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Chapter 8 Organizational DesignChapter 8 Organizational Designand Strategy in a Changingand Strategy in a Changing

Global EnvironmentGlobal Environment

Levels of strategyLevels of strategy

Implementing acrossImplementing across

countriescountries


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Organizational Theory

The strength of an organizations corecompetencies is a product of specialized

resources and coordination abilities.

Specialized resources can be either functional

or organizational:

Functionalskills of functional personnel

Organizationalorganization wide attributes

Coordination abilities refer to an organization's

ability to coordinate its functional and

organizational resources to create maximal

value.


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Strategy is formulated at four levels in anorganization:

Functional-level strategy

Business-level strategy

Corporate-level strategy

Global expansion strategy


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Organizational strategy is a specific patternof decisions and actions that managers

take to use core competencies to achieve

a competitive advantage and outperformcompetitors.

Core competencies are skills and abilities invalue creation activities that allow a company

to outperform its rivals.


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Functional-level strategy

To lead to competitive advantage,

an organization should:

Perform functional activities at a cost

lower than that of its rivals

OR Perform functional activities in a way

that clearly differentiates its product

from those of its rivals


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Organizational TheoryLow-Cost and Differentiation Advantages Resulting from Functional-Level Strategy (continued)

Value-creating Source of low-cost Source of differentiation

function advantage advantage

Human resource Reduction of turnover Hiring of highly skilled

management and absenteeism personnel

Development of innovative

training programs


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Materials Use of just-in-time inventory Use of company reputation

management system/ computerized warehousing and long-term relationships

with suppliers and customers

Development of long-term to provide high-quality inputs

relationships with suppliers and and efficient distribution and

customers disposal of outputs


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Sales and marketing Increased demand and lower Targeting of customer groups

production costs Tailoring products to

customers

Promoting brand names


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Structural Characteristics Associated with the Development of Core Competencies in

Production, Sales, and Research Development

.

Manufacturing Sales R & D

Mechanisticstructure

Organicstructure


Tall

organization

Flat

organization


Centralized

decision

making

Decentralized

decision

making


StandardizationMutual

adjustment


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Business-level strategy

Strategy at this level should:

Select the domain of the organization

AND

Use resources and abilities to manage

its environment to protect andenlarge that domain


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Once an organization has chosen its domain,it can use either of the following:

Low-cost business-level strategyproduces low-priced goods and services

for all customer groups.

Differentiation business-level strategy

produces high-priced, quality products

aimed at particular market segments.


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One type of business-level strategy is thefocus strategy.

Focus strategy involves specialization inone segment of the market and focusing

all of the organizations resources on

that segment.


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Characteristics of Organizational Structure Associated with Business-Level Differentiation

and Low-Cost Strategies

Matrix

structure

Product team

structure

Product, market,

or geographic

structure

Functional

structure

Differentiation Strategy Low-Cost Strategy

Complex structure Simple structure

Decentralized decision making Centralized decision making

High differentiation Low differentiation

High integration Low integration

Organic structure Mechanistic structure


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Corporate-level strategy

An organization that cannot create more

value in its current domain often tries to

find a new domain in which to compete.

Diversificationproducing new products

for new marketsis one avenue for

expansion.

Diversify


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There are various strategies that anorganization can use to seek value creating

opportunities outside its current domain:

Backward vertical integration

Forward vertical integration

Related diversification Unrelated diversification


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Corporate-Level Strategies for Entertaining New Domains

Input

Domains

Related

Domains

Output

Domains

Unrelated

Domains

Related

diversification

Backward

vertical

integration

Unrelated

diversification

Forward

verticalintegration

Core Domain


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Corporate-level strategy and structure:

The appropriate organizational structuremust be chosen at the corporate level

in order to realize the benefits of vertical

integration and related and unrelated

diversification.


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As discussed earlier, a multidivisional structureis appropriate for organizations operating

in more than one domain.

There are a few variants of the multidivisional

structure, and each is suited to realizing

the benefits associated with either relatedor unrelated diversification.


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Organizations pursuing a strategy ofunrelated diversification are likely to use

a conglomerate structure.

Conglomerate structurea structure in

which each business is placed in a

self-contained division and there is nocontact between divisions.


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Conglomerate Structure

A

Division

B

Division

C

Division

D

Division

E

Division

F

Division

G

Division

H

Division

I

Division

Corporate

Headquarters

Staff

CEO


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Organizations pursuing a strategy of

related diversification are likely to use

either a multidivisional or matrix structure.

The bureaucratic costs associated with

managing related diversification are muchgreater than those of vertical integration

or unrelated diversification

(i.e., more communication and coordination)

Bureaucracy


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Before we examine the strategies thatorganizations use to manage activities

in the international environment, we need

to examine how organizations createvalue from international activities.

Organizations adopt a global expansionstrategy to extend their value creation

activities into foreign countries.


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The Creation of Value through Global Expansion

Transfer of core

competencies

abroad

Establishment of

a global network

Use of global

learning to enhance

core competencies

1.

4.

2.

Gaining access to

global skills and

resources

3.


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The International Environment

General international environment

Specific international environment

Customers Distributors

UnionsThe OrganizationGovernment

Suppliers Competitors

Economic forces Technologicalforces

Demographic, cultural,and social forces


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The three factors that influence the choiceof strategy for global expansion are:

Pressures for global integration

Pressures for local responsiveness

Bureaucratic costs


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Each of the different strategies thatcompanies can use to enter and compete

in the international environment involve

different combinations of these factors.

We can use two of these factors, pressures

for local responsiveness and pressuresfor global integration, to develop the

differences between the strategies.


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Multi-domestic Strategy

Pressures for Local Pressures for Global

Responsiveness Integration

HIGH LOW

Manufacturing, R&D, marketing abroad Achieve a differentiation advantage

Bureaucratic costs are lowest


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International Strategy



LOW LOW

Manufacturing abroad, R&D and marketing at home

Bureaucratic costs are low


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Global Strategy



LOW HIGH

Manufacturing at a few low-cost locations, R&D and marketing at home

Bureaucratic costs are high


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Transnational Strategy



HIGH HIGH

Manufacturing, R&D, marketing abroad, BUT Emphasis on global learning / cost reduction

Bureaucratic costs are highest


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The key factor influencing a companyschoice of structure is the degree of control

and coordination that its chosen strategy

requires.

Following is a discussion of appropriate

structural characteristics given ourknowledge of the intent of these strategies.


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Vertical differentiation choices

Levels in the hierarchy

Low Need for Coordination High

Multi-domestic International Global Transnational

Strategy Strategy Strategy Strategy

Relatively Relatively Relatively Relativelyflat tall tall flat

Low Bureaucratic Costs High


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Vertical differentiation choices

Centralization of authority




Decentralized Centralized / Centralized SimultaneousDecentralized Centralized &

Decentralized



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Organization Theory

Horizontal differentiation

Type of Structure




Global Global Global Global matrixgeographic product group product group

structure structure structure



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Global Geographic Structure

Corporate

Headquarters

(located in Sweden)

Functional activities

South

American

Division

Japanese

Division

French

Division

British

Division

United

States

Division

Canadian

Division


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Global Product Group Structure

Worldwide Chemicals

Product GroupHeadquarters

Worldwide Consumer

Goods ProductHeadquarters

Corporate Headquarters

(located in the United States)

Worldwide Automotive

Product GroupHeadquarters

CanadianDivision

BritishDivision

United StatesDivision

FrenchDivision

JapaneseDivision

Product groups

Domestic and foreign divisions


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Global Matrix Structure

Canadian

Division

Individual business division

Automobile

product

group

Chemicalsproduct

group

Consumer

goods

product group

North American Area

United

States

Division

Mexican

Division

European Area

British

Division

French

Division

Pacific Area

Japanese

Division

Taiwan

Division


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Integration

Need for integrating mechanisms




Low Medium Medium High



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Integration

Need for electronic integration




Medium High High Very High



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Integration

Need for integration by organizational culture




Low Medium High Very High



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The principle problem with managing globalproduct group and global matrix structures

is the high number of linkages that have

to be coordinated through structure.

Bureaucratic costs

increase with the number

and complexity of linkages.

One way to reduce bureaucratic costs is to

form strategic alliances.


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Strategic alliances between organizationscan take many forms:

Long-term contracts

Network organizations

Minority ownership

Joint ventures

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