Strategy Execution:
Structure
10
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Chapter Outline
T Organizational Structure
10-1
O 10-1a Vertical Growth
N 10-1b Horizontal Growth
10-2 Structural Forms
, 10-2a Functional Structure
10-2b Product Divisional Structure
10-2c Geographic Divisional Structure
J 10-2d Matrix Structure
O 10-2e Assessing Organizational Structure
10-3 Corporate Involvement in Business Unit Operations
S Corporate Restructuring
10-4
10-5 Summary
H Terms
Key
U Questions and Exercises
Review
Practice
A Quiz
Notes
Reading 10-1
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Chapter 10
T
he best conceived strategic plans often fail from a lack of planning
for their execution. Effective strategy implementation requires managers to consider many issues, including structural, cultural, and leadership concerns.1 These considerations should be made before a strategic
alternative is selected and then detailed after strategy formulation. This chapter
emphasizes the relationship between strategy and structure, especially within the
context of strategy execution. Leadership and cultural concerns are addressed
in Chapter 11.
Organizational
Structure
The formal means by
which work is coordinated in an organization.
Simple Structure
An organizational
form whereby each
employee often performs multiple tasks,
and the owner-manager is involved in all
aspects of the business.
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10-1 Organizational Structure
Organizational structure is the formal means by which work is coordinated in
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an organization. As the focus of this chapter, an organization’s structure dictates
reporting relationships and defines where and how the firm’s work will be done.
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It establishes a framework for identifying levels in the organization where decisions will be made. In many respects, the structure sets the stage for strategy
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execution. A given structure might be appropriate for one particular strategy,
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but not another.
The long-standing debate among scholars is whether a firm’s strategy should
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follow its structure or vice versa. Most practitioners, however, recognize that each
is influenced by the other. In the short term, strategic managers should evaluate
,
and consider the firm’s structure when crafting the strategy, recognizing that
modifying the structure is rarely easy or inexpensive. In addition, they should
be willing to modify the firm’s structure as required to fit with any necessary
strategic change. In the long term, because a firm’s strategy is a key driver of
its performance, the structure should be built around the strategy to ensure its
effectiveness.
Although some new businesses are launched on a large scale, many start
small with an owner-manager and a few employees. Neither an organizational
chart nor a formal assignment of responsibilities is necessary. Each employee
often performs multiple tasks and the owner-manager is involved in all aspects
of the business, a form of organization often called a simple structure. This
structure may remain intact for only a few months in a fast growing organization or for years in a small family business such as a rural convenience or hardware store.
In organizations with a simple structure, early survival depends on an increase
in demand for the company’s products or services. As the organization grows to
meet this demand, however, a more permanent division of labor tends to form.
The owner-manager, who once was nearly involved in all functions of the enterprise, begins to play more of a leadership role and therefore assigns additional
employees to more specialized functions. Growth of the firm reaches a certain
point, however, where top managers must evaluate the effectiveness of the evolving system of coordinating tasks and consider modifying it if necessary, so that
the structure evolves along with the strategy.
Because the simple structure is inappropriate when a firm grows beyond a
certain point, other alternatives must be considered. For such organizations,
the structure exists to provide control and coordination for the organization.
As such, the structure designates formal reporting relationships and defines the
number of levels in the hierarchy.2 (See Figure 10-1.) There are logical reasons
for organizing work along various lines. For example, work can be organized
along function so employees can work only in their areas of specialty, by product
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Strategy Execution: Structure
FIGURE
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S e c u r i t y B a n k O rga n iza tion Cha r t
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so decisions about products can be made in an integrated fashion, and along
geographical lines so decisions can be tailored to unique needs of various geographical regions. It is also reasonable to assume that individuals can and should
work across the structure when necessary. Nonetheless, there is no single best
structure, and the one selected for any organization will have its own set of benefits and challenges. Interestingly, many large, well-known companies change
structures frequently as their environments change.
The extent to which organizational activities are appropriately grouped
affects how well strategy is implemented. For instance, customers may be confused when they are contacted by multiple sales representatives for the same
company, each representing a different product line. In addition, it is difficult
to hold a product divisional manager fully responsible for product sales if this
person has little or no control over either the development or the production
of the product.
In addition, firms with multiple related businesses usually require greater
coordination of their business units’ activities than those operating in only
one business. However, as an organization becomes more complex, coordinating activities becomes more difficult, especially in organizations with related
businesses.
10-1a Vertical Growth
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Vertical Growth
An increase in the
length of the organization’s hierarchical chain
of command.
Span of Control
The number of employees reporting directly to
a given manager.
Tall Organization
The growth of the organization expands its structure, both vertically and horizontally. Vertical growth refers to an increase in the length of the organization’s
hierarchy (i.e., levels of management). The number of employees reporting to
each manager represents that manager’s span of control. A tall organization has
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An organization characterized by many
hierarchical levels and a
narrow span of control.
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Chapter 10
Flat Organization
An organization characterized by relatively few
hierarchical levels and a
wide span of control.
Centralization
An organizational
decision-making
approach whereby most
strategic and operating decisions are made
by managers at the
top of the organization
structure (at corporate
headquarters).
Decentralization
An organizational
decision-making
approach in which most
strategic and operating
decisions are made by
managers at the
business unit level.
many hierarchical levels and narrow spans of control; a flat organization has few
levels in its hierarchy and a wide span of control from top to bottom. In reality,
organizations fall somewhere in between the two extremes. Hence, organizations
are seen as being either relatively tall or relatively flat.
When a structure is marked by centralization, most strategic and operating decisions are made by managers at the top of the organization structure.
Centralized structures push decisions to managers at higher levels who are presumed to have greater experience and expertise. Although clear lines of responsibility and accountability exist, top managers may lack the hands-on experience
that managers have at middle and lower levels. Decision making occurs slowly
and the lower-level managers may be less committed to those decisions made at
higher levels.
Alternatively, when a structure is characterized by decentralization, most
strategic and operating decisions are made by managers at lower levels of the
organization structure. Decentralized firms seek to overcome the difficulties of
centralization by pushing each decision to the lowest level where it can be made
effectively. Decentralization can take advantage of the intellectual capital that
an organization develops across managerial ranks. Decisions are made more
rapidly by managers with direct knowledge about a situation. Decentralization
can cloud lines of accountability when poor decisions are made and can often
result in poor coordination across units in the organization. These potential
disadvantages notwithstanding, it is not difficult to see why many progressive organizations have moved toward greater decentralization in the last two
decades.
The extent to which decision making should be decentralized depends on
several factors, one of which is organizational size. In general, very large organizations tend to be more decentralized than very small ones, simply because
it is difficult for the CEO of a very large company to stay abreast of all of the
organization’s operations. In addition, firms with large numbers of unrelated
businesses tend to be relatively decentralized, whereby corporate-level management determines the overall corporation’s mission, goals, and strategy, and
lower-level managers make the actual operating decisions. Finally, organizations
in dynamic environments must be relatively decentralized so that decisions can
be made quickly, whereas organizations in relatively stable environments can be
managed more systematically and centrally because change is rather slow and
fairly predictable. In such cases, most decisions are routine, and procedures can
often be established in advance.
John Child has studied extensively the link between firm size and number
of management levels. According to Child, the average number of hierarchical levels for an organization with three thousand employees is seven levels.3
Consequently, one might consider such an organization with fewer than seven
hierarchical levels to be relatively flat, and one with more than seven to be
relatively tall. Because tall organizations have a narrow span of control, managers in such organizations exercise a relatively high degree of control over
their subordinates, and authority tends to be relatively centralized. Conversely,
authority is more decentralized in relatively flat structures because managers have broad spans of control and must therefore grant more flexibility to
their employees. Because decisions are more likely to be made at lower levels
in flat organizations, it is advisable for employees to have a more generalist
orientation.
From a strategic perspective, both organizational types possess certain advantages. Tall, centralized organizations foster more effective coordination and
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Strategy Execution: Structure
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communication of the business’s mission and goals to all employees. Planning
and its execution are relatively easy to accomplish because all employees are
centrally directed. As such, tall organizational structures may be best suited for
environments that are relatively stable and predictable, although experts have
begun to suggest that tall structures do not yield the same advantages today as
they once did.
Flat structures also have advantages. Administrative costs tend to be less than
those in taller organizations because fewer hierarchical levels require fewer managers and support personnel. Decentralized decision making also gives managers
at various levels more authority, which may increase their satisfaction and motivation.4 The greater freedom in decision making also encourages innovation.
Hence, flat structures are best suited to more dynamic environments, such as
those in which most Internet businesses operate. Quality tends to improve when
decision making is decentralized closest to the level at which the decisions will
be implemented.
Flatter organizations, with relatively few hierarchical levels and wide spans of
control, tend to work more effectively in dynamic environments, whereas taller
organizations may operate more effectively in stable, predictable environments.
Not all of a firm’s business units need to adopt the same structure. If some business units operate in relatively dynamic environments while others compete in
relatively stable environments, then structural differences may be necessary.
Other factors can also influence the appropriate structure for an organization.
Heavy involvement in outsourcing and offshoring is one such factor. Because
outsourcing reduces internal activities, it can flatten the structure and increase
decision-making speed.5 Outsourcing can stifle the bureaucracy, enabling firms
to concentrate on key strategic concerns such as shortening the cycle time for
new products or new models of existing ones.
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10-1b Horizontal Growth
Horizontal growth refers to an increase inS breadth of an organization’s structhe
ture. The owner-manager and a few employees may perform all of the functions
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in a new business. With growth, however, each function expands so that no one
individual can be involved in all of the company’s functions, and the structure
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of the organization is broadened to accommodate the development of more specialized functions. Owner-managers who are unable to let go of former realms of
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responsibility as their new duties increase are often referred to disparagingly as
micromanagers.
Increases in organizational size usually lead to additional organizational
layers and bureaucracy. Although large organizations are often presumed to
benefit from economies of scale and therefore be more efficient, a large firm
may actually become both less efficient and less capable of meeting the needs
and expectations of its customers over time. Top management often addresses
the burgeoning bureaucracy by instituting a more horizontal structure, which
has fewer hierarchies. The organizational restructuring so pervasive throughout the 1980s and 1990s has often involved forming a more horizontal structure
through downsizing, whereby one or more hierarchical levels—typically middle
managers—are eliminated. Additionally, employee layoffs often occur in order
to cut costs and eliminate some of the bureaucracy that invariably accompanies
multiple organizational layers. As layers are reduced, decision making becomes
decentralized.
Interestingly, downsizing often fails to achieve desired results, especially in
the long term. Studies suggest that approximately 50 percent of downsized
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Horizontal Growth
An increase in the
breadth of an
organization’s structure.
Horizontal Structure
An organizational
structure with fewer
hierarchies designed to
improve efficiency by
reducing layers in the
bureaucracy.
Downsizing
A means of organizational restructuring that
often eliminates one or
more hierarchical levels
from the organization
and pushes decision
making downward in the
organization.
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Chapter 10
firms actually lower costs, and many of these firms also suffer declines in productivity. When cuts are applied equally to all departments, both efficient and
inefficient ones lose employees without regard to performance level. When
buyouts are offered to relatively high-paid, longtime employees, the firm can
be faced with a drastic loss of critical experience. In addition, the positive
changes in the formal organization created by downsizing often lead to dysfunctional consequences in the informal organization. Survivors (i.e., employees who remain after the cuts) are typically less loyal to the organization and
wonder if they will be cut next. Hence, downsizing is a viable strategic alternative, but one whose long-term ramifications must be seriously considered
before it is adopted.6
Firms occasionally seek to downsize for the specific purpose of eliminating
part of the workforce so that it can be rebuilt in a different manner. Downsizing
may occur after an acquisition if there are substantial cultural differences
between the two firms and the acquiring firm wishes to reorient the new combined workforce.
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10-2 Structural Forms
This section describesN general alternative structures that may be adopted
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to meet the strategic needs of the organization. Some structures tend to fit with
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a certain firm level of competitive strategies, although this relationship is not
always clear.
1 0-2a Functional J
Structure
Functional Structure
A form of organizational
structure whereby each
subunit of the organization engages in firmwide activities related
to a particular function,
such as marketing,
human resources,
finance, or production.
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The initial growth of an enterprise often requires that it be organized along
functional areas. In the functional structure, each subunit of the organization
engages in firm-wide activities related to a particular function, such as marketing,
human resources, finance, or production. (Figure 10-2 illustrates one example
of a functional structure.) Managers are grouped according to their expertise
and the resources they use in their jobs. A functional structure has certain strategic advantages. Most notably, it can improve specialization and productivity by
grouping people who perform similar tasks. When functional specialists interact frequently, improvements and innovations for their functional areas evolve,
which may not have otherwise occurred without a mass of specialists organized
within the same unit. Working closely on a daily basis with others who share one’s
functional interests also tends to increase job satisfaction and lower turnover. In
addition, the functional structure can foster economies of scale by centralizing
functional activities.
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Strategy Execution: Structure
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Because of its ability to group specialists and foster economies of scale, this
form tends to address cost and quality concerns well. However, the functional
structure also has its disadvantages. Because the business is organized around
functions rather than around products or geographic regions, pinpointing the
responsibility for profits or losses can be difficult. For example, a decline in sales
could be directly linked to problems in any number of departments, such as marketing, production, or purchasing. Members of these departments may blame
other departments when firm performance declines.
In addition, a functional structure is prone to interdepartmental conflict by
fostering a narrow perspective of the organization among its members. Managers
in functional organizations tend to view the firm totally from the perspective of
their field of expertise. The marketing department might see a company problem as sales related, whereas the human resource department might view the
same challenge as a training and development concern. In addition, communication and coordination across functional areas are often difficult because each
function tends to have its own perspective and vernacular. R&D, for example,
tends to focus on long-term issues, whereas the production department generally emphasizes the short run. Grouping individuals along function minimizes
communication across functions and can foster these types of communication
problems.
In sum, the functional structure can serve as a relatively effective and efficient means of controlling and coordinating activities. For this reason, it may
be appropriate for defenders and low-cost businesses that emphasize efficiency
in established markets. The current emphasis, however, is on customer service and speed, challenges that the functional structure may not be as well
equipped to address. Depending on the specific issues facing an organization, a
division along product or geographical lines may be more appropriate to other
businesses.
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10-2b Product Divisional Structure
The product divisional structure dividesH organization’s activities into selfthe
contained entities, each responsible for producing, distributing, and selling its
own products or services. This structure Uoften adopted when a business has
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several distinct product lines. For example, a software developer may organize
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along three product lines: business, productivity, and educational applications.
Each division would have its own functional areas, such as R&D, marketing, and
finance. For this reason, the product divisional structure may be most appropriate for diversified firms. This structure is used both in manufacturing and
service organizations.
The product divisional structure has certain advantages. Rather than emphasizing functions, the structure emphasizes product lines, resulting in a clear focus
on each product category and a greater orientation toward customer service.
Pinpointing the responsibility for profits or losses is also easier because each
product division becomes a profit center, which is a well-defined organizational
unit headed by a manager who is accountable for its revenues and expenditures.
The product divisional structure is also ideal for training and developing managers because each product manager is, in effect, running his or her own business.
Hence, product managers develop general management skills—an end that can
be accomplished in a functional structure only by rotating managers from one
functional area to another.7
The product divisional structure also has its disadvantages. Because product divisional firms generally have multiple departments performing the same
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Product Divisional
Structure
A form of organizational
structure whereby the
organization’s activities are divided into
self-contained entities,
each responsible for
producing, distributing, and selling its own
products.
Profit Center
A well-defined organizational unit headed by
a manager accountable
for its revenues and
expenditures.
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Chapter 10
function, the total personnel expense for manufacturing is likely to be higher
than if only one department were necessary. The coordination of activities at
headquarters also becomes more difficult, as top management finds it harder to
ensure consistency among the various departments. This problem can become
substantial in large organizations with forty or more product divisions. Finally,
because product managers emphasize their own product area, they tend to
compete for resources instead of working together in the best interest of the
company.
10-2c Geographic Divisional Structure
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Geographic
Divisional Structure
A form of organizational
structure in which
jobs and activities are
grouped on the basis of
geographic location .
When a firm’s operations are dispersed through various locations, top executives often employ a geographic divisional structure, whereby activities and
personnel are grouped by specific geographic locations (see Figure 10-3).
This structure may be used on a local basis (i.e., a city may be divided into
sales regions), on a national basis (i.e., southern region, mid-Atlantic region,
Midwest region), or even on an international basis (i.e., North American
region, Asian Region, Western European region). The primary impetus for
the geographic divisional structure is the existence of two or more distinct
markets that can be segmented easily along geographical lines. For this reason,
differentiated businesses or those unable to standardize product or service
lines because of geographical market differences may implement a geographic
divisional structure.
There are two key advantages to organizing geographically. First, products and
services may be tailored more effectively to the legal, social, technical, or climatic
differences of specific regions. For example, relatively small 220-volt appliances
may be appropriate for parts of Asia where living quarters tend to be limited
and the American 110-volt system is not used. In addition, insurance companies
are often organized along state and national boundaries because of legal differences. Second, producing or distributing products in different locations may
give the organization a competitive advantage. Many firms, for example, produce
components in countries that have a labor cost advantage and assemble them in
countries with an adequate supply of skilled labor.
The disadvantages of a geographic divisional structure are similar to those of
the product divisional structure. Often, more functional personnel ar…
