CHAPTER 11 restructuring alignments in GE

ORGANIZATIONAL STRUCTURE AND CONTROLS Capital, GE’s financial service

group
Strategy may be implemented via:
Organizational structure
• Structure
• Specifies the firm’s formal
• Reward mechanisms
reporting relationships,
• Organizational culture procedures, controls, and
authority and decision-making
• Leadership processes
This chapter focuses on structure. • Specifies the work to be done
IMPORTANT: The match or degree of fit and how to do it, given the
between strategy and structure influences the firm’s strategy or strategies
firm’s ability to earn above-average return. • Is the pivotal component of
● Organizational structure and controls provide effective strategy
the framework within which strategies implementation
(business, corporate, international and It is critical to match organizational structure to
cooperative) are used the firm’s strategy
● No one structure is the best for all Strategy pioneer Alfred Chandler found
organizations organizations change their structures when
● The choice of structure and controls should inefficiencies force them to.
support the strategic goals of the firm • A firm’s strategy is supported
● Structure will change as the strategy of the when its structure is properly
organization changes aligned to its strategy

● Effective strategic leadership means selecting • Two considerations regarding

the appropriate structure. alignment

ORGANIZATIONAL STRUCTURE AND CONTROLS 1. Structural stability:

capacity firm requires
Structure and Firm Performance to consistently and
• Research suggests that predictably manage its
performance declines when the daily work routines
firm’s strategy is not matched 2. Structural flexibility:
with the most appropriate opportunity to explore
structure and controls competitive advantages
• Example: CEO Jeffrey Immelt firm will need to be
recognized the need to match successful in the future
strategy and structure during
the recent economic downturn,
as evidenced by the
ORGANIZATIONAL CONTROLS

Controls guide the use of strategy, indicate how FINANCIAL CONTROLS

to compare actual results with expected results,
Largely OBJECTIVE criteria used to measure
and suggest corrective actions to take when the
firm’s performance against previously
difference is unacceptable.
established quantitative standards
Two types:
 Focus on short-term financial outcomes
1. Strategic Controls  Include accounting-based measures
2. Financial Controls ROI (return on
investment)
STRATEGIC CONTROLS
• ROA (return on
Largely SUBJECTIVE criteria intended to verify
assets)
that the firm is using appropriate strategies for
the conditions in the external environment and • Include market-
the company’s competitive advantages. based
measures
• Are concerned with examining
the fit between: • EVA (economic
value added)
• What the firm might do
(opportunities in its • Produce risk-averse
external environment) managerial decisions
• What the firm can do • Are essential when a
(competitive firm pursues a strategy
advantages) with unrelated
diversification
• Evaluate the degree to which
the firm focuses on the ORGANIZATIONAL STRUCTURE AND CONTROLS
requirements to implement
strategy

• Business-level: primary STRATEGIC CONTROLS

and support activities • Business - differentiation
• Corporate-level strategy emphasizes strategic
(related): sharing of controls (such as subjective
knowledge, markets, measures of the effectiveness
and technologies of product development teams)
across businesses • Corporate - related
• Focus on the content of diversification strategy where
strategic actions sharing among business units is
critical; emphasizes strategic
controls
FINANCIAL CONTROLS ■ Three key structural forms used to implement
strategies:
• Business - cost leadership
strategy emphasizes financial • Simple structure
controls (such as quantitative
• Functional structure
cost goals)
• Multidivisional structure (M-
• Corporate - unrelated
form)
diversification strategies where
capabilities are not shared; STRATEGY AND STRUCTURE: SIMPLE
emphasizes financial controls STRUCTURE
RELATIONSHIPS BETWEEN STRATEGY AND ● Owner-manager makes all major decisions
STRUCTURE and monitors all activities
● RECIPROCAL RELATIONSHIP - change in one ● Staff acts as extension of manager's
typically causes a change in the other, supervisory authority
underscoring the interconnectedness between
strategy formulation and strategy ● Matched focus strategies and business-level
implementation strategies: these firms offer single product lines
in single geographic markets
STRATEGY  STRUCTURE
● Few rules, limited task specialization, basic
● Strategy typically has a much more technology system
important influence on structure than
structure on strategy ● With size comes complexity and managerial
and structural challenges; firms tend to move
from a simple to a functional structure
EVOLUTIONARY PATTERNS OF STRATEGY AND
ORGANIZATIONAL STRUCTURE
STRATEGY AND STRUCTURE: FUNCTIONAL
Chandler found that firms tend to grow in STRUCTURE
predictable patterns:
● CEO and a limited corporate staff make all
● first by volume decisions.
● then by geography ● Functional line managers are in dominant
organizational areas
● then by integration (vertical,
horizontal)  Production Marketing
● finally through product/business Engineering R&D
diversification
 Accounting Human
Growth pattern determines structure! resources
■ Firms typically alter their structure as they ● WITHIN – functional specialization results in
grow in size and complexity active knowledge sharing within each
area
● BETWEEN – impedes communication and ● Facilitates comparisons between divisions,
coordination among different functional areas which improves the resource allocation process

● Facilitates career paths and professional ● Stimulates managers of poorly performing

development in specialized functional areas divisions to look for ways of improving
performance
● Causes functional-area managers to focus on
local versus overall company strategic issues STRATEGY AND STRUCTURE: THE RIGHT
STRUCTURE
● Supports implementing business-level
strategies and some corporate-level strategies IT DEPENDS
(e.g., single or dominant business) with low
● No one organizational structure (simple,
levels of diversification
functional, or multidivisional) is inherently
● When changing from a simple to a functional superior to the others
structure, need to focus on and avoid value-
● The firm must select a structure that is “right”
destroying bureaucratic procedures
for the chosen strategy

● Managers develop proper matches between

STRATEGY AND STRUCTURE: MULTIDIVISIONAL strategies and organizational structures rather
(M-FORM) STRUCTURE than searching for an “optimal” structure

● Operating divisions each represent a separate MATCHES BETWEEN BUSINESS-LEVEL

business or profit center STRATEGIES AND THE FUNCTIONAL
STRUCTURE
● Top corporate officer delegates
responsibilities for day-to-day operations and Firms use different forms of the functional
business-unit strategies to division managers organizational structure to support their
strategy
● Ties together all operating divisions
• Business-level strategies are:
● Each division represents a separate business
or profit center with its own functional 1. Cost leadership (broad or
hierarchy focused)

● Each division is responsible for daily 2. Differentiation (broad or

operations focused)

● Business-unit strategy is delegated to the 3. Integrated cost

division leadership/differentiation

Appropriate structure as firms DIVERSIFY • Structural choices are:

Three Major Benefits 1. Simple

● Simplifies the problem of control through 2. Functional

more accurate monitoring of the performance
3. Multidivisional
of each business
The choice of structure is influenced by 3. Formalization: reporting roles
structural characteristics needed to compete: are clearly defined; simple
lines of communication
1. Specialization: the type and
number of jobs required to Cost leadership and the functional structure
complete the work of the firm results:

2. Centralization: the degree to • Operations is the main function

which decision-making
• Process engineering is
authority is retained at higher
emphasized rather than new
managerial levels
product R&D
3. Formalization: the degree to
• Few decision-making and
which formal rules and
authority layers
procedures govern work
• Centralized corporate staff

• Highly formalized rules and

procedures Low-cost culture

• Centralized staff decision-

making authority

• Job specialization

• Simple reporting relationships

• Overall structure is mechanistic;

structured job roles

FIGURE 11.2 Cost Leadership and Five Forces of Competition

Functional Structure for Implementing a Cost • Low-cost position is a valuable

Leadership Strategy defense against rivals

• Powerful customers can

demand reduced prices
USING THE FUNCTIONAL STRUCTURE TO
IMPLEMENT THE COST LEADERSHIP STRATEGY • Cost leaders are in a position to
absorb supplier price increases
The choice of structure is influenced by
and relationship demands, and
structural characteristics:
to force suppliers to hold down
1. Specialization: departments their prices
are designed around areas of
• Continuously improving levels
expertise—engineering to
of efficiency and cost reduction
accounting
can be difficult to replicate and
2. Centralization: highly serve as significant entry
centralized; staff are all barriers to potential
together competitors
 • Cost leaders hold an attractive 3. Formalization: reporting roles
position in terms of product are clearly defined; simple lines
substitutes, with the flexibility of communication
to lower prices to retain
Differentiation and the functional
customers
structure results:
Cost Leadership Strategy Risks
• Marketing is the main function;
• Processes can become obsolete new product ideas

• Focus on cost reductions can • New product R&D is

come at the expense of emphasized
understanding customer
• Most functions are
perceptions and needs
decentralized, but R&D and
• Strategy could be imitated, marketing may have centralized
requiring the firm to increase staffs
the value offered to retain
• Cross-functional product
customers
development teams

• Complex and flexible reporting

relationships

• Development-oriented culture

• Decentralized decision making

• Broad job descriptions

• Informal rules and procedures

FIGURE 11.3 • Overall structure is organic; less

structured job roles
Functional Structure for Implementing a Differentiation
Strategy Differentiation strategy should deliver:
The choice of structure is influenced by • An integrated set of actions
structural characteristics designed by a firm to produce
1. Specialization: departments are or deliver goods or services at
designed around areas of an acceptable cost that
expertise—engineering to customers perceive as being
accounting different in ways that are
important to them
2. Centralization: the key
departments are coordinated • Target customers – perceived
through a highly centralized product value
office that reflects a focus on • Customized products –
product design and marketing; differentiating as many features
otherwise DECENTRALIZED as possible
 • Unusual features include USING THE FUNCTIONAL STRUCTURE TO
responsive customer service, IMPLEMENT THE INTEGRATED COST
rapid product innovations, LEADERSHIP/ DIFFERENTIATION STRATEGY
technological leadership,
• These firms create value through both
perceived prestige and status,
low cost and uniqueness:
different tastes, engineering
design, performance • Relatively low product cost
through an emphasis on
Differentiation and Five Forces of Competition
production and process
• Customer loyalty: the most engineering, with infrequent
valuable defense against rivals product changes

• Unique products reduce • Reasonable sources of

customer sensitivity to raised differentiation based on new-
prices product R&D

• High margins (for differentiated • Difficult to implement, but

products) insulate firm from frequently used in the global
supplier influence economy

• Significant entry barriers: • Challenges due to primary/support

customer loyalty and product activities
uniqueness
• Need to successfully combine
• Firms with customers loyal to specialization, formalization, and
their products are positioned centralization
effectively against product
• Decision-making patterns that are
substitutes
partially centralized and partially
Differentiation Strategy Risks decentralized

• Price differential for • Semi-specialized jobs

differentiated product may be
• Rules and procedures that allow both
perceived as too large
formal and informal job behaviors
• Firms’ means of differentiation
MATCHES BETWEEN CORPORATE-LEVEL
may cease to provide value for
STRATEGIES AND THE MULTIDIVISIONAL
which customers are willing to
STRUCTURE
pay a premium price (successful
rival imitation) A firm’s continuing success that leads to:
• Experience can narrow Ÿ Product diversification, or
customers' perceptions of the
value of a product's Ÿ Market diversification, or
differentiated features Ÿ Both product and market
• Counterfeit goods may appear diversification
in the marketplace
Increasing diversification creates problems ● Economies of scope (cost savings resulting
beyond the scope of the functional structure: from the sharing of competencies developed in
one division with another division) are
Ÿ Information processing
important for the related constrained strategy
Ÿ Coordination
● Interdivisional sharing of competencies
Ÿ Control depends on cooperation- links result from
effective integration mechanisms
• Diversification strategy requires firm to
change from a functional structure to a ● Sharing of both tangible and intangible
multidivisional structure resources

• Different levels of diversification create the ● The cooperative structure uses different
need for implementation of a unique form characteristics of structure (centralization,
of the multidivisional structure standardization, and formalization) as
integrating mechanisms to facilitate
• Matrix organization may evolve- interdivisional cooperation
organizational structure in which a dual
structure combines both functional
specialization and business product or
project specialization.

FIGURE 11.4 FIGURE 11.5

Three Variations of the Multidivisional Structure Cooperative Form of the Multidivisional Structure for
Implementing a Related Constrained Strategy
COOPERATIVE FORM OF THE
MULTIDIVISIONAL STRUCTURE FOR SBU FORM OF THE MULTIDIVISIONAL
IMPLEMENTING A RELATED CONSTRAINED STRUCTURE FOR IMPLEMENTING A RELATED
STRATEGY LINKED STRATEGY

● Structural integration devices create tight

links among all divisions

● Corporate office dictates centralized decision-

making

● Rewards are subjective and tend to

emphasize overall corporate performance in
addition to divisional performance

● Culture emphasizes cooperative sharing

● Firms that share fewer resources and assets ▪ Cost savings realized through improved
among their businesses, concentrating on the allocations of financial resources based on
transfer of knowledge and competencies among the investments inside or outside firm
businesses (related linked strategy)
▪ Efficient internal capital market allocation:
● Organization structure with three levels to support restructuring of acquired assets
the implementation diversification strategy:
● The efficient internal capital market is the key for
1. Corporate headquarters this strategy, and requires divisional competition
rather than cooperation.
2. Strategic business units (SBUs)
● Specific performance expectations and
3. Divisions under each SBU
accountability for independent divisions stimulate
● SBU divisions related in terms of shared internal competition for future resources
products/markets
● Divisions are independent and separate for
● Divisions of one SBU have little in common with financial evaluation purposes; and retain strategic
divisions of other SBUs control

● Divisions within each SBU share product or market Three benefits from the internal competition:
competencies to develop economies of scope
1. Creates flexibility and resources can then
● Integrations used in cooperative form are equally be allocated to the division with the greatest
effective for the SBU form potential

● Each SBU is a profit center; has its own budget for 2. Challenges the status quo and inertia
staff to foster integration
3. Motivates competition internally
● Financial controls are more vital for evaluating to be as intense as the challenge of external
performance competition

COMPETITIVE FORM OF THE MULTIDIVISIONAL ●Corporate headquarters has a small staff

STRUCTURE FOR IMPLEMENTING AN UNRELATED
● Finance and auditing are the most prominent
STRATEGY
functions in the headquarters office to manage cash
flow and assure the accuracy of performance data
coming from divisions

● The legal affairs function is important for

acquisitions/divestitures

● Financial economies are pivotal for the unrelated

strategy

>Creates value through two types of financial

economies
KEY POINTS FROM TABLE 11.1 : WORLDWIDE GEOGRAPHIC AREA STRUCTURE FOR
IMPLEMENTING A MULTIDOMESTIC STRATEGY
● The three major forms of the multidivisional
structure should each be paired with a particular
corporate-level strategy

● Differences exist in the degree of centralization,

the focus of the performance evaluation, the
horizontal structures (integrating mechanisms), and
the incentive compensation schemes

● Cooperative structure - the most centralized and

most costly structural form

● Competitive structure - the least centralized, with

the lowest bureaucratic costs

● The SBU structure requires partial centralization,

some of the mechanisms necessary to implement
the relatedness between divisions, and the divisional
Multidomestic Strategy: International strategy in
incentive compensation awards allocated according
which strategic and operating decisions are
to both SBUs and corporate performance
decentralized to each country to allow the units to
tailor products to local markets

MATCHES BETWEEN INTERNATIONAL STRATEGIES Worldwide Geographic Area Structure:

AND WORLDWIDE STRUCTURE Organizational structure emphasizing national
interests; facilitates efforts to satisfy local or cultural
International strategies allow the firm to search for
differences
new:
 Focuses on variations of competition within
• Markets
each country
• Resources  Emphasis is on differentiation by local
demand to fit an area or country culture
• Core competencies  Deals with uncertainty due to market
• Technologies differences
 Corporate headquarters coordinates
Three primary international strategies: financial resources among independent
subsidiaries
• Multidomestic
WORLDWIDE PRODUCT DIVISIONAL STRUCTURE
• Global
FOR IMPLEMENTING A GLOBAL STRATEGY
• Transnational
Global Strategy: International strategy with • Coordination mechanisms may
standardized products across country markets, and leverage efficiency/flexibility
the competitive strategy dictated by the home office
• Mandates to subsidiaries may be
Worldwide Product Divisional Structure: global/ specialized-
Organizational structure with centralized decision- contribution/localized-implementation
making authority to coordinate/integrate decisions
• There are competing objectives when a
among divisional units
worldwide combination structure is
• Emphasizes economies of scale and scope used to implement a transnational
strategy
• Corporate headquarters allocates financial
resources in a cooperative way MATCHES BETWEEN COOPERATIVE STRATEGIES
AND NETWORK STRUCTURES
• Facilitated by improved global accounting
and financial reporting standards • Greater levels of environmental complexity and
uncertainty in today’s competitive environment
• Produces lower risk
are causing more firms to use cooperative
• Less effective learning processes due to the strategies such as strategic alliances and joint
pressures to conform and standardize ventures

HYBRID FORM OF THE COMBINATION STRUCTURE • Strategic network: group of firms that form
FOR IMPLEMENTING A TRANSNATIONAL STRATEGY around a core to create value by participating in
multiple cooperative arrangements

• Used to implement business-level, corporate-

level, and international cooperative strategies

Strategic Center Firm has four primary tasks:

1. Strategic outsourcing

2. Competencies
Transnational strategy: international strategy
through which the firm seeks to achieve both global 3. Technology
efficiency and local responsiveness; usually
implemented through global matrix structure and 4. Race to learn
hybrid global design EXAMPLE OF A STRATEGIC NETWORK
Flexible coordination: building a shared vision and
individual commitment through an integrated
network

Combination structure: organizational structure in

which characteristics and mechanisms are drawn
from both the worldwide geographic area structure
and the worldwide product divisional structure (used
to implement transnational strategy)

• Assets and operations may be

centralized/decentralized

• Functions may be integrated/nonintegrated

• Relationships may be formal/informal

IMPLEMENTING BUSINESS-LEVEL COOPERATIVE A DISTRIBUTED STRATEGIC NETWORK
STRATEGIES

Business-level complementary alliances

• Vertical: partnering firms share their resources

and capabilities from different stages of the
value chain to create a competitive advantage

• Horizontal: partnering firms share resources and

capabilities from the same stage of the value
chain to create a competitive advantage;
commonly used for long-term product
development and distribution opportunities

IMPLEMENTING CORPORATE-LEVEL COOPERATIVE

STRATEGIES

Used to facilitate product and market

diversification

• EXAMPLE - Franchising: contractual

relationship to describe and control the
sharing of its resources and capabilities
with partners

• Allows firms to use its competencies to

extend or diversify product or market reach,
without completing a merger or acquisition

• Knowledge embedded in corporate-level

cooperative strategies facilitates synergy

IMPLEMENTING INTERNATIONAL COOPERATIVE

STRATEGIES

• Strategic networks formed to implement

cooperative strategies resulting in firms
competing in several different countries

• Distributed strategic networks:

organizational structure used to manage
international cooperative strategies

• Several regional strategic center firms are

included in the distributed network to
manage partner firms’ multiple cooperative
arrangements