The relationship between structure and strategy

Strategy is a pattern or plan that integrates an organization’s major goals, policies and action sequences into a cohesive whole. This intent of strategy emanates quite explicitly from the definition given by Chandler (1962): strategy is the determination of the basic long term goals of an enterprise and the adoption of courses of actions and the allocation of resources necessary to carry out these goals. The same message is contained in Schendel and Hatten’s definition (1972): strategy is the basic goals and objectives of the organization, the major programs of action chosen to reach these goals and objectives, and the major pattern of resource allocation used to relate the organization to its environment. Webster (1994) calls this the building block of strategic management and notes that a secure foundation (strategy) is needed if the process (strategic management) is to function properly. In this sense strategy provides the link between where the organization is at present and where it would like to be in the future. Mintzberg (1994) portrays strategy as a plan – a direction, a guide or course of action into the future – and as a pattern, that is, consistency in behaviour over time.

Defining structure:

Burns and Stalker (1961) view structure as a process in itself – a means of holding together an organization so that it is able to determine its own destiny. Organizations that operate in dynamically changing and uncertain environments tend to need organic/flexible structures and processes while more stable environments lend themselves to more familiar mechanistic bureaucratic structures. Some of the main functions of organizational structure which provide:

• A formal allocation of work rules;

• Channels for collaborative working;

• Boundaries of authority and lines of communication;

• A means of allocating power and responsibility;

• Prescriptive levels of formality and complexity.

The concept of co-alignment:

If strategy is about realizing a plan, then in implementing it, a suitable means of structuring resources and activities must be found and maintained. “Co-alignment” is a term to describe the “best fit” relationship between strategy and organizational structure. Without co-alignment between structure, strategy and the environment, organizations may experience difficulty in achieving long-term success.

Mintzberg (1989) adds to the list of variables in the context of maintaining alignment between strategy, structure and the marketplace

Flexibility – allowing employees to generate ideas and participate in decision making;

Adaptability – developing an organizational structure that is able to respond as marketplace conditions change;

Empowerment – giving employees the scope to be creative, to generate new ideas and participate in decision making;

Innovation – encouraging employees to try new ideas and “re-invent” processes;

Team support – providing mutual support, encouragement and sharing (learning, improvement, vision).

Business Level Strategy: Co-Alignment between Strategy and Structure

The strategy of an organisation describes the way it will pursue its goals given the threats and opportunities in the environment and its resources and capabilities (Rue and Holland, 1989). Corporate-level strategy relates to the product/market choice(s) of a firm and business-level strategy defines how it will deploy its resources in a given product/market area vis-a-vis its competitors (Hatten et al., 1978). Business-level strategy is a powerful predictor of other organisational phenomena and perhaps the most useful stream of research for practitioners is the empirical examination of its relationship with organisational performance (Hambrick, 1980).

Quinn (Quinn, 1980) defines strategy as a pattern or plan that integrates an organization’s goals, policies and action sequences into a cohesive whole.

A Business-level strategy is a plan to combine the core competencies in order to position the organization so that it has a competitive advantage in its domain (OB Book).

Michael Porter has argued that a firm’s strengths ultimately fall into one of the two headings: cost advantage and differentiation (Porter, 1980) .

Business Level Strategies and Matching Structures

Target Scope

Advantage

Low Cost

Product Uniqueness

Broad Market Scope

Cost Leadership Strategy

Differentiation Strategy

Narrow Market Segment

Focus Cost Leadership

Focussed Differentiation

Table 1: Porter’s Business-level strategies

The value that an organization creates at the business level depends on its ability to use its core competencies to gain a competitive advantage. This ability is a product of the way the organization designs its structure. Strategy and structure have a reciprocal relationship (Yin & Zajac, 2004). Research however suggests, that strategy has a much more important influence on structure than reverse (Keats & O’Neill).

The different structures that a firm can adopt are

Matrix structure

Product team structure

Product, market or geographic structure

Functional structure

Matching structure for Cost Leadership Strategy

To closely control the cost of product development, low-cost companies generally adopt the simplest structure. Simple reporting relationships, few layers in decision-making and authority structure, a centralized corporate staff, and a strong focus on process improvements is what is needed.

WalMart successfully implemented a Cost-leadership strategy by streamlining its supply chain operations. Its other functions like Marketing, Personnel aligned themselves according to the supply chain

TATA Steel heavily invested in its Manufacturing division because it derives its competitive advantage from primarily this function

Figure 1: Functional Structure for Cost Leadership Strategy

Matching structure for Differentiation Strategy

Has to have the ability to develop and introduce products

Close cooperation between functions

Organic structure, decentralized, cross-functional teams

To have the ability to introduce new products in the market, a firm following differentiation strategy will have to be dynamic, with decentralized decision-making structures to quickly respond to market conditions. A matrix structure, with product-based is best suited for these type of firms.

Environment has a moderating effect on the relationship between business-level strategy and performance (e.g. Prescott, 1986; Lee and Miller, 1996). For improving a firm’s performance in comparison to its competitors both cost-leadership and differentiation strategies are effective in environments with high level of dynamism. In low-hostility environments a cost-leadership strategy and in high-hostility environments a differentiation strategy lead to better performance in comparison to competitors. A cost-leadership strategy is more favourable for improving financial performance in highly dynamic environments. However, in environments with low levels of dynamism a differentiation strategy is more helpful in improving financial performance.

Corporate-level strategy

Corporate-level strategy is a plan to use and develop core competences so that the organization not only can protect and enlarge its existing domain but can also expand into new domains. It involves a search for new domains in which to exploit and defend the ability to create value from its core competences.

Vertical integration:

Fig: Various Corporate Level StrategiesVertical integration is a strategy in which an organization takes over and owns its suppliers (backward vertical integration) or its distributors (forward vertical integration). In this way it controls the production of its inputs or the disposal of its outputs. The various benefits of going for a vertical integration strategy are that it can result in production cost savings, control of reliability and quality of inputs, Product differentiation and constant supply of inputs and disposal of outputs.

Crown Equipment Corporation

Crown Equipment Corporation is the fifth-largest lift-truck company in the world, and the largest electric lift-truck company in the world. It is now a billion-dollar company. Crown Equipment is located in a small Ohio town of New Bremen. Crown has vertically integrated manufacturing facilities to produce products for the material handling industry. A core competency of Crown is their attention to the products they produce, along with the total attention to customers’ needs. Crown signifies many aspects of USA’s manufacturing future. They have ability to design, manufacture, distribute, and innovate high-end products where customers are willing to pay more money. The achievements of Crown are astounding. This company started as a privately held company that entered the materials handling industry late in the 1950’s. The company excelled, and rose to become a $1 billion dollar company. The financial success of this company is also complemented by its innovation. They have received many design awards, including an international award that ranks Crown ahead of the likes of Jaguar, Audi, and Porsche. Crown’s vertically integrated manufacturing strategy has been another competitive advantage to achieving such high standards.

Crown plants produce 85% of the parts in its products because of the company’s product focus, and passion for its work. Producing 85% of products’ parts in house enables Crown to build a product that they know is top of the line with minimum defects. Crown’s management does keep an open mind to outsourcing to make sure they are still competitive. But a key thought of Crown’s management is that it would be difficult to achieve the brand promise when outsourcing and purchasing much of the components from another supplier.

An example of Crown’s first break through product shows how an integrated manufacturing and innovation team can lead to a break through. Crown developed the first counter balance lift of its time. It developed a lift that was the first in its industry to combine a multi-function control with a side stance operating position. Crown could not find suppliers to supply components to the control device because the technology was not available. The key point here is that Crown could have had its components supplied all along, but they would not have discovered their break-through product. This discovery was the result of an intense customer focus on the needs of the consumer, and a top notch in house innovation team. Crown’s insistence that it produce most of the components of the final product led to this innovation that made them a global leader. Ultimately, the company’s focus on providing the highest quality product leads the engineer and production employees to always innovate parts and components to be an industry leader – not a follower. If these engineers or the components manufacturers were outsourced or purchased from another supplier, the other supplier would be less inclined to sweat the details and innovate.

When a company buys most of its parts from another company the supplier is just content to receive the pay-check. They have no inclination to innovate. That is why forward integration is so important. Crown is an industry leader because these employees feel like they are part of something and their main focus is to make a technologically advanced product.

There is one ultimate question to be seen in the material handling industry: it is whether low cost overseas manufacturers will redefine competition in the industry. These overseas manufacturers could offer very cheap labour, which would lead to a giant reduction in costs. This may render Crown’s approach obsolete, as in many other industries that cheap global labour has ravaged. Crown does compete at the high end of the price scale, but they may still struggle to compete with the cheap labour force offered internationally. The competitive advantage Crown has over cheaper overseas manufacturers is that they do have the vertically integrated product focus that leads to all of the innovations. These low cost overseas manufacturers are competent at mass-producing. However, they are not currently competent innovators of specialized products.

Crown’s management speculates that it will survive, because it produces a highly specialized product that meets the customer needs better than anyone else in the world. This smallish company may represent the USA manufacturers’ future of an in house vertically integrated production strategy. So far they have performed admirably and have been a high quality and ever-evolving corporation – leveraging their forward integration

Related diversification:

Related diversification refers to the entry into a new domain in which it can exploit one or more of its existing competences. Related diversification creates value by sharing resources or transferring skills from one division to another. It requires lateral communication between divisions as well as vertical communication between divisions and headquarters for smooth operations.

Four categories of diversifying investments are classified as related diversification. One, when new investments involve similar products; two, when they lead to the vertical integration of complementary activities; three, when firms internationalize by adding operations in foreign markets which involve similar products (even if these investments take place in culturally and geographically distant markets); and four, when the new business shares intangible assets such as marketing knowledge, patent protected technology, product differentiation, superior managerial capabilities, or routines and repertoires (Nelson and Winter, 1982; Winter, 1987).

Hitachi Ltd.

It is one of the Japan’s biggest and most innovative companies. Apart from computers it is also engaged in non-computer businesses that rely heavily on computer technology: consumer electronics, power plants, transportation, medical equipment and telecommunications. It is pursuing a strategy of related diversification on a grand scale and R&D forms the bedrock of the organization. Hitachi has 28 divisions. Each division is responsible for independently designing, developing and marketing its products. This decentralized approach puts a heavy pressure on integrating the divisions. Hitachi has taken numerous steps like integrating roles, corporate R&D lab, and sophisticated telecommunication network to link its laboratories. Through all those means, Hitachi has enhanced its ability to transfer its R&D skills around the organization and secure the gains from its strategy of related diversification. The bureaucratic costs of pursuing this strategy, however, are very high because so much money and time is spent on integrating the 28 R&D laboratories. Hitachi has chosen to bear these costs to obtain the benefits of its strategy of related diversification. What matters to Hitachi is maintaining its long term ability to create value.

Unrelated diversification:

Unrelated diversification refers to the entry into new domains that have nothing in common with its core domain. Organizations pursuing this strategy attempt to create value by purchasing underperforming businesses, restructuring them and then managing them more efficiently. Often organizations go for Conglomerate structure, which is a structure in which each business is placed in a self-contained division and there is no contact between divisions.

ITC and Diversification:

The company was incorporated way back in 1910 under the name IMPERIAL TOBACCO COMPANY OF INDIA LIMITED. Soon it was renamed as I.T.C Ltd. Soon it was renamed as I.T.C Ltd. in 1974.The company is market leader in Indian cigarette business. ITC has a diversified presence in cigarettes, hotels, paperboards, specialty papers, packaging, agricultural paperboards, branded apparel, packaged foods & confectionery, greeting cards and other fast moving consumer goods (FMCG).

ITC has diversified into different activities to reduce its dependence on the cigarette business, which has always faced pressure from governments and anti-cigarette activists and organisations. The last five years have seen a steady increase of the non-cigarette revenues in ITC sales. The company has created multiple engines to drive growth through different business streams. This strategy of diversifying into a wide array of businesses comes under unrelated diversification strategy. By following this successful diversification strategy ITC now operates in a number of sectors. ITC currently focuses on four-business groups, FMCG (cigarette and non-cigarette), hotels, paper & packaging, and agribusiness. Predominantly still a tobacco company; ITC is steadily gaining success in increasing its earnings from its non-cigarette diversified businesses. ITC is going for this strategy not only to reap high profits in future but also to reduce the risk. Investors shall continue to benefit as the company’s strategy of de-risking its portfolio is executed successfully.

The Global Strategy

As organisations grow and the domestic market saturates the growth potentials lay in the unchartered waters of another nation. This involves lot of risks but the returns are also unlimited.

Types of Global Strategies

The strategies used by the organisations can be studied under two basic strategies i.e. Local responsiveness and Global Integration

Local Responsiveness

Global Integration

A Multi Domestic strategy focuses on local requirements. The company decentralizes authority to subsidiaries and divisions in each country in which it operates to produce and customize product to local requirement.

An Internationalisation strategy focuses more on its products and maintaining consistency across countries. Only very small set of functions that are essential or value added are decentralized.

A global Strategy focuses on cost reduction from scale, the most important production centres are centralised to get the minimum cost of production.

A Transnational strategy focuses to achieve both scale and local configurability, leading to best practices being centralised and empowering countries do desired modifications for local demand

Adopting any of the above strategies also comes with certain constraints and costs. All these strategies call for radical structure changes in the organisation. And other risks include loss of core competencies, lack of coordination among the national and central headquarters, costs of actual transportation of goods and services, local administration responsiveness and many more. Some of these have been listed in the table below.

Implementation of Global Strategies

Multidomestic Strategy

Firms that implement Multi Domestic Strategy operate in a ‘global geographic structure’. Company operates virtually all its activities inside each country. This gives the flexibility to respond to requirement very fast. The corporate headquarters mainly do overseeing job and monitor the output factors like Return on investments (ROI). The communication among different country units is also minimal as interdependencies are less. The disadvantage of this structure is evident from the global headquarters perspective becomes clear as key resources get locked in countries and are not available for exploiting at the global level.

This strategy is most evident in the global automakers that design their cars according to local needs and get support of basic R&D from their parent organisation. Cars are sold under the same brand names in different regions with completely different positioning. The cars are redesigned based on local needs. Many auto makers including General Motors, Volkswagen etc. use similar strategies

International Strategy

Firms usually operate in ‘global product group structure’ while using this strategy. This is generally used by companies with a large product portfolio and a seamless transfer of products from one country to another. Product group headquarters hold the key in this structure. The products value creation is done for the products and the standardisation is maintained across different countries and regions including the home country.

For e.g. TCS came up with the concept of “offshore development centres”, these centre provided them the flexibility to have an offshore centre for major software development keeping very less staff at the client site. This way they could generate software which can be used by multiple clients with small modifications giving TCS the cost leadership.

Global Strategy

The main emphasis here is segregating the production and functions to places they are cheapest and most effective. The economies of scale are attained but the integration in various departments is very important. The ‘product group structure’, which is best for this scenario, allows managers to decide how best to pursue a global strategy. For e.g. companies are moving their production centres to low cost counties in Asia and keeping their product design centres at Europe or America.

For e.g. Schering-Plough a drug giant from US, when it had to implement a global strategy, a multi domestic strategy was chosen. But inefficiencies crept in because of tall hierarchy. Schering had just one kind of product so the new chairman decided to reduce the number of levels and created a global structure as having heads of international divisions just under him. This enabled the organisation to attain economies of scale and tide thru the crisis.

Transnational Strategy

All the above strategies either attain a consumer focus or have economies of scale. But large companies which have varied products and demanding customers have to adopt a strategy called transnational strategy and a Matrix structure. Matrix structure allows the cost effectiveness as well as market responsiveness but adds to integration costs as at country level the reporting structure does note remain linear and managers have to report to the country manager as well as product manager.

For e.g. ABB implemented a matrix of business and geography. It created profit centres located in business markets. These profit centres directly report to two head the national company and the business segment. Profit centres had their own reports and decisions of product development and marketing were taken from the upper level. The role of the central executive committee was to create synergies amongst these departments to achieve the company goals.