Strategy Implementation (I): Organizing for Advantage pdf

Strategy Implementation and the Firm’s Managers Strategy Implementation and the Firm’s Employees A Framework for Understanding Organizational Structure Basic Ingredients of Organizationa

CHAPTER OUTLINE

CASE 1 Ford Motor Company

CASE 2 Asea-Brown-Boveri (ABB)

Introduction

Why Study Strategy Implementation?

Strategy Implementation and the Firm’s Managers Strategy Implementation and the Firm’s Employees

A Framework for Understanding

Organizational Structure Basic Ingredients of Organizational

Structure

Specialization Standardization Centralization

Broad Forms of Organizational Structure

Functional Structures Product Divisions Variants of the Product Division Structure Geographic Division Structures

Matrix Structures

Organizing for Global Operations

International Division Structures Worldwide Product Divisions Worldwide Geographic Division Structures Worldwide Functional Structures

Worldwide Matrix Structures Worldwide Hybrid or Mixed Structures

Corporate Application to Ford Motor

Company and ABB

Ford Motor Company Asea-Brown-Boveri (ABB)

No Single Structure Is Perfect

An Overview of Organizational Structure

Ethical Dimension

Summary

Discussion and Exercise Questions

Strategy Implementation (I):

Organizing for Advantage

WHAT YOU WILL LEARN

• Why strategy implementation

is important

• How strategy implementationcontributes to a firm’s competitiveadvantage

• Why organizational issues are

a significant part of strategyimplementation

• How organizational structure lays the foundation for strategyimplementation

• The broad types of organizationalstructures that companies are likely

to use

• Why no single type of organizationalstructure is likely to fit all companies

Following more than ninety years of growth, Ford Motor

Com-pany has become one of the largest manufacturers of

automo-biles in the world (1997 revenues of $153 billion, profits of $6.9

billion) Throughout its long history, Ford has prided itself on

its innovation and the creative flair used to design some of the

world’s most popular and best selling cars For example, in the

late 1960s, Ford revolutionized automobile design with its

orig-inal Mustang sports car that took the world by storm Other

leg-endary Ford nameplates developed during the 1960s and 1970s,

such as the Thunderbird (T-Bird), Fairlane, Galaxy, Mustang,

and Lincoln Continental, remain distinctive in the annals of

U.S automobile manufacturing history.

All of the three major U.S automobile companies (Ford,

General Motors, and Chrysler) grew very fast in the twenty

years that followed World War II The American automobile

industry was expanding rapidly not only in the United States,

but also around the world General Motors and Ford especially

invested heavily in their European operations after the war

because of the rapidly growing economic prosperity of those

markets, the sophistication of their customers, and the fact that

countries such as France, Germany, and Italy had a strong base

of engineering talent that made many European car companies

significant competitors (e.g., BMW, Daimler-Benz, Fiat,

Fer-rari, and Renault) Throughout the 1960s and 1970s, both GM

and Ford set up product development centers and factories in

Europe to begin designing and developing cars for different

national markets by tapping into the strong pool of local

engi-neering talent and expertise Ford, in particular, devoted a

con-siderable amount of effort and resources to building a large

European operation that would design and develop new

auto-motive technologies and products that appealed to a very

dis-tinctive set of preferences, tastes, weather conditions, driving

habits, and operating requirements that were more specific to a

European environment Because European roads tend to be

more narrow than American roads, and road conditions often

varied significantly from one region to another, cars targeted for

European customers often required a different set of design,

manufacturing, and performance requirements than cars sold in

U.S markets In particular, engines, transmissions, suspension,

safety features, and other components manufactured for

Euro-pean cars often had very different design and manufacturing

specifications from those used for cars designed for American

markets In addition, cars developed for a European customer

base often focused on maximizing fuel efficiency and economy,

since gasoline costs were significantly higher than those in the

United States Thus, European cars typically housed a smaller, more fuel-efficient (and oftentimes more powerful) engine than those found in American cars Also, European transmissions and suspensions were often more “tight” than those found in U.S cars, meaning that the car gave a feeling to the driver that

it would “hug” the road more closely This was an especially important design feature, since narrow European roads and fre- quent bad weather spells meant that drivers would potentially encounter a high range of different and possibly hazardous driv- ing conditions, especially in different countries Thus, the designs, components, and operating requirements for European cars were often very different from those that guided automo- bile development and manufacture for cars in U.S markets.

Early Organizational Structure

To manage the significant differences in the way cars are designed, developed, and manufactured in the United States and Europe, Ford employed a geographical division form of organ- ization for over four decades Ford’s European operations were responsible for all aspects of automotive development, manu- facture, and sales in Europe In turn, Ford’s North American headquarters was responsible for developing, manufacturing, and selling cars in the United States and elsewhere In this way, Ford Europe and Ford North America operated autonomously from one another For all practical purposes, Ford Europe acted

as if it were almost a completely separate car company from Ford North America Each part of the company designed and implemented its own set of product development centers, design centers, factories, and purchasing operations according

to its respective market needs Within the United States, ever, Ford utilized a product division structure to manage two separate car divisions, Ford and Lincoln/Mercury Each of these product divisions offered a line of cars tailored for a different market segment (Ford—smaller and midsize cars; Lincoln/ Mercury—larger, luxury cars) Ford’s sales to the Asia/Pacific region were quite small after the war, so this region reported directly to North American headquarters through a small inter- national division.

how-Over time, the long separation of Ford Europe from Ford North America resulted in extensive duplication of effort and activities between the two subunits In many cases, the same Ford car design developed in the United States was often com- pletely reengineered from the ground up in Europe, thus con- suming significant design time and development effort to reach the market Even auto parts and components made in the United

States became increasingly incompatible with the separate

design and manufacturing specifications created by Ford

Europe The separation of European and American operations

also meant that innovations created in one part of the world

could not be readily transferred to the other For example,

design innovations and improvements in fuel-efficient engines

made by Ford Europe were not readily adapted by Ford North

America during the 1970s Also, steady improvements in the

introduction of new paint and assembly techniques in Ford’s

U.S automobile plants did not flow to Ford’s European

opera-tions as well, thus leaving the company in a situation where

experience, talent, and skills in one part of the world could not

readily be used in another This separate division of effort

between the two regions made it difficult for the entire company

to respond quickly to the onslaught of better quality, lower-cost

Japanese car imports in the U.S and European markets during

the past two decades Moreover, even the same model name

used for a Ford car had very different components, design

spec-ifications, and even target market between the two parts of the

company For example, the Ford Escort in the United States

appealed to a market segment that is interested in basic

trans-portation with few of the features that are found in mid-size or

other performance-oriented models On the other hand, the

Ford Escort in Europe is a mid-range family car that typically

comes with a full range of options absent on the U.S model.

This duplication of design, development, and manufacturing

activities between the two regions carried over to the entire

range of Ford’s products Moreover, maintaining fully

autonomous vehicle design and development centers in Europe

meant that Ford’s overall cost structure became bloated and a

real burden on financial performance during the same time

period Duplication of design and development activities

became so profound during the 1980s that at one point, the

company realized that it had over eighty-two different

automo-bile models, none of which shared even the same size radiator

cap Thus, the separation of Ford Europe from Ford North

America represented an organizational approach that the

com-pany could no longer afford, especially as the automobile

industry itself became more global in scope.

Creating a Global Organization

In April 1994, then CEO Alex Trotman put forth a new

organi-zational architecture for the entire company Known as Ford

2000, the company’s reorganization combines its European and

North American automotive operations into one unit By

inte-grating these once-separate divisions into a single unit, Trotman

hopes to transform Ford into a much more nimble company that

can compete with fast-moving Japanese and other competitors

around the world This single automotive division will be

organized around five product vehicle development centers,

four in the United States and one in Europe Each vehicle opment center will be responsible for a particular type of vehi- cle platform (e.g., small car, mid-sized car, luxury car, sport- utility vehicle, commercial truck) that would then be developed and sold around the world under its authority Under this new structure, for example, the European vehicle development cen- ter will focus on designing small, front-wheel, fuel-efficient cars that can be sold in any global market that wants that type

devel-of car Mid-size and larger cars, trucks, and sport-utility cles will be developed in Ford’s four vehicle development cen- ters based in the United States Each of these vehicle develop- ment centers will then oversee product design, manufacture, and marketing for various car or truck models that fall under its platform category.

vehi-The objective of the reorganization is to create a company

in which global product teams will design around a central type of car platform a series of car models that can then be sold around the world with minor modification As currently con- ceived, Ford’s engineers and technical staff will likely have two types of responsibilities: an individual expertise in a given technical or functional area (e.g., engines, powertrains, sus- pensions, or cooling systems) and a vehicle platform center to which they report (small car, mid-sized car, luxury car, sports- utility vehicle, or commercial truck) Ultimately, they will report to their superiors in the vehicle platform center under which they are assigned Instead of designing two separate lines of Taurus mid-sized cars for sale in the United States and Europe, the company intends to create one basic mid-sized vehicle platform in North America and then modify it for indi- vidual markets anywhere around the world Conversely, Ford’s European vehicle development center will concentrate its efforts on designing all of Ford’s small car needs and then modifying it according to road conditions and customer needs

in individual markets as well By the end of the century, CEO Trotman hopes that Ford’s small car engineers (based in Europe) will be creating small cars for all of Europe, the United States, and other worldwide markets using the same basic vehicle template.

To ensure that the company is capable of fully ing the vision of Ford 2000, Trotman is aggressively investing

implement-in new vehicle platforms that can carry over more parts from one model to another Also, the company has begun to invest heavily in new types of computer-assisted design and manufac- turing (CAD/CAM) technologies that enable engineers to test design prototypes for vehicle ruggedness, reliability, and per- formance before they are actually produced in the factory Once

an underlying platform meets the company’s stringent quality, safety, operating, and manufacturability requirements, engi- neers in the factory would be able to directly download design data and other bits of information from the development center

into the factory, thus saving considerable amounts of time and

engineering effort This powerful combination of using more

common vehicle platforms and computer-integrated

manufac-turing is the basis for Ford’s ambition to reduce the number of

basic car designs from twenty-four to sixteen, and yet increase

the number of actual car models from those platforms by over

50 percent By using the same basic platform for a variety of

different car models, the company seeks to spend much less

time and money on redesigning each model separately every

year By more closely linking Ford’s design, engineering, and

manufacturing activities, Trotman hopes that the company will

be better able to respond quickly to changing customer tastes

and the rise of new market segments in different parts of the

world In addition, by using more common parts throughout

Ford’s operations, the company also hopes to save over $1

bil-lion by reaping greater economies of scale in purchasing and

improved negotiations with key suppliers.

The transformation of Ford into one of the world’s most

powerful automobile companies continues into the new

millen-nium Under its newest CEO, Jacques Nasser (who took over in

1997), Ford is aggressively seeking to grow in all automobile

categories, both in the United States and abroad With the

global automobile industry consolidating, Ford has begun to

make some major moves that will begin to give it significant

new strength in Europe and Asia In January 1999, for example,

Ford paid $6.45 billion to purchase the automobile businesses

of Volvo of Sweden, thus helping Ford compete more

effec-tively in the upper range of the mid-sized car market The

acquisition of Volvo is important to Ford because it allows the

company to gain access to many innovations in safety, ergonomics, and advanced manufacturing techniques developed

by the Swedish firm (Ford, however, did not elect to purchase the truck division of Volvo) With the acquisition of Volvo, Ford

is much better positioned to compete in Europe against the likes

of DaimlerChrysler and the newly formed alliance between France’s Renault and Japan’s Nissan The acquisition of Volvo complements Ford’s European buyout of Jaguar and Aston- Martin earlier in the 1990s Many analysts believe that Ford will manage Volvo in such a way that it will preserve its Euro- pean heritage and styling, while adapting Volvo’s assets to help Ford compete better around the world.

In Asia, Ford’s growing strength in marketing, financial management, and technology has given it the upper hand in working with its Japanese partner Mazda In the late 1990’s,

Ford took on a de facto controlling interest in Mazda by

own-ing 33 percent of the Japanese firm, and by placown-ing many icans in the most senior management positions within the Japanese company Many analysts have commented that Ford’s closer relationship and cash injection into Mazda saved the Japanese firm from the brink of potential financial disaster with the downturn in the Japanese and Southeast Asian economies.

Amer-In March 1999, Ford announced that it would work much more closely with Mazda to co-develop a new line of car platforms that would enable both companies to accelerate their product development times and simultaneously share key product com- ponents to gain even greater economies of scale In effect, Mazda has become an important Ford affiliate in helping the U.S auto giant become more competitive in the Far East.

Asea-Brown-Boveri (ABB) is one of Europe’s leading

produc-ers of power generation equipment, factory automation

sys-tems, robotics and machine tools, high-speed trains, and

envi-ronmental monitoring systems The company is becoming well

known for its wide range of high-quality products and for its

organizational structures In 1997, the company’s revenues

exceeded $31 billion It has close to 200,000 employees

world-wide ABB spends nearly 8 percent of sales on R&D ($265

bil-lion) per year It is an important technological leader in the

development of factory automation systems Recently it

extended its market share gains in power transmission and

dis-tribution systems.

Originally, ABB was two separate companies, Asea (a

Swedish engineering group) and Brown-Boveri (a Swiss

manu-facturer of electrical motors) The current ABB came into being

in 1987 with a merger of the companies Despite the long history and growth that both companies enjoyed on their own, the new ABB is a model for managing operations around the world Dur- ing the past ten years, ABB has restructured its European oper- ations to achieve lower-cost economies of scale for its products.

It has also undertaken an aggressive acquisition strategy to build market share abroad In 1989, ABB purchased Westinghouse Electric’s power transmission and distribution business In the same year, it purchased Combustion Engineering, an innovative U.S firm with specialized technologies in the turbine and the power automation field In 1991, it acquired the robotics busi- ness from Cincinnati Milacron, one of the largest U.S produc- ers of machine tools and integrated factory systems Throughout

So far, we have focused on ways a firm can build and extend its sources of competitive

advantage We have analyzed how companies from various industries formulate specific

strategies to create new sources of value from their activities However, strategy

formula-tion is only part of the equaformula-tion in developing competitive advantage Once a particular

strategy has been chosen, the firm must then devote considerable effort to ensure that

man-agers and employees are united in their efforts to execute the strategy Manman-agers must see

that individual activities within an organization work together to help achieve competitive

advantage This task is referred to as strategy implementation

This chapter is the first of two that focus on the ingredients of effective strategy

imple-mentation In its simplest definition, strategy implementation refers to converting

strate-gies into desired actions and results In a broader sense, strategy implementation is

con-cerned with efforts to build a more effective organization.3 Understanding strategy

implementation is crucial because the success of any organization depends upon how well

people work together to translate strategies into action Managers and employees are the

ultimate source of a firm’s competitive advantage, because competitive advantage arises

only when managers and employees in an organization work together in an integrated

manner to achieve high performance Thus, the issues of strategy implementation and

competitive advantage are inextricably linked

We begin by providing some reasons why strategy implementation is an imperative

issue Effective strategy implementation occurs when people from different parts and

the mid-1990s, ABB has expanded its market reach around the

world by forming strategic alliances and other partnerships with

governments and other firms to tap into the growing market for

power generation and distribution systems in Latin America and

Southeast Asia As recently as October 1998, ABB spent over

$1.5 billion to purchase engineering and manufacturing firms in

the Netherlands that will give the company greater access to

tal-ent and markets around the world Through these acquisitions,

ABB has numerous factories, R&D centers, and other facilities

around the world, so it now manages a global empire of

compa-nies The company continues to expand and look for new

busi-ness and market opportunities.

The organizational tasks and pressures facing ABB managers

are enormous On the one hand, they need to ensure that each

ABB business remains responsive to the individual markets it

serves On the other hand, ABB must develop and produce

prod-ucts at a cost low enough to compete against other global

elec-trical equipment giants In other words, ABB needs to balance

low-cost production with fast response to local markets This

daunting task represents a major organizational challenge.

To accommodate these two goals (low cost and fast

response), ABB is organized along a global matrix or grid

organization The idea behind a matrix is to develop core

tech-nologies and low-cost production without sacrificing the firm’s

ability to respond to local markets The essence of ABB’s matrix

is that each person reports to two bosses simultaneously: a

country manager and a product manager Each country manager runs local operations with their own set of strategies to deal with local markets, customers, competitors, legal regulations, and other issues Each product manager deals on a worldwide basis with the technical specifications and costs of product design and manufacture Both kinds of managers must work together to design leading-edge products that fit local market conditions In practice, the matrix system is often “tilted” towards the product

or country manager depending on the strategy needed by a ticular product at different times.

par-As ABB moves into the next century, CEO Goeran Lindahl

is building upon his predecessor’s effort in this direction ous ABB CEO Percy Barnevik believed that the global matrix gives ABB a competitive advantage, despite the fact that it requires more meetings and consultations among managers from different product and geographic areas The matrix format allows ABB to coordinate its operations against General Elec- tric, Siemens, Toshiba, Hitachi, and Mitsubishi These compa- nies compete directly with ABB in many markets Also, the matrix encourages a diversity of perspectives, ideas, and cul- tures This diversity becomes vital to stimulate new product and market ideas By using the matrix carefully, ABB is trying to become a truly global firm with both technological leadership and a strong local presence ABB has been described as neither Swiss nor Swedish, not even European; the primary language spoken is English.

Previ-strategy implementation:

the process by which strategies are converted into desired actions.

activities of an organization work and act together to achieve the desired strategy In thesecond section, we focus exclusively on the topic of organizational structure We look athow a firm may select a particular organizational structure to support its strategy In thethird section, we examine how firms with extensive global operations may modify theirorganizational structures Finally, we revisit Ford and ABB to see how they have used spe-cific organizational structures to support their strategies.

WHY STUDY STRATEGY IMPLEMENTATION?

Strategy implementation is an important topic for managers and employees at all levels tounderstand Successful strategy implementation depends upon both a well-managedorganization and a solid base of committed, competent personnel Management can for-mulate any number of strategies to build competitive advantage, but the success of anygiven strategy is only as good as the organization and the people behind it Without a solidbase of competent people who understand and support the firm’s strategy, it remains noth-ing more than words on paper The effectiveness of implementation ultimately determinesthe success or failure of any given strategy

Strategy Implementation and the Firm’s Managers

A key implementation task for senior managers is to design an organization that allows ple to use their talents, capabilities, and insights to the fullest in supporting the firm’s strat-egy Companies, especially large companies, are complex organizations composed of manyfunctions, activities, businesses, and most importantly, people Many people, through nofault of their own, will not always understand the value and role of how individual parts ofthe organization contribute to the firm’s overall strategy Through a well-designed organi-zation, senior managers can guide and channel their people’s efforts to work together in anintegrated, cohesive manner that best supports the firm’s strategy Building an organization

peo-in which many people work together smoothly is not an easy task

First, managers themselves must take steps to carefully understand how different types

of strategies will require specific organizational configurations or designs to achieve cessful implementation Just as every firm’s strategy is likely to be distinctive, so will beits need for an appropriately fitting organization The organization—structure, systems,staff—represents the bricks and mortar that implement and sustain a strategy Each firmwill likely require a customized set or arrangement of organizational “building blocks” thatbest fit its strategy In other words, the choice of how to design and build an organizationwill depend heavily upon the firm’s strategy For example, firms whose business units arepursuing low-cost leadership strategies will likely require a type of organizational frame-work unlike that of businesses competing through differentiation or focus Conversely,highly diversified firms will not require the same type of organizational setup as those

suc-firms that are less diversified Effective strategy implementation depends on a close fit

between the firm’s strategy and the shape or structure of the organization supporting it.

Second, managers must ensure that their choice of an organizational setup is internallyconsistent In other words, all ingredients of the organization must fit tightly together, inmuch the same way as the parts of a high-performance combustion engine Organizational

consistency means that the various components of an organization fit together and make

logical sense All parts of the organization must be arranged, put together, and fine-tuned

in a coherent way in order to make strategy implementation smooth and powerful mentation, as an ongoing task, requires management to monitor how well the firm’s manyfunctions, activities, and people are coordinated smoothly to support a given strategy This

Imple-task is almost equivalent to an onboard automobile computer that monitors and controls

the various parts of the engine—the fuel/air mixture, the temperature, the RPMs, and the

idle speed—all of which must work together to achieve balance, control, and fast response

to provide smooth performance.4

Strategy Implementation and the Firm’s Employees

For employees, their value to the firm hinges directly on how well they understand and

support the firm’s strategy in the conduct of their own jobs Talented and capable

employ-ees are the bedrock of any organization These employemploy-ees are people who work on a daily

basis to translate the firm’s strategy into tangible products or services for customers

Equally important, employees represent much more than simply a company’s head count

or staff They represent vital sources of knowledge and are the “eyes and ears” of the

organization

Employees’ close and continuing contact with customers and operational activities

makes them a wellspring of knowledge and ideas for the firm Their daily contact with

cus-tomers gives them an edge over senior managers in sensing whether the firm appears to be

moving in the right direction These same competent people can quickly identify potential

areas of improvement among the firm’s activities For example, factory workers on an

assembly line are in a perfect position to spot potential weaknesses and defects in an

air-craft or automobile They are also the people who would be most likely to know how best

to deal with the problem and suggest ways for improvement Japanese companies are

leg-endary in their efforts they take to listen and gather ideas from their employees

Employ-ees are the source of continuing quality and process improvement in Japanese factories

Thus, strategy implementation in its most effective form is a joint effort Ideally,

man-agers and employees work together in understanding and supporting the firm’s strategy to

the best of their efforts Sustained strategy implementation is more than selecting the right

type of organizational framework; it is managers and employees working together in a

clear and coherent direction Successful implementation depends upon the coordinated

efforts of many people from all parts of the firm

A FRAMEWORK FOR UNDERSTANDING

ORGANIZATIONAL STRUCTURE

The basis for successful strategy implementation rests on designing an effective

organiza-tion People working within an organization must be able to understand how their actions

interrelate with the actions of others to support and execute the firm’s strategy Yet, in

many instances, talented people in even the best-managed firms are sometimes left

grop-ing to understand their own roles in supportgrop-ing the firm’s strategy Organizational

struc-ture is vital in clarifying the roles of managers and employees that hold the company

together

Although the word structure often conjures up images of rigid control and tight rules,

the concept of organizational structure is actually much richer Developing an appropriate

structure that tightly fits and supports the firm’s strategy is one of senior management’s

primary tasks In some ways, the choice of organizational structure is so important and

enduring to the firm that it can markedly influence the way the firm will formulate and

implement strategies in later time periods

Structure refers to the formal definition of working relationships within an

organiza-tion Structure is a vital component in any organization and serves a two-fold purpose On

the one hand, structure distinguishes and separates the specific tasks that make up the

structure: the formal

definition of working relationships between people in an organization.

firm’s activities: what people should do On the other hand, structure provides the basis to

integrate these tasks into a coherent whole: how people should work together Structure

balances the need for separating and integrating tasks within an organization.5

Structure is vitally concerned with the relationships among activities Grouping togethercritical core activities into organizational units forms the basis for a sustainable strategy Inthis way, management can better understand the ingredients of what constitutes the majorsources of its competitive advantage A well-designed structure that facilitates the execution

of the firm’s central value-adding activities can greatly assist management to build and extendthe firm’s distinctive competence into new areas of activity in later time periods Firms willchoose a structure that best suits their particular grouping of activities For example, considerthe illustrations of Exxon and AT&T from an earlier chapter on corporate strategy The explo-ration, production, and refining of petroleum products is Exxon’s single-most important busi-ness On the other hand, AT&T is increasingly involved in various telecommunications-basedproducts and services that are in many ways significantly different from its historic core busi-ness One would expect that Exxon’s management would prefer one kind of structure toorganize Exxon’s closely related activities while AT&T’s management would choose another

in managing its broader array of businesses and technologies

Thus, any given strategy will require a particular form of organizational structure to

best lend support to implementation In other words, the firm’s strategy is a big factor that

influences how senior managers choose to organize and group their key value-addingactivities and tasks The strategy a firm selects will, in large measure, determine the group-ing of activities and tasks, the choice of practices and procedures to attain consistency ofperformance, and the delegation of authority within the firm Once a firm’s organizationalstructure is in place, however, it can be extremely costly to modify or replace it

BASIC INGREDIENTS OF ORGANIZATIONAL STRUCTURE

Three important ingredients, or dimensions, compose organizational structure: (1) ization, (2) standardization, and (3) centralization Each of these ingredients of organiza-tional structure influences how managers and employees interact (see Exhibit 9-1)

special-Specialization

Specialization refers to identifying and assigning particular activities or tasks to the

appro-priate individuals, teams, or units capable of performing them When used effectively,

e x h i b i t (9-1) Key Dimensions of Organizational Structure

Specialization

• Matching activities with people who are best able to perform them

• Found at all levels within an organization

Standardization

• Practices, procedures, and guidelines that provide the basis for consistent performance

• Focused on achieving internal order within a given structure

Centralization

• Delegation of authority throughout the organization’s ranks

specialization: the

assignment of particular

tasks and activities to those

people who are best able to

perform them.

specialization enables an organization to divide many activities and tasks and allocate them

to those people best equipped to handle them The dimension of specialization can be found

at all levels within an organization

Every company uses the concept of specialization in some way For example, within an

automobile factory, welders perform only those tasks that relate to welding; assemblers do

their jobs by putting the parts of the car together; painters work the specialized machinery

that paints each car to a glowing finish The skills of painters are different (specialized)

from those of assemblers In a fashion salon, customers can also find specialization at

work For example, some stylists are particularly skilled at cutting and shaping hair to

cur-rent styles or perms; other stylists are better trained at choosing the right mix of dyes to

modify hair color according to a customer’s skin complexion or tone; while other stylists

specialize in care for the hands and feet as manicurists and pedicurists People conduct

par-ticular activities according to their skills and capabilities

Specialization is also found when we examine larger units of a firm For example, an

automobile manufacturer may decide to group all of its assembly activities in one part of

the factory, while placing the specialized paint machinery in another On an even larger

scale, the same automobile company can group all of its assembly operations in one unit

that reports to senior management, while placing all of its engine manufacturing operations

in another specialized unit dedicated to producing engines In the hair salon example, a

company such as Supercuts could group all of its U.S salons and shops in one unit, while

placing all of its Latin American salons in another unit Supercuts may choose to do this

because the fashion and hair-styling requirements of U.S customers (time spent on

make-up, time spent on perms, type of shampoos used, type of advertising) may vary from those

of Latin American customers Thus, for Supercuts as a company, dividing up its markets

may help management to better understand specific market conditions Specialization is

vital to any organization, because it matches activities with people and units best able to

perform them

Standardization

Standardization is the process of defining the organization’s work, procedures, and

prac-tices in such a way that people do their jobs in a consistent manner Standardization is

con-cerned with achieving internal order and performance within a given structure The concept

of standardization focuses on ensuring that people, teams and larger units perform “up to a

given standard.” It is found in many forms and at all levels, even within a single company

For example, standards for quality and ethical behavior exist at the personal level, while

financial performance standards are used for larger units in a company Regardless of level,

the purpose behind standardization is to attain and to measure consistency of performance

Standardization can take the form of rules, practices, procedures, and the criteria by

which people are evaluated and measured on their performance For example, the

qual-ity of welding and assembly in the automobile factory will be evaluated according to

exacting, precisely defined measures of the car’s fit, while the quality of a paint job will

be assessed according to the luster and consistency of the car’s appearance In the

fash-ion salon example, hair stylists are evaluated according to a quite challenging set of

stan-dards—those of the customer Customers can tell if their hair “looks and feels right”

when they look in the mirror Yet, in both the car factory and fashion salon examples, a

defined set of practices, procedures, and criteria is used to measure and ensure

consis-tent performance

The concept of standardization also applies to larger units within a company Here,

the focus of standardization tends to be on gauging consistency of financial or operating

standardization: the

process of defining the organization’s work practices and procedures

so that people can repeatedly perform them

at a given level or measure of performance.

performance For example, a division in an automobile company producing luxury cars

is likely to have a different standard for profitability as compared to a division ing subcompact, economy cars for young people in their first jobs For example, at Ford,senior managers will probably hold the division producing luxury cars to a higher stan-dard of profitability than the division producing economy cars for a less wealthy group

produc-of customers Thus, standardization is concerned with organizational practices,

proce-dures, and criteria that provide the basis for consistent performance.

Centralization

Centralization refers to the degree to which senior managers have the authority to make

decisions for the entire organization Delegating authority to lower-level personnel is animportant aspect of organizational structure because it involves choosing which peoplehave the right to decide and act In a highly centralized organization, senior managementretains most of the authority to decide how subunits will act Senior managers in a cen-tralized company decide strategy and objectives, even for smaller subunits within the firm

In contrast, a highly decentralized organization places wide discretion with lower-levelmanagers and employees Senior management plays a lesser role in setting goals andobjectives for the company’s subunits By delegating authority to lower-level managersand personnel, senior management can harness the decision-making capabilities of manypeople throughout the company Companies differ widely in the amount of authority theydelegate to lower-level subunits For example, in chemical and pharmaceutical companiessuch as Dow, DuPont, Monsanto, American Home Products, Merck, Schering-Plough, andPfizer, top managers make many key decisions and communicate them to lower-level man-agers and employees On the other hand, many high-tech and software firms such asMicrosoft, Adobe Systems, Apple Computer, Hewlett-Packard, and Sun Microsystemsprefer a high degree of decentralization that encourages their lower-level managers to

make decisions on their own Centralization is concerned with the degree of delegation of

authority throughout the organization’s ranks.

BROAD FORMS OF ORGANIZATIONAL STRUCTURE

In the preceding section, we examined the three basic ingredients of any organizationalstructure Specialization deals with how managers assign activities and tasks to the peo-ple, teams, or units best capable of performing them Standardization deals with thepractices, procedures, and criteria used to attain and ensure consistent performance.Centralization deals with the delegation of authority throughout the organization Thesethree ingredients can be combined in many different ways to build the right type oforganization to implement strategy Activities and tasks to achieve specialization can bedivided in many ways Also, managers can utilize any number of practices, procedures,and criteria to achieve consistent performance In addition, senior managers have fewpredetermined limits as to how they may wish to decentralize and delegate authority.The interaction of these three ingredients—specialization, standardization, and central-ization—will vary according to the firm’s strategy Accordingly, managers need to findthe right combination of specialization, standardization, and centralization to implementtheir firm’s strategy most effectively

Four common combinations of these elements are: (1) functional, (2) product, (3) graphic, and (4) matrix structures Each of these broad structures involves different choiceswith respect to specialization, standardization, and centralization to implement a givenstrategy.6

geo-centralization: the degree

to which senior managers

have the authority to make

decisions for the entire

organization.

Functional Structures

In a functional structure, each subunit is assigned responsibility for firm-wide activities

related to a particular function Functions are the broad tasks that every organization

per-forms to create value: production, marketing, engineering, finance, human resources

Func-tional structures group managers and employees according to their areas of expertise and

the resources they use to perform their jobs For example, in a functional structure, all

com-pany manufacturing activities are assigned to the same subunit regardless of where they are

conducted or to what products they apply; all company marketing activities are grouped

under another subunit that deals solely with marketing issues; all company development and

engineering activities are grouped in a common subunit, and so on (see Exhibit 9-2)

A functional structure permits the firm to achieve a high degree of specialization in key

value-adding activities Functional structures are usually found in firms engaged in

high-volume production of a single or narrow range of products or services Thus, functional

structures are particularly useful in supporting low-cost leadership strategies Technical

competence and specialization of skills in value-adding activities are concentrated in each

of the functions Grouping activities by way of a functional structure is efficient and cost

effective when technical, marketing, or product development expertise is scarce

Func-tional structures exhibit a high degree of standardization of procedures Tight cost control,

frequent detailed reports on operating efficiency, and well-defined assignment of

respon-sibilities are the hallmarks of a functional structure in firms seeking to lower their costs

Operating practices, such as quality improvement and efficient flow of work, tend to

fol-low strict procedures within each function In addition, functional structures in fol-low-cost

leadership firms tend to be highly centralized Top management monitors, oversees, and

makes decisions concerning all of the functional activities occurring within the firm

The functional structure can also be used to support differentiation strategies, but its

application in such a setting is unlike its use in firms practicing low-cost leadership

strate-gies Recall that differentiation strategies place a high premium on quality, strong

market-ing skills, creative flair, innovative technologies, and often a distinctive company

reputa-tion Firms practicing differentiation can therefore use a functional structure to develop

especially distinctive or specialized marketing or R&D skills Production efficiency, while

important to firms that practice differentiation, is less likely to be as critical as other issues

such as product design, marketing capabilities, and innovative technologies Instead, these

latter areas of activity are likely to receive continuous attention from top management

Diagram of a Typical Functional Structure

Corporate

Production/

Operations R&D

e x h i b i t (9-2)

• Each function is responsible for its own set of tasks and activities.

• Each function has its own set of goals and objectives that require coordination with other functions.

functional structure: an

organizational structure that groups managers and employees according to their areas of expertise and skills to perform their tasks.

Functional structures are particularly common in the petroleum, mining, and otherresource-extractive industries These firms organize their value-adding activities according

to the specific stages of exploration, production, refining, distribution, and marketing.Exxon, Chevron, Texaco, and other large oil companies use a functional structure to organ-ize their petroleum-based activities Functional structures are also common in other firmsthat have high levels of vertical integration Steel, glass, and rubber companies have tradi-tionally relied on functional structures to manage the stages of production, refining, andfabrication of their products Companies in the telecommunications industry also fre-quently use a functional structure, because it allows them to achieve low-cost, efficientmanagement of their transmission operations All of the local “Baby Bell” (or RegionalBell Operating Companies) firms, such as Southwestern Bell, Ameritech, U.S West, BellAtlantic, and Bell South, employ a functional structure to manage their telephone opera-tions A functional structure is a very efficient vehicle to coordinate activities, such asrepair, installation, and switching for homes and businesses

Functional structures are particularly suitable for firms that are small They are equallysuitable for firms that do not diversify into new businesses or areas of activity In otherwords, functional structures support the needs of a single-business firm quite well A func-tional structure consumes little overhead because it has only one general manager and oneset of functional managers that oversee activities for the entire firm (high centralization).When businesses are very small or confine their activities to a narrow range ofproducts/markets, functional structures work well to concentrate expertise (high specializa-tion and standardization) For example, small food-processing firms, such as bakeries andcanneries, often organize functionally for these reasons

Advantages of Functional Structures. Functional structures provide economies ofscale for management and administration of each function; therefore, they are excellent inreducing overhead costs for a firm Functional structures hold down administrative costsbecause everyone in a department shares the training, experience, and resources devoted

to a particular function In addition, senior management can easily identify and promotethose people who have the necessary technical expertise to manage their particular func-tion A key advantage of the functional structure is the high degree of centralized decisionmaking it allows within each functional area Functional structures are simple structuresand are highly suitable for small firms, less diversified firms (big and small), and growingstart-up firms For large companies, such as those in the petroleum and telecommunica-tions industries, functional structures are excellent in supporting high-volume, low-costdedicated production or operations Functional structures support large economies of scalefor each functional activity

Disadvantages of Functional Structures. The Achilles’ heel of a functional structure isthe difficulty it poses for coordination, especially if the firm expands into a broad range ofproducts When a functional structure is used, individuals within functional units will tend

to develop loyalty to their specialties, which frequently makes them unwilling to modate the needs of other functional units Consider, for example, a proposal by market-ing personnel to expand a company’s product line Such a change will complicate the tasks

accom-of manufacturing personnel by increasing the number accom-of designs, components, equipmentvariations, and production setups they must handle Manufacturing personnel are thereforelikely to object to such a change Thus, a big disadvantage of the functional structure isthat each function is likely to have its own set of values, priorities, goals, and even timeperspectives on what constitutes an urgent versus routine matter This narrowness oftenlimits functional managers’ perspective concerning the entire firm’s operations Functional

managers will generally place their priorities above that of others for additional

resources—sometimes to the detriment of the entire firm (See Exhibit 9-3 for a summary

of advantages and disadvantages of a functional structure.)

In some ways, management control that spans functional activities may be difficult to

achieve, because no common performance criteria are available by which to measure, for

example, marketing effectiveness and manufacturing efficiency Measuring performance

involves comparing apples and oranges in the sense that each function is unlike the other

Although performance standards are easy to set and measure within a function, they do not

mix well when comparing across functions

Product Divisions

As a firm expands into new products, businesses, or areas of unrelated activity, the

func-tional structure often loses many of its advantages High product diversity often leads to

serving many types of customers and involves the firm in multiple technologies In

response to these developments, senior management will often utilize a product divisional

structure Product divisions are structures that divide the organization into self-contained

units responsible for developing, producing, distributing, and selling their own products

and services for their own markets (see Exhibit 9-4)

A product division structure establishes a separate organizational subunit (and

manage-ment team) for each product (or group of related products) in the firm Product divisions

are the most commonly used organizational structures in large U.S corporations Most

companies in the Fortune 500 have expanded into new businesses at some point and

exhibit some degree of related or unrelated diversification Product division structures tend

to fit companies exhibiting wide diversification because each individual business unit is

likely to face a different set of product, technology, market, and customer requirements.7

Product divisions in effect represent small, self-contained businesses within a company

Although a large company can have many product divisions, these divisions tend to remain

fairly autonomous Thus, managers and individuals assigned to a particular product division

often become expert about that division’s products and markets Still, each division reports

to senior management Each product division also contains its own functional specialists

Key Characteristics of a Functional Structure

Advantages Disadvantages

• Economies of scale in administrative

costs/activities

• Good for small-sized firms

• Easy to identify talent

• Fosters high centralization of decision

making

• Promotes high task and activity

specialization

• Supports a low-cost leadership strategy

• Supports vertical integration in a single

• Poor fit for highly diversified firms

product divisions: the

most basic form of product structure, in which each division houses all of the functions necessary for it to carry out its own strategy and mission.

and resources that are usually organized into departments These functional departments aredesigned to support the needs of various products within the division Most product divi-sions are evaluated on the basis of their own financial performance and the competitive suc-cess of their products Consequently, each product division has the opportunity to developits own distinctive competence or sources of competitive advantage for its own products.8

Product divisions display a high level of specialization based on the products the firmdevelops and produces Unlike functional structures, in which specialization is based onoperational activities and tasks, product divisions are organized in such a way that man-agers and employees become specialists and experts about the products they develop, pro-duce, and sell A product structure, therefore, encourages tailoring functional activities tothe needs of particular products A purely functional structure, by contrast, does notencourage such emphasis Since managers of functional subunits are functional specialists,they have less detailed understanding of individual products A product structure is there-fore especially desirable when functional activities must be readily adapted to facilitate aproduct’s competitive success in the marketplace

Product divisions also differ from functional structures in terms of how performance

is measured Product divisions are evaluated on the basis of their profit contributions tothe entire corporation Since each division represents a product or group of similar prod-ucts, senior management can easily isolate the financial performance of each divisionaccording to some benchmark or performance standard (usually a rate of return on invest-ment or assets) In many cases, divisions are evaluated according to the performance cri-teria that best support that division’s business strategy Thus, individual divisions may beevaluated along different performance criteria, even within the same company Conse-quently, senior management has great leeway in applying performance standards acrossdivisions For example, in General Electric, the standard for profitability may be quitehigh for mature businesses, such as light bulbs Because GE light bulbs are well estab-lished in the marketplace, senior management may place a high priority on the light bulbdivision to earn a big return on investment On the other hand, GE’s senior managementmay consider using another performance standard for a fast-growing business, such as

e x h i b i t (9-4) Diagram of a Typical Product Division Structure

Product 2

Production/

Operations R&D

Product 3 Product 1

Corporate

• Each division is self-contained and responsible for its own products and markets it serves.

• Each division contains its own set of functions.

medical equipment or plastics In these businesses, GE must continue to invest large sums

of money building new factories and laboratories Consequently, these divisions may be

evaluated along other performance criteria, such as growth in market share or number of

customers added

Although product structures allow senior management to mix and match standards to

measure financial performance, senior management may still need to establish

corpo-ratewide guidelines, practices, and procedures to ensure consistency of actions across

divi-sions, say for example, in ethical areas and quality standards Leading-edge companies that

practice total quality management, such as Motorola, AT&T, Texas Instruments, and IBM,

all use product division structures Standards for product and service quality are uniformly

understood, practiced, and applied across all divisions

Some firms using product divisions display a high degree of centralization, with senior

management closely monitoring and even participating in the shaping of business unit or

product strategy For example, at Motorola, senior managers often work closely with

man-agers in the semiconductor and memory products divisions to plan production schedules

and product rollouts for new types of chips Senior managers, often with strong

back-grounds in electronics, play a direct and major role in shaping the decisions and actions of

individual product divisions Other firms using product divisions may be much more

decentralized For example, at PepsiCo, senior management requires each division (soft

drinks and Frito-Lay snack foods) to achieve a prespecified measure of profitability but

leaves the operating details up to the divisions’ managers PepsiCo management makes

few decisions about product offerings, timing of rollout, discounts, promotions, and other

details specific to the division Thus, the use of product division structures by themselves

does not reveal much about the degree of centralization

Advantages of Product Divisions. Product divisions offer enormous advantages in

allo-cating, assigning, and defining the responsibilities required for each product or group of

products It allows managers to concentrate their expertise on their assigned products lines

or markets In addition, each product division has its own self-contained functional

depart-ments designed to support the needs for individual products Thus, product divisions allow

for considerable specialization that enables firms to develop a base of managerial and

tech-nical expertise for each product A big advantage of the product division is that it enables

senior management to locate and identify the costs, profits, and potential problems

accu-rately within each line of business

Product divisions also tend to help managers develop a cross-functional perspective that

is important to achieving fast response Since each product division has a self-contained

set of functional departments, managers tend to learn fast and know what it takes to

coor-dinate these functional departments effectively to build competitive advantage

Product division structures are also excellent mechanisms by which to train and develop

future senior and general managers, since this type of structure holds each division manager

accountable for results of an entire business Thus, opportunity for advancement presents

con-siderable incentive for division managers to learn how to manage their businesses effectively

Organizing along a product division format gives senior management considerable

flex-ibility in rearranging the shape of the company’s portfolio of businesses Management can

decide to sell different pieces of the company that are underperforming or do not have

attractive prospects for the future Since product divisions are self-contained units that

house their own functions and centers of expertise, senior management can more readily

put divisions on the block for sale if they no longer fit the company’s long-range strategy

Disadvantages of Product Divisions. Several important disadvantages are associated

with product divisions First is the potential for inefficient use of functional resources

Remember that each product division has its own self-contained set of functional ments If a fim’s products are actually quite similar in terms of development, production,

depart-or marketing, multiple functional departments duplicate time and effdepart-ort across divisionsthat may be striving to accomplish the same objective

Second, a product division structure duplicates administrative, management, and staffactivities Since each product division by design is highly autonomous, high overheadcosts are associated with this structure Each division is likely to possess its own adminis-trative setup, including accounting and other staff functions

Third, firms using product divisions tend to measure individual divisional performance byway of quantitative financial measures This emphasis could induce a significant bias towardshort-term thinking Since division managers must meet a certain level of financial return(return on investment, assets, or sales), they may be inclined to run the business “according

to the numbers.” This may cause them to delay important investment in new process nologies, R&D, or other future sources of competitive advantages because of the daily short-term pressures to produce Divisional managers may reinterpret “competitive advantage” ascurrent return on investment, as opposed to building and applying new skills or capabilitiesthat may not come to full fruition until much later Thus, product division structures mayinstill a short-term orientation in divisional managers that, if uncontrolled, could lead tosteady deterioration of overall corporate competitive advantage and distinctive competence.Finally, product division structures may indirectly encourage an excess of internal com-petition between divisional managers Since product divisions within the same companyare often highly autonomous, their financial performance is easily compared, one againstthe other, by senior management Divisional managers may attempt to outdo each other intrying to beat some performance target or goal, particularly when the potential for bonusesand future promotions is based on current divisional performance This possibility is espe-cially pronounced when division managers know that senior management may sell offdivisions of the company that appear to be underperforming Internal competition may alsostrongly discourage managers from working together on joint investment activities or

tech-“megaprojects” that could help all divisions involved.9(See Exhibit 9-5 for a summary ofadvantages and disadvantages of a product division structure.)

• Cross-functional perspective

• Supports highly diversified strategies (related and unrelated)

e x h i b i t (9-5) Key Characteristics of Product Division Structures

• Duplicates functions within each product division

• Duplicates administrative and staff functions

• Leads to short-term thinking if not careful

• Promotes high internal competition between divisional managers

• May under-invest in firm’s core competence and skills; discourages companywide “mega” projects

Variants of the Product Division Structure

Many U.S companies have attempted to modify their product division structures in

response to some of the disadvantages noted above Three important modifications involve

the use of strategic business units, groups or sectors, and the conglomerate or holding

com-pany structure Related diversification firms tend to use the strategic business unit and

group/sector modifications, while companies pursuing unrelated diversification tend to

rely on the conglomerate, holding company structure

Strategic business units, or SBUs, represent a collection of individual product

divi-sions that produce related or similar products (see Exhibit 9-6) SBUs are used by related

diversified companies such as General Electric, American Express, Citigroup, Motorola,

Texas Instruments, DuPont, IBM, Ralston-Purina, Warner-Lambert, and Allied-Signal to

manage the great expanse of products and businesses under their umbrella If these

com-panies were to use a pure product division structure for each type of product they

pro-duce, they would have literally hundreds of product divisions that would report to senior

management at corporate headquarters This vast number would make it extremely

cum-bersome for senior management to understand and monitor what is going on in each

busi-ness The SBU concept, on the other hand, attempts to identify and group together

simi-lar product divisions that share an underlying common characteristic, such as technology

used, customer served, etc By shrinking a hundred different product divisions into ten

SBUs, for example, senior management can monitor and oversee operations more easily

and effectively

In theory, SBUs attempt to group several product divisions to achieve important

oper-ational synergies First, SBUs can enhance the prospects for sharing and transferring

activities between businesses in related diversified firms Second, by putting together

divisions that share similar technological or market characteristics, the SBU form may

Diagram of a Strategic Business Unit Structure

• Supports related diversification because similar products that are grouped together share

a common underlying technology, market, skill, or resource.

strategic business unit:

form of organization that often represents larger product divisions or collections of smaller product divisions under one reporting relationship.

reduce the potential for excessive internal competition In turn, skillful use of the SBUconcept may encourage divisional managers to undertake joint investment projects thathelp each division accomplish some objective that it could not accomplish alone Forexample, Motorola uses a modified SBU structure to manage its highly diverse semicon-ductor and electronic components business If Motorola were to employ a product divi-sion for each type of electronic component or product it produced, there would be dozens

of product divisions and managers Instead, Motorola groups its microprocessor andmemory product divisions together under one larger SBU that is responsible for oversee-ing and monitoring the performance of these different product lines This SBU shares acommon manufacturing technology that is essential to producing state-of-the-art chips formany different kinds of customers Whether chips are used in automobile engines or inpersonal computers, they are likely to share some common core technologies, compe-tences, and production processes

In practice, though, the SBU concept in many companies has not overcome an tant deficiency of the product division structure—that of short-term orientation by man-agers Both divisional and SBU managers still face the same intense pressures to perform,

impor-as the product and SBU structures make it eimpor-asy for senior management to isolate and point financial performance Even worse, in some cases, the SBU concept may aggravatethe tendency toward short-term thinking, since it enables senior management to allocatecash and other resources more easily by dealing with groups or clusters of divisions,instead of many separate divisions working by themselves Even though the SBU conceptwas originally designed to help senior managers build closely related clusters of divisions,

pin-in practice SBUs suffer from the same potential for short-term thpin-inkpin-ing that occurs withconventional product divisions.10

In the case of Ford, the company’s recent reorganization in its Ford 2000 programplaces a great emphasis on utilizing a variant of the strategic business unit type of struc-ture to help the company achieve greater economies of scale and cost efficiencies indesigning the next generation of high-technology automobile By organizing itself into fivedifferent vehicle platform centers, Ford hopes to improve the speed, innovation, and qual-ity of automotive products that it develops and produces In effect, each of Ford’s five vehi-cle platform centers corresponds to a strategic business unit (SBU) dedicated to a particu-lar type of vehicle platform design Within each vehicle platform center (e.g., mid-sizedcars), a number of different vehicle models (e.g., Taurus, Sable, Crown Victoria, and Mer-cury Marquis) will share similar types of designs, components, and manufacturing needsthat are housed within that vehicle platform center In turn, these different vehicle modelswill be organized into separate product divisions responsible to the vehicle platform cen-ter (SBU) to which they report This arrangement enables Ford to develop different kinds

of expertise for each SBU For example, requirements for competing in the small car cle platform center is likely to be quite different from that needed to compete in the sport-utility vehicle segment in terms of market served, number of available options, enginetypes used, and the kind of suspension and powertrain developed By using SBUs, Fordwill be able to develop individual vehicle platform strategies for each particular market

vehi-Groups and sectors occur when companies go beyond the SBU concept to form large

collections of SBUs For example, TRW and United Technologies Corporation use thebroader organizing concept known as the sector or group (see Exhibit 9-7) Companiessometimes use groups or sectors to tie together separate SBUs into one larger unit that rep-resents a common industry or type of technology For example, Motorola links up its SBUsthat are related to electronics under one larger semiconductor products sector Motorola’ssemiconductor sector contains all the core skills and technologies used in production andproduct design applications

group, sector: a larger

version of the SBU

structure that often houses

many different SBUs under

one reporting relationship.

The group and sector concept, however, still displays the same fundamental limitations

and disadvantages found in product divisions and SBUs Sectors are simply groups of

SBUs (composed of product divisions) lumped together in a grander unit Groups and

sec-tors add another layer of management between senior managers and SBU general

man-agers Although they are designed to help further ease senior management’s need to

under-stand the various businesses and technologies within the company, they are extremely

costly to operate In effect, they add a third layer of management between the product

divi-sion and senior management (with SBU and group/sector layers in the middle) In the

1990s, many companies, such as General Electric and Allied-Signal, have moved away

from using groups and sectors for this reason GE found that this additional layer of

man-agement generated enormous administrative, staffing, and overhead costs Instead, GE

relies primarily on the simpler SBU concept to organize its many lines of businesses

Allied-Signal, another leading industrial company with numerous lines of businesses, has

also begun to eliminate this layer of management between corporate headquarters and its

various SBUs.11

Conglomerate or holding company structures represent the last important

modifi-cation of the pure product division structure (see Exhibit 9-8) In contrast to the SBU and

group or sector organization, the conglomerate structure emphasizes an extremely lean

administrative staff at corporate headquarters.12Companies such as Textron, Tyco

Inter-national, Allegheny Teledyne, and other firms known to pursue unrelated diversification

Diagram of a Sector/Group Structure

• Sector or group structures tie together different SBUs that represent a common industry,

technology, or critical skill.

• Sectors help senior management get a handle on broad-based, related diversification.

They are, however, costly to operate because of several layers of management.

conglomerate: firm that

practices unrelated diversification.

strategies use the holding company structure to keep overhead costs low Most firmsusing this very lean structure contain no groups or sectors or even SBUs Conglomeratesare often called holding companies in the sense that the lines of business currently underthe corporate umbrella can be readily sold to a willing buyer (an advantage for organiz-ing businesses by way of product divisions) Conglomerate firms “hold” these assetsuntil they are ready to sell them Product division managers within the conglomerateholding company structure are given high autonomy and significant leeway to run theirbusinesses in ways they see fit In fact, divisional autonomy is likely to be greater in theholding company structure than in SBU or group/sector structures In turn, however,divisional managers are under extreme pressure to perform, especially to provide highcash flow and fast return on investment Companies such as Tyco International, ITT,Textron, and Allegheny Teledyne are known for actively selling and acquiring divisions

to improve overall corporate profitability For example, ITT has sold off more than 240different lines of businesses (including, for example, Hostess Twinkies and makers ofperfume) over the past fifteen years to boost total corporate returns Another conglom-erate, Textron, has sold more than twenty-four businesses from utensils to steel millsover the past decade as well.13

Geographic Division Structures

Some firms operate in a number of geographical regions For example, many fast-foodchains fall in this category, as they must prepare food, serve it, maintain facilities, runlocal promotions, and perform other activities in many different restaurant market loca-tions Such firms often find the functional structure and the product division structurecumbersome because they provide for no direct way to coordinate activities within geo-graphic regions Functional and product structures also do not lend themselves well todeveloping expertise about what it takes to compete in a specific geographic region A

geographic division structure helps firms organize activities operated in many locations.

Also known as place or area structures, geographic division structures allow firms to

develop competitive advantage in particular regions according to that area’s customers,competitors, and other factors Many organizations use a geographic structure, such as the

e x h i b i t (9-8) Diagram of a Conglomerate/Holding Company Structure

Business Unit 2

Business Unit 3

Business Unit 1

Corporate

• Each business unit is managed independently of the others Each business unit is also a company that can be easily sold off.

• Extremely lean corporate and administrative staff means few overhead costs.

• Supports unrelated diversification very well.

geographic division: an

organizational form that

divides and organizes the

firm’s activities according

to where operations and

people are located.