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Chapter 11

Organizational Structure and Controls

CHAPTER OVERVIEW

LEARNING OBJECTIVES

LECTURE NOTES

11-3a Simple Structure

11-3b Functional Structure

11-3c Multidivisional Structure

11-3d Matches between Business-Level Strategies and the Functional Structure

11-3e Matches between Corporate-Level Strategies and the Multidivisional

Structure

ADDITIONAL QUESTIONS AND EXERCISES

INSTRUCTOR’S NOTES FOR MINDTAP

What Would You Do?

Chapter 11: Organizational Structure and Controls

CHAPTER OVERVIEW

Chapter 11 opens with an explanation of organizational structure and organizational

controls. Organizational structure specifies the firm’s formal reporting relationships,

procedures, controls, and authority and decision-making processes. Essentially,

organizational structure details the work to be done in a firm and how that work is to be

accomplished. Ideally, an organization’s structure will be both stable and flexible.

Organizational controls guide the use of strategy, indicate how to compare actual and

expected results, and suggest actions to take to improve performance when it falls below

expectations. A proper match between strategy and structure can lead to a competitive

advantage.

Before explaining the potential matches between structure and strategy, the chapter

explains the three basic structures—simple, functional, and multidivisional. The functional

structure is used to implement business-level strategies. The cost leadership strategy

requires a centralized functional structure—one in which manufacturing efficiency and

process engineering are emphasized. The differentiation strategy’s functional structure

decentralizes implementation-related decisions, especially those concerned with

Chapter 11: Organizational Structure and Controls

The transnational strategy—a strategy through which the firm seeks the local

responsiveness of the multidomestic strategy and the global efficiency of the global

strategy—is implemented through the combination structure. Because it must be

simultaneously centralized and decentralized, integrated and nonintegrated, and

formalized and nonformalized, the combination structure is difficult to organize and

successfully manage. Two structures can be used to implement the transnational strategy:

the matrix structure and the hybrid structure with both geographic and product-oriented

divisions.

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.

Chapter 11: Organizational Structure and Controls

Lecture Notes

Chapter Introduction: As students will recall, Chapter 10 described how governance

mechanisms are used to align the interests of a firm’s top-level managers with those of the

OPENING CASE

Changing McDonald’s Organizational Structure and Controls: A Path to Improved

Performance

Several times larger than its two closest competitors—Wendy’s and Burger King—

McDonald’s is a global fast-food restaurant chain doing business in more than 100

countries. Yet, when current CEO Steve Easterbrook took the helm, he felt the

Teaching Note

Kick off the chapter’s discussion by asking students if they’ve eaten at a McDonald’s

restaurant recently and noticed any changes in the hamburgers. With such an iconic

Define organizational structure and controls and discuss the

difference between strategic and financial controls.

The match or degree of fit between strategy and structure influences the firm’s attempts to

Chapter 11: Organizational Structure and Controls

The focus of this chapter is on the structure- and control-related issues of strategy

implementation, including:

• The pattern of growth and changes in organizational structure experienced by strategically

11–1 ORGANIZATIONAL STRUCTURE AND CONTROLS

When the firm’s strategy isn’t matched with the most appropriate structure and controls,

performance declines.

Teaching Note

Selecting the organizational structure and controls that result in effective

implementation of chosen strategies is a fundamental challenge for managers,

11-1a 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

Chapter 11: Organizational Structure and Controls

11-1b 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

Strategic controls are largely subjective criteria intended to verify that the firm is using

strategies that are appropriate, given the conditions in the external environment and the

Strategic controls help evaluate how well a firm is focusing on what it takes to implement

its strategies.

• For a business-level strategy, strategic controls are used to study value chain activities and

Chapter 11: Organizational Structure and Controls

Teaching Note

The use of strategic controls, which are behavioral in nature, requires high levels of

cognitive diversity among the firm’s top-level managers. Cognitive diversity is a term

that captures differences among top-level executives regarding their beliefs about

cause-and-effect relationships and outcome-related preferences.

Financial controls are largely objective criteria used to measure the firm’s performance

Describe the relationship between strategy and structure.

11–2 RELATIONSHIPS BETWEEN STRATEGY AND

STRUCTURE

Strategy and structure have a reciprocal relationship, highlighting the interconnectedness

between strategy formulation (Chapters 4, 6–9) and strategy implementation (Chapters

10–13).

In general, structure follows the selection of the firm’s strategy. However, once in place,

Teaching Note

Using the four criteria of sustainability, the firm’s strategy/structure match is an

advantage when that match is valuable, rare, imperfectly imitable, and nonsubstitutable.

Chapter 11: Organizational Structure and Controls

11–3 EVOLUTIONARY PATTERNS OF STRATEGY AND

ORGANIZATIONAL STRUCTURE

Chandler found that firms tend to grow in somewhat predictable patterns: volume 

geography  integration (vertical, horizontal)  product/business diversification.

Figure Note

Figure 11.1 graphically illustrates the evolution of structure as the organization grows.

FIGURE 11.1

Strategy and Structure Growth Pattern

As indicated by Figure 11.1, firm structure evolves from simple to functional to

multidivisional.

11-3a 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:

• Little specialization of tasks

Chapter 11: Organizational Structure and Controls

Teaching Note

In the United Kingdom, some analysts believe that the simple organizational structure

If they are successful, small firms grow larger; as a result, they outgrow the simple

structure.

• There is a significant increase in the amount of competitively relevant information that

requires analysis.

11-3b 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, and human resources.

Teaching Note

Functional specialists may develop a myopic or narrow perspective and lose sight of

the firm’s strategic vision and mission. When this happens, the problem can be

overcome by implementing the multidivisional structure.

11-3c 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,

As initially designed, the M-form was thought to have three major benefits.

1. It enabled corporate officers to more accurately monitor business unit performance,

which simplified control problems.

Teaching Note

An expanded discussion of the M-form may be helpful at this point. Some facts related

to use of the multidivisional structure at DuPont and General Motors (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 GM called for:

• Creating separate divisions, each representing a distinct business

Chapter 11: Organizational Structure and Controls

This would enable the firm to:

• Accurately monitor performance of each business, simplifying control problems

11-3d 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

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 structure usually features:

• Simple reporting relationships

Teaching Note

Because of restructuring during the late 1980s and early 1990s—and reductions in the

number of management layers—firms now have flatter structures. “Higher” in the

Chapter 11: Organizational Structure and Controls

Cost leadership strategies emphasize:

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:

• Dotted lines from the centralized staff to each function represent tight controls and

centralized coordination.

Teaching Note

Southwest Airlines has successfully implemented a 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:

Chapter 11: Organizational Structure and Controls

• Frequent use of cross-functional product development teams

• Low formalization, decentralization, and low specialization of work tasks allowing people

to interact frequently to further differentiate products while developing ideas for new

products

Figure Note

Figure 11.3 summarizes the relationships between the differentiation strategy and the

functional structure.

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. However, there are

several subtle but important differences.

Formalization is limited to enable emergence of new product ideas and enhanced ability to

change.

• Marketing is the main function for keeping track of new product ideas.

Chapter 11: Organizational Structure and Controls

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

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.

11-3e Matches between Corporate-Level Strategies and the Multidivisional Structure

A firm’s level of diversification is a function of decisions about the number and type of

businesses in which it will compete, as well as how it will manage the businesses (see

Chapter 11: Organizational Structure and Controls

Teaching Note

From 1950 to the late 1980s, among Fortune 500 firms, diversification and

implementation of the multidivisional structure increased dramatically.

Figure Note

Figure 11.4 indicates that there are three variations (or versions) of the multidivisional

structure.

FIGURE 11.4

Three Variations of the Multidivisional Structure

The three variations of the multidivisional structure that will be discussed from the

perspective of how each is best suited to specific diversification strategies are as follows:

Using the Cooperative Form of the Multidivisional Structure to Implement the Related

Constrained Strategy

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

Chapter 11: Organizational Structure and Controls

FIGURE 11.5

Cooperative Form of the Multidivisional Structure for Implementing a Related

Constrained Strategy

The first variant of the M-form structure—the cooperative M-form—is characterized by

an increased emphasis on integration devices and horizontal human resource practices.

Integrating mechanisms are indicated by the lines connecting the divisions, which create:

• Tight linkages between divisions

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.

• Production expertise is one of the strengths of Sony’s divisions, but they have had

difficulties coordinating across divisions to create joint products in online music.

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

Chapter 11: Organizational Structure and Controls

The following characteristics of structure 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.

Using the Strategic Business Unit Form of the Multidivisional Structure to Implement the