Issues in Management
ORGANIZATION STRATEGY AND STRUCTURE
Organization strategy basically refers to the way or plan which an organization formulates for investing resources in order to achieve its goals and objectives and acquire competitive advantage. Every organization develops a strategy which describes how the work is to be done. A strategy should be able to create value for the organization’s stakeholders. These stakeholders specially include the customers and shareholders. The strategy should be such so value added products must be manufactured by the organization in order to satisfy the customers’ needs and long with this the shareholders confidence in the company should increase when they see the value of their invested stock rising in the market. Shareholders want that the profits of the company should continue rising making them more profitable and wealthy. Therefore, a company’s strategy should involve providing high quality products and services to the customers and earning profits for the stockholders. (Hersey and Blanchard , 2001)
My paper is going to center on the issue of the organizational strategy for the company. A company must be able to select a suitable strategy from the various types to accomplish its goals and achieve its objectives. It should be able to use scarce resources
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The issue faced by the management today of any organization is to develop a strategy which can match its structure. Most organizations fail because the strategy formulated does not go along with the structure of the organization. Their structure says something else while their strategy says something. For the efficient achievement of the goals, all the functions in an organization should be aligned together and say one thing about the organization. The structure and strategy of an organization should match together to create value from the resources in order to create value for the stake holders. Strategies are formulated basically at three levels in an organization: functional level, business level and corporate level. Value should be created at all levels rather than just one for achieving the long term goals and objectives. Functional level strategy is concerned with investing in functions of an organization in order to create more skills and value from them. The functions of an organization like manufacturing, marketing, human resource must be strengthened with respect to resources and coordination abilities so that these functions should perform better than those of the competitors (Jones, 2000). Managers must be able to improve the skills of the functional departments from within as well as the outside. They must not only monitor the skills of the departments but also the functional environment to identify any uncertainties and deal with them accordingly. Business level strategy is about planning to position the organization after developing the functional core competences. In other words, business level strategy is built around the functional level strategy for positioning the company in such a way so that it attains competitive advantage (Jones, 2000). It describes how a business should compete with other businesses in the same industry. For example, some companies use marketing skills to build an image in the minds of the consumers. Businesses stand upon their functions, the stronger the functions, the more successful business. The people behind the business level strategy are the CEO and President of an organization that is the top management. Corporate Level Strategy is a plan whereby companies focus on expanding into new markets with new products along with the strengthening of existing markets and products. It accounts for improving the competitive position of the function and business as a whole. Corporate level managers combine the resources of various operating divisions for creating superior value from the core competences of all the divisions which cannot be obtained from working independently. The strategy usually concerns with acquisition, additions or divestments, or join ventures etc. All these three levels are discussed in detail in the following paragraphs. (Miles and Snow , 2003)
Formulating Functional-Level Strategy
As mentioned earlier functional level strategies are required for the execution of business level strategy. Both these strategies should be aligned together for achieving organizational goals. The functions of manufacturing, marketing, production, finance, human resource etc must support the business objectives. For example, if a company is planning to introduce value added products through differentiation strategy which will bring rapid growth so all the functions should strive for rapid growth. The human resource department should hire additional employees for managing the growth. The marketing department should focus on launching aggressive marketing campaigns and attracting customers whereas the finance department should plan for additional budgets required to support the differentiated products. The strategies adopted by departments tend to be different with mature or low cost products where fewer workers will be required; brand loyalty will be emphasized focusing on cost reduction. The manufacturing and production function can utilize efficient production methods for producing high quality or low cost products for differentiation or low-cost strategy respectively. Similarly, sales and marketing can increase the demand and sales of a product due to which companies get a low-cost advantage of producing in bulk or they can focus on targeting customers and heavy promotion to differentiate their products. Through R&D efficient methods of production can be found which lower the cost of a product or can help in production of new differentiated products by adding innovating features. (Hersey and Blanchard , 2001)
Functional-Level Strategy and Structure
The structure of an organization should support the core competences developed in a particular function. Suppose an organization has developed core competence in production so it requires a mechanistic structure with tall hierarchy and centralized decision making. There is a high level of standardization with rules and policies to support the efficient production of goods and services. On the other hand, for the sales function the management should be flat and decentralized with a flexible, organic structure because the sales people are in direct contact with the customers whose needs and tastes continue changing with time. (Jones, 2000)
Formulating Business-Level Strategy
At this level, the business aims to achieve competitive advantage over others using the functional resources and coordination abilities of departments. It may go for cost leadership or differentiation strategy whichever gives the company competitive advantage. The strategy should be able to give the business advantage over its competitors. Therefore, a domain must be selected by the organization in which to compete and position it and continue enlarging that domain paying attention to the environmental factors. Domain represents the high or low cost area of goods and services in which the company decides to serve. After selecting the domain, the company should think of the basis on which to position itself against its rivals. If it has the skills of producing low cost products then it can go for low-cost business level strategy. On the other hand, if the company specializes in producing differentiated products for selling at a premium price so it can select differentiation business level strategy. The direct competition comes between the businesses having the same domains, core competences and thus, same business level strategy. The strength of core competences will determine which company outperforms others. Where there is a low cost approach in functions so there is a low cost business level strategy and where there is a differentiation approach, there is a differentiation business level strategy. An organization must select a suitable strategy for protecting and enlarging its domain. Even some organizations pursue both low-cost and differentiation strategies simultaneously because of a combination of skills and core competences in different departments. Some departments may be good at producing low cost products while others skills are based on differentiated products. But doing so becomes extremely difficult to manage for the organizations in the long run. There are even instances in which environmental uncertainties can cause an organization to change its business level strategy to match with the changing environment. These changes may pertain to technological developments, foreign competitors or changing customer needs and preferences. (David, 2006)
Besides low-cost and differentiation business level strategy, there also exists a focus strategy at the business level. Organizations specialize in a particular segment and divert all its resources towards that particular segment. This involves tailoring products and services according to the needs and preferences of target customers. By specializing in a particular segment the company stays ahead of competition and has to compete with only few companies which increases its chances of becoming the market leader. (Miles and Snow , 2003)
Business-Level Strategy and Structure
The structure of an organization should be designed in way to support its business-level strategy. An organization adopting the differentiation strategy should be able to communicate and coordinate the activities of different departments effectively and ensure speedy production of products for availability in the market. For this an organic structure is most suitable where the decision making process is decentralized and cross-functional teams exist for speedy production and efficient coordination between departments. On the other hand, a mechanistic structure is most suitable for low-cost business-level strategy. There is no need to respond quickly and costs should be controlled with centralized decision making. (Jones, 2000)
Formulating Corporate-Level Strategy
As explained earlier, corporate-level strategy involves finding new domains in which to create value with the low-cost or differentiation strategies. Existing core competences are used within the new domains in which a company wishes to enter. The organization might also continue protecting and enlarging its existing domain. Organizations try to control their supply of inputs at this level so that they can improve their quality for achieving differentiation or reduce their cost for gaining low-cost advantage. There are different strategies at the corporate-level which the companies can select from for protecting and enlarging their core domains. Core domains represent the actual products and services in which a company is serving the market. For example, the core domain of Pepsi is ‘soft drinks’. Companies tend to acquire the control of the inputs including suppliers and distributors necessary to enable the product to become available in the market. The strategies that are used to support the corporate-level strategy are vertical integration, related diversification and unrelated diversification. Following paragraphs provide a brief description of each strategy. (David, 2006)
Vertical Integration strategy basically pursues acquiring the suppliers and distributors in order to have control over the product inputs as well as its distribution. Acquiring control over the inputs is called ‘backward vertical integration’ whereas acquiring control over the distribution is called ‘forward vertical integration’. Through backward vertical integration, an organization gets a supply to its inputs which ensure speedy delivery of products and services in the market. The inputs can be designed for cost reduction or quality emphasizing differentiation. When an organization has a control over the supply of the inputs then a great deal of money is saved and operations become efficient. On the other hand, forward vertical integration provides an organization control over its distributing companies to achieve maximum profits. The profits once made by the retailers and wholesalers now belong to the company. Thus, both these strategies make the processes efficient and result in low-cost or differentiation advantage.
Diversification as already been discusses refers to entering new domains with the core competences and organization resources. Related diversification means entering applying the resources and competences in related domains for creating low-cost or differentiation competitive advantage in that domain. For example, Honda’s core domain was motorbikes and its core competences were in the excellent engine design and low-cost manufacture through which it entered into a related domain of small cars and utilized the same core competences in that domain. This way organizations continue entering into related domains for achieving competitive advantage in the market.
In this strategy, the existing skills and core competences of any functional department are applied into completely new domains which are not related to the core domains. For example, if an organization’s personnel are highly motivated with little absenteeism or turnover then this organization can use the same personnel in another business which is inefficient and requires restructuring.
Corporate-Level Strategy and Structure
The strategy implemented at the corporate-level should match the structure of the organization for gaining success and competitive advantage. A multidivisional structure is most appropriate for organizations adopting vertical integration, related and unrelated diversification because the business is functioning in more than one domain. There are self-contained operating divisions and coordination is required between these divisions for sharing the core competences and resources. (Jones, 2000)
David, Fred R (2006). Strategic Management: Concepts and Cases . Prentice Hall.
Hersey , Paul , & Blanchard , Kenneth H. (2001). Management of Organizational Behaviour.Prentice Hall.
Jones, Gareth R. (2000). Organizational Theory: Texts and Cases. Pearson Education.
Miles , Raymond , & Snow , Charles (2003). Organizational Strategy, Structure, and Process.Stanford Business Books.