Strategic Management and the Organization

Chapter 8

Organizational Strategy

Like in military applications, strategy is about knowing yourself, knowing your opponent, and making better use of your knowledge than your opponent does

Strategy is the guiding force that gives direction to the value creation activities of the entire organization

Strategy in practice is strategic management…

Strategic Management

Process by which the organization becomes aware of the threats and opportunities inherent in the external environment as well as its own internal strengths and weaknesses and uses this knowledge to guide decision making

Key tool is SWOT analysis Strategy is about the focused pursuit of

thoughtfully established goals

Purposes of Organizational Goals

Provide employees with direction and motivation (recall goal-setting theory)

Provide a guide for managerial and employee decision making

Establish performance criteria Provide legitimacy to external stakeholders by

showing the organization has a game plan Integrate all employees by giving them

common objectives.

The Strategy Process

Determining the Mission Determining Operative Goals Identifying a Strategy to meet those goals

– Competitive advantage through core competencies

Define tactics to carry out the strategy

Levels of Strategy (1)

Corporate (organizational) level (what business are we in?)– Growth

Vertical integration of supply chainRelated diversificationUnrelated diversification

– Resource control (e.g. strategic alliances)– Stability (holding market share)– Retrenchment (divestiture)

Levels of Strategy (2)

Business level (how do we compete through strategic business units)– Low-cost– Differentiation– Focus (focused-low cost, focused differentiation)

Functional level (how do the organization’s units support business-level strategy?)– Each function (manufacturing, R&D, Sales, etc. need

to find and exploit their competencies in order to contribute to unique organizational competencies

Strategic Analysis (SWOT)

At all levels (corporate, business, functional, global) strategies are devised by looking at the internal, external and global environments and seeking sources of competitive advantages

Internal analysis – Strengths and Weaknesses (i.e. competencies)

External analyses – Opportunities and Threats (i.e. competitive forces)

Key Ideas – Strategy Setting

Core Competencies – unique skills and abilities within an organization that are translated into value creation

Competitive Advantage - The ability of an organization to transform its core competencies into sustainable advantage over competitors that is not easily replicated

Competitive Forces – the external environmental forces that directly affect the organization’s competitive position in its industry

Competitive Forces (Porter)

1. Threat of entry by new competitors

2. Threat of substitute goods/services

3. Bargaining power of buyers

4. Bargaining power of suppliers

5. Rivalry amongst existing competitors

Sources of Competitive Advantage

Product and Process Technologies Protected and regulated markets Access to financial resources Economies of scale Management of people

Matching Strategy & Structure

Structure must match the corporate and business level strategy

Considerations:– Size of the organization– Degree of centralization– Degree of standardization– Amount of integration

Overall, mechanistic vs. organic

Corporate-Level Strategy and Structure

Growth – larger organizations, particularly those that are diversified, need a divisional structure to handle diversification– Related diversification – incorporation into product

division structure– Unrelated diversification – conglomerate m-form

Stability and Retrenchment – means reducing the complexity of structure, possibly network structure)

Business-Level Strategy and Structure

Low cost strategy –mechanistic structure (centralized, low differentiation, high standardization, low integration, simple structure like functional)

Differentiation Strategy – organic structure (decentralized, high differentiation, high integration, complex structure like divisional or matrix)

Focus strategy – stay as small as the market – simple, lean structure

The International Environment

Opportunities Expansion into new markets

(commercial and consumer) Increase sales and production =

economies of scale/scope Access to many suppliers Access to new resources and

competencies Production in lowest cost regions New competencies can be

attained from foreign ‘best practices’

Threats Increased competition in the

domestic market from low-cost foreign competitors

Increased competition in foreign markets from third-country firms

Increased volatility of markets due to global interconnectedness of markets

International Environment: Opportunities and Threats

Environmental Elements

InternalEnviron-

ment

Task Environment

General Environment

Technology

Socio-cultural

International

Economic

Legal/Political

Customers

Supply Chain

CompetitionLabourMarket

Financial

Global monitoring –need a structure that enables collection and sharing of information about important international events

Flexibility and Adaptability – Structure must be flexible enough to adapt quickly to changes in different areas

Efficiency – need to cut costs and eliminate redundancies to remain competitive internationally

Integration of Information – flow of information vertically and horizontally must be managed effectively to deal with time and space issues

Demands on Org. Structure

Entering Foreign Markets

Most companies start out domestic and expand globally gradually in stages.

Typically, a company, once it becomes aware of foreign opportunities, enters foreign markets first through export

The most likely structure for exporting domestic companies is a divisional structure with an international division.

International Division Structure

CEO

Line 1 Line 2 Line 3 Interntn’l

Europe

USA

Asia

Staff

Global Strategic Alliances

Orgs. Can enter foreign markets without building foreign facilities through strategic alliances:

Long-term contracts with foreign producers– Includes franchising and licensing

Network Structure – contract out non-core functions to foreign firms (e.g. Nike)

Joint Ventures – work with an established organization to exploit both organizations’ core competencies

Minority Ownership – can be used to gain leverage and learn from foreign organizations

Global Expansion

The goal of global expansion is to transfer the org.’s core competencies into new markets in order to create competitive advantages abroad

The challenge of global expansion is to find the most effective means of linking resources and information from all global facilities in order to create greater value for the org.

Global organizations must also secure resources in each area in which they operate

Competing Demands in Global Expansion

Firms expanding globally must balance two competing demands:– The need to be responsive to local markets,

customizing to meet the needs of consumers in order to be effective at marketing its goods/services

– The need to integrate operations and strategy as much as possible worldwide in order to reduce costs through economies of scale and scope

Both integration and customization increase bureaucratic costs

International Strategy

Product Standardization

Global Integration

Multi-Domestic Strategy

(Magazine)

Transnational Strategy

(Electronics)

International Strategy (Coke)

Global Strategy

(Nike Shoes)

low

low

high

high

Global Expansion 1 - Multidomestic Strategy

Products/services are highly customized to meet the needs of the specific market

Foreign operations are only loosely integrated with other foreign operations and domestic HQ

Involves the establishment of autonomous foreign divisions that operate like mini organizations in foreign markets

Foreign divisions secure their own suppliers and distributors in the foreign market

Allows ‘country-by-country’ expansion Global Geographic structure is likely

Global Geographic Division Structure

CEO

Pacific Europe S. America USA HQ

Project Coordination

Long-Term Planning

Global Expansion 2 - International Strategy

Goal is minimal customization of products or services while retaining high integration (one product for the world)

Core functions of R&D, Marketing and Product Design are centrally located at HQ for the entire organization

Production facilities worldwide operate very similarly, with minor adaptations to local needs

Allows transfer of core competencies Global Product Structure

Global Product Structure

Acctg. M ktg. M fg.

G lobal OperationsProduct Line 1

Acctg. M ktg. M fg.

G lobal OperationsProduct Line 2

CEO

Global Product Structure (International Strategy)

R&D Mktg

.Mfg

.

Global Operations

Product Line 1

Global Operations

Product Line 2

Corporate HQ

R&D Mktg

.Mfg

.Mexico

US

UK

France

US

UK

Local Market

Local Market

Local Market

Local Market

Local Market

Local Market

Global Expansion 3 – Global Strategy

Goal is total product standardization and global integration

For products that can be mass produced for the entire global market in a central facility

Core functions located in HQ like with International Strategy

Production is located wherever in the world the lowest cost can be achieved, product is then exported

Global Product Structure, with production located in various global regions

R&D Mktg

.Mfg

.

Global Operations

Product Line 1

Global Operations

Product Line 2

Corporate HQ

R&D Mktg

.Mfg

.

Global Product Structure - (Global Strategy)

US UK Mex US UK Mex

Product MarketsDomestic and Foreign

Global Expansion 4 – Transnational Strategy

Goal is complete customization of product and complete integration of value-creation activities

Operations are located in most markets where the company sells

Local org. units coordinate the customization of products, network with other global org. units

Various operations use their core competencies to add value in the best way possible

Fluid interconnections between global org. units to remain adaptive

Each centre can develop its core competencies to benefit the entire org.

Global Matrix or Transnational Structure

Global Matrix Structure

USA UK Mexico Congo

Hemorrhoid Cream

Jock Itch Powder

Acne Cream

Wart Remover

Globally Located Org. Units

Global Expansion – Concluding Thoughts

Global expansion is not “all or nothing” – it occurs in phases

The level of complexity of a global organization grows exponentially

Structure must match the strategy Culture is as important, if not more important

than structure in a global organization Flexibility and adaptability are essential.

Team Discussion

Read the case ABB’s Matrix Structure on pp.262 – 264

Answer the following questions (NOT THE ONES IN THE TEXT)

1. What potential advantages does the Global Matrix structure provide for a company like ABB?

2. What problems are likely to emerge with such a structure

YOU HAVE 20 MINUTES!