Wednesday, 10 November 2010

The importance of identifying the best fit between corporate structure and strategy


The definition of corporate strategy is very much associated with that of competitive advantage. Strategy is typically defined as the direction and scope of a company over the long-term. Notwithstanding, the exogenous environment is changing at such a pace that it can be hardly contended that this definition may still hold true. An additional distinctive characteristic of strategy, or rather, a feature strategy should invariably have is adaptability, that is, the capacity to change and adapt to the ever-changing contextual circumstances in order for organizations to constantly attain and maintain competitive edge. Employers define a direction and determine a scope in that these essentially aim at gaining an as huge advantage as possible over their direct and indirect competitors.

 
 
 
The idea of competitive advantage refers to an employers’ ability to increasingly attract new customers and make these faithful to the business by offering them good value for money. This objective can be either attained by introducing in the relevant market average products or services at a lower-than-average price or marketing above-than-average quality products and services at a higher price, totally justified by the products’ quality.



All in all, it can be contended that corporate strategy might be most aptly defined as the direction and scope an employer identifies and amends over time, as suggested by the changing circumstances, in order to achieve and maintain competitive advantage over its competitors. Attaining and maintaining competitive edge over time, nonetheless, definitely represents a daunting feat to perform. Yet, each organization is unique so that in terms of strategy, as in many other managerial aspects, the one-size does not fit all.

 

Each firm needs to develop its own strategy, which even though the world is subject to an incessant process of change, should enable this to be clear about how it intends to add value to its resources. Developing strategy and keeping it up to date represent two essential stages of the mandatory process necessary to constantly keep connected an organization to the exogenous environment. Despite every organization develops its own strategy not all the organizations competing in the same market are successful or equally successful, which may be in general due to either the adoption of an inappropriate, unsuitable strategy or to its bad execution.

 

Different layers of organizational strategy have been actually identified over time. Corporate level strategy is habitually intended to sustain growth, ensure stability and stimulate innovation, whereas Business Unit level strategy, according to the Generic Competitive Strategies Framework developed by Porter (Porter, 1980), can enable firms to achieve competitive advantage by opting for one of the three different types of generic strategies suggested by the Author:

- Cost leadership,

- Differentiation,

- Focus.

 

Cost leadership strategy, which is essentially intended to contain the business expenditures, is typical of the low-cost, no-frills organizations and of the companies which do not aim at diversifying themselves in the market in terms of the quality of their customer service. Despite the main objective of these organizations is to reduce expenditures at large, these businesses habitually take into due consideration the circumstance that their customers attach a particular significance to the quality of what they receive in exchange for what they pay. Organizations pursuing a differentiation strategy, by contrast, aim at introducing in the market products or services which are different from those proposed by their competitors, that is, which are “distinctive and valued as such by customers” (Porter, 1985). Employers having recourse to a focus strategy basically intend to reach a more specifically identified consumer target, either at geographic or at group target level.

 

Both overall corporate strategies and business unit level strategies are clearly developed and implemented to enable employers to achieve their intended objectives. Having recourse to a type of structure not adequately supporting the strategy developed by an employer may clearly risk jeopardizing its successful pursuance: “The purpose of structure is to encourage people to act in ways that management hopes will support its objectives” (Boddy, 2008). The adoption of the wrong structure can hence be tantamount to the implementation of an “inconsistent strategy” or to “bad execution” and can be in any case considered as a reason for employers failing to achieve competitive advantage.

 

Employers can develop their structure according to two main models, what Burns and Stalker (1961) called “mechanistic” and “organic” structures. Mechanistic models imply a vertical hierarchy and communication; decisions and responsibilities are respectively taken and defined centrally. Yet, the delegation of tasks is tightly defined and subject to rigorous reporting requirements. The distinctive characteristics of this model are:

- The central roles know and can hence control what is happening;

- The business policies are consistently applied within the organization;

- The organization board presents a uniform image of the organization, also externally;

- Customers receive a consistent treatment.

 

In companies adopting an organic structure tasks are much more flexible, work is carried out by cross-functional teams and authority is delegated on the basis of expertise rather than position. Communication amongst those familiar with the task is horizontal and managers accept that those at the centre must rely on those nearest to the action, that is to say those who have the expertise to find the best solutions. Differently from what occurs in the organizations structured according to the mechanistic approach, in those adopting an organic structure, just by reason of the organic division of work, organizational charts are not usually prepared. In the different units of larger organizations it may indeed be possible to find a blended application of both the mechanistic and the organic approaches.

 

The restructuring process implemented by the Dutch Group Philips in 2001 represents a successful case of adjustment of organizational structure in order for this to support the pursuance of business strategy. In order to curb the heavy losses suffered by the organization the Group reduced to five the number of active divisions and broke down internal communications barriers so that the internal expertise could be shared within the entire organization.

 
 
The existence of a tight relationship between organizational structure and strategy was firstly suggested by Chandler (1962), who to support his conclusions developed the dynamic model of structure and strategy, Table1.
 
Classical model of dynamic relationship between structure and strategy.
E = Environment, R = Resource (Capabilities), S = Strategy, St = Structure, t1 = time


The external environment characteristics (Et1) and the resources available to the organization (Rt1) influence the strategy (St1) an employer decides to adopt at the time t1. This in turn influences and determines organizational structure (Stt1). The changes occurring in the external environment and resources availability call for a new strategy (St2) and consequently a new structure (Stt2) at the subsequent time t2.

 

More recently, to underscore the importance of this link, Worthington and Britton (2009) have claimed that “structure is not an end in itself, but a means to an end” and should hence mirror an organization’s needs within its current context in the light of its future requirements.

 

The Generic Competitive Strategies Framework (Porter, 1980) and the concepts of mechanistic and organic structures (Burns and Stalker, 1961) can help to better identify the link existing between organizational strategy and structure. The objective of a firm aiming at pursuing a cost leadership strategy is to reduce the expenditures at large whilst increasing its operation efficiency and productivity. The type of structure most suitable to effectively support this strategy is the mechanistic structure, based on strictly defined tasks in an efficient functional structure. In this case, a hierarchical structure ensures that people work according to plans and that a vertical communication channel keeps the centre informed. Organic structures, by contrast, better support organizations aiming at enabling a rapid flow and circulation of ideas amongst the people involved in, for instance, a particular project.

 

A good example of how a company can successfully shift from one type of structure to the other according to its wants is represented by the PowerGen case. This privatized utility company had originally decided to implement a cost leadership approach, adopting a strict functional structure and putting in place severe rules and a performance measurement system. As the organization decided to diversify its activity in different businesses, this supported its decision with an organic structure organized in several autonomous product divisions able to quickly respond to the evolving and changing customers’ demand. As a general rule, companies whose business units have a relatively high decision-making authority are more successful than those in which this is centralised. A similar success was attained by GlaxoSmithKline in 2001, when the company’s R&D activities were split into six autonomous, but tightly focused units.

 
 
The link between strategy and structure is well summarised in the model developed by Boddy (2008), table 2, which shows that the more an organization’s strategy is based on cost leadership, the more likely is that its business leaders will support it with a functional structure. Whether the balance should shift to differentiation, a divisional team or network structure should rather prove to be more appropriate in order for the employer to attain its objectives.
 

Employers, especially when facing increasing pressure from the exogenous context, may try to achieve competitive edge simultaneously pursuing a cost leadership and differentiation strategy. The pursuance of such an “integrated strategy”, as termed by Kim et al. (2004), notwithstanding, is not completely immune from problems. Porter himself (1985) had indeed originally, and for nearly a decade, supported the idea that companies have to make a precise choice between cost leadership and differentiation, but changed his mind after a series of critics were made to his position, later in 2008.

 

Some Authors have supported the idea that an organization’s structure depends, that is, is contingent upon the external context. This theory is essentially underpinned by the same tenets underpinning the emergent strategy theory; Donaldson (1996) avers that organizations operate in an environment which “shapes their strategy, technology, size and innovation rate.” These factors somewhat of naturally determine the most effective organizational structure and enable businesses to operate effectively in their respective markets.

 
Despite Donaldson considers of paramount importance the formulation of strategy and the adoption of a structure which effectively supports the intended strategy, his approach appears to be both determinist and functionalist. Determinist in that organizational structure would be contingent upon and determined by the external environment; functionalist in that the type of structure, basically suggested by the exogenous context, is aimed at supporting the business performance. Managers’ role would be thus limited to merely make structure adjustments accordingly, as conditions change.

 
 
Advocates of the contingent structure theory as well as the supporters of the emergent strategy theory consider final results as something managers and business leaders have no influence on and which basically escape to their control. Despite technology, company size, innovation, trends, markets and external variations definitely have a remarkable impact, the managers role cannot be indeed considered limited to that of the audience, who just simply watch what occurs. In order for employers to take advantage of the opportunities eventually arising and properly respond to threats, it is paramount that managers timely evaluate and analyse the impact which all of these changes may have and take action accordingly. It is indeed hardly supposable that without any manager intervention things may properly work. Moreover, according to this theory it would even be hard to pinpoint the role managers should play in an organization and the responsibilities and duties resting with them.
 

One of the most prominent opponents of the contingency theory is John Child, who stresses the significance of the “political process” in addition to the technical and the rational ones for shaping organizational structure. Managers and their choices in term of organizational structure assume indeed a greater importance in reference to this aspect. The opponents of the contingency theory claim in fact that managers are neither “puppets” nor “automatons”, they do actually have the choice, and it must also be added the duty, to exert their influence over their organizations’ structure.


 


A good example of how differently organizations can respond to the changes occurring in the exogenous context is represented by the diverse retailers’ response to the Internet phenomenon, which made it possible for these to develop websites by means of which customers can shop online and receive their orders directly at their homes. Sainsbury’s, for instance, created a new bespoke division with a separate management, warehouse and distribution system. Tesco, by contrast, decided to integrate its new Internet shopping business into the existing stores; employees collect the items ordered online from the shelves of conventional stores and deliver them to the customers. Some other retailers, such as Morrisons and Sommerfield, simply decided not to sell their products online.


 

In this case, technology was available to all of these organizations at the same time, but each employer had the latitude to decide whether to have recourse to it and eventually how. Some employers considered this as an opportunity and decided to take advantage of it, but practically having recourse to different types of structure. Despite it is definitely true that technology and more broadly external factors have or may potentially have an impact on an organization’s structure, it is invariably ultimately up to each organization’s management taking the final decisions about the type of restructuring which needs eventually to be implemented.

 

Some Authors argue that an organization may find it easier to develop its strategy according to its structure. This approach, nonetheless, would entail that organizations would be sorely static and could not respond, let alone promptly, to the pressure coming from the exogenous environment. Under such circumstance, an organization would not be able to properly take advantage of the opportunities eventually arising and to timely counter the threats eventually posed by the external environment. Yet, organizations could hardly be able to achieve an acceptable level of performance, never mind to properly and adequately compete in the market.

 

Structure by extension invariably follows and supports strategy.

 
Longo, R., (2010), The importance of identifying the best fit between organizational structure and strategy; HR Professionals, [online].