Chapter 4: Organizational Strategy, Design and Effectiveness

Introduction

In this chapter firstly, strategies that organizations develop to increase the value they create to satisfy the stakeholders are discussed. Three levels of strategy -which are functional, business and corporate-level - as well as organizational design elements specific to each level are discussed Then we look at international strategy dealing with companies that enter into foreign markets. Lastly, we discuss various approaches to the assessment of organizational effectiveness.

Strategy

One of the primary responsibilities of top managers and executives is to give direction to organizations. They establish goals and strategies which influence how organizations should be designed in order to adapt to organizational environments. With an overall goal as a guiding principle, an organization lays out its mission that explains its reason for existence, its values and beliefs, and what it should be doing.

Terms and Definitions

A mission often states in general terms the firm’s purpose and philosophy. A mission statement communicates to a company’s current and potential internal and external stakeholders such as employees, customers and shareholders, what it is about now and what it wants to become. In order to accomplish its mission, an organization formulates and implements specific strategies. A strategy , on the other hand, determines an organization’s basic long-term goals and objectives; including courses of action and allocation of resources in order to reach those goals.

Competitive Advantage

Competitive advantage is a firm’s ability to generate superior economic performance and outperform its competitor because managers are able to create more value and meet customer needs in the marketplace. There are five general categories of organizational resources and capabilities which lead to competitive advantage. These are,

• Physical resources
• Human resources
• Financial resources
• Learning resources
• General resources

When some of these resources and capabilities are valuable and unique, they give the potential for the firm to create a competitive advantage. However, the firm’s managers should be aware of their potentials and be able to exploit them effectively. Furthermore, only those resources and capabilities that are difficult or expensive to imitate, with no readily available forms of substitutes, would lead to sustainable competitive advantage over the long term.

Core Competence

When an organization is able to achieve competitive advantage from its unique skills, knowledge, and abilities of managers and employees in value-creating activities, it leads to its core competence. A core competence distinguishes a company from its competitors and emerges over a period of time through organizational learning. In other words, a core competence is created when the firm can apply its valuable and unique resources and capabilities that are difficult to imitate in order to achieve superior efficiency, quality, innovation or customer responsiveness.

There are two major sources of core competencies: specialized resources and coordination abilities. Specialized resources are composed of functional and organizational resources . Functional resources are the highly skilled personnel from an organization’s various functions that must be special, unique or difficult to imitate. Organizational resources, on the other hand, are the skills that are specific to the organization such as excellent top management team and possession of valuable and scarce resources such as raw materials, land and capital assets. Finally, a coordination ability refers to an organization’s ability to coordinate and direct its specialized resources to create the most value such as effective control systems and adaptable and open organizational culture.

Levels of Strategy

A typical organization often considers three levels of strategy: corporate level, business level and functional level. Note that these levels are interconnected and therefore should be aligned together. In other words, they should complement and support one another.

Corporate-level strategy is often made at the highest levels of the organization such as the board of directors, the CEO and executive management with inputs from other managers. It is formulated for the overall organization and often deals with the selection of which business domain or markets the firm is to compete in. The overall corporate directional strategy can be conceptualized in terms of stability , growth and retrenchment. A corporate strategy of growth such as market expansion is to achieve growth in sales, assets, and/or profits .

Business-level strategy concerns with the competitive aspect of a firm’s products or services in its industry or market segment. It addresses how the firm can develop core competencies to exploit current opportunities, to explore new ones, or to balance between the two. In other words, a firm must establish a competitive advantage over its competitors to prosper within an industry or market.

Functional-level strategy concerns with developing distinctive competencies by functional areas or departments such as R&D or production as well as their ability to coordinate among various departments to provide competitive advantage. Functional managers should strengthen the technical and human resources skills and abilities of employees within their areas of expertise. Functional areas should coordinate and integrate their activities with each other in order to improve the overall performance of the whole organization.

Strategy Frameworks

Before we can analyze structure-strategy relationships, it is helpful to review strategy frameworks that managers can use to formulate organizational strategy that would build competitive advantage for firms.

Porter’s Generic Strategies

According to Michael E. Porter, a firm must select a strategy to cope with competitive forces such as the threats of new and existing competitors in order to gain competitive advantage. Managers can choose from cost leadership , differentiation and f ocus strategies . A cost leadership strategy is adopted when a firm tries to gain market share by keeping costs low compared to its competitors. Secondly, a differentiation strategy is adopted when a firm seeks to be unique and distinguish its products or services from others in the industry. Finally, a focus strategy aims either at a low cost advantage or a differentiation advantage for a narrow segment or niche market.

Miles and Snow Strategy Framework

As an alternative approach to generic strategy, Miles and Snow developed four business strategies: Prospectors, Defenders, Analyzers , and Reactors in order to deal with environmental uncertainty. The defender strategy is concerned with stability by aggressively seeking to hold on to current customers. This can be done with competitive pricing or producing high quality products. However, defenders tend to ignore innovations and development trends and not to take risks as they tend to focus primarily on internal efficiency. In order to be efficient, defenders seek to centralize control, using extensive division of labor along with a high degree of horizontal differentiation and formalization. This strategy works well in stable organizational environments, often in declining industries.

The prospector strategy on the other hand is to innovate and to grow by finding and exploiting new products and new opportunities. It is almost the opposite of the defender strategy. Prospectors regard creativity and innovation highly rather than stability. Therefore, this strategy is suited to firms facing dynamic or changing organizational environments. Prospectors need to maintain flexibility a in dynamic environment therefore they should have loose and flexible structural characteristics such as decentralization and a low degree of formalization along with open organizational culture.

Thirdly, an analyzer strategy aims to maintain the best of both defender and prospector strategies by maintaining stability and efficiency through stable products and market areas, while pursuing flexibility and growth for new products or new markets. Since analyzers seek both stability and flexibility, they should have efficient production processes for existing products while pursuing innovative new product lines that have growth potential. These firms should have a moderate level of centralization, tight control over current activities, and loose controls for new products or new ideas.

Finally, when a firm pursues one of the above strategies improperly or poorly, or responds to environmental changes in an unstable and inconsistent fashion, it follows a reactor strategy . We can argue that the reactor strategy is not really a strategy at all as managers fail to pursue a clear strategic direction for the future.

Miles & Snow typology of strategy is one of the important and widely used by a variety of firms. Researchers have generally found support for its effectiveness in practice. In sum, defenders, analyzers, and prospectors were found to perform equally well and consistently out-perform reactors.

Functional-Level Strategy

Core competencies are often embedded in the skills, resources and capabilities at the functional level. The strength of a firm’s core competencies also depends on its functions to coordinate the use of its resources and capabilities among them as business processes often are cross-functional. An understanding of the linkages and interdependencies among functional activities is critical as managers need to align or fit these activities and capabilities of the firm with its chosen strategy.

Production

Using Porter’s framework, a production function can lower the costs of manufacturing and the final costs of products or services. A supply chain management can be used to manage supply chain activities from sourcing, production to logistics needs. For example, managing relationships with key suppliers for superior input materials at reasonable costs is one source of low cost advantage. Additionally, adopting advanced production equipment and methods such as flexible manufacturing systems (FMS), lean manufacturing, and just-in-time inventory system can contribute to not only lower production costs, but better quality and reliable products.

Marketing & Sales

Marketing function deals with pricing, selling, and distributing products or services. To stand out in the marketplace, marketing function often engages in brand management or excellence in customer services for the fundamental purpose of differentiating the firm’s products or services from competitors’. It can emphasize differentiated advertising, one-to-one marketing, promotion, and distribution of its products or services for existing and/or new markets.

R&D

Research and development efforts are essential for many firms especially those that put priority on new product development, process improvement, and to advance innovation goals.

Information Systems

Organizations have been increasingly adopting information technology/information systems (IT/ IS) for strategic purposes. The use of recent technologies such as social networking, big data analytics, and the Internet of things (IoT) can benefit all of a firm’s functional departments. A company-wide information system acts as a tool to gather, store and distribute relevant and timely information to anyone, anywhere. Managers and employees use the information to make faster and better decisions and to improve coordination among employees for firm-wide effectiveness.

Functional-Level Strategy & Design

Organizational structure and culture are important to a firm’s functional-level strategy because they need to support the development of skills, knowledge and expertise. These include providing various and adequate resources needed and coordination abilities to use those resources effectively by the functional departments. When a firm faces a complex and fast changing organizational environment, its functional departments need to become highly specialized and highly skilled to handle complexity and uncertainty in its environment. Therefore, the degree of differentiation among departments increases as each department has unique orientations, attitudes, values, goals, and education that distinguish them from one another.

Business-Level Strategy

Business-level strategy defines an organization’s approach to improve its competitive position within its specific industry or market segment. Business strategy can be competitive to be used against competitors or it can be cooperative by working with one or more competitors to gain advantage against other competitors.

Competitive Business Strategy

A competitive business strategy would position a firm in an industry to outperform its competitors. A firm can choose to produce lower priced products and services using a low-cost business-level strategy , or to produce for a customer group who wants unique or differentiated products by using a differentiation business-level strategy. A focus business-level strategy would put all their efforts and resources to serve a narrow segment of a market well.

Cooperative Business Strategy

An organization can pursue cooperative business strategies to gain competitive advantage within its industry by working with, rather than against, others. This can be done using strategic alliances. A strategic alliance is any cooperative efforts of two or more organizations to achieve strategic objectives of developing, producing or selling products or services. An alliance creates values by leveraging complementary resources and capabilities of all firms for mutually beneficial gains. There are several types of strategic alliances such as joint ventures, minority ownership, technology and product licensing, franchising, R&D consortiums, outsourcing, distribution relationships, long-term contracts, partnership frameworks, innovative networks, and clusters.

Business-Level Strategy & Design

A firm can gain a competitive advantage at the business level by using its core competencies created by its functions, combined with opportunities in its environment to create value. A firm needs to select which domain to compete in and position itself to protect and enlarge that domain. A firm with low cost business-level strategy needs to keep its costs as low as possible to serve all customer groups or market segments. Often, this can be accomplished under tight control over functional activities with high degrees of formalization and specialization. Since product development tends to be expensive, firms with low-cost strategy often imitate differentiator’s products or tends to wait to develop products with clear demand in the market place. Further, they often focus on producing only a few products in order to reduce costs. However, organizations that employ differentiation strategy often attempt to create new innovative products or services, for example, through unique features or attributes. They typically produce a wider range of products to satisfy the needs of various customer groups. They often use speed in product development cycles or time to market as a key differentiation to get new products to the market place before competitors. To achieve successful new product innovation, key departments such as R&D, production and marketing should have highly specialized skills and knowledge appropriate for those functions.37 They must share ideas, information, i.e. have high coordination among them.

Corporate-Level Strategy

A corporate-level strategy defines the scope of the firm or the organizational domain in which it competes. Organizations should adopt a growth strategy only if growth is expected to create value while earning above average returns.

Diversification

A corporate-level strategy of diversification allows a firm to use its core competencies to pursue opportunities in several industries and product markets.

Related Diversification

A firm engages in related diversification when it enters a new domain with similar or related core competence.

Unrelated Diversification

A firm engages in unrelated diversification when it enters into a new business that has no relationship with its core business.

Vertical Integration

Vertical integration is used to pursue growth along an industry’s supply chain from extracting raw materials, production and distribution of products or services. In other words, it is a strategy in which an organization owns its suppliers and/ or its distributors. Backward integration involves acquiring ownership or increasing control over its suppliers to make some of its own inputs. This strategy is appropriate when the current suppliers are too costly for the firm and/or not reliable in terms of quality or delivery time. A firm acquiring or increasing control over its distributors or retailers is engaged in forward integration to distribute its own outputs.

Vertical integration allows an organization to use its core competencies to gain competitive advantage by enhancing its value creating activities along the industry’s value chain. It can also reduce transaction costs which are incurred when buying products or services from the marketplace. Transaction costs involve information and coordination costs of finding and negotiating such as price and quality, including transportation costs, and legal fees. Vertical integration would further allow a higher degree of control over some of the supply chain activities.

Corporate-Level Strategy and Design

Organizations must have properly designed structures to create value and effectively manage their diversified businesses. In general, the multidivisional (M-form) structure is appropriate when a firm diversifies by adding products or services, and expands into new markets or geographical areas. Analyze Figures 4.3 and 4.4 on pages 92-93 for examples.

An important example of unrelated diversification that can be analyzed is a conglomerate structure where corporate managers only monitor each division’s performance but do not get involved in day-to-day operations of those divisions. A conglomerate is a diversified large corporation that is made up of several firms. They are called different names in various countries, for example, a Business house in India, a Chaebol in South Korea, and a Holding in Turkey.

International Strategy

An international strategy involves choosing the best strategy to expand into international markets. An organization can seek to do business in another country in order to develop and exploit its core competencies, to realize economies of scale of its operations, to exploit economies of scope to various geographic locations, to increase market size, and to find low-cost factors of production such as low cost labor and raw materials. However, managers will face different problems, threats, and complexities in dealing with international strategies and how to best design the organizations for successful international expansion.

International Business-Level Strategy

The resources and capabilities in a firm’s home country often give advantages that allow the firm to pursue international markets. Porter described four attributes that can lead to national competitive advantage; factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry.

International Corporate-Level Strategy

Organizations pursuing international corporate level strategy often concentrate on the scope of their operations with diversification through both product and geography. They can use three strategies at this level: multidomestic, global, and transnational. The strategies are based on Bartlett & Ghoshal typology of multinational companies using two criteria:

• Global integration where businesses focus on standardization of product offerings worldwide,
• Local responsiveness where businesses adapt products to local markets.

Global Strategy

A global strategy is oriented towards building cost advantage by focusing on efficiency and taking advantage of the economies of scale as their products are standardized across country markets.

Multidomestic Strategy

A multidomestic strategy is oriented towards a high level of local responsiveness where products can be actively adapted to local preferences in each country market.

Transnational Strategy

Transnational strategy combines characteristics of both multidomestic and global strategies along with its own unique features by trying to achieve both local responsiveness and efficiency at the global level.

Organizational Effectiveness

A manager’s main responsibility is to develop the organizational capacity to create value, i.e. to generate more effective organization. Effectiveness is a broad concept that is difficult to define and measure as organizations are diverse and fragmented. Therefore, the assessment of effectiveness requires multiple criteria, using different characteristics, and both processes (means) and outcomes (ends) must be considered.

The Goal Approach

One way to define effectiveness under the goal approach is to look at the degree to which an organization achieves its goals or how well it is performing. There are official goals and operative goals that are created by managers within an organization. An official goal is stated as part of an organization’s mission statement in public documents such as on a company Website or its annual reports. Operative goals are an organization’s actual short-term and long-term goals. Operative goals are those that managers pursue that can be used instead of the official goals.

The External Resource Approach

An external resource approach focuses on the ability of organizations to acquire inputs from their external environment.

The Internal Process Approach

An internal process approach focuses on the transformation process and to what extent organizational skills and resources are used to convert into finished products or services.

The Strategic Constituency Approach

A strategic constituency approach is concerned with how successfully an organization satisfies its strategic constituency or the key stakeholder groups from which it requires support to survive and thrive.

The Balanced Scorecard Approach

The balanced scorecard approach (BSC) is an integrated measure of organization effectiveness that includes not only traditional financial measurements and business processes but also includes concerns for customers, employees and organizational learning.

The Competing Value Approach

The competing value approach tries to balance concerns from various parts of an organization as well. This approach is represented by three underlining value dimensions: organizational focus, organizational structure, and organizational means and ends.