Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

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Part 3: Strategic Actions: Strategy Implementation

businesses in a cooperative way such that all of the services are bundled and sold together

to large IT centers. It will probably develop different structural approaches to manage

its consumer businesses. It remains to be seen whether Cisco can make these changes

effectively. Cisco does have one thing going for it—its strong culture focused on customer

satisfaction. As stated earlier, customer focus is even embedded in its engineering divisions.

But it will need more than a strategy—it will need a ﬁ nely tuned organization to make

it all work. Only time will tell whether Cisco is successful with this new strategy and the

necessary structural adaptation.

Sources: R. Gulati & P. Puranam, 2009, Renewal through reorganization: The value of inconsistencies between

formal and informal organization, Organizational Science, 20(2): 422–440; S. Lohr, 2009, In Sun, Oracle sees a

software gem, The New York Times, http://www.nytimes.com, April 20; S. H. Wildstrom, 2009, Meet Cisco, the

consumer company, BusinessWeek, May 4, 73; B. Worthen & J. Scheck, 2009, As growth slows, ex-allies square

off in a turf war, Wall Street Journal, March 16, A1; J. Duffy, 2008, Cisco accelerates shift to software, data

center, Network World, January 7, 12; J. Duffy, 2008, Cisco plans data center product overhaul, Network World,

December 15, 1–2; B. Novak, 2008, Cisco connects the dots; aligning leaders with new organizational structure,

Global Business and Organizational Excellence, 27(5): 22–32.

As we explain in Chapter 4, all firms use one or more business-level strategies. In

Chapters 6–9, we discuss other strategies firms may choose to use (corporate-level, inter-

national, and cooperative). Once selected, strategies are not implemented in a vacuum.

Organizational structure and controls, this chapter’s topic, provide the framework within

which strategies are used in both for-profit organizations and not-for-profit agencies.

However, as we explain, separate structures and controls are required to successfully

implement different strategies. In all organizations, top-level managers have the final

responsibility for ensuring that the firm has matched each of its strategies with the

appropriate organizational structure and that both change when necessary. Thus, John

Chambers, the CEO of Cisco, is responsible for changing its organizational structure

if the firm decides to use a different business or corporate-level strategy. The match or

degree of fit between strategy and structure influences the firm’s attempts to earn above-

average returns.

Thus, the ability to select an appropriate strategy and match it with the

appropriate structure is an important characteristic of effective strategic leadership.

This chapter opens with an introduction to organizational structure and controls. We

then provide more details about the need for the firm’s strategy and structure to be prop-

erly matched. Affecting firms’ efforts to match strategy and structure is their influence on

each other.

As we discuss, strategy has a more important influence on structure, although

once in place, structure influences strategy.

Next, we describe the relationship between

growth and structural change successful firms experience. We then discuss the different

organizational structures firms use to implement the separate business-level, corporate-

level, international, and cooperative strategies. A series of figures highlights the different

structures firms match with strategies. Across time and based on their experiences, orga-

nizations, especially large and complex ones, customize these general structures to meet

their unique needs.

Typically, the firm tries to form a structure that is complex enough

to facilitate use of its strategies but simple enough for all parties to understand and imple-

ment.

When strategies become more diversified as with Cisco’s in the Opening Case,

a firm must adjust its structure to deal with the increased complexity.

Organizational Structure and Controls

Research shows that organizational structure and the controls that are a part of the

structure affect firm performance.

In particular, evidence suggests that performance

declines when the firm’s strategy is not matched with the most appropriate structure and

controls.

Even though mismatches between strategy and structure do occur, research

indicates that managers try to act rationally when forming or changing their firm’s

structure.

His record of success at General Electric (GE) suggests that CEO Jeffrey

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Chapter 11: Organizational Structure and Controls

Immelt pays close attention to the need to make certain that strategy and structure

remain matched, as evidenced by restructuring alignments in GE Capital, GE’s financial

service group, during the economic downturn.

Organizational Structure

Organizational structure specifies the firm’s formal reporting relationships, procedures,

controls, and authority and decision-making processes.

Developing an organizational

structure that effectively supports the firm’s strategy is difficult, especially because of the

uncertainty (or unpredictable variation

) about cause-effect relationships in the global

economy’s rapidly changing and dynamic competitive environments.

When a struc-

ture’s elements (e.g., reporting relationships, procedures, etc.) are properly aligned with

one another, the structure facilitates effective use of the firm’s strategies.

Thus, organiza-

tional structure is a critical component of effective strategy implementation processes.

A firm’s structure specifies the work to be done and how to do it, given the firm’s

strategy or strategies.

Thus, organizational structure influences how managers work and

the decisions resulting from that work.

Supporting the implementation of strategies,

structure is concerned with processes used to complete organizational tasks.

Having

the right structure and process is important. For example, many product-oriented firms

have been moving to develop service businesses associated with those products. This has

been a strategy used by many of GE’s businesses, such as medical equipment. However,

research suggests that developing a separate division for such services in product-oriented

companies, rather than managing the service business within the product divisions, leads

to additional growth and profitability in the service business.

Effective structures provide the stability a firm needs to successfully implement its

strategies and maintain its current competitive advantages while simultaneously provid-

ing the flexibility to develop advantages it will need in the future.

Structural stability

provides the capacity the firm requires to consistently and predictably manage its daily

work routines

while structural flexibility provides the opportunity to explore competi-

tive possibilities and then allocate resources to activities that will shape the competi-

tive advantages the firm will need to be successful in the future.

An effectively flexible

organizational structure allows the firm to exploit current competitive advantages while

developing new ones that can potentially be used in the future.

For example, the man-

agement system at Cisco is said to provide “speed, skill, and flexibility.”

Cisco is able to

accomplish this by using team-based processes as an overlay to its basic structure, allow-

ing it to exploit its current advantages while exploring for new ones.

Modifications to the firm’s current strategy or selection of a new strategy call for

changes to its organizational structure. However, research shows that once in place, orga-

nizational inertia often inhibits efforts to change structure, even when the firm’s per-

formance suggests that it is time to do so.

In his pioneering work, Alfred Chandler

found that organizations change their structures when inefficiencies force them to.

Chandler’s contributions to our understanding of organizational structure and its rela-

tionship to strategies and performance are quite significant. Indeed, some believe that

Chandler’s emphasis on “organizational structure so transformed the field of business

history that some call the period before Dr. Chandler’s publications ‘B.C.,’ meaning

‘before Chandler.’”

Firms seem to prefer the structural status quo and its familiar working relationships

until the firm’s performance declines to the point where change is absolutely necessary.

For example, necessity is obviously the case for General Motors given that it went into

bankruptcy to force the required restructuring.

In addition to the issues we already mentioned, it is important to note that top-level

managers hesitate to conclude that the firm’s structure (or its strategy, for that matter) are

the problem, in that doing so suggests that their previous choices were not the best ones.

Because of these inertial tendencies, structural change is often induced instead by actions

Organizational

structure speciﬁ es

the ﬁ rm’s formal

reporting relationships,

procedures, controls,

and authority and

decision-making

processes.

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Part 3: Strategic Actions: Strategy Implementation

from stakeholders (e.g., those from the capital market and customers—see Chapter 2) who

are no longer willing to tolerate the firm’s performance. Evidence shows that appropriate

timing of structural change happens when top-level managers recognize that a current

organizational structure no longer provides the coordination and direction needed for the

firm to successfully implement its strategies.

Interestingly, many organizational changes

are taking place in the current economic downturn, apparently because poor performance

reveals organizational weaknesses. As we discuss next, effective organizational controls

help managers recognize when it is time to adjust the firm’s structure.

Organizational Controls

Organizational controls are an important aspect of structure.

Organizational controls

guide the use of strategy, indicate how to compare actual results with expected results,

and suggest corrective actions to take when the difference is unacceptable. When fewer

differences separate actual from expected outcomes, the organization’s controls are more

effective.

It is difficult for the company to successfully exploit its competitive advan-

tages without effective organizational controls.

Properly designed organizational con-

trols provide clear insights regarding behaviors that enhance firm performance.

Firms

use both strategic controls and financial controls to support using their strategies.

Strategic controls are largely subjective criteria intended to verify that the firm is

using appropriate strategies for the conditions in the external environment and the com-

pany’s competitive advantages. Thus, strategic controls are concerned with examining

the fit between what the firm might do (as suggested by opportunities in its external

environment) and what it can do (as indicated by its competitive advantages). Effective

strategic controls help the firm understand what it takes to be successful.

Strategic

controls demand rich communications between managers responsible for using them to

judge the firm’s performance and those with primary responsibility for implementing the

firm’s strategies (such as middle and first-level managers). These frequent exchanges are

both formal and informal in nature.

Strategic controls are also used to evaluate the degree to which the firm focuses on

the requirements to implement its strategies. For a business-level strategy, for example,

the strategic controls are used to study primary and support activities (see Tables 3.6 and

3.7, on page 87) to verify that the critical activities are being emphasized and properly

executed.

With related corporate-level strategies, strategic controls are used by corporate

strategic leaders to verify the sharing of appropriate strategic factors such as knowledge,

markets, and technologies across businesses. To effectively use strategic controls when

evaluating related diversification strategies, headquarter executives must have a deep

understanding of each unit’s business-level strategy.

As we described in the Opening Case, Cisco’s executives allocate a great deal of

time and energy to issues related to strategic control. Constantly challenged to meet

the demands of an ever-changing market, John Chambers, Cisco’s CEO, was able to

implement a revised strategic controls system where he “was able to surrender his role

as a command-and-control CEO and institute a collaborative decision-making model

that allows the company to respond speedily to emerging transitions.”

Using this

system on strategic control allowed Cisco to move to open source software development

before competitors such as Microsoft. They also were one of the first companies to move

to Web-based customer service centers from call centers having foreseen this change

through their strategic control system.

Financial controls are largely objective criteria used to measure the firm’s performance

against previously established quantitative standards. Accounting-based measures such as

return on investment (ROI) and return on assets (ROA) as well as market-based measures

such as economic value added are examples of financial controls. Partly because strategic

controls are difficult to use with extensive diversification,

financial controls are empha-

sized to evaluate the performance of the firm using the unrelated diversification strat-

egy. The unrelated diversification strategy’s focus on financial outcomes (see Chapter 6)

Organizational

controls guide the use

of strategy, indicate how

to compare actual results

with expected results,

and suggest corrective

actions to take when the

difference is unacceptable.

Strategic controls are

largely subjective criteria

intended to verify

that the ﬁ rm is using

appropriate strategies

for the conditions in the

external environment and

the company’s competitive

advantages.

Financial controls are

largely objective criteria

used to measure the ﬁ rm’s

performance against

previously established

quantitative standards.

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Chapter 11: Organizational Structure and Controls

requires using standardized financial controls to

compare performances between business units and

associated managers.

When using financial controls, firms evaluate

their current performance against previous out-

comes as well as against competitors’ performance

and industry averages. In the global economy,

technological advances are being used to develop

highly sophisticated financial controls, making it

possible for firms to more thoroughly analyze their

performance results and to assure compliance with

regulations. Companies such as Oracle and SAP sell

software tools that automate processes firms use to

meet the financial reporting requirements specified

by the Sarbanes-Oxley Act. (As noted in Chapter

10, this act requires a firm’s principal executive and financial officers to certify corpo-

rate financial and related information in quarterly and annual reports submitted to the

Securities and Exchange Commission.)

Both strategic and financial controls are important aspects of each organizational

structure, and as we noted previously, any structure’s effectiveness is determined by using

a combination of strategic and financial controls. However, the relative use of controls

varies by type of strategy. For example, companies and business units of large diversified

firms using the cost leadership strategy emphasize financial controls (such as quantitative

cost goals), while companies and business units using the differentiation strategy empha-

size strategic controls (such as subjective measures of the effectiveness of product devel-

opment teams).

As previously explained, a corporate-wide emphasis on sharing among

business units (as called for by related diversification strategies) results in an emphasis on

strategic controls, while financial controls are emphasized for strategies in which activi-

ties or capabilities are not shared (e.g., in an unrelated diversification strategy).

As firms consider controls, the important point is to properly balance the use of stra-

tegic and financial controls. Indeed, overemphasizing one at the expense of the other can

lead to performance declines. According to Michael Dell, an overemphasis on financial

controls to produce attractive short-term results contributed to performance difficul-

ties at Dell Inc. In addressing this issue, Dell said the following: “The company was too

focused on the short term, and the balance of priorities was way too leaning toward

things that deliver short-term results.”

Executives at Dell have now achieved a more

appropriate emphasis on the long term as well as the short term due a reemphasis on

strategic controls, although Dell is still playing catch up to Hewlett-Packard.

Relationships between Strategy and Structure

Strategy and structure have a reciprocal relationship.

This relationship highlights the

interconnectedness between strategy formulation (Chapters 4, 6–9) and strategy imple-

mentation (Chapters 10–13). In general, this reciprocal relationship finds structure flow-

ing from or following selection of the firm’s strategy. Once in place though, structure can

influence current strategic actions as well as choices about future strategies. Consider, for

example, the possible influences of the Cisco’s structure and control system in influenc-

ing its strategy as illustrated in the Opening Case.

The general nature of the strategy/structure relationship means that changes to the

firm’s strategy create the need to change how the organization completes its work. In

the “structure influences strategy” direction, firms must be vigilant in their efforts to

verify that how their structure calls for work to be completed remains consistent with

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Part 3: Strategic Actions: Strategy Implementation

the implementation requirements of chosen strategies. Research shows, however, that

“strategy has a much more important influence on structure than the reverse.”

Regardless of the strength of the reciprocal relationships between strategy and

structure, those choosing the firm’s strategy and structure should be committed to

matching each strategy with a structure that provides the stability needed to use current

competitive advantages as well as the flexibility required to develop future advantages.

Therefore, when changing strategies, the firm should simultaneously consider the structure

that will be needed to support use of the new strategy; properly matching strategy and

structure can create a competitive advantage.

Evolutionary Patterns of Strategy and

Organizational Structure

Research suggests that most firms experience a certain pattern of relationships between

strategy and structure. Chandler

found that firms tend to grow in somewhat predictable

Efﬁcient implementation

of formulated strategy

Sales Growth—

Coordination

and Control

Problems

Multidivisional

Structure

Functional

Structure

Simple

Structure

Efﬁcient implementation

of formulated strategy

Sales Growth—

Coordination

and Control

Problems

Figure 11.1 Strategy and Structure Growth Pattern

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Chapter 11: Organizational Structure and Controls

patterns: “first by volume, then by geography, then integration (vertical, horizontal), and

finally through product/business diversification”

(see Figure 11.1). Chandler interpreted

his findings as an indication that firms’ growth patterns determine their structural form.

As shown in Figure 11.1, sales growth creates coordination and control problems

the existing organizational structure cannot efficiently handle. Organizational growth

creates the opportunity for the firm to change its strategy to try to become even more

successful. However, the existing structure’s formal reporting relationships, procedures,

controls, and authority and decision-making processes lack the sophistication required

to support using the new strategy.

A new structure is needed to help decision makers

gain access to the knowledge and understanding required to effectively integrate and

coordinate actions to implement the new strategy.

Firms choose from among three major types of organizational structures—simple,

functional, and multidivisional—to implement strategies. Across time, successful firms

move from the simple to the functional to the multidivisional structure to support

changes in their growth strategies.

Simple Structure

The simple structure is a structure in which the owner-manager makes all major deci-

sions and monitors all activities while the staff serves as an extension of the manager’s

supervisory authority.

Typically, the owner-manager actively works in the business on

a daily basis. Informal relationships, few rules, limited task specialization, and unsophis-

ticated information systems characterize this structure. Frequent and informal commu-

nications between the owner-manager and employees make coordinating the work to be

done relatively easy. The simple structure is matched with focus strategies and business-

level strategies, as firms implementing these strategies commonly compete by offering a

single product line in a single geographic market. Local restaurants, repair businesses,

and other specialized enterprises are examples of firms using the simple structure.

As the small firm grows larger and becomes more complex, managerial and struc-

tural challenges emerge. For example, the amount of competitively relevant information

requiring analysis substantially increases, placing significant pressure on the owner-

manager. Additional growth and success may cause the firm to change its strategy. Even

if the strategy remains the same, the firm’s larger size dictates the need for more sophis-

ticated workflows and integrating mechanisms. At this evolutionary point, firms tend to

move from the simple structure to a functional organizational structure.

Functional Structure

The functional structure consists of a chief executive officer and a limited corporate

staff, with functional line managers in dominant organizational areas such as production,

accounting, marketing, R&D, engineering, and human resources.

This structure allows

for functional specialization,

thereby facilitating active sharing of knowledge within

each functional area. Knowledge sharing facilitates career paths as well as professional

development of functional specialists. However, a functional orientation can negatively

affect communication and coordination among those representing different organiza-

tional functions. For this reason, the CEO must work hard to verify that the decisions

and actions of individual business functions promote the entire firm rather than a single

function. The functional structure supports implementing business-level strategies and

some corporate-level strategies (e.g., single or dominant business) with low levels of

diversification. When changing from a simple to a functional structure, firms want to

avoid introducing value-destroying bureaucratic procedures such as failing to promote

innovation and creativity.

Multidivisional Structure

With continuing growth and success, firms often consider greater levels of diversification.

Successfully using a diversification strategy requires analyzing substantially greater

The simple

structure is a structure

in which the owner-

manager makes all

major decisions and

monitors all activities

while the staff serves

as an extension of the

manager’s supervisory

authority.

The functional

structure consists

of a chief executive

ofﬁ cer and a limited

corporate staff,

with functional line

managers in dominant

organizational areas

such as production,

accounting, marketing,

R&D, engineering, and

human resources.

324

amounts of data and information when the firm offers the same products in different

markets (market or geographic diversification) or offers different products in several

markets (product diversification). In addition, trying to manage high levels of diversifica-

tion through functional structures creates serious coordination and control problems,

fact that commonly leads to a new structural form.

The multidivisional (M-form) structure consists of a corporate office and operating

divisions, each operating division representing a separate business or profit center in which

the top corporate officer delegates responsibilities for day-to-day operations and business-

unit strategy to division managers. Each division represents a distinct, self-contained busi-

ness with its own functional hierarchy.

As initially designed, the M-form was thought to

have three major benefits: “(1) it enabled corporate officers to more accurately monitor

the performance of each business, which simplified the problem of control; (2) it facili-

tated comparisons between divisions, which improved the resource allocation process;

and (3) it stimulated managers of poorly performing divisions to look for ways of improv-

ing performance.”

Active monitoring of performance through the M-form increases the

likelihood that decisions made by managers heading individual units will be in stakehold-

ers’ best interests. Because diversification is a dominant corporate-level strategy used in

the global economy, the M-form is a widely adopted organizational structure.

Used to support implementation of related and unrelated diversification strategies,

the M-form helps firms successfully manage diversification’s many demands.

Chandler

viewed the M-form as an innovative response to coordination and control problems that

surfaced during the 1920s in the functional structures then used by large firms such as

DuPont and General Motors.

Research shows that the M-form is appropriate when the

firm grows through diversification.

Partly because of its value to diversified corpora-

tions, some consider the multidivisional structure to be one of the twentieth century’s

most significant organizational innovations.

No one organizational structure (simple, functional, or multidivisional) is inherently

superior to the others.

Peter Drucker says the following about this matter: “There is no one

right organization. … Rather the task … is to select the organization for the particular task

and mission at hand.”

In our context, Drucker is saying that the firm must select a structure

that is “right” for successfully using the chosen strategy. Because no single structure is optimal

in all instances, managers concentrate on developing proper matches between strategies and

organizational structures rather than searching for an “optimal” structure. This matching of

structure and strategy is taking place at Cisco. As noted in the Opening Case, John Chambers

is increasing the firm’s level of diversification and as such is adjusting its structure to match.

We now describe the strategy/structure matches that evidence shows positively con-

tribute to firm performance.

Matches between Business-Level Strategies and the

Functional Structure

Firms use different forms of the functional organizational structure to support

implementing the cost leadership, differentiation, and integrated cost leadership/

differentiation strategies. The differences in these forms are accounted for primarily

by different uses of three important structural characteristics: specialization (concerned

with the type and number of jobs required to complete work

), centralization (the

degree to which decision-making authority is retained at higher managerial levels

), and

formalization (the degree to which formal rules and procedures govern work

Using the Functional Structure to Implement the Cost Leadership

Strategy

Firms using the cost leadership strategy sell large quantities of standardized products to

an industry’s typical customer. Simple reporting relationships, few layers in the decision-

making and authority structure, a centralized corporate staff, and a strong focus on

The multidivisional

(M-form)

structure

consists of

a corporate ofﬁ ce and

operating divisions,

each operating division

representing a separate

business or proﬁ t center

in which the top corporate

ofﬁ cer delegates

responsibilities for day-

to-day operations and

business-unit strategy to

division managers.

Part 3: Strategic Actions: Strategy Implementation

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Chapter 11: Organizational Structure and Controls

process improvements through the manufacturing function rather than the development

of new products by emphasizing product R&D characterize the cost leadership form of

the functional structure

(see Figure 11.2). This structure contributes to the emergence

of a low-cost culture—a culture in which employees constantly try to find ways to reduce

the costs incurred to complete their work.

In terms of centralization, decision-making authority is centralized in a staff function

to maintain a cost-reducing emphasis within each organizational function (engineering,

marketing, etc.). While encouraging continuous cost reductions, the centralized staff also

verifies that further cuts in costs in one function won’t adversely affect the productivity

levels in other functions.

Jobs are highly specialized in the cost leadership functional structure; work is divided

into homogeneous subgroups. Organizational functions are the most common sub-

group, although work is sometimes batched on the basis of products produced or clients

served. Specializing in their work allows employees to increase their efficiency, resulting

in reduced costs. Guiding individuals’ work in this structure are highly formalized rules

and procedures, which often emanate from the centralized staff.

Wal-Mart Stores Inc. uses the functional structure to implement cost leadership strat-

egies in each of its three segments (Wal-Mart Stores, Sam’s Clubs, and International).

In the Wal-Mart Stores segment (which generates the largest share of the firm’s total

sales), the cost leadership strategy is used in the firm’s Supercenter, Discount, and

Neighborhood Market retailing formats.

Long known for its “Always Low Prices”

slogan (which was used for 19 years), Wal-Mart recently changed to a new slogan—

“Save Money, Live Better.”

Although the slogan is new, Wal-Mart continues using the

functional organizational structure in its divisions to drive costs lower. As discussed in

Chapter 4, competitors’ efforts to duplicate the success of Wal-Mart’s cost leadership

Ofﬁce of the President

Engineering Marketing Operations Personnel Accounting

Centralized Staff

May be a relatively ﬂat or tall structure

Figure 11.2 Functional Structure for Implementing a Cost Leadership Strategy

Notes:

• Operations is the main function

• Process engineering is emphasized rather than new product R&D

• Relatively large centralized staff coordinates functions

• Formalized procedures allow for emergence of a low-cost culture

• Overall structure is mechanistic; job roles are highly structured

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Part 3: Strategic Actions: Strategy Implementation

strategies have generally failed, partly because of the effective strategy/structure matches

in each of the firm’s segments.

Using the Functional Structure to Implement the Differentiation Strategy

Firms using the differentiation strategy produce products customers perceive as being

different in ways that create value for them. With this strategy, the firm wants to sell non-

standardized products to customers with unique needs. Relatively complex and flexible

reporting relationships, frequent use of cross-functional product development teams,

and a strong focus on marketing and product R&D rather than manufacturing and pro-

cess R&D (as with the cost leadership form of the functional structure) characterize the

differentiation form of the functional structure (see Figure 11.3). From this structure

emerges a development-oriented culture in which employees try to find ways to further

differentiate current products and to develop new, highly differentiated products.

Continuous product innovation demands that people throughout the firm interpret

and take action based on information that is often ambiguous, incomplete, and uncer-

tain. Following a strong focus on the external environment to identify new opportunities,

employees often gather this information from people outside the firm (e.g., customers

and suppliers). Commonly, rapid responses to the possibilities indicated by the collected

information are necessary, suggesting the need for decentralized decision-making respon-

sibility and authority. To support creativity and the continuous pursuit of new sources

of differentiation and new products, jobs in this structure are not highly specialized.

This lack of specialization means that workers have a relatively large number of tasks in

their job descriptions. Few formal rules and procedures also characterize this structure.

Low formalization, decentralization of decision-making authority and responsibility, and

low specialization of work tasks combine to create a structure in which people interact

frequently to exchange ideas about how to further differentiate current products while

developing ideas for new products that can be crisply differentiated.

New Product

R&D

Human

Resources

Operations

Marketing

Finance

MarketingR&D

President and

Limited Staff

Figure 11.3 Functional Structure for Implementing a Differentiation Strategy

Notes:

• Marketing is the main function for keeping track of new product ideas

• New product R&D is emphasized

• Most functions are decentralized, but R&D and marketing may have centralized staffs that work closely with each other

• Formalization is limited so that new product ideas can emerge easily and change is more readily accomplished

• Overall structure is organic; job roles are less structured

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Chapter 11: Organizational Structure and Controls

Under Armour has used a differentiation strategy and matching structure to create

success in the sports apparel market. Under Armour’s objective was to create improved

athletic performance through innovative design, testing, and marketing, especially to

professional athletes and teams, and translate that perception to the broader market. With

a strong match between strategy and structure, it has successfully created innovative sports

performance products and challenged Nike and other sports apparel competitors.

Using the Functional Structure to Implement the Integrated Cost Leadership/

Differentiation Strategy

Firms using the integrated cost leadership/differentiation strategy sell products that cre-

ate value because of their relatively low cost and reasonable sources of differentiation. The

cost of these products is low “relative” to the cost leader’s prices while their differentiation

is “reasonable” when compared with the clearly unique features of the differentiator’s

products.

Although challenging to implement, the integrated cost leadership/differentiation

strategy is used frequently in the global economy. The challenge of using this structure

is due largely to the fact that different primary and support activities (see Chapter 3)

are emphasized when using the cost leadership and differentiation strategies. To achieve

the cost leadership position, production and process engineering are emphasized, with

infrequent product changes. To achieve a differentiated position, marketing and new

product R&D are emphasized while production and process engineering are not. Thus,

effective use of the integrated strategy depends on the firm’s successful combination

of activities intended to reduce costs with activities intended to create additional dif-

ferentiation features. As a result, the integrated form of the functional structure must

have decision-making patterns that are partially centralized and partially decentralized.

Additionally, jobs are semispecialized, and rules and procedures call for some formal and

some informal job behavior.

Matches between Corporate-Level Strategies and

the Multidivisional Structure

As explained earlier, Chandler’s research shows that the firm’s continuing success leads to

product or market diversification or both.

The firm’s level of diversification is a function

of decisions about the number and type of businesses in which it will compete as well as

how it will manage the businesses (see Chapter 6). Geared to managing individual orga-

nizational functions, increasing diversification eventually creates information processing,

coordination, and control problems that the functional structure cannot handle. Thus,

using a diversification strategy requires the firm to change from the functional structure

to the multidivisional structure to develop an appropriate strategy/structure match.

As defined in Figure 6.1, corporate-level strategies have different degrees of product

and market diversification. The demands created by different levels of diversification

highlight the need for a unique organizational structure to effectively implement each

strategy (see Figure 11.4).

Using the Cooperative Form of the Multidivisional Structure to Implement

the Related Constrained Strategy

The cooperative form is an M-form structure in which horizontal integration is used to

bring about interdivisional cooperation. Divisions in a firm using the related constrained

diversification strategy commonly are formed around products, markets, or both. In

Figure 11.5, we use product divisions as part of the representation of the cooperative

form of the multidivisional structure, although market divisions could be used instead of

or in addition to product divisions to develop the figure.

Using this structure, Hewlett-Packard (HP) has implemented the related constrained

strategy as described in the Strategic Focus. HP’s intent is to sell integrated solutions

to corporate data centers, so it has placed an emphasis on creating more relationships

The cooperative

form

is an M-form

structure in which

horizontal integration

is used to bring

about interdivisional

cooperation.