Business Strategy and Organizational Structure
Structure and Strategy
The possible relationship between business strategy and organizational structure has been addressed since the 1960s. Alfred Chandler’s work examines the historical evolution of a set of seventy major U.S. companies in the period from 1909 to 1959. Three key ideas are noteworthy:
The Structure Follows Strategy
As companies change their growth strategy to utilize resources more profitably, new administrative problems arise. These problems lead to a deterioration of the company’s economic performance, which can only be solved by changing the organizational structure to adapt to the new strategy. If this adjustment does not take place, the strategy does not fully achieve its objectives, and economic inefficiencies appear.
Types and Stages of Growth Strategy and the Predominant Structural Changes
The model of the relationship over time is quite predictable to the extent that remedies are cumulative, and growth strategies create a need for new structural forms. The types or stages are:
- Volume Expansion: Central Administrative Office.
- Geographic Expansion: Functional organization to achieve coordination and control of geographically dispersed units.
- Vertical Integration: Functional organization, planning techniques, and more sophisticated operating structures.
- Product Diversification: Cluster organization with a central corporate office to achieve coordination between divisions.
Structural Change Following a Change in Strategy
Structural change following a change in strategy does not occur instantaneously but rather follows the emergence of inefficiencies after the implementation of the strategy. The lack of simultaneity is attributed to the fact that the individuals who formulate the strategy are different from those who design the organization, having different training and interests.
This study stimulated numerous works whose purpose was to verify whether the statements were true. All papers reach the same conclusion: increasing diversity of product, markets, and technologies of the firm (diversification) will require different structures. The limitations are:
- Growth Strategies are Studied: The definition of competitive strategy or business level is not taken into account.
- Transition Between Structures: The passage or transition from one organizational structure to another is not instantaneous or uniform in length; it varies with countries and sectors. The gap is due to the greater difficulty for structural change concerning the strategic. The time lag is less when the firm is in competition because inefficiencies can occur.
- Strategy Change Does Not Always Improve Results: When you change your strategy, it does not always improve the result to change the structure. This is due to the existence of other contingency factors, different from the strategy, that determine the choice of the structure.
The consistency between the strategy chosen by the company and the structure used to implement it has a decisive impact on the results. However, in turn, strategy and structure are influenced by the environment in which the firm operates and other factors.
Basic Structural Configurations
1. The Simple Structure
This basic structure is usually appropriate for small businesses or firms in their early stages.
The “pioneer” is the one who retains decision-making power and authority. There is a centralization of structures. There is little hierarchy, and behavior is not very formalized.
Its main advantages are flexibility and adaptability of the strategies, as well as the low cost of maintenance. The strategies are aimed at finding opportunities.
The disadvantages are the risky nature of its structure, its restrictive nature, and the fact that all actions are determined by one person.
2. The Functional Structure
It is a bureaucratic type of design; its essence is found in the division of labor and the systematization of rules and procedures.
It constructs departmentalization by function.
The design of the superstructure also has departmentalization based on simple numbers (number of individuals) and time (shift work). Then there is departmentalization by function produced by a functional division of labor. Departmentalization by process or equipment occurs when a department is subdivided into more, for example, production: assembly, painting, quality, etc. Market-based departmentalization occurs because of products (product lines), geographical areas, customers (wholesalers, retailers, etc.).
The advantage of the functional structure is the efficient use of resources and specialization of tasks.
The disadvantages are given by the difficulty of coordinating the departments (with “parochial” behaviors) and the fact that it is not a creative or proactive structure.
3. The Divisional Structure
When a company begins to expand its product lines, it creates the divisional form. In this structure, the primary basis for departmentalization is customer groups, geographical areas, or product lines.
Generally, headquarters allows divisions to enjoy almost complete autonomy to make their own decisions, after monitoring their results.
The divisional structure is especially appropriate given the diversity of markets for products and services.
With regard to contingency factors, it is applied in large organizations in the pursuit of expanding markets. In the case of the emergence of new competitors, it leads to a search for new segments.
Among the advantages are the efficient allocation of resources and the preparation of new general managers. There is a dispersion of risk.
The drawbacks are associated with the spread of threats, causing a reduction in risk and, therefore, innovation. It can encourage duplication and does not encourage cooperation.
4. The Matrix Structure
The matrix structure combines elements of the functional and divisional structures. The matrix organization emerges to solve the problems of departmentalization.
On the one hand, there is the logic of the functional form (major), and on the other hand, the parent company responds to changing markets and promotes the autonomy of the units.
The problems arise between the lines of command between functional and project managers. There is a high administrative cost.
The advantages are flexibility and motivation.