Strategy and Structure Interaction
Relationship Between Strategy and Organizational Structure
Since the pioneering work of Chandler (1962), interactions between strategy and structure have received much attention, both theoretically and empirically. The following conclusions have been reached:
- “The structure follows strategy.” As a company changes its growth strategy to use resources more profitably, new administrative problems affecting economic performance arise. These inefficiencies will only be solved by changing the organizational structure.
- A company that adopts an expansion strategy must have a functional departmentalization. However, if it decides to adopt a diversification strategy (products, markets, and technology), the best approach is the multidivisional structure.
- The tendency towards diversification has led to a shift from a functional structure to a multidivisional one.
There are some limitations that require these statements to be taken with caution:
- These studies primarily focus on growth strategies, not considering aspects of competitive strategy or business-level strategy.
- The transition from one organizational structure to another is not instantaneous or uniform in duration, also depending on countries and sectors. This can question the relationship between strategy and structure as the time lag increases. Generally, the gap is due to the greater difficulty of structural change, which occurs more slowly as inefficiencies resulting from strategic change become more apparent.
- Changing strategy does not always improve results by simply changing the structure, suggesting the existence of other factors (contingency factors) that influence the choice of structure.
- Therefore, coherence between strategy and structure has a decisive influence on results, but in turn, strategy and structure are influenced by environmental factors in which the firm operates.
Dialectic Between Structure and Strategy
Strategy and structure are mutually adapted so that strategies and structures interact in a dialectical way, although the relationship is dominant in the strategy-structure sense. As for the reverse relationship, there are some things to consider:
- When the costs necessary to change the structure are very high and the organization is unable to address them, the strategy will adapt to the structure.
- Once the basic structure of the business is chosen, organizational units are defined to be responsible for the company’s business. This will condition strategic decisions at the business level, influencing the selection of environmental conditions, products, and markets served, and so on.
- The organizational structure involves an unequal distribution of power in decision-making, which generates constraints in strategy reformulation. Thus, setting targets, choosing business areas, or formulating competitive strategy are influenced by the interests and objectives of those with more power within the organization.