1. MANAGING ORGANIZATIONS
Session 6 & 7: Organization Strategy & Structure
Sourav Mukherji
PGP 2012-14 Section C & E
Associate Professor of Organization & Strategy
Term 1:June-September 2012 Indian Institute of Management Bangalore, India

2. STRATEGY COMPRISES PLANS AND ACTIVITIES FOR CREATING 2
AND CAPTURING VALUE IN A SUSTAINABLE MANNER
COMPETITIVE
ASSUMPTIONS INNOVATION
COMPETITIVE
STRATEGY
ORGANIZATION
PURPOSE PERFORMANCE
ORGANIZATION
DESIGN
ANALYSIS
BUILDING
Industry Dynamics
COMPETENCIES
Distinctive Competencies
© S Mukherji

3. THERE ARE FOUR KEY LEVERS OF VALUE CREATION 3
SUPERIOR • Increase in reliability
QUALITY • Creates brand name, reputation
• Can lead to greater efficiency
• Greater resource leverage
• Greater employee productivity
SUPERIOR COST LEADER SUPERIOR
EFFICIENCY INNOVATION
DIFFERENTIATOR
• Product , process
• Managerial, organizational
• Incremental, disruptive
• Customize goods and services
to unique demands
SUPERIOR
• Can be achieved through
CUSTOMER RESPONSE
superior design, service
and support
Capabilities - the skills of an organization at leveraging its resources -
are a product of on organization’s structure and control systems
© S Mukherji

4. ORGANIZATIONS CAPTURE VALUE BY CREATING 4
SUSTAINABLE COMPETITIVE POSITIONS
THREAT OF NEW
ENTRANTS BARGAINING POWER
OF BUYERS
• Brand loyalty
• Patents, innovations • How much are the buyers dependent on us ?
• Experience curve • How much are we dependent on the buyers ?
• Economies of scale • Are the buyers consolidated ?
BARGAINING POWER THREAT OF
OF SUPPLIERS SUBSTITUTES
• Can the needs be serviced by alternate
• Nature of supplier industry products or services ?
-fragmented or consolidated • Are there chances of technological
• Switching costs breakthroughs that might make our
• Ability of buyer to vertically INDUSTRY product less attractive / obsolete ?
integrate RIVALRY
• Dependence of buyer on
supplier
• Industry structure – fragmented or consolidated
• Demand conditions – increasing or declining
• Ease of expanding or contracting operations
Industry analysis needs to be complemented by analysis of the second order environment
- the impact of social , economic, political and technological analysis
© S Mukherji

5. STRATEGY IS FORMULATED AT SEVERAL 5
INTERDEPENDENT LEVELS
Global Coordinate and integrate global
tasks and activities
CEO
Board of HO Corporate Protect and grow existing domain
Directors Expand into new domain
Corporate Staff
Develop organizational competencies
BU BU BU Business Combine functional competencies
to gain competitive advantage in
Divisional managers chosen domain
Functional Improve efficiency and effectiveness
of functional operations
R&D, Purchase, Manufacturing, HR, Sales
© S Mukherji

6. 6
LINKING FUNCTIONAL STRATEGY TO DESIGN CHOICES
Strategic goals of …can be achieved in two ways
functional operations…
• higher efficiency • Perform functional activities at
• better quality lower costs than competitors
• faster innovation • Perform functional activities
• faster customer responsiveness that differentiates its offerings
from its rivals
Design decisions fall in two categories
1
Choices about level of vertical differentiation
2
Choices about monitoring and evaluating systems
© S Mukherji

7. 7
DESIGN IS CONTINGENT ON FUNCTIONAL OBJECTIVES
R&D Manufacturing Sales
Innovation Faster time to market
Strategic aim Efficient
New product Reduced sales cycle
production
development Customer
responsiveness
Vertical differentiation Low High Moderate
Centralization Low High Moderate
Formalization Low High Moderate
Control systems Clan Standardization, Output,
normative rules, procedures, rules, regulations
output
Overall structure Organic Mechanistic mostly Mechanistic
With advent of TQM and FMS, structure of manufacturing moving towards being more
organic, decentralized with greater empowerment of shop floor employees
© S Mukherji

8. 8
THERE ARE THREE GENERIC BUSINESS LEVEL STRATEGIES…
1 • low cost, high volume efficient producer
Cost • cater to mass market , large stable customer base
Leadership • R & D focus on process improvement to reduce costs
• manufacturing , sourcing, material handling key to success
2 • satisfy customer need in unique way and charge premium
Differentiation
• quality, innovation, customer responsiveness
• R & D , marketing ( branding, BI, segmentation)
3 • serve a particular market niche leveraging specific advantage
Focus e.g., local knowledge of tastes, preferences
• close to customer, responsive to changing needs
• small volume customized product
Design decisions are about
• degree of horizontal differentiation
• integration among functional areas to achieve
business level strategies
© S Mukherji

9. …LEADING TO DIFFERENT STRUCTURAL CHARACTERISTICS 9
Cost leader Differentiator Focus
Minimize Maximize innovation Maximize responsiveness
Structural aim
bureaucratic & value creation to niche conditions
costs Control costs
Configuration Functional Organic, Product Simple, functional
mechanistic Matrix
Differentiation High High Low
Standard and Low
Integration Standard means
non-standard means
Clan control Direct supervision
Control Standardization
Some rules & output
mechanisms Output control, e.g., Some rules and output
control control
production, cost
& quality targets
Design
Bottom line structure and control systems Adapt to create a
focus around source of competitive flexible and economic
advantage structure
© S Mukherji

10. FOUR KEY ELEMENTS OF CORPORATE STRATEGY 10
• Vertical integration • Mergers
• Balancing bureaucratic • Acquisitions
costs with transaction • Fast startup
costs 1. 2. • Mature industry
• Related diversification • Strategic alliances
• Economies of scope What business to How to enter • Joint ventures
• Unrelated diversification participate to different • Internal new ventures
• Risk diversification maximize businesses ? • Embryonic and growth
• Internal capital market long term industries
profitability?
Corporate
4. strategy 3.
• Composition of Board What should • Portfolio investor
be the What should
• Committees be the role • Resource allocation
structure of
• Executive and non- of corporate • Performance evaluation
corporate
executive directors centre ? office / • Parenting
• Composition of corporate centre ? • Resource allocation
office • Performance evaluation
• Corporate development
• Synergy
© S Mukherji

11. STRUCTURAL CHARACTERISTICS RELATED 11
TO CORPORATE STRATEGY
• Choose a structure that enables organization to operate efficiently in multiple businesses
• Preferred structure chosen at corporate level is Multidivisional structure
• loose coupling of different business units
• each business unit nearly autonomous in deciding its suitable structure
• corporate head office oversees and evaluates operations of business units
Vertical integration Related diversification Unrelated diversification
Purpose Economies of integration Economies of scope Internal capital market
Interdependence Sequential Pooled Insignificant
Need for integration High Medium Low
Integration Scheduling, rules Committee Need based,
mechanisms procedures Liaison roles Minimum
Control mechanisms
• Markets transfer price ROCE, ROI ROCE, ROI
• Bureaucracies standardization rules budget
budget, rules budgets
• Clan Moderate Norms, values Norms, values
© S Mukherji

12. 12
ADDITIONAL ISSUES RELATING TO CORPORATE STRUCTURE
‘Ideal’ board composition is ‘Size’ of corporate staff
an issue of open debate related to role of centre
• What is the ideal size of the • Which functions should be
board ? centralized and which should be
• What should be the composition handled by the business units ?
of the board ? • scale economy vs.
• executive vs. non executive responsiveness
directors • interference vs. autonomy
• autonomy vs. business • Role of corporate staff
insights • providing strategic inputs
• What should be the composition • environmental scanning
of the various board level • analysis of existing business
committees? • realizing synergy
Is good corporate governance a function Which of these functions are best
of right structure or right processes ? carried at the centre and which at the
business units ?
© S Mukherji

13. 13
FOUR STRATEGIES FOR COMPETING IN GLOBAL MARKETS
Centralized
production
High
Global Transnational
Increasing needs
for coordination
• centralized production of • centralized production of & integration
standardized product customized product
• lowest cost global location • low cost and differentiation
• learning at global scale
Pressures for
global integration
International Multidomestic
• decentralized production of • decentralized production of
standardized product customized product
• transfer of skills and products • near autonomous facilities at
Low from parent to local market different global locations
Decentralized Pressure for local
production Low High
responsiveness
Standardized product Customized product
© S Mukherji

14. MULTIDOMESTIC STRUCTURE FOR DECENTRALIZED OPERATIONS14
MNC - HO
• duplication of value creation
activities
N America Europe Asia Pacific • decentralized decision making
• low needs for coordination
Foreign divisions in regions of operation • less integrating mechanisms
• low bureaucratic costs
• HO uses market and
Decentralized production of customized products output controls for performance
• transfer skills and products from parent to evaluation
local market • no experience curve effects
• customization for achieving local responsiveness • less leverage of international
• have end to end value creation activities in local presence
markets
• Suitable for services industry
© S Mukherji

15. 15
INTERNATIONAL DIVISION FOR LOW-DIVERSITY OPERATIONS
MNC - HO
International • duplication of value creation
Division 1 Division 2
division activities leading to high costs
• strategic decisions centralized
operational decisions decentralized
• moderate needs for coordination
China India Japan • moderate integrating mechanisms
• moderate bureaucratic costs
• bureaucratic controls for
Decentralized production of standardized products monitoring by corporate HO
• transfer skills and products from parent to • control rests with managers of
local market international division
• minimum customization
• no local competition for similar products
• centralize product development, decentralize
manufacturing , marketing , sales
© S Mukherji

16. GLOBAL PRODUCT GROUPS FOR GREATER 16
ALIGNMENT WITH PARENT
MNC - HO
• Incurs high coordination and
communication costs in order
to gain advantage from scale
Product 2
Product 1 Product 3 economies and global learning
• structure to facilitate transfer
of resources
• centralized controls for
c coordination
China India Japan
• product group managers take
strategic decisions, location
Centralized production of standardized products managers deal with operational
• distinctive value creation activities at least decisions
cost locations • high need for integration
• minimum customization • in a truly global organization, all
• low cost producer leveraging global scale and product heads need not be
location economies in the same location
• ideal for products having global standards
e.g., industrial products , semiconductors
© S Mukherji

17. GLOBAL MATRIX: AN IDEAL STRUCTURE 17
Inputs for global economies Inputs for localization
of scale and scope
N American European Asia Pacific
SBU SBU SBU
• global matrix structure
that reduces cost and
Product differentiates
Group 1 • matrix allows
knowledge and
Product experience to be shared
Group 2 across regions and
c divisions
• high needs for
Individual operating
coordination and
organizations integration
• complex and expensive
Centralized production of customized products structure
• simultaneous achievement of low cost and differentiation • mutual adjustments and
• exploit location and experience based cost economies collaboration necessary to
• transfer distinctive competencies both from parent to local make the structure work
country and back – learning at global scale
• customize offering to cater to local demands
• Centralized manufacturing with localized assembly plants
• Leverage manufacturing innovations and information technology
© S Mukherji