In this chapter we examine the strategy/structure interface and the control process as outlined in Exhibit 6-1. We do so in the context of external and internal influences on structural choices, and by examining some of the options in unit formation and linkages. The control process is viewed as a way to monitor goal achievement and resource conservation.
THE CONTINGENCY CALCULUS: INFLUENCES ON STRUCTURE
Ideally a strategy/structure calculus would dictate appropriate organizational
forms for different strategic postures. But researchers and practitioners
have yet to formulate that normative, determinant calculus effectively.
Indeed the best that can be offered at this point is the familiar "contingency"
approach to the problem. By contingency approach we mean that the choice
of an appropriate organization structure is contingent upon an array of
factors, the combination of which is likely to be unique to the firm at
hand. These factors can be categorized as (1) strategic thrusts, (2) environmental
circumstances, (3) complexities introduced by growth, and (4) management
culture and style.
Strategic Thrusts
As part of its strategic decision making, a firm identifies its distinctive
competencies (strengths) and then attempts to capitalize on these in identified
niches or segments of the marketplace. In so doing, cutting edges for organization
structure may naturally fall out. For example, a fully integrated firm
that has chosen to
To a large extent, the concept of the strategic business unit (SBU) represents the organizational manifestation of strategic thrust. By grouping "businesses" according to commonality of mission, related product/market segments, similarity of competition, size, and facilities/technology, adopters of the SBU concept explicitly recognize strategic thrust as an organizational cutting edge (size notwithstanding).3 Of course, in the case of SBUs, not only are differences between units magnified, but the existence of a coordinating mechanism (through the corporate executive office) becomes both crucial and organizationally distinct.
Environmental Circumstances
Glueck boldly suggests, "All organization forms work; the key is to
match the organization form with the characteristic of the environment
[emphasis his]."4 He goes on to conclude:5
Finally, both environmental threats and opportunities can lead to the establishment of "boundary spanning" units specifically designed to deal with the environmental circumstance at hand. Concern over pollution in the chemical industry has led many member firms to establish corporate-level offices to deal with the matter.
Complexities Introduced by Growth
In his classic work Strategy and Structure, Alfred Chandler
examined the structural evolution of 70 large firms over several decades.7
He generally concluded that structure follows strategy as a firm expands.
Structural changes are necessary so that internal resources can be administered
efficiently and effectively in light of changing market conditions brought
about by expansion.
Chandler's work set off a string of research dealing with structural correlates of growth, many of which supplemented his model with additional contingency variables.8 Without going into the refinements of each, they may be summarized through the notion that firms evolve somewhat definable organizational forms as they grow--entrepreneurial, functional, divisional, and, occasionally, matrix.9
Entrepreneurial Form (Exhibit 6.2). This stage is characterized by the small, rather informal, enterprise. It is dominated by the entrepreneur who directly controls all or nearly all employees. Strategic planning, if any, is done by the central figure, who also carries responsibility for all important operating
Functional Form (Exhibit 6-3). This form represents the first step toward formality and specialization. As a firm expands in size and scope of operations, delegation of authority and responsibility to managers of specialized units is called for. Here the role of the central figure (chief executive officer) becomes more refined, reflecting the need for coordination of functional units and more focused concern on environmental and strategic matters.
Divisional Form (Exhibit 6-4). As the firm's strategic thrusts build around product and/or market expansion and differentiation, both the internal climate and environmental conditions become more complex. Here the need for decentralization and semiautonomy is amplified, as the time and capability of the chief executive become overstretched. A corporate office is established (which may include vestiges of functional departmentalization, such as the corporate financial officer) to plan, coordinate, and allocate resources. The divisions, in turn, carry operational burdens and functional responsibilities. As complexity increases, through diversification, the divisions themselves may pick up increased responsibility for their own strategic planning, and possibly be grouped as strategic business units.
Matrix Form10 (Exhibit 6-5). The matrix structure is somewhat of an aberration in that it is designed to combine the virtues of the divisional and functional structures without overly disturbing whichever has been chosen. To some extent it is less an evolutionary stage than the others since it can grow out of either of the latter forms.
Of course, the matrix structure suffers from problems of dual authority, among others, but it can creatively serve the needs of strategic change that otherwise might be constrained by more traditional structures.
Management Culture and Style
Though it may be argued that strategy should dominate the design of
organization structure,12 the internal workings and styles of
management are going to shape it as well. Mintzberg suggests that "power"
factors play an important role.13 These include the personal
needs of organization members, organizational "fashions of the day" (e.g.,
participative versus nonparticipative styles), and the presence of outside
control (e.g., degree of control by the board of directors). He argues
that pressures for centralization and formality arise from needs for personal
power at the strategic level as well as from higher degrees of external
control. And the culture surrounding structures "in fashion" leads to pressures
for their adoption.
What this suggests is that the choice of organization structure is not simply a matter of weighing impersonal strategic, environmental, and technical circumstances. Instead organization design is going to be tempered by the human factor, including the capabilities of those organizing and being organized, and their collective needs, aspirations, and expectations. here generic typologies give way to human complexities. Indeed it is this complex web that calls for creativity and insights on the part of the strategist when choosing a structure for strategy implementation.
STRUCTURAL OPTIONS IN UNIT FORMATION
The combination of strategic thrusts, environment, growth, and management
style influences the conceptual perspectives of top management toward organization
design. Hierarchical placement of organization units, lateral differentiation
between units, the formality or informality of authority/responsibility
relationships, and matters of centralization versus decentralization are
among these. Though the process is not necessarily sequential, these grand
perspectives at some point must be translated into the establishment of
specific organizational units. Deciding upon a divisional structure, for
example, must be further refined to define what the divisions will be.
Further, interunit coordination and decision making may be enhanced through
lateral linkages beyond those inherent in the unit hierarchy.
Bases for Unit Formation
Thus far we have alluded to different bases upon which hierarchical
and lateral assignments are made in an organization. This grouping or Departmentation
of the enterprise represents the specific interpretation of the contingency
relationships outlined. Generally grouping has four primary effects on
the firm:14
Function or Process. This represents grouping based on commonality of skills, abilities, and the nature of work or activity. Often it refers to the basic business functions of marketing, finance, accounting, production, personnel, research and development, and so on. Departmentation on this basis suggests that there are fundamental categories of business operations upon which organizational differentiation should center.
Somewhat extended, it can also refer to phase of activity, particularly where the operations of an enterprise are sequential. Here different processes are seen as discrete components of the operational sequence. On a small scale, a furniture company's manufacturing department might be further subdivided into cutting, turning, sanding, assembling, and finishing. At a more strategic level, a vertically integrated firm may make a primary organizational cut according to the different stages in the vertical chain. An aluminum producer might have mining, transportation, smelting, fabrication, and marketing departments or semiautonomous divisions, for example. In the latter case, "function or process" is not used in the same sense as "functional organization" presented previously. A semiautonomous division by definition would represent a divisional structure, though the grouping itself is based on a "phase" interpretation of function.
Product. For product grouping the departmental configuration represents output categories instead of either input skills or location. General Motors, for instance, has Chevrolet, Buick, Pontiac, Oldsmobile, Cadillac, and other divisions that reflect major product classes. Small marinas often have slip rentals, repair services, retail stores, and fuel retail departments. In both cases departmentation represents the major product or service categories of the firm.
In larger firms especially, product units often have their own functional groups (marketing, production, personnel, research, and others) such that the functional specialties are subordinate to the major emphasis of output. Of course, the choice of product (or service) categories becomes an important component of effectively departmentalizing this way. Products can be grouped according to such diverse criteria as technology (e.g., electronic versus mechanical versus electromechanical), brand (e.g., Noxzema versus Cover Girl), product function (e.g., welding versus grinding equipment), size (e.g., low-volume versus high-volume pumps), and so forth. These distinctions often become manifest in "product-line" decisions, which, in turn, have organizational implications. Again we see a strategy/structure linkage.
Client or Customer. Here groupings revolve around market typologies that define customer classes (or individual customers) to whom the firm sells. Distinctions between commercial and defense clients are very often made in consulting and aerospace circles. Organizations are structured accordingly. In the extreme the organization can be based on individual accounts, as in advertising agencies. For obvious reasons one often finds evidence of client or customer groupings within marketing or sales organizations, but these distinctions can also extend to the upper levels of the hierarchy as strategy calls for them.
Location. The basis for structuring normally refers to the territory covered by an organizational unit and/or its actual siting. Different manufacturing plans producing the same products, funneling into the same distribution channels, may be organizationally distinct by virtue of their location. Or geographical distinctions may be more market oriented, such as with domestic versus international divisions (e.g., hotel chains) or the establishment of sales territories (e.g., consumer products companies).
Personal Skills or Attributes. Occasionally one encounters a firm in which individuals are the primary organizational bases. For example, medical or dental partnerships and clinics are often organized by physicians. Similarly consulting firms can be structured around senior partners. This type of organization may be found where the product or service of the firm is extraordinarily dependent upon the particular skills and capabilities, or even personalities, of certain people. The development of various forms of prepaid group medical facilities (often called Health Maintenance Organizations or HMOs), in which patients are served by whatever physician happens to be available at the time of the patient's visit, represents attempts to get away from the inefficiencies of organization by person.
Time. Grouping on the basis of time actually has two dimensions. the first is a function of when tasks or overall operations are performed.15 Shift work in a manufacturing plant is organized this way. On a somewhat different level, some colleges and universities have day and evening faculties, and in some instances separate administrative units for them. To the extent that evening educational programs represent a method of diversification and/or market development, the time dimension for organizing (day versus evening) results directly from that strategic commitment.
Second, time has structural implications from planning and responsibility perspectives. Vertical divisions of labor and responsibility often carry with them differences in planning and execution time horizons. Thus general managers tend to have longer-term planning and perspectives than operational managers. And operational managers generally realize greater responsibility for short-term results than would those responsible for long-term affairs. Indeed a general management/operational management hierarchy is established precisely so this can occur.16
Although these six bases for structuring an organization and its sub-units appear somewhat distinct, their distinctions often become clouded.17 For example, units defined on the basis of territory (location) may be established that way because markets (customers) have been so segmented. Similarly it may be difficult to distinguish clearly between the product basis and personal skills basis, particularly when the delivery of skills is the product. Or product classes may be defined in a way that parallels customer classes (e.g., the familiar "consumer products" versus "industrial products" breakdown). Nonetheless recognition of structural options is often facilitated by considering each of these alternatives in light of strategic and sub-unit objectives.
Another caveat is necessary. Except perhaps in the entrepreneurial structure, one rarely finds the instance where one, and only one, of these bases is used to structure an entire organization. As the components of strategy are translated and retranslated downward, their organizational interpretations demand structures to match them. The organizational tiering that results is likely to show evidence of any combination of the structural bases outlined. Exhibit 6-6 demonstrates one such combination.
Finally, lateral combinations are possible, and may be particularly useful at the upper levels of an organization. Strategic thrusts, environmental conditions, growth influences, and
Additional Lateral Linkages
The implementation of strategy through structural design implies more
than the somewhat mechanistic process of establishing organizational units.
Inherent in the process is the specification of unit objectives and responsibilities,
boundaries of authority, and interunit interactions. To some extent the
last of these derives simply from the hierarchical nature of organizations.
Sub-units are blended together in the context of the higher-order unit
of which they are a part. Thus organization design is as much a matter
of aggregation as it is of disaggregation.
But desirable interunit interactions often go beyond the strictures that might be imposed by the structural groupings we have discussed. Often additional coordination, decision making, and informational mechanisms are necessary. These can extend from the informal communications between employees to the formality of the complex matrix organization presented earlier.18 In between lie company rules and procedures, and the establishment of liaison roles and committees. Company rules and procedures cross-cut departments for the purpose of standardizing behavior, and to that extent coordinate. Liaison roles are established to bypass vertical communication channels; they are largely an information-flow device and are particularly useful in conflict resolution. Committees, of course, are institutional collections of people that can be either informational, coordinating, or decision making in their purpose.
CONTROL IN STRATEGIC MANAGEMENT
Control of the organization within a strategic management system is
concerned with achieving goals by carrying out strategies effectively and
efficiently.19 Thus the strategic management control process
addresses two broad issues: (1) the adequacy of performance in fulfilling
organizational goals (the effectiveness of the organization) and (2) the
efficiency with which strategies are carried out.
The "correctness" of goals and strategies is evaluated during earlier stages of the strategic management process. Therefore, attention during control can be restricted to organizational performance. That is, failure to achieve goals is viewed as a performance problem, not as a matter of faulty goals. We thus are concerned in control with determining the degree to which (1) goals are achieved and (2) resources are conserved.
EFFECTIVENESS AND EFFICIENCY
Effectiveness refers to how well an organization achieves its goals--produces
expected results. Similarly Hofer and Schendel define effectiveness as
the optimal relationship between a firm and its environment.20
Thus effectiveness relates to the organization's goals.21 Efficiency,
however, is the amount of output per unit of input and relates more to
the nature of internal operations.22 It is not specifically
related to goals. An efficient organization is one that does whatever it
does with the minimum consumption of resources.23
Ideally organizations carry out their activities both effectively and efficiently; that is, they do the right things in the right way.24 However, the other three permutations are possible. Indeed a company could be neither effective nor efficient in the conduct of its business. Such a firm would experience competitive disadvantages as well as low productivity. In other words, it would be doing the wrong things wrong.
All this suggests that a number of structural options exist that can be overlaid or used in conjunction with traditional hierarchical relationships. As with other structural matters, however, the equation is underdefined--there is no single best way.
Somewhat better off are firms that do the wrong things right (that is, are efficient but not effective). However, while citing Drucker, Hofer and Schendel note that this is a less advantageous situation than doing the right things wrong (attaining effectiveness without efficiency). Organizations that do the right things wrong will outperform those that do the wrong things right.25
It is clearly better to be both effective and efficient at the same time. But when effectiveness and efficiency are in conflict, then positive external relations that lead to effectiveness should be stressed instead of internal efficiency.26 Although strategic management in its entirety emphasizes organizational effectiveness, the control process is concerned with both effectiveness and efficiency.
In this section we discuss (1) the type of control systems can be used, (2) phases of the control cycle, (3) typical employee responses to control methods, and (4) some suggestions for making a control system work.
TYPES OF CONTROL SYSTEMS
Managers use either steering, yes/no, or postaction control systems,
or some combination of the three, for monitoring the organization's progress.27
Steering controls generally involve making predictions of expected results in the form of a set of standards and then comparing performance, as it occurs, with standards to detect deviations. The near simultaneity of performance and deviation detection enables timely corrective action.
The process of keeping a moving automobile on the road is an example of steering control. Similarly new employees' fellow workers will push, prod, scale, and instruct them until they begin to conform consistently to work group norms (standards). Another example is high-frequency sampling of items produced on an assembly line for purposes of quality inspection. As soon as samples whose tolerances deviate from the standards are detected, corrections can be made in the way they are manufactured.
Yes/no controls are tests a piece of work must pass to go on to the next process. Examples include automobile inspection systems in some cases, "core" academic programs that must be completed before other courses can be taken, and the preflight tests of an aircraft.
Postaction controls consist of tests conducted on completed processes to determine whether or not results meet a standard. An inspector's evaluation of a long paper, end-line quality control inspection of manufactured products, and the use of review by peers to select articles for publication in journals and magazines are examples of postaction controls.
Of these three steering controls best meet the control needs of strategic management systems. They can be put in place to monitor the performance of an organization while its operations are under way. Information about unmet goals, especially interim targets in the form of key variables, can be fed back to each stage in the strategic management process so that corrective action can be taken.
The frequency of measurements is an important question when using steering controls. When measurements of performance are taken often, deviations from goals can be minimized. However, the cost of such a system can be great when compared with the costs of infrequent measurement. But the costs of too infrequent measurement can also be excessive. Therefore, control system management costs must be evaluated against the costs of such factors as high product failure rates, lost customers, and competitive disadvantage. In these terms even high short-term costs of control can be small when compared with its long-term benefits.
PHASES OF THE CONTROL CYCLE
The control process consists of the following four phases:
Key Variables for Control
Control systems are most often designed to measure profitability because
it is a dominant goal in most companies.28 However, the particular
measure of profitability of interest in a particular firm can vary across
several interpretations of the various forms of gross profit, operating
profit, and net profit. But control systems may focus on other measurements
(besides profitability), called key variables ["(a)lso called 'strategic
factors, 'key success factors,' 'key result areas,' and 'pulse points'!29]
Usually only a few key variables are used for control purposes, "six being
the number most commonly used."30
Key variables have the following characteristics:31
The resulting set of key variables that become control variables is peculiar to the firm. These variables reflect its major strategic thrusts and can be as different in various organizations as are people's fingerprints. However, there are some common ones that are peculiar to certain functions. The list that follows is intended merely as an example of the kinds of key variables that may be ultimately selected for purposes of monitoring performance in ways consistent with strategy:34
Too often management will set a long-term target and wait until it is not met before taking corrective action. Of course, it is then usually too late to change operations in a constructive way. Timely, feasible, understandable key variables are essential for effective control systems.
Setting Standards
After selecting key variables for monitoring organizational performance,
standards have to be set for them. Standards are the levels of key variables
that will be accepted as satisfactory.
Anthony and Deardon describe three types of standards: predetermined standards (budgets), historical standards, and external standards.35 Predetermined standards or budgets are the goals set during the goal formulation process of a strategic management program. A targeted five-year growth in return (operating profit) on sales from, say, 8 to 13 percent, defines a direct key control variable. Annual standards, or interim targets, would probably be set as part of business-level strategy. Whatever annual values were given to expected return on sales goals would be the standards against which subsequent annual performance would be compared for control purposes.
Similarly budgets, another form of predetermined standard, are often established as part of the functional strategy formulation process. Functional managers, along with top-level managers, decide upon the size of budget necessary to carry out strategy when functional strategy goals (and action plans) are established.
Historical standards are set by using past performance as a comparative base. Thus current performance is compared with past performance. Historical standards are often used to evaluate performance. Management may wish to maintain a current ratio of 2 to 1, for example, or a certain inventory turnover ratio.
Use of historical standards is recommended only when it is determined that conditions have not changed so as to invalidate the trend and when prior performance is known to be acceptable.
External standards are those whose values are derived from sources outside the firm or SBU. Examples are other firms' performance characteristics the object firm's management wants to exceed, such as market share, return on assets, to earnings per share. The shortcoming of this type of standard is the possible noncomparability of firms.
Of these three types of standards, the one best suited for strategic management control purposes is predetermined standards.
Comparison of Actual Performance Against Standards
This stage involves measuring actual key variable performance, comparing
results against standards, and informing the appropriate people so that
deviations can be detected and corrections made or reinforcement given.
Financial or management accounting systems are usually relied on for measuring
actual performance. There are, however, many other measurement methods
available, including product sampling, various predictions, observation
by managers, meetings, and conferences.36 Whatever measurement
methods are selected, they should be timely, accurate, and cost effective.
The need to inform people of measurements results necessitates a system of reporting. Anthony and Deardon identify two types of reports for control systems: information reports and control reports.37 Information reports tell managers what is happening around them and may or may not be intended to precipitate action. Managers study them to determine if it is necessary to take corrective action. Control reports are those directed at actual versus planned performance comparisons and can take many forms.38
Reinforcement or Corrective Action
Detection of negative deviations from standards usually leads to analysis
of problems, decisions about how to correct them, and adjustments to operations.39
Sometimes a control report will precipitate starting a new strategic management cycle. This new cycle may lead to the reformulation of goals or action plans, or both. Usually, however, strategies remain intact while operations are adjusted. The control process should be continuous so that control information is constantly fed back to the goal and action plan formulation stage. Deviations, therefore, should prompt immediate analysis so that a timely decision can be made about whether to change goals or action plans or operational management.
It is important too that performance that exceeds standards be reinforced. Too often management focuses attention only on negative deviations from expectations.
EMPLOYEE RESPONSES TO CONTROL
Control systems themselves can trigger an array of human behaviors,
some of which are positive in their impact on the organization and some
of which are negative. Positive reactions such as voluntary compliance
or even active acceptance can be expected when control criteria demonstrate
relevance through operational significance and lead to results that can
be (1) affected by employees and (2) directly measured.40 Further,
positive reactions to control can be precipitated by employee participation
in the process of setting standards, especially when standards are perceived
as achievable but not challenging.41
Negative reactions to controls can take several forms.42 First, employees can resort to fudging records or even sabotage in order to distort performance measurements favorably. This result often stems from lack of participation in the process of developing standards as well as misunderstanding of the importance of control.
A large book printing company installed various types of production-counting devices on its printing and binding machines to determine which tasks represented production bottlenecks. At the end of each work day, the counters would be broken, reset before readings could be recorded, or disconnected altogether. Management was never able to install and use mechanical counters.
Another example of how control systems can be thwarted is a furniture factory in which the canvas bins containing the output of lathes were weighed to estimate the number of turnings produced. Lathe operators stopped discarding defective pieces and instead threw them into the finished goods bin to maximize their respective counts.
Similarly a university administration that measures enrollment in classes according to course registrants rather than enrollment after the drop period usually will receive distorted class-size information.
Trading of favors among organizational units can take place when there is an imbalance between staff people responsible for measuring or reporting results and line people responsible for generating those results. One might find a production manager vehemently supporting the promotion of a cost accounting manager and expecting more lenient treatment in return. This expectation clearly demonstrates the absence of understanding of the purposes of the control system.
A control system that emphasizes short-term results can jeopardize achievement of long-term goals. Failure to replace obsolete machinery may prevent short-term declines in return on assets but may also reduce long-term profitability.
Finally, absenteeism and turnover can be manifestations of tension and pressure caused by an overly strict control system.
SUGGESTIONS FOR CONTROL SYSTEM DEVELOPMENT
These negative results of control can be minimized by following Steiner's
suggestions for developing control systems.43 They are as follows:
The section on organization structure has two parts. First, the influences on structure caused by major strategic thrusts or emphases are discussed. These thrusts normally should be highlighted through organization structure. Also, various environmental factors can influence the nature of organization, as discussed next.
In the second part of the section on organization, the types of structures available to strategists are explained and the lateral linkage options are presented. Most tend to view organization structuring as largely a matter of working out vertical authority and responsibility relationships for a particular strategy. However, lateral relationships also must be thought through and specified so that the appropriate cross-unit integration takes place.
The second section of the chapter addresses the process of controlling strategy implementation. Managers are primarily concerned with two factors in designing control systems. Progress toward achieving goals specified in strategy at all levels is monitored to determine whether or not strategy is effective. Then control systems should be set up to monitor the extent to which resources are conserved. The section explains several types of control systems, the elements of the control cycle, and how employees can be expected to respond to different control configurations. Last, some principles for the development of control systems are enumerated.