22 Structural Implementation

    1.      Learning Outcomes

2.      Structure

3.      Relationship between structure and strategy

4.      Importance of structural implementation

5.      General Grand Strategies

6.      Different organisation structure

7.      Structure for different strategies

8.      Summary

1. Learning Outcomes

After studying this module, you shall be able to

1. Understand the concept of structure and strategy

2. Learn about the link between strategy and structure

3. Learn about the various organisation structures

4. Understand various structures for implementing different strategies

2. Structure

Structure refers to how the workers within a business are organised and how they relate to each other. Structure defines how activities such as task allocation, coordination and supervision are directed toward the achievement of organizational aims.

An organisation structure specifies three key components that are enumerated below:

1. It identifies the relationships between the number of steps in the hierarchy and the span of control of managers.

2. It specifies the grouping of individuals into departments and of departments into total organisation.

3. It consists of plan of activities in order to ensure effective communication, harmonization and integration of goals and objectives across departments.

The first two components constitute the structural framework, which is vertical structure created through the process of differentiation that involves division of labour and specialization. The third component refers to the pattern of interactions among various constituents of the organisation and is the horizontal structure, created through the process of integration that involves cross-functional information systems and teamwork. Exhibit 1.1 shows these structures.

3.   Relationship between Structure and Strategy

The plan which identifies how an organisation will utilize its major resources can be defined as the strategy of an organisation. In other words, an organization’s strategy is a route plan aimed at staying in good shape with clients and vendors and reaching specific aims and objectives of the organisation. However, the manner in which different sections of the organization fit together internally is an organization’s structure. For the organization to achieve its goals, the strategy and the structure must complement each other seamlessly.

The research done by Chandler indicates the matching of organisation structure to the various needs and requirements of strategy, the structure follows strategy. Chandler‘s (1962) statement ‘Structure follows strategy’ implies that every organizational structure is mainly developed based on the strategy of the organization and therefore successful implementation of an organization‘s strategy will depend on the firm‘s primary organizational structure.

Though Chandler’s research suggests that change in strategy requires structural change for achieving economic efficiency, succeeding researches have generally supported the idea that structure and strategy have a two-way, reciprocal relationship. The structure flows from the strategy.

Exhibit 1.2 presents a two-way relationship of structure and strategy. It shows that the strategy determines the structure in a major way. When a company opts for large scale changes, it must take into consideration every aspect of the structure required to support the strategy which is the only way to implement long-term development. Every part of an organization and every person working for that organization needs to focus on supporting the vision and direction. How everything is done and everything operates needs to be integrated so that all efforts and resources compliment the strategy. It does this by providing the necessary infrastructure and administrative mechanisms that enable implementation of the chosen strategy. The structure conversely impacts the strategy, but to a lesser extent. The structure once established might support or preclude the selection of some types of strategies and thereby, affect the strategic choice. Ideally, the structure of an organisation should be such that it enables a smooth implementation of the chosen strategies, support operational flexibility to improvise and revamp as implementation moves on and facilitates the choice of future strategies.

Exhibit 1.2: Interrelationship of structure and strategy

The two-way relationship between strategy and structure helps us to understand what structural implementation is. It is the continual process of matching the structure of an organisation with its chosen strategy.

4.   Importance of structural implementation

When a company opts for a new or revised strategic plan, then new or modified strategies are also adopted. The implementation of these strategies starts taking place. As they are implemented, managers notice mismatches that occur owing to a variety of reasons. For instance, the administrative mechanisms in the organisation may not be relevant to the strategies being implemented or interdepartmental conflicts may arise. As a consequence of these mismatches, the performance declines, leading to a reduction in effectiveness. When the structure is changed appropriately so as to resolve the problems, performance improves, leading to better effectiveness. This cyclical process goes on as new strategies are implemented.

Exhibit 1.3: Why is structural implementation needed?

An example from the competitive insurance industry in India could serve our purpose to understand how strategy and structure interact. Sometimes in 2003, the top management at Bajaj Allianz realised that its multi-layered pyramidal structure with centralised authority may not work in the current and emerging scenario. There was a CEO assisted by deputy chief operating officer, chief financial officer, president of R&D and heads of sales and marketing. At the operational level, the underwriting authority of the branch head was limited and proposals were sent up to the head office for decisions, leading to delays and customer dissatisfaction. The capacity of the company to service clients was limited and it had a narrow product and service portfolio. As a result, the company could only have small individual policies placing restrictions on growth. Post-2004, the company went into high gear and started implementing a rapid expansion strategy. Authority was decentralised, with branch offices given autonomy to accept or reject proposals. Branch managers were handed the responsibility to prepare their targets and focus on high net worth individuals to raise revenue. The product portfolio was strengthened and the distribution network was expanded. Of course, there was some heartburn among the existing top managers and quite a few left the company. The company had to poach mangers from rivals to make up for the shortfall. The net result of the structural implementation is that the company is able to perform effectively and regularly posts good financial results.

5.   General Grand Strategies

Porter in the year 1980 gave the generic strategies of product differentiation, cost leadership and focus. He showed that firms which are looking to control the market should opt one of the three. Firms which applied a combination, according to him, were stuck in the middle and lost efficiency and effectiveness thus lost competitive advantage. Several grand strategies have been postulated and show a multiplicity of ready to use strategies to gain competitive advantage. Exhibit 1.4. below shows the combinations based on market growth and competitive position.

Exhibit 1.4: Grand Strategy Matrix

6.   DIFFERENT ORGANISATION STRUCTURE

There are several types of structures that are found in organisations. Here, some major types of ‘pure’ structures with special emphasis on their appropriateness for the different types of strategies. In practice, the actual organisational structure may be a combination of these pure structures. Such structures are called as hybrid structure.

FUNCTIONAL STRUCTURE

The most commonly used structure is functional or centralized type because this structure is the simplest and least expensive of the other structures. An example of the typical functional structure is shown in Exhibit 1.5. Besides being simple and inexpensive, a functional structure also promotes specialization of labour, encourage efficient use of managerial and technical talent and provide time for the top management to focus on strategic decisions. But there are some disadvantages also of this structure like that it forces accountability to the top, line/staff conflicts, poor delegation of authority and inadequate planning for products and markets. Functional structures are found in firms with a single or narrow product focus and such firms require well-defined skills and area of specialization to acquire competitive advantages in providing products and services. For example, Airtel has a functional structure. The transformed organizational structure have two separate Customer Business Units (CBU) with main focus on B2C (Business to Customer) and B2B (Business to Business) segments. Bharti Airtel’s B2C business unit caters the retail consumers, homes and small offices, by combining the previous business units— Mobile, Telemedia, Digital TV etc. The B2C organization consists of Consumer Business and Market Operations. Today Airtel is the largest telecommunication company in India.

Exhibit 1.5: Functional Structure

DIVISIONAL STRUCTURE

Exhibit 1.6: Divisional Structure

The divisional structure is the second most common type of structure in U.S businesses. Exhibit 1.6 shows a type of divisional structure in which work is divided on basis of product lines. The divisional structure can be organized in one of the four ways: by geographic area, by product or service, by customer, or by process. For example, Tata Steel, the organisation structure of the Tata Steel can be divided into 3 levels, each level having distinct roles and responsibilities. These three levels are namely upper management, senior management and the middle management. Each of the lower levels is accountable to perform its duties and responsibilities and thereby report to the next higher level in the organization on a regular basis. Overall, we can say that the company has a flat structure, beginning from the top management to the lowest level of management.

Also we can take an example of Ford Motor Company’s organizational structure which is build on business requirements in changing market conditions around the world. Ford Motor Company’s organizational structure is divided according to geographical markets. Ford’s organizational structure has the benefit of ensuring global direction and control. Also, the global functional groups maintain hierarchy through functional support, such as HR management to maintain Ford’s personnel. In contrast, the large regional geographic divisions have the advantage of effortlessly applying incorporated plans and policies throughout Ford’s organizational structure.

The main advantage of this type of organisation structure is that the accountability is clear. Also it generates quick response to environmental changes affecting the businesses of different divisions. But with these advantages there are a few disadvantages also like in this structure inconsistency arises from the sharing of authority between the corporate and divisional levels and also in this type of structure there are problems in the allotment of funds and company’s expenditure.

STRATEGIC BUSINESS UNIT

Source: http://cdn.yourarticlelibrary.com/wp-content/uploads/2014/12/clip_image00816.jpg

It is an additional layer of management due to the need to improve strategy implementation, to promote synergy and to gain greater control over the firm‘s diverse business units. The adoption of this type of structure by management is as a result of firms encountering difficulty in assessing and managing the operations of their departments as the diversity, size and number of these units continues to increase. Conceptually an SBU is ‘a discrete element of the business serving specific product-markets with readily expected competitors and for which strategic planning can be carry out’. Exhibit 1.7 provides a diagram of an SBU organisation structure. The disadvantages of an SBU structure are that it requires an additional layer of management, which increases salary expenses. Also, the role of the group vice president is often ambiguous. However, these limitations often do not outweigh the advantages of improved coordination and accountability. Another main advantage of this structure is that it facilitates strategic management and control of large and diverse organisations. For example: Nestle, they have business in coffee (Nescafé), bottled water, other beverages, dairy products, chocolate, ice cream, infant foods, performance and healthcare nutrition, seasonings, frozen and refrigerated foods, confectionery and pet food. Each business must be treated as a strategic business unit so each SBU can concentrate in each market by their own expertise, instead of guided by one centralized CEO.

Exhibit 1.7 Example of SBU

Exhibit 1.8: Matrix Structure example

A matrix structure (Exhibit 1.8) is the most complex of all design as it depends on both vertical and horizontal flows of authority and communication. The matrix structure allows effective knowledge management since separate areas of skills and resources will be integrated across organizational boundaries. This structure provides dual channels of authority, performance responsibility, evaluation and control. Subordinates are assigned both to a basic functional area and a project or product manager. Thus, the matrix structure simplifies and amplifies the focus of resources on a narrow but strategically important product, project or market. The advantages that matrix structure offers are that it facilitates use of specialized personnel, equipments and facilities. Also it offers a clear project objectives and workers can see the visible result of their work. For example, Wal-Mart uses Matrix structure. Wal-Mart’s advantage is because each division of the company focuses its efforts on specific goals such as product, service, or customers. Narrowing the focus really allows the company to perform more effectively because they are allowed to pinpoint specific areas needing change and adjust appropriately. But there are few limitations also of this structure such as that it requires a high level of vertical and horizontal combination which can lead to communication problems.

VIRTUAL STRUCTURE

Exhibit 1.9: Virtual Structure Example

Source: http://www.referenceforbusiness.com/management/Tr-Z/Virtual-Organizations.html

Virtual organizational structure connects different departments through the net. This is a situation where departments are located in different geographical locations but are networked and operate as though they are in the same building. It brings in advantages because departments can be located where it is most appropriate. Exhibit 1.9 shows a type of virtual organisation structure.

There are a lot many computer organizations that have applied variety of this new virtual structure such as Apple Computer and Sun Microsystems. When Apple Computer linked its easy-to-use software with Sony’s manufacturing skills in miniaturization, Apple was able to get its product to market quickly and gain a market share in the notebook segment of the PC industry.

7. STRUCTURE FOR DIFFERENT STRATEGIES

There are different type structures that are adopted for different type of strategies at the corporate and business level. Let us discuss each strategy in detail.

STRUCTURES FOR BUSINESS STRATEGIES

There are different types of Business strategies such as cost leadership, differentiation or focus strategies. Each of these strategies creates a different set of requirements and therefore requires a different organisation design with a different structural arrangement.

Why do organisations adopt cost leadership approach? First, they want to sell large quantities of product or services to a lot of customers in the industry or a segment and secondly they want to reduce costs to bare minimum. A cost leadership strategy, as shown in Exhibit 1.10 would require an efficiency approach to organisation design. This means a clear-cut, centralised authority to direct actions, backed by stringent controls to keep a close check on costs. Regular working procedures would guide employees in performing routine tasks under close supervision. There would be less self-rule for the employees and more emphasis on strong leadership. Decision making authority could be centralized in a staff function, to emphasis cost reduction in all functional areas. In terms of importance, operations could be the main functional area. Jobs would have to be highly specialized so that there is high level of employee efficiency, reducing per unit cost of the product or service. Overall the structure could be mechanistic.

Exhibit 1.10: Organisation design for business strategies

(Source: Comparison of organisation designs from R.L Daft, Organisation Theory and Design, Mason, Ohio,

South-Western, 2004, pp 63-64)

STRUCTURE FOR CORPORATE STRATEGIES

Corporate strategies of integration, diversification, internationalization, cooperation, digitalization and retrenchment generate differing requirements to be satisfied by different organisation designs and structures. Under the corporate strategy of concentration, the organisation does not require structural changes. The only change in the organisation design may be an added emphasis on marketing for market penetration and development and R&D and operations for product development strategies.

Structures for integration strategies

Vertical integration and horizontal integration are two business strategies that companies use to consolidate their position among competitors. Horizontal integration generates commitment to adjacent businesses. Organisation design and structure may have to be changed to accommodate those adjacent businesses. Addition to the existing structure may lead the organisation to create a geographical or product structure to accommodate to the requirements of horizontal integration. For instance, after reaching a certain heights, Walt Disney has been considering ways to expand and increase profits. Disney was established as an animation studio focusing children and families, which also represent their currently core target audience. However, in the process of diversifying and rising their company, Disney did a horizontal integration into live action films (For example, Pirates of the Caribbean series). In this manner the company managed to reach new audiences and control a larger segment of the film industry. Under vertical integration, the organisation extends itself either backward to raw material or forward to the customers. These strategies would create requirements for the structure to be extended accordingly. For example Zara, a Spanish clothing and accessory company, has more than 1,000 outlets worldwide. The reason for their success is vertical integration – from design to manufacture to retail. Unlike companies like Gap and A&F that purchase their clothes from suppliers, Zara makes most of its own. Sixty percent of its goods are made in house. This helps the company to handle its inventory with great effectiveness. It also allows the company to respond to changes like seasonal or fashion very easily and quickly. While Gap and A&F may take up to nine months to introduce a new line of clothing, Zara can response in two to three weeks. The firm can respond quickly to any market contingency.

Structure for diversification strategies

Diversification strategies are implemented through multidivisional and SBU structures. Depending on whether the diversification is related or unrelated, the structure would also reflect the differences. Exhibit 1.11 and 1.12 presents some illustrative structures for implementing related and unrelated diversification strategies. Observe that the corporate headquarter may retain some of the functions and dencentralise some others, depending on the nature of diversification. Related diversification would create the requirement of retaining linkages among functions and departments within the organisation so that synergies can play a role in creating economies of scope. Unrelated diversification implemented mainly through the multidivisional structure, could ignore such linkages in favour of divisional autonomy to pursue a different line of business.

Exhibit 1.11: Suggested Structure for Related Diversification

(Source: Structures adapted from M.A. Hitt, R.D.. Ireland & R.E. Hoskisson, Strategic Management:

Competitiveness and Globalization, Mason, Ohio, South-Western, 2007, pp. 347-353)

Exhibit 1.12: Suggested Structure for Unrelated Diversification

(Source: Structures adapted from M.A. Hitt, R.D.. Ireland & R.E. Hoskisson, Strategic Management:

Competitiveness and Globalization, Mason, Ohio, South-Western, 2007, pp. 347-353)

Structure for Internationalisation Strategies

There are four types of internationalisation strategies: international, multi domestic, global and transnational. Each of these strategies creates its own requirements for organisation design and structure. A model that shows the appropriate structures for each of these internationalization strategies is presented in Exhibit 1.13.

Exhibit 1.13: Structures for international strategies

Exhibit 1.15: Global Strategies: Global Product Structure

Exhibit 1.16: Multi Domestic Strategies: Global Geographic Structure

Exhibit 1.17: Transnational Strategies: Global Matrix Structure

Structure for Cooperative Strategies

Cooperative strategies are used in the cases of friendly mergers and acquisitions, joint ventures and strategic alliances. The appropriate organisation design and structure for implementing cooperative strategies are network organisation structure within, with a combination of network of organisations outside.

Structure for Digitalisation Strategies

The digitalization of information has profound implications for strategy as well as for the organisation design. Structure for implementing digitalization strategies may not be very different from those used for implementing other types of corporate strategies. The differences arise in the way the digitalization impact the organisation design. For example, digitalization may impact process design in an organisation, resulting in structural changes. Or digitalization may help create a flexible organisation structure and opening up an organisation to enter into a greater number of interorganisational relationships. The impact of information technology on organizational design is seen in terms of several factors such as these: emergence of smaller-sized organisations decentralized organizational structures, improved horizontal coordination, improved interorganisational relationships and enhanced modular structures.

Structure for Retrenchment Strategies

Retrenchment does not involve significant organisation design and structural changes. It may result in hiving off departments or divisions that are retrenched resulting in curtailed structures.

8.  Summary

Structure is an approach in which different activities of management required to implement a strategy are arranged.

In setting the strategies, a firm is required to change its structure so that it can better implement the strategies. Structure follows strategy. The development of organizational structure is primarily based on the firm‘s strategy.

There are different strategies that can be used to implement different organisation structure. These organisation structures have their own pros and cons.

Further there are different structures that are used at different strategic level and for implementing various business and corporate strategies.

REFERENCES

• David, F. R. (2011). Strategic Management – Concepts and Cases. 13th Edition. New Jersey: Prentice Hall.
• Kazmi, A. (2010). Strategic Management and Business Policy. 13th Edition. New Delhi: Tata McGraw Hill.
• Nag, A. (2011). Strategic Management – Analysis, Implementation, Control. New Delhi: Vikas Publishing.
• Kim and Mauborgne, (2005), Blue Ocean Strategy. Harvard Business Press.