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Transcript of Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico ...
![Page 1: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/1.jpg)
Economics of Strategy
Slide show prepared by
Richard PonArulCalifornia State University, Chico
John Wiley Sons, Inc.
Chapter 16
Strategy and Structure
Besanko, Dranove, Shanley and Schaefer, 3rd Edition
![Page 2: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/2.jpg)
Structure Follows Strategy
According to Alfred Chandler, the choice of organizational structure depends on the business strategy being pursued
Structure of an organization affects– how division of labor is used to organize tasks– how information flow is facilitated– how agency problems are dealt with
![Page 3: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/3.jpg)
Organizational Forms
A small group of employees within a firm can be organized in several ways– Each member may be treated as a unit and is
rewarded based on his/her output– The group can be a self managed team and individual
rewards will be wholly or partly based on team performance
– Hierarchy of authority may be used with one member of the group coordinating and monitoring the activities of others
![Page 4: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/4.jpg)
Nature of Tasks and Organizational Forms
Firms may use different forms in different situations depending on the nature of the tasks
When tasks do not require coordination employees can be treated as individuals
When coordination is essential and individual contribution is difficult to measure, team approach will be used
![Page 5: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/5.jpg)
Nature of Tasks and Organizational Forms
Beyond a certain size, self managed teams may not perform well in coordination and hierarchy of authority may be needed
The same firm may use different approaches for different tasks
A given employee may perform certain tasks as an individual, others as part of self managed teams and yet others subject to hierarchical control
![Page 6: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/6.jpg)
Coordination and Hierarchy
If a group has n members, the number of possible interactions is
As n increases, hierarchies can be created to keep the number of interactions within manageable limits
When the number of relations for a supervisor goes beyond the optimal span of control a new layer of hierarchy can be created
( 1)
2
n n
![Page 7: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/7.jpg)
Coordination and Hierarchy
![Page 8: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/8.jpg)
Complex Hierarchy
Large firms tend to have multiple groups and multiple levels of groupings
Complex hierarchies are designed to address the following two issues– Departmentalization– Coordination and control
![Page 9: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/9.jpg)
Departmentalization
Formal groupings in large organizations can be based on functional areas, geography, products, types of customers and so on
A firm should decide on the organizing dimensions based on– economies of scale and scope– transactions costs and– agency costs
![Page 10: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/10.jpg)
Firm Boundaries and Structure
A firm’s decisions regarding vertical and horizontal boundaries will influence its choice of organizing dimensions– Diversifying into a new business area will expand
the set of formal groupings– Decision to outsource will contract a firm’s
structure
![Page 11: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/11.jpg)
Coordination and Control
Coordination involves the flow of information to facilitate decisions
Control involves the distribution of decision making rights and rule making authority within the organization
![Page 12: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/12.jpg)
Coordination, Control and Technical Efficiency
Coordination affects the technical efficiency by the provision of information needed to exploit economies of scale and scope
To accomplish improvements in technical efficiency, decision making rights should be allocated to those who have the best and timely information
![Page 13: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/13.jpg)
Coordination, Control and Agency Efficiency
Allocating decision rights to individuals will affect agency efficiency since the decision makers will have the opportunity for selfish behavior
A balance must be struck between technical and agency efficiencies in the allocation of decision rights
![Page 14: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/14.jpg)
Approached to Coordination
When a firm consists of self contained units, information related to operating decisions are controlled by the manage of the unit
A firm may also organize itself into units that have strong lateral relationships
These lateral relationships can be formalized into structure (Matrix Organization) or remain informal
![Page 15: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/15.jpg)
Centralization and Decentralization
Authority becomes more centralized (decentralized) as decision making moves to higher (lower) levels
It is possible for a firm to be centralized in some dimension while being decentralized in others
For example, a university’s administrative functions may be centralized while its teaching function is decentralized
![Page 16: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/16.jpg)
Organizational Structure
Organizational structure of large businesses can be classified as follows:– The unitary functional structure (U-form)– The multidivisional structure (M-form)– The matrix structure– The network structure
![Page 17: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/17.jpg)
The U-form structure
![Page 18: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/18.jpg)
The U-form structure
Each department in the firm is responsible for a particular functional area such as finance or marketing
The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration
![Page 19: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/19.jpg)
The M-form structure
![Page 20: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/20.jpg)
The M-form structure
The multidivisional firm is organized along such dimensions as– product line– geography or– type of customers
Divisional managers will be responsible for operating decisions and the top management will handle strategic decisions
![Page 21: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/21.jpg)
Advantages of the M-form
Measuring divisional performance is easier under M-form
Divisional managers compete for funds in the internal capital markets based on their operating performance in the past
Pay for performance schemes are easier to implement in managerial compensation
![Page 22: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/22.jpg)
Matrix Structure
![Page 23: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/23.jpg)
Matrix Structure
A firm that uses a matrix structure is organized along two (or more) dimensions - for example, product line and geography
In a two-dimensional matrix, an employee belongs to two hierarchies and has two bosses
![Page 24: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/24.jpg)
Advantages of Matrix Structure
Matrix structure can help exploit economies of scale and scope
A firm may need national coordination to achieve economies of scale for manufacturing a particular product and regional coordination to negotiate with large buyers for different products
![Page 25: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/25.jpg)
Advantages of Matrix Structure
Matrix structure allows a firm to economize on scarce human resources
Having a firm wide engineering department (or marketing department) will be more efficient than maintaining a separate engineering group for each product group
![Page 26: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/26.jpg)
Network Structure
![Page 27: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/27.jpg)
Network Structure
Workers or worker groups contribute to multiple organizational task
Work groups are reconfigured when the tasks change
Relationships among groups are governed by the requirements of the task
![Page 28: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/28.jpg)
Network Structure
Coordination costs will be a major concern in Network Structure
The Japanese Keiretsu is a variety of network structure
In high technology companies, network structure facilitates information flows, leading to high level of product development
![Page 29: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/29.jpg)
Modular Organization
Modular organization is a network structure with subunits that are relatively self contained
Subunits are tied together via standardized linkages
Modularity may sacrifice economies of scope If may encourage innovations at the subunit
level
![Page 30: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/30.jpg)
Contingency Theory
Contingency theory suggests that a particular structure will not be the optimal structure for a firm under all circumstances
Contingency theory focuses on three factors that affect the efficiency of a structure– Technology and task interdependence– Information flows– Tension between differentiation and integration
![Page 31: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/31.jpg)
Technology and Task Interdependence
There can be three modes of task interdependence– Reciprocal - when two workers (or work groups)
depend on each other– Sequential - when one worker (or work group) has
a one way dependence on another– Pooled - when there is no direct dependence, but
indirect dependence exists because of common goals
![Page 32: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/32.jpg)
Technology and Task Interdependence
Changes in technology will cause the nature of task independence to change
The organizational structure may need to be changed in response to the change in task interdependence
Example: Technology has weakened the sequential and reciprocal interdependencies in some industries and has made outsourcing attractive
![Page 33: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/33.jpg)
Information Flows
When work is routine, workers can be autonomous
When exceptions need to be handled, higher level hierarchies are involved and information flow becomes important
The firm’s organizational structure should enable the desired amount and speed of information flow to occur
![Page 34: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/34.jpg)
Information Flows
Workers in the higher levels deal with more difficult exceptions that occur less frequently
Higher levels have fewer workers with larger human capital
Technological changes reduce the cost of information flow and increase the span of control (flatter organization)
![Page 35: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/35.jpg)
Information Retrieval
According to Arthur Stinchcombe, the optimal structure should enable efficient information retrieval
Different levels of structure will deal with different types of information
To make information retrieval efficient, the firm should integrating into the firm activities that provide critical information
![Page 36: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/36.jpg)
Balancing Differentiation and Integration
If the organizational structure does not sufficiently differentiate, the firm may inefficiently use a “one size fits all” approach to all products (and regions)
For integrated planning and control, too much differentiation can be an impediment
The optimal structure should balance differentiation and integration
![Page 37: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/37.jpg)
Structure Follows Strategy
The U-form structure allowed firms to exploit the economies of scale in production, marketing and distribution
When firms began to diversify, the U-form became cumbersome and M-form emerged as a better alternative
![Page 38: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/38.jpg)
Structure Follows Strategy
The M-form lead to duplication of activities when firms expanded globally and created “international divisions”
As firms try to balance local responsiveness with global economies, a mix of matrix form and network form help create flexible organizations
![Page 39: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/39.jpg)
Structure, Strategy, Knowledge and Capabilities
Critical knowledge and decision capabilities are distributed throughout the firm in large firms
Structure determines the shortlist of alternatives that reach the top management
Organizations enable generation and manipulation of new knowledge for strategic uses (knowledge-based view of the firm)
![Page 40: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/40.jpg)
Structure, Strategy Knowledge and Capabilities
Structure induces biases in the information reaching the top management
Structure also influences how strategies are implemented and how top management is informed regarding the implementation
Formal administrative control should be supplemental by informal means of winning the cooperation from lower levels
![Page 41: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/41.jpg)
Evolutionary Economics and Structure-Strategy
Evolutionary economics offer two new views on structure-strategy relationship– Structure and strategy evolve over time through
local external interactions rather than through top management initiative
– Strategy and structure are higher level heuristics that enable the management to respond quickly to difficult and unusual problems
![Page 42: Economics of Strategy Slide show prepared by Richard PonArul California State University, Chico John Wiley Sons, Inc. Chapter 16 Strategy and Structure.](https://reader036.fdocuments.in/reader036/viewer/2022062313/56649f4f5503460f94c71404/html5/thumbnails/42.jpg)
Implications of the Evolutionary Economics View
Strategy and structure changes will be evolutionary rather than revolutionary
Large scale strategy changes and comprehensive reorganizations will be rare
Current decision regarding strategy and structure will be constrained by past decisions