate strategy preceded and led to changes in the organization structure.
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Chandler concluded that the efficient structure for an organization with a single product strategy is one that is simple- high centralization, low formalization, and low complexity. As organization grows, it moves towards vertical integration strategy which requires increased interdependence among organizational units and creates need for a more complex device.

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Finally, if growth proceeds further into product diversification, a structure must be adjusted by following a product diversification strategy. A product- diversification strategy demands a structural form that allows for efficient allocation of resources, accountability of performance, and coordination between units. This can best be achieved through the creation of a multiple set of independent divisions, each responsible for a specified product line.
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Limitations of Chandlers Theory: The theory of Chandler that structure follows strategy has some validity but some distinct restrictions as summarized below: 1. Chandlers theory looked only at very large and powerful industrial business firms. How far his study is helpful to small and medium sized organizations, service companies or those in public sector could not be answered.
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2.Growth was major concern of Chandlers theory and not profitability. 3. Several studies were conducted to confirm conclusions of Chandlers theory for single business, dominant business, related business and unrelated business. 4. Strategy may also be concerned with market segmentation, financial strengths and leverage opportunities, actions of competitors, assessment of organizations comparative advantage vis--vis its competition and the like.
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5.Contemporary Strategic-structure Theory: There are three contributions on Contemporary Strategic-Structure by different theorists.: 1.Miles and Snows Four Strategic Types: The Organizations are classified based on the rate at which they change their products or markets in to one of the four strategic types: defenders, prospectors, analyzers and reactors.

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Defenders seek stability by producing only a limited set of products directed at narrow segment of the total potential market. Within this limited niche, or domain, defenders strives aggressively to prevent competitors from entering their turf. Their organization structure is made up of high horizontal differentiation, centralized control and an elaborate formal hierarchy of communications.
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Prospectors are almost the opposite of defenders. Their strength is finding and exploiting new-product and market opportunities. Innovation may be more important than high profitability. Their organization structure will be low in formalization, have decentralized control, with lateral as well as vertical communications.
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Analyzers try to capitalize on the best of both the preceding types. They seek to minimize risk and maximize opportunity for profit. Their strategy is to move into new products or new markets only after viability has been proved by the prospectors. Analyzers seek both flexibility and stability. They respond to structure made up of dual components.
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Part of these organizations have high levels of standardization, routinization and mechanization for efficiency. Other parts are adaptive to enhance flexibility. In this way they seek structures that can accommodate both stable and dynamic areas of operations.

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Reactors represent a residual strategy. The label is meant to describe the inconsistent and unstable patterns that arise when one of the other three strategies is pursued improperly. Management is responsible for such happening. The key element in Miles and Snows strategystructure theory is managements assessment of environmental uncertainty.

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2. Porters Competitive Strategies: Michael Porter of the Harvard Graduate School of Business argues that no firm can successfully perform at aboveaverage level trying to be all things to all people. He proposes that management must select a strategy that will give its organization a competitive advantage.
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Management can choose from among three strategies cost leadership, differentiation and focus. Which one management chooses depends on organizations strengths and Competitors weaknesses. Cost leadership strategy is followed by an organization which sets out to be low- cost procedure in its industry.
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The success of this strategy requires that organization be the cost leader and not merely one of the contenders for that position. Further, the product or service being offered by the organization must be perceived as comparable to that offered by rivals, or at least acceptable to rivals. The cost advantage can be gained by a firm by means such as efficiency of operations,
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economies of scale, technological innovation, lower cost of labor or preferential access to raw materials. The differential strategy is followed by a firm that seeks to be unique in its industry in ways that are widely valued by buyers.

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It might emphasize high-quality, extraordinary service, innovative design, technological capability or an unusual positive brand image. The key is that attribute chosen must be different from those offered by rivals and significant enough to justify price premium that exceeds cost of differentiation.
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There is no shortage of firms that have found at least one attribute that allows them to differentiate themselves from competitors: City Research (Super Computer technology), Toyota (reliability), IBM( superiorly trained personnel), Haagen Dazs( quality ingredients in ice cream) or Ferrari (performance).

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The first two strategies sought a competitive advantage in a broad range of industry segments. The focus strategy aims at a cost advantage or differential advantage in a narrow segment. Management will select segment or group of segments in an industry such as product variety, type of end buyer, distribution channel or geographical location of buyers and tailor the strategy to serve them to the execution of others.
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The goal is to exploit a narrow segment of a market. Of course, whether a focus strategy is feasible or not depends on size of segment and whether it can support additional cost of focusing. Colleges that appeal to working students by offering only night classes hope to gain competitive advantage over their rivals by following a differentiation-focus strategy.
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Porter uses the term stuck in the middle to describe organizations unable to take advantage by one of the previous strategies. Such organizations will find it very difficult to achieve long term success. Structural implications are relevant only for Cost leadership and differentiation strategies.
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The goal of cost leadership is to achieve efficiencies through tight controls, minimization of overhead, the economies of scale. The best structure for achieving this end would be high in complexity, high in formalization, and centralized. The differential strategy relies essentially on the development of unique products. This demands a high degree of flexibility which can best be achieved through low complexity, low formalization and decentralized decision making.
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Millers Integrative Framework: Danny Miller and McGill University developed the four strategy dimensions of innovation, marketing differentiation, breadth, and cost-control in the integrated manner in the tabular form which summarizes Millers framework and predicted structural characteristics.
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Strategic Dimension Innovation

Challenge

Predicted Structural Characteristics Low formalization and decentralization and extensive use of committees and 37 task forces.

To understand and manage more products, Consumer types, technologies and markets
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Market differentiation

To understand and cater to consumer preferences

Moderate to high complexity and formalization, Moderate decentralization

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Breadth Innovation

Breadth Stability

To select the right range of products, services, customers and territory -As above-

High complexity, low formalization and decentralization High complexity, formalization and centralization

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Cost Control

To produce standardized products efficiently

High formalization and centralization

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These four categories do an excellent job of tapping the concepts of other theories. There is however one limitation. Miller has no compelling explanation for predictions made for the breadth-stability dimension.

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6.Limitations to the Strategy Imperative: No one argues that strategy cannot determine structure. That possibility does exist. Attacks on strategy imperative lie basically in questioning the degree of discretionary latitude that managers actually have. Another challenge to strategy imperative deals with the lag factor.
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7. Could strategy follow structure? There is divergent view on this. A structure can influence strategy. Structure can motivate or impede strategic activity as well as simply constrain strategic choices. Study of large manufacturing firms and fortunes 500 companies supported the view that structure determines strategy.
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8. The industry-structure relationship: There are distinct characteristics of industries that affect strategies they choose. Industries differ in terms of growth possibilities, regulatory constraints, barriers to entry and mobility and numerous other factors.
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Simply knowing the industry in which an organization operates allows one to know something about product life cycles, required capital investments, long term prospects, types of production technologies, regulatory requirements and so forth. The industry categories do influence structure.
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Any Questions? Thank you

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