STRATEGY AND STRUCTURE

STRATEGY IMPERATIVE1. The organization has a goal or goals

toward which it drives.2. It moves toward its goals in a “rational”

manner.3. The organization exists to transform

economic inputs to outputs.4. The environment within which the

organization operates is a given.

STRATEGY-DEFINED

Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

TWO VIEWS OF STRATEGY

1. Planning Mode: strategy as a plan or explicit set of guidelines developed in advance. Managers identify where they want to go; then they develop a systematic and structured plan to get there.

2. Evolutionary Mode: strategy is not necessarily a well-thought-out and systematic plan. Rather, it evolves time as a pattern in a stream of significant decisions.

STRATEGY HISTORY

Early writers assumed that the Planning Mode wasthe proper way in which to view strategy. Thebroader Evolutionary Mode has been gaining acceptance in recent years. Due to the need to cope with both static and dynamic strategies.

LEVELS OF STRATEGY

GENERAL MOTORS

THE STRATEGY IMPERATIVE

EnvironmentalFactors and

OrganizationalCapabilities

STRATEGY STRUCTURE

CHANDLER’S THESIS – 1960’s

Chandler studied almost 100 of America’s largestfirms from 1909 to 1959, including DuPont,

General Motors, Standard Oil of New Jersey, and Sears, Roebuck.

He concluded that changes in corporate strategy preceded and led to changes in an organization’s

structure

CHANDLER, CONT’D

Concluded that organization structures follow the growth strategies of firms.

He also found that growth strategies tended to follow certain patterns.

GROWTH STRATEGIES I

• The initial stage typically involves plants, sales offices, or warehouses in a single

industry, a single location, and performance of a single function. If successful, they

follow a predictable path.

GROWTH STRATEGIES II

• The first growth stage is VOLUME EXPANSION, producing selling and distributing more of their product or

service to customers.

GROWTH STRATEGIES III

• The next stage of growth is GEOGRAPHIC EXPANSION,

continuing what it was already doing in new geographical areas, with new field

units.

GROWTH STRATEGIES IV

• The third growth strategy is VERTICAL INTEGRATION, as firms

either buy or create other functions.

GROWTH STRATEGIES V

• The ultimate growth strategy, PRODUCT DIVERSIFICATION,

involving the firm in new industries either through merger, acquisition, or

creation (product development).

CHANDLER, CONT’D

• As a firm moves through each stage, it must change its organization structure in successive steps through System 1 to System 4 (Likert)

structural types. The initial System 1 structure is appropriate because volume expansion of a single product or service in a single industry stresses low

unit cost (efficiency) and maximum resource utilization (production), with relatively low

concern for response to change and uncertainty.

CHANDLER, CONT’D

• The change to geographic expansion, and ultimately, product diversification increases

the firm’s concern for adaptability and flexibility in the face of diverse and complex environments. Thus, the

organization structures of such firms are characterized by product-based divisions and departments, decentralized authority,

and relatively wide spans of control.

LIKERT SYSTEM 1

• Also known as: Bureaucratic, Classical, Formalistic, Mechanistic

• Characteristics: high specialization of labor, homogeneous departments, narrow spans of control, centralized authority

LIKERT SYSTEM 4

• Also known as: Nonbureaucratic, neoclassical, informalistic, organic

• Characteristics: low specialization of labor, heterogeneous departments, wide spans of control, decentralized authority

CHANDLER TIME-LINE

CHANDLER - PROGRESSION

TIME – t

Simple Structure. Centralized. Single Product Line

Simplicity of strategy is compatible with a loose and simplestructure. Decisions can be centralized. Is low in both Complexity and Formalization.

(High Centralization, Low Formalization, Low Complexity)

CHANDLER – PROGR. II

TIME – t+1

As demand grows for products. Companies expand. They increase product lines. Integrate vertically to

control sources of supply. Reducing dependency on suppliers. To produce a greater variety of products.

They separate into product groups within the organization.

t+1, continued Strategies become more ambitious and elaborate. Expand activities within their same industry. Vertical integration requires more complex coordination due to increased interdependence between organizational units. Accomplished by redesigning the structure to form specialized units based on functions performed.

(Moderate Centralization, Moderate Formalization,Moderate Complexity)

CHANDLER – PROGR. III

TIME – t+2

Growth and diversification give rise to the need for anautonomous multi-divisional structure. The centralizedstructure becomes inefficient and impractical fordealing with significantly greater complexity.

t+2, continued

A product-diversification strategy requires a structural form that allows for the efficient allocation

of resources. Accountability for performance, andcoordination between units. This can best be achievedthrough the creation of a multiple set of independent

divisions, each responsible for a specified productline.

(High Complexity, Low Centralization, ModerateFormalization)

MILES AND SNOW – 1970’sClassify organizations into four strategic types:

1. Defenders: seek stability by producing only a limited set of products directed at a narrow segment of the total potential market. Strive aggressively to prevent competitors from entering their limited niche or domain. They accomplish this by standard economic actions such as competitive pricing or production of high-quality products.

DEFENDERS, CONT’DDefenders tend to ignore developments outside theirproduct line areas. They do little environmental scanning and limit product development. There isintensive planning towards cost and efficiencyissues.

Example – “Soft Soap”

MILES AND SNOW II

2. Prospectors: Almost the opposite of Defenders. They find and exploit new-product and market opportunities. Innovation is sometimes more important than profitability after exploiting a new opportunity, they get out. Must have high profit margins to cover high costs.

Examples - 3M, some Magazine publishers

MILES AND SNOW III3. Analyzers: Capitalize on the best of both Defenders and Prospectors. Minimize risk and maximize opportunities for profit. They move into new innovations and new markets only after Prospectors have proven the viability of the market. They live by imitation. They take the ideas of Prospectors and copy them.

Analyzers must have the ability to respond to leading Prospectors, but maintain operating efficiency. They tend to have smaller profit margins than Prospectors, but are more efficient.

ANALYZERS – CONT’D

Analyzers seek both flexibility and stability. They developa structure made up of dual components. Parts have highlevels of standardization, routinization, and mechanizationfor efficiency. Other parts are adaptive to maintainflexibility.

Examples – IBM, Catapillar, Digital Equipment Corp.

MILES AND SNOW IV

4. Reactors: A residual strategy. Inconsistent and unstable patterns when one of the other three strategies is pursued improperly.

In general, Reactors respond inappropriately, perform poorly, and are reluctant to commit themselves aggressively to a specific strategy.

ENVIRONMENT STRATEGY CONTINUUM

Little Changeand Uncertainty

Rapid Change& High Uncertainty

Defender ProspectorReactor Analyzer

TWO-VARIABLE ANALYSIS OF INDUSTRIES

MILES & SNOW:INDUSTRY-STRUCTURE

TYPE A and C INDUSTRIES: The high capital requirements tend to result in large organizations and a limited number of competitors. Firms in Type A and C industries will be highly structured and standardized, with the Type A’s (text error) being more decentralized to facilitate rapid response to innovations introduced by competitors.

INDUSTRY-STRUCTURE II

TYPE B and D INDUSTRIES: Because of low capital requirements. These industries tend to be made up of a largenumber of small firms. Type D, however, will likely havemore division of labor and more formalization than Type B’sbecause low innovation rates allow for greater standardization.in the same way that capital requirements influenceorganizational size and number of competitors. We shouldexpect high product-innovation rates to result in less formalization and more decentralization of decision-making.

LIMITATIONS OF THE STRATEGY IMPERATIVE

1. Some theorists claim that the impact of strategy on structure is greater at the earliest stages of organization development. Once huge investments are made in plants, equipment and personnel managers become

much more severely restricted in their ability to alter structure.

LIMITATIONS, II

2. Another observation of theorists is that when there is a major change in strategy there is normally not any major change in structure soon. Some claim because of this that there is a “lag” between changes in structure and changes in strategy, or vice-versa. Some feel that this is a “cop-out.” Organizations that do not face stiff competition are slower to change their structures than others.

LIMITATIONS, III

3. A study of the upper half of the Fortune 500 firms found that structure influences and constrains strategy, rather than the other way around.

INDUSTRY-STRUCTURE RELATIONSHIP

Industry Strategy Structure

PROPOSITIONS REGARDING THE EFFECTS OF

STRUCTURE ON STRATEGY

1. Complexity2. Formalization3. Centralization

COMPLEXITY

As the level of complexity increases, so does the probability that:

1. Members initially exposed to the decision stimulus will not recognize it as being strategic or will ignore it because of parochial preferences.2. A decision must satisfy a large constraint set, which

decreases the likelihood that decisions will be made to achieve organization-level goals;

3. Strategic action will be the result of an internal process of political bargaining, and moves will be incremental; and

COMPLEXITY, CONT’D

4. Biases induced by members’ parochial perceptions will be the primary constraint on the comprehensiveness of the strategic decision process. In general, the integration of decisions will be low.

FORMALIZATIONAs the level of formalization increases, so does the probability that:

1. The strategic decision process will be initiated only in response to problems or crises that appear in variables monitored by the formal system;2. Decisions will be made to achieve precise, yet remedial, goals, and means will displace ends;3. Strategic action will be the result of standardized organizational processes, and moves will be incremental; and

FORMALIZATION, CONT’D

4. The level of detail achieved in the standardized organizational processes will be the primary constraint on the comprehensiveness of the strategic decision process. The integration of decisions will be intermediate.

CENTRALIZATION As the level of centralization increases, so does the probability that:

1. The strategic decision process will be initiated only by the dominant few, and it will be the result of proactive, opportunity-seeking behavior;2. The decision process will be oriented toward achieving “positive” goals (i.e.- intended future domains) that will persist in spite of significant changes in means;3. Strategic action will be the result of intendedly rational choices, and moves will be major departures from the existing strategy; and

CENTRALIZATION, CONT’D

4. Top management’s cognitive limitations will be the primary constraint on the comprehensiveness of the strategic process. The integration of decisions will be relatively high.