Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts
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The fits between the multidomestic strategy and the worldwide geographic area
structure and between the global strategy and the worldwide product divisional structure
are apparent. However, when a firm wants to implement the multidomestic and global
strategies simultaneously through a combination structure, the appropriate integrating
mechanisms are less obvious. The structure used to implement the transnational strategy
must be simultaneously centralized and decentralized; integrated and nonintegrated;
formalized and nonformalized.
IKEA has done a good job of balancing these organization aspects in implementing
the transnational strategy.
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IKEA is a global furniture retailer with outlets in more than
35 countries. IKEA focuses on lowering its costs and also understanding its customers’
needs, especially younger customers. It has been able to manage these seemingly opposite
characteristics through its structure and management process. It has also been able to
encourage its employees to understand the effects of cultural and geographic diversity
on firm operations. IKEA’s system also has internal network attributes, which will be
discussed next in regard to external interorganizational networks.
Matches between Cooperative Strategies and
Network Structures
As discussed in Chapter 9, a network strategy exists when partners form several alliances
in order to improve the performance of the alliance network itself through coopera-
tive endeavors.
106
The greater levels of environmental complexity and uncertainty facing
companies in today’s competitive environment are causing more firms to use cooperative
strategies such as strategic alliances and joint ventures.
107
The breadth and scope of firms’ operations in the global economy create many
opportunities for firms to cooperate.
108
In fact, a firm can develop cooperative relation-
ships with many of its stakeholders, including customers, suppliers, and competitors.
When a firm becomes involved with combinations of cooperative relationships, it is part
of a strategic network, or what others call an alliance constellation or portfolio.
109
A strategic network is a group of firms that has been formed to create value by par-
ticipating in multiple cooperative arrangements. An effective strategic network facilitates
discovering opportunities beyond those identified by individual network participants.
110
A strategic network can be a source of competitive advantage for its members when its
operations create value that is difficult for competitors to duplicate and that network
members can’t create by themselves.
111
Strategic networks are used to implement
business-level, corporate-level, and international cooperative strategies.
Headquarters
Product
Division A
Area 2Area 1
Area 2
Area 1
Product
Division B
Product BProduct BProduct A Product A
Geographic
Area
Division 1
Geographic
Area
Division 2
Figure 11.10 Hybrid Form of the Combination Structure for Implementing a Transnational Strategy
PepsiCo has organized its businesses into
three groups: PepsiCo North American
Beverages (PNAB), PepsiCo Americas Foods
(PAF), and PepsiCo International (PI). PNAB
focuses on the Pepsi brand that includes
carbonated soft drinks, juices and juice drinks,
ready-to-drink teas and coffees, and isotonic
sports drinks (Gatorade). It also has Aquafina water, Sierra Mist, Mug root beer, Tropicana
juice drinks, Propel, SoBe, Slice, Dole, Tropicana Twister, and Tropicana Season’s Best.
Some of these drinks are through joint ventures such as with the Thomas J. Lipton Company
(tea) and Starbucks coffee (Frappuccino). Gatorade became part of PepsiCo through a 2001
acquisition of Quaker Oats Company.
PAF is focused on food and snacks in North and South America including the products of
Frito-Lay, Quaker Oats, Sabritas (Mexican snacks and fun food), and Gamesa (one of Mexico’s
top brands for cookies, pastries, oats, and cereals).
PepsiCo International includes the PepsiCo
businesses in Europe, Asia, Africa, and Australia.
Originally, this segment focused on distribution
of beverages, but in 2003 it combined food and
beverages to form PepsiCo International.
As you can see from these descriptions of its
business segments, PepsiCo is primarily organized
geographically—beverages in North America,
food in North America, and food and beverages
internationally by region. Accordingly, like most
consumer product firms, it has traditionally
implemented the multidomestic strategy with a
regional focus, using the worldwide geographic area
structure to better create a marketing approach that
is adaptable to various languages, cultures, and
lifestyles. However, as it has diversified into a variety
of beverages and snack foods, it has consequently
organized into product divisions as well to gain greater
efficiencies in managing these products worldwide.
Although it is still predominately area focused through
the management structure, it has additional structures
that allow the product divisions to be managed more efficiently. Accordingly, PepsiCo is
moving toward implementing the transnational strategy through the combination structure.
Interestingly, PepsiCo has one of the most diverse leadership teams. Its CEO and
chairman of the board, Indra Nooyi, is originally from India. A large number of board
members possess significant international experience, including the ability to speak several
languages. These board members allow a broad understanding of cultures and buying
habits within geographic regions outside of the United States. The diversity on the board
supports the geographic focus maintained by the company and has added to the success of
marketing the PepsiCo brands and products throughout the world.
Sources: 2009, The PepsiCo family, http://www.pepsico.com, June 25; H. Ehein, 2009, Internal relations, Brand Week,
February 16, 8–9; D. Morris, 2008, The Pepsi challenge, Fortune, March 3, 54; M. Useem, 2008, America’s best leaders:
Indra Nooyi, PepsiCo CEO, US News & World Report, http://www.usnews.com, November 19; 2008, Global companies
with global boards, Directorship, 34(5): 28–30; 2008, Pepsi versus Coke: An unhealthy obsession: They are global, but
are they relevant? Strategic Direction, 24(1): 6–8.
PEPSICO: MOVING FROM
THE GEOGRAPHIC AREA
STRUCTURE TOWARD THE
COMBINED STRUCTURE
IMPLEMENTING THE
TRANSNATIONAL STRATEGY
PepsiCo’s geographic organization
and move toward the implementation
of a transnational strategy are sup-
ported by a highly diverse leadership
team, headed by CEO and chairman
of the board, Indra Nooyi, who is
originally from India.
Neville Elder/CORBIS
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Commonly, a strategic network is a loose federation of partners participating in the
network’s operations on a flexible basis. At the core or center of the strategic network,
the strategic center firm is the one around which the network’s cooperative relationships
revolve (see Figure 11.11).
Because of its central position, the strategic center firm is the foundation for the
strategic network’s structure. Concerned with various aspects of organizational structure,
such as formal reporting relationships and procedures, the strategic center firm manages
what are often complex, cooperative interactions among network partners. To perform
the tasks discussed next, the strategic center firm must make sure that incentives for
participating in the network are aligned so that network firms continue to have a reason
to remain connected.
112
The strategic center firm is engaged in four primary tasks as it
manages the strategic network and controls its operations:
113
Strategic outsourcing. The strategic center firm outsources and partners with more
firms than other network members. At the same time, the strategic center firm requires
network partners to be more than contractors. Members are expected to find opportuni-
ties for the network to create value through its cooperative work.
Competencies. To increase network effectiveness, the strategic center firm seeks ways
to support each member’s efforts to develop core competencies with the potential of
benefiting the network.
Technology. The strategic center firm is responsible for managing the development
and sharing of technology-based ideas among network members. The structural require-
ment that members submit formal reports detailing the technology-oriented outcomes
of their efforts to the strategic center firm facilitates this activity.
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Race to learn. The strategic center firm emphasizes that the principal dimensions of
competition are between value chains and between networks of value chains. Because of
this interconnection, the strategic network is only as strong as its weakest value-chain link.
Strategic
Center
Firm
Figure 11.11 A Strategic Network
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Chapter 11: Organizational Structure and Controls
With its centralized decision-making authority and responsibility, the strategic center
firm guides participants in efforts to form network-specific competitive advantages. The
need for each participant to have capabilities that can be the foundation for the net-
work’s competitive advantages encourages friendly rivalry among participants seeking
to develop the skills needed to quickly form new capabilities that create value for the
network.
115
Interestingly, strategic networks are being used more frequently, partly because of the
ability of a strategic center firm to execute a strategy that effectively and efficiently links
partner firms. Improved information systems and communication capabilities (e.g., the
Internet) make such networks possible.
116
Implementing Business-Level Cooperative
Strategies
As noted in Chapter 9, the two types of business-level complementary alliances are verti-
cal and horizontal. Firms with competencies in different stages of the value chain form
a vertical alliance to cooperatively integrate their different, but complementary, skills.
Firms combining their competencies to create value in the same stage of the value chain
are using a horizontal alliance. Vertical complementary strategic alliances such as those
developed by Toyota Motor Company are formed more frequently than horizontal
alliances.
117
A strategic network of vertical relationships such as the network in Japan between
Toyota and its suppliers often involves a number of implementation issues.
118
First, the
strategic center firm encourages subcontractors to modernize their facilities and provides
them with technical and financial assistance to do so, if necessary. Second, the strate-
gic center firm reduces its transaction costs by promoting longer-term contracts with
subcontractors, so that supplier-partners increase their long-term productivity. This
approach is diametrically opposed to that of continually negotiating short-term contracts
based on unit pricing. Third, the strategic center firm enables engineers in upstream
companies (suppliers) to have better communication with those companies with whom
it has contracts for services. As a result, suppliers and the strategic center firm become
more interdependent and less independent.
119
The lean production system (a vertical complementary strategic alliance) pioneered
by Toyota and others has been diffused throughout the global auto industry.
120
However,
no auto company has learned how to duplicate the manufacturing effectiveness and
efficiency Toyota derives from the cooperative arrangements in its strategic network.
121
A key factor accounting for Toyota’s manufacturing-based competitive advantage is the
cost other firms would incur to imitate the structural form used to support Toyota’s
application. In part, then, the structure of Toyota’s strategic network that it created as
the strategic center firm facilitates cooperative actions among network participants that
competitors can’t fully understand or duplicate.
In vertical complementary strategic alliances, such as the one between Toyota and
its suppliers, the strategic center firm is obvious, as is the structure that firm establishes.
However, the same is not always true with horizontal complementary strategic alliances
where firms try to create value in the same part of the value chain, as with airline alli-
ances that are commonly formed to create value in the marketing and sales primary
activity segment of the value chain (see Table 3.6). Because air carriers commonly par-
ticipate in multiple horizontal complementary alliances such as the Star Alliance between
Lufthansa, United, Continental, US Airways, Thai, Air Canada, SAS, and others, it is dif-
ficult to determine the strategic center firm. Moreover, participating in several alliances
can cause firms to question partners’ true loyalties and intentions. Also, if rivals band
together in too many collaborative activities, one or more governments may suspect the
possibility of illegal collusive activities. For these reasons, horizontal complementary alli-
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Part 3: Strategic Actions: Strategy Implementation
ances are used less often and less successfully than their vertical counterpart, although
there are examples of success, for instance, among auto and aircraft manufacturers.
122
Implementing Corporate-Level Cooperative
Strategies
Corporate-level cooperative strategies (such as franchising) are used to facilitate prod-
uct and market diversification. As a cooperative strategy, franchising allows the firm
to use its competencies to extend or diversify its product or market reach, but without
completing a merger or an acquisition.
123
Research suggests that knowledge embedded
in corporate-level cooperative strategies facilitates synergy.
124
For example, McDonald’s
Corporation pursues a franchising strategy, emphasizing a limited value-priced menu
in more than 100 countries. The McDonald’s franchising system is a strategic network.
McDonald’s headquarters serves as the strategic center firm for the network’s franchi-
sees. The headquarters office uses strategic and financial controls to verify that the fran-
chisees’ operations create the greatest value for the entire network.
An important strategic control issue for McDonald’s is the location of its franchi-
see units. Because it believes that its greatest expansion opportunities are outside the
United States, the firm has decided to continue expanding in countries such as China
and India, where it might need to adjust its menu according to the local culture. For
example, “McDonald’s adapts its restaurants in India to local tastes; in a nation that is pre-
dominantly Hindu and reveres the cow, beef isn’t on the menu, for instance, replaced by
chicken burgers and vegetable patties.”
125
It plans on expanding the number of restaurants
in India by 40 in 2009 bringing the total to 200; it expanded by 25 restaurants in 2008.
Accordingly, as the strategic center firm around the globe for its restaurants, McDonald’s
is devoting the majority of its capital expenditures to develop units in non–U.S. markets.
Implementing International Cooperative
Strategies
Strategic networks formed to implement international cooperative strategies result in
firms competing in several countries.
126
Differences among countries’ regulatory envi-
ronments increase the challenge of managing international networks and verifying that
at a minimum, the network’s operations comply with all legal requirements.
127
Distributed strategic networks are the organizational structure used to manage inter-
national cooperative strategies. As shown in Figure 11.12, several regional strategic center
firms are included in the distributed network to manage partner firms’ multiple coopera-
tive arrangements.
128
Hewlett-Packard recently acquired EDS, a large information technology consulting
firm. One of EDS’s assets is the EDS Agility Alliance, its distributed strategic network. “The
Agility Alliance is EDS’ premiere partner program bringing together industry-leading
technology providers to build and deliver end to end IT solutions.”
129
EDS is the main
strategic center firm in this alliance and has two dedicated centers that are the hubs for
jointly developing initiatives with its partners. Cisco, SAP, Sun, Xerox, Oracle, EMC, and
Microsoft are members of this distributed strategic network. Symantec, an Internet anti-
virus and security firm, was recently added as a partner to respond to clients’ needs “for
more innovative security products and solutions that help them better secure their mis-
sion-critical business data and address specific enterprise security issues.”
130
EDS’s part-
ners each work with their own networks to complete projects that are a part of the Agility
Alliance. As this example demonstrates, the structure used to implement the international
cooperative strategy is complex and demands careful attention to be used successfully.
343
Chapter 11: Organizational Structure and Controls
Organizational structure specifies the firm’s formal report- •
ing relationships, procedures, controls, and authority and
decision-making processes. Essentially, organizational struc-
ture details the work to be done in a firm and how that work
is to be accomplished. Organizational controls guide the use
of strategy, indicate how to compare actual and expected
results, and suggest actions to take to improve performance
when it falls below expectations. A proper match between
strategy and structure can lead to a competitive advantage.
Strategic controls (largely subjective criteria) and financial •
controls (largely objective criteria) are the two types of
organizational controls used to implement a strategy. Both
controls are critical, although their degree of emphasis varies
based on individual matches between strategy and structure.
Strategy and structure influence each other; overall though, •
strategy has a stronger influence on structure. Research
indicates that firms tend to change structure when declin-
ing performance forces them to do so. Effective managers
anticipate the need for structural change and quickly modify
structure to better accommodate the firm’s strategy when
evidence calls for that action.
The functional structure is used to implement business-level •
strategies. The cost leadership strategy requires a centralized
functional structure—one in which manufacturing efficiency
and process engineering are emphasized. The differentia-
tion strategy’s functional structure decentralizes implemen-
tation-related decisions, especially those concerned with
marketing, to those involved with individual organizational
functions. Focus strategies, often used in small firms, require
a simple structure until such time that the firm diversifies in
terms of products and/or markets.
Unique combinations of different forms of the multidivisional •
structure are matched with different corporate-level diver-
sification strategies to properly implement these strategies.
The cooperative M-form, used to implement the related con-
strained corporate-level strategy, has a centralized corporate
office and extensive integrating mechanisms. Divisional
incentives are linked to overall corporate performance to
foster cooperation among divisions. The related linked SBU
M-form structure establishes separate profit centers within
the diversified firm. Each profit center or SBU may have
divisions offering similar products, but the SBUs are often
Distributed Strategic Center Firms
Main
Strategic
Center
Firm
Figure 11.12 A Distributed Strategic Network
SUMMARY
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Part 3: Strategic Actions: Strategy Implementation
unrelated to each other. The competitive M-form structure,
used to implement the unrelated diversification strategy,
is highly decentralized, lacks integrating mechanisms, and
utilizes objective financial criteria to evaluate each unit’s
performance.
The multidomestic strategy, implemented through the •
worldwide geographic area structure, emphasizes decen-
tralization and locates all functional activities in the host
country or geographic area. The worldwide product divi-
sional structure is used to implement the global strategy.
This structure is centralized in order to coordinate and
integrate different functions’ activities so as to gain global
economies of scope and economies of scale. Decision-
making authority is centralized in the firm’s worldwide divi-
sion headquarters.
The transnational strategy—a strategy through which the •
firm seeks the local responsiveness of the multidomestic
strategy and the global efficiency of the global strategy—is
implemented through the combination structure. Because
it must be simultaneously centralized and decentralized,
integrated and nonintegrated, and formalized and nonfor-
malized, the combination structure is difficult to organize
and successfully manage. However, two structural designs
are suggested: the matrix and the hybrid structure with both
geographic and product-oriented divisions.
Increasingly important to competitive success, cooperative •
strategies are implemented through organizational structures
framed around strategic networks. Strategic center firms
play a critical role in managing strategic networks. Business-
level strategies are often employed in vertical and horizontal
alliance networks. Corporate-level cooperative strategies
are used to pursue product and market diversification.
Franchising is one type of corporate strategy that uses a
strategic network to implement this strategy. This is also true
for international cooperative strategies, where distributed
networks are often used.
REVIEW QUESTIONS
What is organizational structure and what are organizational 1.
controls? What are the differences between strategic con-
trols and financial controls? What is the importance of these
differences?
What does it mean to say that strategy and structure have a 2.
reciprocal relationship?
What are the characteristics of the functional structures used 3.
to implement the cost leadership, differentiation, integrated
cost leadership/differentiation, and focused business-level
strategies?
What are the differences among the three versions of the 4.
multidivisional (M-form) organizational structures that are used
to implement the related constrained, the related linked, and
the unrelated corporate-level diversification strategies?
What organizational structures are used to implement 5.
the multidomestic, global, and transnational international
strategies?
What is a strategic network? What is a strategic center firm? 6.
How is a strategic center used in business-level, corporate-
level, and international cooperative strategies?
EXPERIENTIAL EXERCISES
EXERCISE 1: ORGANIZATIONAL STRUCTURE
AND BUSINESS-LEVEL STRATEGY
The purpose of this exercise is to apply the concepts introduced
in this chapter to live examples of business-level strategies
and how various firms actually structure their organizations to
compete. In teams, your instructor will assign a business-level
strategy such as differentiation or cost leader. You are to iden-
tify a firm that exemplifies this strategy and pictorially draw out
its corporate structure. You will need to present the results of
your investigation by comparing your firm’s organizational chart
with that in your text identified for your particular business-level
strategy. (See text for figures labeled “Functional Structure for
Implementing a Differentiation [or Cost Leadership] Strategy.”)
Be prepared to address the following issues:
Describe your firm’s business-level strategy. Why do you con-1.
sider it to be a cost leader or a differentiator?
What is the mission statement and/or vision statement of this 2.
firm? Is this firm targeting specific strategic goals?
Using the text examples for a functional structure, how does 3.
your firm match those structures or differ, if it does?
Summarize your conclusions. Does your team believe that this 4.
firm is structured appropriately considering its current and
future strategic goals?
EXERCISE 2: BURGER BUDDY AND MA
MAISON
Assume that it is a few months before your college graduation.
You and some classmates have decided to become entrepre-
neurs. The group has agreed on the restaurant industry, but your
discussions thus far have gone back and forth between two differ-
ent dining concepts: Burger Buddy and Ma Maison.
Burger Buddy would operate near campus in order to serve
the student market. Burger Buddy would be a 1950s-themed ham-
burger joint, emphasizing large portions and affordable prices.
Ma Maison is the alternate concept. One of your partners has
attended cooking school and has proposed the idea of a small,
upscale French restaurant. The menu would have no set items,
345
but would vary on a daily basis instead. Ma Maison would position
itself as a boutique restaurant providing superb customer service
and unique offerings.
Working in small groups, answer the following questions:
What is the underlying strategy for each restaurant concept?1.
How would the organizational structure of the two restaurant 2.
concepts differ?
How would the nature of work vary between the two restau-3.
rants?
If the business concept is successful, how might you expect 4.
the organizational structure and nature of work at each restau-
rant to change in the next five to seven years?
VIDEO CASE
Chapter 11: Organizational Structure and Controls
ORGANIZATIONAL STRUCTURE AND
ACCOUNTABILITY
Roger Parry/Former Chairman and CEO/Clear Channel
International
Roger Parry, former chairman and CEO of Clear Channel
International, discusses structure and control inside of an
organization. Before you view the video, think through your
concept of an organizational chart and its role in the modern
corporation.
Before you watch the video consider the following concepts
and questions and be prepared to discuss them in class:
Concepts
Organizational structure •
Organizational control •
Strategy and structure •
Performance due to proper strategy and structure alignment •
Questions
Do you think it is important for an organization to have an 1.
organizational chart?
How can organizations use structure to allow business units to 2.
meet their goals as well as corporate goals?
How important is it for everyone in the organization to know 3.
precisely their responsibility and that proper control is in place
to ensure that these responsibilities are being met?
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