Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
Subject COMMERCE
Paper No and Title 12: STRATEGIC MANAGEMENT Module No and Title 29: STRATEGY & STRUCTURE
Module Tag COM_P12_M29
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure TABLE OF CONTENTS
1) Learning Outcomes
2) Importance of Structure in Strategy Implementation 3) Interrelationship between Strategy & Structure
4) Evolution of Structure in Different Stages of Organisation Development 5) Summary
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure 1. Learning Outcomes
After studying this module, you shall be able to:
Know about the importance of structure in strategy implementation
Understand the interrelationship of structure and strategy
Know how structure evolves in different stages of Organization Development.
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
2.
Importance of Structure in Strategy Implementation
Organisational structure is core variable for the implementation of strategy. Without appropriate structure, strategy does not work properly and if strategy does not work in desired way then organisation will gradually led towards its doom. An incompatible structure can become liability for an organisation instead of asset. Hence for organization to work effectively and efficiently, there should be proper fit between strategy and structure.
There are two parts of organisational structure. First part is Supra–structure, which is more obvious and is based on differentiation and grouping of activities into various departments and is shown in organisation’s chart. Second part is infra–structure, which is not obvious and is present in form of authority; responsibility; relation; information system and communication channel.
Structure should be compatible with strategy for successful implementation of strategy. If structure is not compatible with strategy then it may ultimately lead to collapse of organisation in the following way:
Hence it is very important to strike a match between structure and strategy in order to prevent downfall of the organization.
Commerce PAPER No. 12: Strategic Management
MODULE No. 29: Strategy & Structure
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure 3. Interrelationship between Strategy and Structure
Incompatibility between strategy and structure is serious issue and it should be resolved as soon as possible. There are three approaches to solve this compatibility issue and these are as follows:
(1) Changes can be made in structure to make it compatible with strategy.
(2) Changes can be made in strategy to make it compatible with structure.
(3) Strategy and Structure can be modified simultaneously to make both of them compatible with each other.
These approaches are discussed hereunder.
3.1 Structure Follows Strategy
Alfred D. Chandler in his book “Strategy and Structure” published in year 1962 recommended that structure follows strategy i.e. any change in strategy is followed by appropriate changes in structure. Chandler recommendation was based on his research.
This recommendation is in tandem with forward link of strategy implementation.
Chandler observed that as organisation expand and diversify the traditional organisation structure become redundant. Instead of supporting organisation strategy it rather creates hindrances in successful implementation of strategy. As a consequence, organisation effectiveness and efficiencies reduce which led to downfall of the organisation. To overcome such situation, organisation must evolve their structure to make it compatible with present strategy. Diagrammatically this can be shown as follows:
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
As per this diagram there is old structure, which is compatible with old strategy. However due to change in environment and circumstances, old strategy is given up and new strategy is made. With a change in strategy, old structure become incompatible with new strategy and there is need to bring desired changes in structure to make it compatible with new strategy. Desired changes are made in structure and as a consequence old structure is
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
replaced by new structure. This new structure is
compatible with new strategy and thus once again reinstating the effectiveness and efficiency of the organisation.
3.2 Strategy follows Structure
This approach is placed just opposite to above approach. This approach advocates that strategy shall be formulated in way that is compatible with present structure of the organization. Thus in this approach it is structure which determine the type of strategy to be adopted by the organization. This approach emphasised that structure is not dependent variable and it can influence the process of strategy formulation through perception and strategic choices. This approach is based on backward link of strategy implementation and diagrammatically shown as follows:
In above diagram it is shown first there was an old strategy which is in place with given structure. However due to change in environment and circumstances over time, old strategy become redundant and new strategy is required to be formulated. While formulating new strategy, problems that had occurred during interaction of old strategy
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
with existing structure are recognised and these problems
together with environment and circumstances changes become basis for strategic choice.
New Strategy is formulated with the help of strategic choice and is formulated in manner so as to be compatible with existing structure and address environment and circumstance changes in an appropriate way.
3.3 Strategy and Structure are intertwined and be addressed simultaneously
This approach is based on Mckinsey 7S framework. Mckinsey 7S framework is not a model of strategy formulation and implementation but it is a tool for increasing organisation effectiveness. This is multivariate model and it identifies 7 variables, which needs to be addressed simultaneously for bringing in any desired change in organisation or improving organisation effectiveness.
The 7 variables of this model are interconnected together and each of them cannot be considered in isolation. This model is diagrammatically shown as follows:
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
This model emphasises that organisation effectiveness does not depend merely upon strategy but on entire networks of seven factors. These seven factors are interconnected among themselves and work in an integrated and comprehensive manner to achieve organisational goals.
These seven elements are classified into two categories that is hard elements and soft elements. The division is as follows:
Hard Elements Soft Elements
Strategy Shared Values
Structure Skills
System Staff
Style
Hard elements are tangible and thus easily identifiable. As they are easily identifiable, it can be changed systematically. However conversely soft elements are intangible and thus
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
not easily identifiable. As they are not easily identifiable, changing these elements pose problems to organisation.
As organisation effectiveness is outcome of the complex and interconnected network of these seven factors, any desired change can only be implemented if all these seven factors are addressed altogether. Although Shared Values assumed central place and is off utmost importance but other factors are also important. These seven factors are discussed as follows:
(1) Shared Values: It is off primary importance and assumed central importance in the interconnected network of seven factors. Shared values are core values of the organisation which is agreed and adopted by top–level management and is embraced by lower level management and other employees of the organisation.
These values are even important than organisational formal objective and in long run organisation shared values become one of its distinctiveness. Organisation culture is built upon shared values and these values should never be compromised to achieve short–term goals. These values serve as significant motivational force in the organisation.
(2) Strategy: Strategy are strategic plans framed by organisation to nurture and maintain distinctive competence over the competitor so as to gain competitive advantage in the market thereby achieving its objective effectively and efficiently.
(3) Structure: Structure refers to systematic and formal organisation of activities in an organisation.
(4) System: It refers to rules, regulation and procedures both in formal and informal way through which activities are performed in an organisation and it complement structure. Without system, structure cannot subsist. For this reason, structure is referred as supra structure and system is referred as infra structure.
(5) Skills: It refers to distinctive competencies developed within an organisation. These distinctive competencies help in achieving competitive advantage for an organisation in the market.
(6) Staff: It refers to process of recruitment of new people and their training and development under the supervision of senior manger so as to effectively cater them within organisation. It also includes skill development programme of existing employees.
(7) Style: It refers to leadership style of top management. Style can be inferred from pattern, which might be developed among members of organisation while making decision.
Successful implementation of strategy requires proper coordination and alignment among all these seven factors. It usually happens that while implementing strategy top
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
management tend to ignore soft elements. This gaffe on
part of top management leads to ineffective implementation of strategy due to which organisation is not able to achieve its desired objectives. Thus both soft and hard elements of this network should be aligned and coordinated so as to achieve desired outcomes.
4. Evolution of Structure in Different Stages of Organization Development
An organization cannot work successfully throughout its life with one unique structure.
As organisation expands there arises need for change in structure. Thus structure changes with change in organisation scale of activities. At every stages of organisation growth different kind of structure is required. Diagrammatic representation of evolution of structure needed at different stages of organisational development is as follows:
1. Entrepreneur Structure: At initial stage when organisation is operating at small scale there is no formal structure. Entrepreneur dominates organisation and controls and manages all significant activities in an organisation. As there is no formal structure, it can be adapted to all situations and is extremely flexible and dynamic.
However the major limitation of this structure is its limited capabilities due to complete dependence on entrepreneur.
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
2. Functional Structure: As organisation grow, it becomes difficult for entrepreneur to manage organisation solely. Due to expanding scale of operations, there arises need for specialists to mange specialized activities. Organisation starts internalising different functions and each function is managed and controlled by experts of that function. Formalisation of structure start from this stage. Organisation is still controlled centrally with responsibility for management and control of different functions is assigned to functional managers. Diagrammatically functional structure can be shown as follows:
3. Divisional Structure: When organisation expands its business into multi–products then it becomes extremely difficult for organisation to manage organisation with functional structure. Divisional structure is appropriate for multi–product organisation. Divisional structure share similarities with functional structure but with a difference that now business is primarily divided into different products/divisions and each product/division is managed through functional based structure. Divisionally structured organisation is also centralized organization with responsibility of product/division assigned to Product/Division managers.
Diagrammatically functional structure can be shown as follows:
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
4. Strategic Business Unit: When a multi–product organisation expand tremendously in scale of its operation it becomes increasingly difficult to centrally manage and control the organisation. Hence decentralisation occurs at this stage of development when division managers start working independently. At this stage, division managers do not work under supervision of top management and are solely in charge of their division. At this stage of development, division attain the status of strategic business unit with following characteristics:
(i) Unique Mission
(ii) Identifiable competitors
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
(iii) External Market Focus
(iv) Control of its business function
The basic tenet of this kind of structure is to decentralise on the basis of strategic features rather than on any other basis such as functions, products, size, area, etc.
5. Matrix Structure: This form of structure is suitable for very large–scale multi–
product organisation operating in uncertain and complex environment. As multi–
product organisation scale of operation become heavily voluminous and complex, division managers need expert advise for managing their respective functional area.
Hence this kind of structure incorporates the elements of both functional and divisional organisation. Thus this structure provides stability due to presence of functional structure and flexibility due to presence of divisional structure. Matrix structure is highly tactical in tackling with complex and uncertain environment.
Diagrammatically functional structure can be shown as follows:
Thus as organisation expands from small firm to conglomerate diversification, structure should also evolved from entrepreneurship to matrix structure. Hence structure should be in tandem with organisation scale of operations and if structure is not changed so as to accommodate organisation’s growth, scale of operations and increasing complexities then
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
organisation effectiveness would reduce substantially ultimately resulting in collapse of organisation.
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure 5. Summary
This module discusses the importance of structure in successful implementation of strategy. If structure is not compatible with strategy then it reduces the organisation effectiveness. Due to decreased organisation effectiveness, inefficiencies in the organisation increases, which result in losses ultimately leading to collapse of the organisation.
As structure should be compatible with strategy there are three approaches to maintain compatibility between structure and strategy. These three approaches are:
(1) Structure follows Strategy (2) Strategy follows Structure
(3) Strategy and Structure are intertwined and be addressed simultaneously
Alfred D. Chandler on the basis of his research concluded that structure follows strategy.
Chandler observed that as organisation expands, existing structure became inefficient to address new problems and complexities. Hence existing structure must be changed so as to cope up with new situation and challenges.
On the other extreme there is another approach, which suggest that strategy follows structure. This approach suggests that an organisation should learn from its past experience of implementation of strategy and change strategy so as to suitable address the present challenges and opportunities and be compatible with existing structure.
The last approach suggests that organisation effectiveness depends upon the interconnected network of seven factors that is strategy, structure, system, shared values, skills, staff and style and is based on Mckinsey 7S framework. As per this approach all these factors are interconnected and organisation effectiveness is outcome of coordinated interconnection of all these factors. Thus all these factors should be simultaneously addressed to increase organisation effectiveness.
Lastly evolution of organisation structure is discussed during organisation development.
As organisation expands from small firm to conglomerate diversification, structure also evolved from entrepreneurship to matrix organisation. Organisation structure evolved as follows:
(i) Entrepreneur structure: There is no formal structure and entrepreneur dominates all activities of an organisation.
Commerce PAPER No. 12: Strategic Management MODULE No. 29: Strategy & Structure
(ii) Functional Structure: In this structure, organisation
is primarily divided on the basis of various specialised functions. Functional manager heads each function. However all functional mangers are under general supervision of top management.
(iii) Divisional structure: In this structure, organisation is primarily divided on the basis of various products/divisions. Each division is headed by division manger and is further sub–divided on the basis of functions. In this structure also, all divisional managers work under general supervision of top management.
(iv) Strategic business unit: This is also based on divisional structure but with a difference that division mangers become autonomous and not work under the supervision of top management. Each division has its own set of missions and objectives and they formulate their own plans and strategies to accomplish their mission and objectives.
(v) Matrix Structure: This structure is suitable for largely diversified conglomerates operating in highly uncertain environment. This structure shares the features of both functional and divisional structure and employees work under the supervision of both divisional and functional manager.
