Organizational Structure in Strategy Implementation

Essentials of Organizational Structure

What is an Organizational Structure?

Organizational structure specifies the organizational formal reporting relationships, procedures, authority, and decision-making processes.

Thus, an organizational structure determines and specifies the decisions that are to be made and the work that is to be completed by everyone within an organization as a result of those decisions.

Organizational structure helps firms successfully implement their strategies as a means of outperforming competitors. Thus, after firms formulate their strategies, executives must make designing organizational structure its next priority. Strategy, structure and the environment need to be closely aligned. Otherwise, organizational performance will suffer.

Organizational structure can facilitate strategy implementation efforts, but changes in this structure should not be expected to make a bad strategy good, to make bad management good, or to make bad products sell.

Symptoms of an ineffective organizational structure include too many levels of management, too many meetings attended by too many people, too much attention being directed toward solving inter-departmental conflicts, too large a span of control, and too many unachieved objectives.

Resistance to Changes in Organizational Structure

There are several reasons for the resistance to changes in organizational structure.

Organizational inertia often inhibits efforts to change organizational structure, even when the firm’s performance suggests that it is time to do so.

Firms usually prefer the structural status quo and its familiar working relationships until their performance declines or inefficiencies occur to the point where change is absolutely necessary.

Executives often hesitate to conclude that the firm’s structure is the problem because doing so suggests that their previous choices were not the best ones. Because of these tendencies, structural change is often induced instead by actions from stakeholders who are no longer willing to tolerate the firm’s performance.

Stages of Organizational Structure

Organizations follow a pattern of development from one kind of structure to another as they expand and evolve. Successful corporations tend to follow a pattern of structural development as they grow and expand.

No two organizational structures are exactly alike. When creating a structure for a firm, executives need to take one of the general organizational structures and adapt it to fit the firm’s unique circumstances.

Beginning with a simple structure of the entrepreneurial firm in which everybody does everything, successful corporations usually get larger and organize along functional lines, with marketing, production, and finance departments. With continuing success, the company adds new product lines in different industries and organizes itself into interconnected divisions.

As organizations grow, their structures generally change from simple to complex as a result of concatenation, or the linking together of several basic strategies. Consumer goods companies tend to emulate the divisional structure-by-product form of organization. Small firms tend to be functionally structured (centralized). Medium-sized firms tend to be divisionally structured (decentralized). Large firms tend to use a strategic business unit (SBU) or matrix structure.

Corporations often find themselves in difficulty because they are blocked from moving into the next logical stage of development.

Blocks to this development may be internal as in lack of resources, lack of abilities, or refusal of top management, or external as in economic conditions, labor shortages, or lack of market growth.

Founders also have a tendency to carefully hire, train, and groom his or her own team of managers. The team tends to maintain the founder’s influence throughout the organization, even long after the founder is gone. Although this may often be an organization’s strength, it may also become a weakness.

Organizational Structure in Strategy

Changes in Strategy Affect Organizational Structure

There is no one optimal organizational design or structure for a given strategy or type of organization. What is appropriate for one organization may not be appropriate for a similar firm, although successful firms in a given industry do tend to organize themselves in a similar way. When a firm changes its strategy, the existing organizational structure may become ineffective.

There are 2 major reasons why changes in strategy often require changes in the way an organization is structured.

First, structure largely dictates how objectives and policies will be established. Objectives and policies are stated largely in terms of products in an organization whose structure is based on product groups. The structural format for developing objectives and policies can significantly impact all other strategy implementation activities.

Second, organizational structure dictates how resources will be allocated. If an organization’s structure is based on customer groups, then resources will be allocated in that manner. Similarly, if an organization’s structure is set up along functional business lines, then resources are allocated by functional areas. Unless new or revised strategies place emphasis on the same areas as old strategies, structural reorientation commonly becomes a part of strategy implementation.

Relationship between Organization Structure and Strategy

Strategy and organizational structure have a reciprocal relationship. This relationship highlights the interconnectedness between strategy formulation and strategy implementation.

In general, the influence of strategy and structure on each other affects firms’ efforts to match individual strategies with their appropriate structure. The nature of this relationship means that changes to the firm’s strategy create the need to change how the organization is structured to complete its work. Without a strategy or reason for being (mission), companies may find it difficult to design an effective structure.

Therefore, when changing strategies, the firm should simultaneously consider the structure that will be needed to support the use of the new strategy, as properly matching strategy and structure can create a competitive advantage.

Which Side of the Relationship has Higher Influence?

A strategy has a more important influence on the structure, although once in place, structure influences strategy.

At the beginning of a firm, structure following the selection of the firm’s strategy. Across time and based on their experiences, firms, especially large and complex ones, customize these general structures to meet their unique needs.

Once in place though, a structure can influence and constraint current strategic actions as well as choices about future strategies. Any change in business, corporate, or functional strategy would very likely result in changes that force organizational structure to be changed. If a certain new strategy required massive structural changes it would not be an attractive choice.

Because structure can influence strategy by constraining the potential alternatives considered, firms must be vigilant in their efforts to verify how their structure not only affects the implementation of chosen strategies but also limits the organizational structure placed on possible future strategies. If a firm’s structure is designed to maximize efficiency, the firm may lack the flexibility needed to react quickly to exploit new opportunities.

General Guidelines on Strategy/Structure Relationship

First, firms try to form a structure that is complex enough to facilitate the use of their strategies but simple enough for all parties to understand and use.

Second, firms must revisit an organizational structure over time to make changes to it. Sometimes, structures become too complex and need to be simplified. A structure might need to be adjusted if decisions are being made too slowly or if the organization is performing poorly given the potential of the strategies being implemented.

Third, regardless of the strength of the reciprocal relationships between strategy and structure, those choosing the firm’s strategy and structure should be matched in such a way that provides the stability needed to use current competitive advantages as well as the flexibility required to develop future competitive advantages.

Stability and Flexibility in Organizational Structure

Appropriately designed organizational structures provide the stability a firm needs to successfully implement its strategies while simultaneously providing the flexibility to develop advantages it will need in the future.

Structural stability provides the capacity the firm requires to consistently and predictably manage its daily work routines.

Structural flexibility makes it possible for the firm to identify opportunities and then allocate resources to pursue them as a way of being prepared to succeed in the future.

Thus, an effectively flexible organizational structure allows the firm to exploit current competitive advantages while developing new advantages that can be used in the future.

An ineffective structure that is inflexible may drive productive employees away because of frustration and an inability to create value while completing their work. Losing productive employees can result in a loss of knowledge within a firm.

Related Concepts to Organizational Structure

Functional Structures of an Organization

Functional structure is the structure of each organizational function.

Each functional structure needs some type of structure to help it assign people to tasks and link its activities together.

The activities then become value creation activities. Thus, each organizational function can now develop a distinctive competency in order to increase efficiency, quality, innovation, or customer responsiveness.

Therefore, it is crucial that each member of the organization needs a structure designed to allow it to develop skills and become more specialized and productive.

Organizational structure provides the vehicle through which firms can coordinate the activities of various organizational members (functions, divisions, or business units) to take advantage of their skills and competencies.

To achieve gains from economies of scope and resource sharing between divisions, firms must design mechanisms that motivate and encourage divisional management to communicate and share their skills and knowledge.

Without a unified structure, each organizational member may soon begin to pursue their own goals exclusively and lose sight of the need to communicate and coordinate with other members.

Example:

To pursue a cost-leadership strategy, a company must design a structure that facilitates close coordination between the activities of manufacturing and those of R&D to ensure that innovative products can be produced reliably and cost-effectively.

In pursuing a global or transnational strategy, firms must create the right kind of organizational structure for managing the flow of resources and capabilities between domestic and overseas divisions.

The goals of R&D may center on innovation and product design, whereas the goals of manufacturing often revolve around increasing efficiency. Left to themselves, the various functions may have little to work with one another, and value creation opportunities will be lost.

Organizational Design

Organizational design means selecting the combination of organizational structure and control systems that allows a company to pursue its strategy most effectively—that lets it create and sustain a competitive advantage.

Organizational structure and controls provide the framework within which strategies are implemented and used in both for-profit organizations and not-for-profit agencies.

However, separate structures and controls are required to successfully implement different strategies.

An analysis of how structure and control work makes it possible to change them to improve both coordination and motivation. A good organizational design allows an organization to improve its ability to create value and obtain a competitive advantage.

The primary role of organizational structure and control is twofold.

They are as follows: (1) to coordinate the activities of employees in such a way that they work together most effectively to implement a strategy that increases competitive advantage and (2) to motivate employees and provide them with incentives to achieve superior efficiency, quality, innovation, or customer responsiveness.

Organizational structure and control shape the way people behave and determine how they will act in the organizational setting. If a CEO wants to know why it takes a long time for people to make decisions in a company, why there is a lack of cooperation between sales and manufacturing, or why product innovations are few and far between, he or she needs to look at the design of the organizational structure and control system and analyze how it coordinates and motivates employees’ behavior.

A good organizational design increases profits in two ways.

First, it economizes on operating costs and lowers the costs of value creation activities.

Second, it enhances the ability of a company’s value creation functions to achieve superior efficiency, quality, innovativeness, and customer responsiveness and to obtain a differentiation advantage.

Resources

Related Concepts

References

Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic Management: Concepts: Competitiveness and Globalization (12th ed.). Cengage Learning.
Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
Mastering Strategic Management. (2016, January 18). Open Textbooks for Hong Kong.

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