Chapter 11: Organizational Structure and Controls
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Chapter 11
Organizational Structure and Controls
LEARNING OBJECTIVES
1. Define organizational structure and controls and discuss the difference between
strategic and financial controls.
2. Describe the relationship between strategy and structure.
3. Discuss the different functional structures used to implement business-level
strategies.
4. Explain the use of three versions of the multidivisional (M-form) structure to
implement different diversification strategies.
5. Discuss the organizational structures used to implement three international strategies.
6. Define strategic networks and discuss how strategic center firms implement such
networks at the business, corporate and international levels.
CHAPTER OUTLINE
Opening Case: Luxottica’s Dual CEO Structure: A Key to Long-term Success or a Cause
for Concern?
ORGANIZATIONAL STRUCTURE AND CONTROLS
Organizational Structure
Strategic Focus: Changing McDonald’s Organizational Structure: A Path to Improved
Performance?
Organizational Controls
RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL
STRUCTURE
Simple Structure
Functional Structure
Multidivisional Structure
Matches between Business-Level Strategies and the Functional Structure
Matches between Corporate-Level Strategies and the Multidivisional Structure
Strategic Focus: Sony Corp.’s New Organizational Structure: Greater Financial
Accountability and Focused Allocations of Resources
Matches between International Strategies and Worldwide Structure
Matches between Cooperative Strategies and Network Structures
IMPLEMENTING BUSINESS-LEVEL COOPERATIVE STRATEGIES
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IMPLEMENTING CORPORATE-LEVEL COOPERATIVE STRATEGIES
IMPLEMENTING INTERNATIONAL COOPERATIVE STRATEGIES
SUMMARY
KEY TERMS
REVIEW QUESTIONS
MINI-CASE Unilever Cooperates with Many Firms and Nonprofit Organizations to
Implement Its Strategy While Creating a More Sustainable Environment
ADDITIONAL QUESTIONS AND EXERCISES
MINDTAP RESOURCES
LECTURE NOTES
Chapter Introduction: As students will recall, the discussion in Chapter 10 described
how governance mechanisms are used to align the interests of a firm’s top-level
managers with those of the firm’s owners. It also described how those mechanisms
influence the firm’s ability to execute strategies that have been implemented
successfully as the firm strives to achieve a competitive advantage in the new
competitive landscape. The same could be said of organizational structure, the focus
of the current chapter.
OPENING CASE
LUXOTTICA’S DUAL CEO STRUCTURE: A KEY TO LONG-TERM SUCCESS
OR A CAUSE FOR CONCERN?
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Teaching Note
Ask the students to brainstorm about Luxottica’s current situation. Can a
company have two CEO’s and be successful? What will need to happen in order
for the co-CEOs to effectively run Luxottica. What can go wrong with this
structure? If you had to run a business, would you choose this structure?
1
Define organizational structure and controls and discuss the
difference between strategic and financial controls.
ORGANIZATIONAL STRUCTURE AND CONTROLS
Teaching Note
Selecting the organizational structure and controls that result in effective
implementation of chosen strategies is a fundamental challenge for managers,
especially top-level managers. The reasons for this are:
STRATEGIC FOCUS
Changing McDonald’s Organizational Structure: A Path to Improved Performance?
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For its size and prominence around the world, many would believe that McDonalds is doing
very well. But, according to the new CEO, Steve Easterbrook, McDonalds may be in trouble.
Teaching Note
Have a conversation with the students about how difficult a change like this could be for a
company that is massive. Use concepts from this chapter to determine what may have
hindered the implementation of these changes. Talk about the risk that is being taken for
implementing these changes and what needed to be done before executing the new
structure.
Organizational Structure
Organizational structure specifies the firm’s formal reporting relationships, procedures,
controls, and authority and decision-making processes.
Developing an organizational structure that effectively supports the firm’s strategy is
difficult, especially because of the uncertainty (or unpredictable variation) in cause-effect
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Organizational Controls
Organizational controls guide the use of strategy, indicate how to compare actual results
with expected results, and suggest corrective actions to take when the difference between
actual and expected results is unacceptable.
Effective strategic controls help the firm understand what it takes to be successful. Strategic
controls demand rich communication between managers and those implementing the firm’s
strategy. These frequent exchanges are both formal and informal in nature.
Strategic controls help evaluate how well a firm is focusing on what it takes to implement its
strategies.
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executives must have a deep understanding of each unit’s business-level strategy.
Extensive diversification often requires that financial controls be emphasized.
Teaching Note
2
Describe the relationship between strategy and structure.
RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE
Strategy and structure have a reciprocal relationship, highlighting the interconnectedness
between strategy formulation (Chapters 4–9) and strategy implementation (Chapters 10–13).
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL
STRUCTURE
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Chandler found that firms tended to grow in somewhat predictable patterns: volume
geography integration (vertical, horizontal) product/business diversification.
FIGURE 11.1
Strategy and Structure Growth Pattern
As indicated by Figure 11.1, firm structure evolves from simple to functional to
multidivisional.
Simple Structure
A simple structure is an organizational form in which the owner-manager makes all major
decisions directly and monitors all activities, and the firm’s staff is merely an extension of
the manager’s supervision authority.
The simple structure is characterized by:
Teaching Note
In the U.K., some analysts believe that the simple organizational structure may result
in competitive advantages for some small firms relative to their larger counterparts.
These competitive advantages include a broad openness to innovation, greater
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structural flexibility, and an ability to respond more rapidly to environmental
changes.
If they are successful, small firms grow larger; and as a result, the firm outgrows the simple
structure.
Functional Structure
The functional structure consists of a chief executive officer and limited corporate staff with
functional line managers in dominant functions: production, accounting, marketing, R&D,
engineering, human resources.
Teaching Note
Functional specialists often may develop a myopic or narrow perspective, losing sight
of the firm’s strategic vision and mission. When this happens, the problem can be
overcome by implementing the multidivisional structure.
Multidivisional Structure
Because of limits to an individual CEO’s ability to process complex strategic information,
problems related to isolation of functional area managers, and increasing diversification, the
structure of the firm must change again. In these instances, the multidivisional or M-form
structure is most appropriate.
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The multidivisional (M-form) structure is composed of operating divisions where each
division represents a separate business to which the top corporate officer delegates
responsibility for day-to-day operations and business unit strategy to division managers.
Teaching Note: An expanded discussion of M-form may be helpful at this point.
Some facts related to use of the multidivisional structure at DuPont and GM follow.
• The multidivisional or M-form structure was developed in the 1920s, in response
to coordination and control problems in large firms such as DuPont and GM.
The new, innovative structure adopted at General Motors called for
• Creating separate divisions, each representing a distinct business
• Each division would house its functional hierarchy
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Discuss the functional structures used to implement
business-level strategies.
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Matches between Business-Level Strategies and the Functional Structure
Different forms of the functional organizational structure are used to support implementation
of the cost leadership, differentiation, and integrated cost leadership/differentiation strategies.
Using the Functional Structure to Implement the Cost Leadership Strategy
Firms using the cost leadership strategy want to sell large quantities of standardized products
to an industry’s or a segment’s typical customer. The cost leadership form of the functional
Teaching Note
Because of firm restructuring during the late 1980s and early 1990s—and the
reduction in the number of management layers—firms now have flatter structures.
“Higher” in the organizational structure has thus become a relative term.
Figure Note
Figure 11.2 summarizes the functional structural characteristics required for
successful implementation of the cost leadership strategy.
FIGURE 11.2
Functional Structure for Implementing a Cost Leadership Strategy
Key points include the following:
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• Dotted lines from the centralized staff to each function represent tight controls and
centralized coordination.
Teaching Note
Southwest Airlines has successfully implemented the cost leadership strategy,
encouraging the emergence of a low-cost culture by (1) using specialized work tasks
and (2) striving continuously to reduce costs below those of competitors.
Using the Functional Structure to Implement the Differentiation Strategy
Firms offering products that are considered unique by customers usually are following a
differentiation strategy.
A differentiation strategy requires:
• The firm to sell nonstandardized products to customers with unique needs
• Relatively complex and flexible reporting relationships
• Frequent use of cross-functional product development teams
Figure Note
Figure 11.3 summarizes the discussion of the relationships between the differentiation
strategy and the functional structure.
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FIGURE 11.3
Functional Structure for Implementing a Differentiation Strategy
A first glance, Figure 11.3 appears to be very similar to Figure 11.2 (Functional Structure for
Implementing a Cost Leadership Strategy). However, there are several subtle but important
differences.
Using the Functional Structure to Implement the Integrated Cost
Leadership/Differentiation Strategy
As discussed in Chapter 4, some firms may attempt to implement simultaneously both the
cost leadership and differentiation strategies by providing value through
• Low cost relative to a differentiated firm’s products
• Differentiated features relative to features offered by cost leadership firms’ products
Teaching Note: Toyota Motor Corporation has become a world leader in the auto
industry primarily through its ability to implement cost leadership and differentiation
at the same time. The key to Toyota’s success has been the differentiated design and
manufacturing process that the company has implemented through its integrated
product design process.
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Matches between Corporate-Level Strategies and the Multidivisional Structure
Teaching Note
From 1950 to the late 1980s, among Fortune 500 firms, diversification and
implementation of the multidivisional structure increased dramatically.
• The percentage of diversified firms increased from 30% to approximately 75%.
• The multidivisional structure increased from less than 20% to approximately 90%.
Figure Note
Figure 11.4 should be used to indicate to students that there are three variations (or
versions) of the multidivisional structure.
FIGURE 11.4
Three Variations of the Multidivisional Structure
Teaching Note
It is important to reiterate that the functional structure is not as well suited to
managing and controlling multiple businesses as is the multidivisional structure or M-
form.
Using the Cooperative Form of the Multidivisional Structure to Implement the Related
Constrained Strategy
Chapter 11: Organizational Structure and Controls
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The cooperative form structure uses horizontal integration to bring about interdivisional
cooperation. The divisions in the firm using the related-constrained diversification strategy
commonly are formed around products, markets, or both.
Figure Note
Figure 11.5 summarizes the structural characteristics of the Cooperative M-form that
create and encourage cooperation.
FIGURE 11.5
Cooperative Form of the Multidivisional Structure for Implementing a Related
Constrained Strategy
All divisions are controlled by the central office and integrated by one of the integrating
mechanisms (such as division managers meeting face-to-face, integrating teams, or task
forces).
Integrating mechanisms are indicated by the dotted line connecting the divisions, which
create:
All of the related-constrained firm’s divisions share one or more corporate strengths.
Production competencies, marketing competencies, or channel dominance are examples of
strengths that the firm’s divisions might share.
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businesses for activities sharing, and to share its expertise in running franchise operations
across contracting, advertising, training, and more.
The sharing of divisional competencies facilitates the corporation’s efforts to develop
economies of scope (cost savings resulting from the sharing of competencies developed in
The following are different characteristics of structure that are used as integrating
mechanisms by the cooperative structure to facilitate interdivisional cooperation:
• Centralization—control at the corporate level allows the linking of activities among
divisions.
• Frequent, direct contact between division managers—encourages and supports
cooperation and the sharing of competencies or resources that can be used to create new
Using the Strategic Business Unit Form of the Multidivisional Structure to Implement the
Related Linked Strategy
A strategic business unit (SBU) structure consists of at least three levels, with a corporate
headquarters at the top, SBU groups at the second level, and divisions grouped by relatedness
within each SBU at the third level.
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This means that:
Figure Note
Figure 11.6 summarizes structural characteristics of the SBU multidivisional
structure and leads to a discussion of this structural form’s potential pitfalls or
disadvantages.
FIGURE 11.6
SBU Form of the Multidivisional Structure for Implementing a Related Linked
Strategy
Although the SBU M-form appears similar to the Cooperative M-form (Figure 11.5), there
are several differences.
• The SBU M-form includes an additional layer—the strategic business unit or SBU—
STRATEGIC FOCUS
Sony Corp.’s New Organizational Structure: Greater Financial Accountability and
Focused Allocations of Resources
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Teaching Note
This is a perfect example of a strong CEO enacting changes to help the firm perform.
Without the alignment of strategy and structure, the changes would have not been
successful. Ask the class to think about why the three business unit structure could be
successful, and what the CEO should be thinking about to play to Sony’s core
competencies of innovation.
Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated
Diversification Strategy
Unrelated diversified firms should adopt the third variant of the multidivisional structure, the
competitive form of the multidivisional structure, where controls emphasize competition
between separate (usually unrelated) divisions for corporate capital allocations.
Figure Note
Figure 11.7 summarizes structural characteristics of the Competitive M-form.
FIGURE 11.7
Competitive Form of the Multidivisional Structure for Implementing an Unrelated
Strategy
The Competitive M-form differs from both the Cooperative and SBU M-forms (see Figures
11.5 and 11.6) by:
• Establishing a smaller headquarters office, generally containing three functions:
1. Legal affairs, which increases in importance when a firm acquires or divests units
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Table Note
Table 11.1 compares the structural attributes of the three variants of the
multidivisional structure from the perspectives of centralization, integrating
mechanisms, divisional performance appraisal criteria, and bases of incentive
compensation.
TABLE 11.1
Characteristics of the Structures Necessary to Implement the Related Constrained,
Related Linked, and Unrelated Diversification Strategies
Table 11.1 provides a handy reference that can be used to compare the structural attributes of
the Cooperative, SBU, and Competitive M-form structures based on the
5
Discuss the organizational structures used to implement three
international strategies.
Matches between International Strategies and Worldwide Structures
Using the Worldwide Geographic Area Structure to Implement the Multidomestic Strategy
Although centralization of decision-making authority has been recognized as a means of
achieving coordination (and control) in organizations, some strategies require that local
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business units (or divisions) have the flexibility that will enable them to adapt to local market
preferences. This may mean that a decentralized structure is needed to provide this
flexibility.
Figure Note
Characteristics of the worldwide geographic area structure (presented in Figure 11.8)
illustrate the decentralized nature of the structure.
FIGURE 11.8
Worldwide Geographic Area Structure for Implementing a Multidomestic Strategy
The worldwide geographic area structure is characterized by:
The multidomestic strategy requires a decentralized structure.
• National or country-specific preferences require local adaptation for success.
Using the Worldwide Product Divisional Structure to Implement the Global Strategy