USA: +1(669)289-8683 
Sign in
using all the course materials and ideas, write a paper on how organizations develop and manage strategies to establish, safeguard and sustain its position in a competitive market.
-see my posts business weeks 1-6
2/9/2018 Project 2: Strategy Analysis and Selection – BMGT 495 6380 Strategic Management (2182)
https://learn.umuc.edu/d2l/le/content/267247/viewContent/11190913/View 1/4
Instructions
Assignment 2: Internal Environmental Analysis/Strategy Analysis and Strategy Selection
(Week 6)
Purpose: This assignment is the second of three assignments. Students will use the tools and
concepts learned in the course and in previous business courses to develop an understanding of
how organizations develop and manage strategies to establish, safeguard and sustain its position in
a competitive market.
Students also have the opportunity to review an organization’s objectives and goals and the key
functional areas within the organization. Performing an internal environment analysis helps assess
a firm’s internal resources and capabilities and plays a critical role in formulating strategy by
identifying a firm’s strengths to overcome weaknesses. Students will then 1) assess longterm
objectives, 2) identify and evaluate alternative strategies and 3) recommend strategies for a
company to pursue.
Instructions:
In completing the report, students will use the chapters in the eBook as a guide and perform
research on the company from Assignment 1, answer the required elements below in narrative form
following the steps.
The companies used in Assignment 1 are below. Students will use the same company to complete
this assignment as they did in Assignment 1. Students who fail to use the companies on the list or
an unapproved company will receive a zero for the assignment.
Team, Inc. (NASDAQ: TISI)
HealthStream (NASDAQ: HSTM)
United Rentals (NYSE: URI)
Hawkins (NASDAQ: HWKN)
NOTE: All submitted work is to be your original work (and only yours). You may not use any work
from another student, the Internet or an online clearinghouse. You are expected to understand the
Academic Dishonesty and Plagiarism Policy, and know that it is your responsibility to learn about
instructor and general academic expectations with regard to proper citation of sources as specified
in the APA Publication Manual, 6th Ed. (Students are held accountable for intext citations and an
associated reference list only).
Students may use subheadings.
Step 1: Preparation for the Assignment
Before you begin writing the report, you will read the following requirements that will help you meet
the writing and APA requirements.
Read the grading rubric for the assignment. Use the grading rubric while writing the report
to ensure all requirements are met that will lead to the highest possible grade.
In writing this assignment, you will read and following these tasks:
Thi d iti i i d Thi d th t th d h
2/9/2018 Project 2: Strategy Analysis and Selection – BMGT 495 6380 Strategic Management (2182)
https://learn.umuc.edu/d2l/le/content/267247/viewContent/11190913/View 2/4
Third person writing is required. Third person means that there are no words such as
“I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second
person writing). If uncertain how to write in the third person, view this
link: http://www.quickanddirtytips.com/education/grammar/firstsecondandthird
person.
Contractions are not used in business writing, so you are NOT to use contraction in
writing this assignment.
You are expected to paraphrase and are NOT to use direct quotes. You are expected
to paraphrase, which can be learned by reviewing this
link: https://writing.wisc.edu/Handbook/QPA_paraphrase2.html.
You are responsible for APA only for intext citations and a reference list. Cite the
page or paragraph number.
In writing the analysis, writing in the third person. What this means is that there are
no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you
or your” (second person writing). If uncertain how to write in the third person, view
this link: http://www.quickanddirtytips.com/education/grammar/firstsecondandthird
person
In writing this assignment, students are asked to support the reasoning using intext
citations with page or paragraph number and a reference list. If information is taken
from a source document, it has to be cited and referenced with a page or paragraph
number. A reference within a reference list cannot exist without an associated intext
citation and vice versa.
In completing this assignment, you are required to support reasoning or conclusions
using intext citations. Note that a reference within a reference list cannot exist
without an associated intext citation and vice versa.
When using a source document, the expectation is that the information is cited and
referenced with a page or paragraph number.
No books other than course eBook.
In writing this assignment, students are expected to paraphrase and not use direct
quotes unless citing the mission statement of a company. Learn to paraphrase by
reviewing this link: https://writing.wisc.edu/Handbook/QPA_paraphrase2.html
Read all course material for weeks 1 through 6 and perform independent research to
provide a comprehensive internal environmental analysis, strategy analysis and
selection.
Jot down key facts about the company. Consider making an outline to capture key
points in the paper.
Step 2: How to Set Up the Plan
Create a doublespaced, 12point font Word or Rich Text Format (RTF) document. The final
product cannot be longer than 16 pages in length, which includes all tables and matrices but
excludes the title page and reference page. Those items identified in the technical analysis
should appear under the appropriate heading in the paper. Do no use an Appendix.
http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person
https://writing.wisc.edu/Handbook/QPA_paraphrase2.html
http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person
https://writing.wisc.edu/Handbook/QPA_paraphrase2.html
2/9/2018 Project 2: Strategy Analysis and Selection – BMGT 495 6380 Strategic Management (2182)
https://learn.umuc.edu/d2l/le/content/267247/viewContent/11190913/View 3/4
Review assignment grading rubric and periodically throughout completing the report, review.
Follow the following format using these topics as headings:
Title page with title, your name, the course, the instructor’s name;
Company Background/Information
Internal Environmental Analysis
Strategic Analysis & Strategy Selection
Reference page
Under the appropriate heading, include the following:
Background analysis including vision and mission statements and objectives
Internal Environmental Analysis
Corporate Level Strategy
Business Unit Level Strategy
Functional Level Strategy
Explain how these strategies align with the company’s vision and mission statements;
Assess the company’s interactions with its stakeholders, the organizational structure,
the organizational culture, and communication/decision making among managers
within human resources, marketing production, operations, finance and accounting,
R&D, and computer information systems, which can be accomplished by viewing the
company’s website, interviews, and surveys.
Financial analysis for the last reported fiscal year:
Use the company’s income statement and balance sheet to calculate key, but no less
than 10 key financial ratios to the business. There must be a mix of the different
ratios so that the ratios do not all come from the same category. Show the
calculations.
Using Excel or a Word table, record key financial ratios in the first column;
Research the industry average financial ratios for the same ratios above and record in
a second column. If you cannot find an industry average, then select another ratio;
[Ratios presented should not all come from the same category]
In the third column, indicate whether the financial ratio is a strength, a weakness or a
neutral factor.
Explain the results and compare and contrast the company financials to the industry.
Technique Analysis: develop and explain an IFE, BCG matrix, Grand Strategy Matrix, and
QSPM. The expectation is not to copy from the Internet but to develop one’s own. The
various tools are to appear in the appropriate area of the paper and not in one section of the
paper.
Strategy Analysis:
Identify and explain company strengths and weaknesses. Discuss success factors and what
the company must do to perform successfully in the industry? Discuss what strategies would
allow the company to capitalize on its major strengths. Discuss strategies that would allow
the company to improve upon its major weaknesses
Generate a minimum of three possible alternative strategies for the company;
Identify and discuss cultural factors that should be considered in analyzing and
choosing among the alternative strategies;
Prioritize and explain the selection of alternative strategies
Recommend the best one or two strategies among the alternative strategies and explain why
th t t i th b t
2/9/2018 Project 2: Strategy Analysis and Selection – BMGT 495 6380 Strategic Management (2182)
https://learn.umuc.edu/d2l/le/content/267247/viewContent/11190913/View 4/4
these strategies are the best;
Step 3: Create an introductory paragraph. The Introduction should clearly and concisely convey
the main points of the assignment’s requirements. Review the following website to learn how to
write an introductory paragraph: http://www.writing.ucsb.edu/faculty/donelan/intro.html
Step 4: Write a summary paragraph. A summary paragraph restates the main idea(s) of the
essay. Make sure to leave a reader with a sense that the essay is complete. The summary
paragraph is the last paragraph of a paper.
Step 5: Using the grading rubric as a comparison, read through the paper to ensure all required
elements are presented.
Step 6: Proofread the paper for spelling and grammatical issues, and third person writing.
Use the spell and grammar check in Word as a first measure;
Have someone who has excellent English skills to proof the paper;
Consider submitting the paper to the Effective Writing Center (EWC). The EWC will provide
46 areas that may need improvement.
Step 7: Submit the report in the Assignment Folder (The assignment submitted to the Assignment
Folder will be considered a student’s final product and therefore ready for grading by the instructor.
It is incumbent upon the student to verify the assignment is the correct submission. No exceptions
will be considered by the instructor.)
http://www.writing.ucsb.edu/faculty/donelan/intro.html
2/9/20
1
8Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 1/12
Article
June 2015
McKinsey Quarterly
Getting
organizational redesign right
By Steven Aronowitz, Aaron De Smet, and Deirdre McGinty
“
I
Companies will better integrate their people, processes, and
structures by following nine golden rules.
f at first you don’t succeed, try, try, try again.” If W. E. Hickson, the British
author known for popularizing that familiar proverb in the mid-19th century,
were alive today, he might easily be applying it (disparagingly) to the efforts of modern
corporations to redesign their organizations.
Recent McKinsey research surveying a large set of global executives suggests that many
companies, these days, are in a nearly permanent state of organizational flux. Almost 60
percent of the respondents, for example, told us they had experienced a redesign within
the past two years, and an additional 25 percent said they experienced a redesign three or
more years ago. A generation or two back, most executives might have experienced some
sort of organizational upheaval just a few times over the course of their careers.
One plausible explanation for this new flurry of activity is the accelerating pace of
strategic change driven by the disruption of industries. As a result, every time a company
switches direction, it alters the organization to deliver the hoped-for results. Rather than
McKinsey uses cookies to improve site functionality, provide you with a better browsing experience, and t
o
enable our partners to advertise to you. Detailed information on the use of cookies on this Site, and how you
can decline them, is provided in our cookie policy. By using this Site or clicking on “OK”, you consent to the
use of cookies.
OK
Organization
https://www.mckinsey.com/quarterly/overview
https://www.mckinsey.com/our-people/aaron-de-smet
https://www.mckinsey.com/cookie-policy
https://www.mckinsey.com
/
https://www.mckinsey.com/business-functions/organization/our-insights
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 2/12
small, incremental tweaks of the kind that might have been appropriate in the past,
today’s organizations often need regular shake-ups of the Big Bang variety.
Frustratingly, it also appears that the frequency of organizational redesign reflects a high
level of disappointment with the outcome. According to McKinsey’s research, less than a
quarter of organizational-redesign efforts succeed. Forty-four percent run out of steam
after getting under way, while a third fail to meet objectives or improve performance after
implementation.
The good news is that companies can do better—much better. In this article, we’ll
describe what we learned when we compared successful and unsuccessful organizational
redesigns and explain some rules of the road for executives seeking to improve the odds.
Success doesn’t just mean avoiding the expense, wasted time, and morale-sapping
skepticism that invariably accompany botched attempts; in our experience, a well-
executed redesign pays off quickly in the form of better-motivated employees, greater
decisiveness, and a stronger bottom line.
Why redesign the organization?
Organizational redesign involves the integration of structure, processes, and people to
support the implementation of strategy and therefore goes beyond the traditional
tinkering with “lines and boxes.” Today, it comprises the processes that people follow, the
management of individual performance, the recruitment of talent, and the development
of employees’ skills. When the organizational redesign of a company matches its strategic
intentions, everyone will be primed to execute and deliver
them.
The company’s
structure, processes, and people will all support the most important outcomes and
channel the organization’s efforts into achieving them.
When do executives know that an organization isn’t working well and that they need to
consider a redesign? Sometimes the answer is obvious: say, after the announcement of a
big new regional-growth initiative or following a merger. Other signs may be less visible—
for example, a sense that ideas agreed upon at or near the top of the organization aren’t
being translated quickly into actions or that executives spend too much time in meetings.
These signs suggest that employees might be unclear about their day-to-day work
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 3/12
priorities or that decisions are not being implemented. A successful organizational
redesign should better focus the resources of a company on its strategic priorities and
other growth areas, reduce costs, and improve decision making and accountability.
The case of a consumer-packaged-goods (CPG) company that chose to expand outside its
US home base illustrates one typical motivation for a redesign. Under the group’s
previous organizational structure, the ostensibly global brand team responsible for
marketing was not only located in the United States but had also been rewarded largely
on the performance of US operations; it had no systems for monitoring the performance
of products elsewhere. To support a new global strategy and to develop truly
international brands and products, the company separated US marketing from its global
counterpart and put in place a new structure (including changes to the top team), new
processes, new systems, and a new approach to performance management. This intensive
redesign helped promote international growth, especially in key emerging markets such
as Russia (where sales tripled) and China (where they have nearly doubled).
Avoiding the pitfalls
That CPG company got it right—but many others don’t, and the consequences can be
profoundly damaging. Leaders who fail to deliver the benefits they promise not only
waste precious time but also encourage employees to dismiss or even undermine the
redesign effort, because those employees sense that it will run out of steam and be
replaced by a new one, with different aims, two to three years down the line.
We believe that companies can learn from the way successful redesigners overcome
challenges. By combining the results of our research and the insights we’ve gained from
working with multiple companies on these issues, we’ve identified nine golden rules.
They cover everything from early alignment, redesign choices, and reporting structures
to performance metrics, the nature of effective leadership, and the management of risks.
Individually, each of the rules is helpful. Our research shows, though, that 73 percent of
the executives whose companies followed more than six of them felt that the
organizational redesign had succeeded. Executives at these companies were six times
more likely to “declare victory” than those at companies that adopted just one or two.
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 4/12
Following all nine rules in a structured approach yielded an even higher success rate: 86
percent (exhibit).
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 5/12
Exhibit
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 6/12
The rules, it’s important to make clear, are not self-evident. We tested more than 20
common approaches and found that upward of half of them weren’t correlated with
success. We expected, for example, that benchmarking other companies and trying to
adopt some of their structural choices might be an important ingredient of successful
redesigns—but there is no evidence from the research that it is. Our rules, incidentally,
are broadly relevant for different industries, regions, and company sizes. They also hold
true for redesigns prompted by different types of organizational change, including end-
to-end restructurings, postmerger integration, or more focused efforts (such as cost
cutting or improvements in governance).
1. Focus first on the longer-term strategic aspirations
Leaders often spend too much time on the current deficiencies of an organization. It’s
easy, of course, to get fixated on what’s wrong today and to be swayed by the vocal (and
seemingly urgent) complaints of frustrated teams and their leaders. However, redesigns
that merely address the immediate pain points often end up creating a new set of
problems. Companies should therefore be clear, at the outset, about what the redesign is
intended to achieve and ensure that this aspiration is inextricably linked to strategy. One
retail company we know, strongly committed to creating a simple customer experience,
stated that its chosen redesign option should provide “market segment–focused
managerial roles with clear accountability” for driving growth. The specificity of that
strategic test proved much more helpful than simply declaring a wish to “become
customer-centric.”
2. Take time to survey the scene
Sixty percent of the executives in our survey told us they didn’t spend sufficient time
assessing the state of the organization ahead of the redesign. Managers can too easily
assume that the current state of affairs is clear and that they know how all employees fit
into the organizational chart. The truth is that the data managers use are often inaccurate
or out of date. A high-profile international bank, for example, publicly announced it was
aiming to eliminate thousands of staff positions through an extensive organizational
redesign. However, after starting the process, it discovered to its embarrassment that its
earlier information was inaccurate. Tens of thousands of positions, already referenced in
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 7/12
the press release, had been inaccurately catalogued, and in many cases employees had
already left. This new organizational reality radically changed the scope and numbers
targeted in the redesign effort.
Knowing the numbers is just part of the story. Leaders must also take time to understand
where the lines and boxes are currently drawn, as well as the precise nature of talent and
other processes. That helps unearth the root causes of current pain points, thereby
mitigating the risk of having to revisit them through a second redesign a couple of years
down the road. By comparing this baseline, or starting point, with the company’s strategic
aspirations, executives will quickly develop a nuanced understanding of the current
organization’s weaknesses and of the strengths they should build on.
3. Be structured about selecting the right blueprint
Many companies base their preference for a new structure on untested hypotheses or
intuitions. Intuitive decision making can be fine in some situations but involves little
pattern recognition, and there is too much at stake to rely on intuition in organizational
redesign. Almost four out of five survey respondents who owned up to basing decisions on
“gut feel” acknowledged that their chosen blueprint was unsuccessful. In our experience,
companies make better choices when they carefully weigh the redesign criteria, challenge
biases, and minimize the influence of political agendas.
Interestingly, Fortune magazine found that its Most Admired Companies had little in
common when it came to aspects of their organizational design, beyond a flexible
operating model. This finding is consistent with our experience that off-the-shelf
solutions aren’t likely to work. The unique mix of strategy, people, and other assets within
a company generally requires an individual answer to things like role definition, decision-
making governance, and incentives, albeit one based on a primary dimension of function,
geography, or customer segment. The key is to get the right set of leaders reviewing
options with an open mind in the light of redesign criteria established by the strategic
aspiration.
Take a large public pension system we know. Its leaders convinced themselves that a new
organization must be set up along product lines. Challenged to reconsider their approach,
they ultimately arrived at a functional model—built around health, pensions, and
1
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 8/12
investment—that has served the system well over the past five years and underpinned
significant cost savings and the launch of innovative new products.
4. Go beyond lines and boxes
A company’s reporting structure is one of the most obvious and controllable aspects of its
organization. Many leaders tend to ignore the other structure, process, and people
elements that are part of a complete redesign, thereby rearranging the deck chairs but
failing to see that the good ship Titanic may still be sinking.
Companies such as Apple and Pixar are well known for going far beyond lines and boxes,
taking into account questions such as where employees gather in communal spaces and
how the organizational context shapes behavior. One small but fast-growing enterprise-
software player we know made some minor changes to senior roles and reporting as part
of a recent organizational redesign. But the biggest impact came from changing the
performance-management system so that the CEO could see which parts of the company
were embracing change and which were doing business as usual.
Surveyed companies that used a more complete set of levers to design their organizations
were three times more likely to be successful in their efforts than those that only used a
few. The strongest correlation was between successful redesigners and companies that
targeted at least two structural-, two process-, and two people-related redesign elements.
5. Be rigorous about drafting in talent
One of the most common—and commonly ignored—rules of organizational redesign is to
focus on roles first, then on people. This is easier said than done. The temptation is to
work the other way around, selecting the seemingly obvious candidates for key positions
before those positions are fully defined.
Competition for talent ratchets up anxiety and risk, creating a domino effect, with groups
poaching from one another to fill newly created gaps. This is disruptive and distracting. A
talent draft that gives all units access to the same people enables companies to fill each
level of the new organizational structure in an orderly and transparent way, so that the
most capable talent ends up in the most pivotal roles. This approach promotes both the
perception and the reality of fairness.
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 9/12
Powerful technology-enabled solutions allow companies to engage hundreds of
employees in the redesign effort in real time, while identifying the cost and other
implications of possible changes. One web-based tool we’ve seen in action—full
disclosure: it’s a McKinsey application called OrgLab—helps leaders to create and
populate new organizational structures while tracking the results by cost, spans, and
layers. Such tools expand the number of people involved in placing talent, accelerate the
pace, and increase the level of rigor and discipline.
6. Identify the necessary mind-set shifts—and change those
mind-sets
Leaders of organizational-redesign efforts too often see themselves as engineers and see
people as cogs to be moved around the organizational machine. Organizations, however,
are collections of human beings, with beliefs, emotions, hopes, and fears. Ignoring
predictable, and sometimes irrational, reactions is certain to undermine an initiative in
the long run. The first step is to identify negative mind-sets and seek to change the way
people think about how the organization works. Actions at this stage will likely include
communicating a compelling reason for change, role modeling the new mind-sets,
putting in place mechanisms that reinforce the case for change and maintain
momentum, and building new employee skills and capabilities.
One company in the payments industry—beset by changing consumer habits, technology-
led business models, and regulatory pressure—understood the importance of shifting
mind-sets as part of its recent redesign. The group’s sales team traditionally worked well
with large retailers and banks. But looking ahead, the company knew it would be
important to establish a new set of relationships with high-tech hardware and software
players. Simply appointing a new boss, changing role descriptions, and drawing up a
revised process map wasn’t enough. The company therefore embarked on a program that
consciously sought to shift the thinking of its sales experts from “we create value for our
customers” to “we create value with our partners.”
7. Establish metrics that measure short- and long-term success
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 10/12
Nobody would drive a car without a functioning speedometer, yet a surprising number of
companies roll out an organizational redesign without any new (or at least specially
tailored) performance metrics. Some older ones might be relevant, but usually not the
whole set. New metrics, typically focusing on how a changed organization is contributing
to performance over the short and long term, are best framed at the aspiration-setting
stage. Simple, clear key performance indicators (KPIs) are the way forward.
During the redesign effort of one high-tech manufacturer, it set up a war room where it
displayed leading indicators such as orders received, orders shipped, supply-chain
performance, and customer complaints. This approach helped the company both to
measure the short-term impact of the changes and to spot early warning signs of
disruption.
One utility business decided that the key metric for its efficiency-driven redesign was the
cost of management labor as a proportion of total expenditures on labor. Early on, the
company realized that the root cause of its slow decision-making culture and high cost
structure had been the combination of excessive management layers and small spans of
control. Reviewing the measurement across business units and at the enterprise level
became a key agenda item at monthly leadership meetings.
A leading materials manufacturer introduced a new design built around functional
groups, such as R&D, manufacturing, and sales, but was rightly anxious to retain a strong
focus on products and product P&Ls. To track performance and avoid siloed thinking, the
company’s KPIs focused on pricing, incremental innovation, and resource allocation.
8. Make sure business leaders communicate
Any organizational redesign will have a deep and personal impact on employees—it’s
likely, after all, to change whom they report to, whom they work with, how work gets
done, and even where they work. Impersonal, mass communication about these issues
from the corporate center or a program-management office will be far less reassuring
than direct and personal messages from the leaders of the business, cascaded through the
organization. An interactive cascade (one that allows two-way communication) gives
people an opportunity to ask questions and forces top leaders to explain the rationale for
change and to spell out the impact of the new design in their own words, highlighting the
things that really matter. This can take time and requires planning at an early stage, as
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 11/12
well as effort and preparation to make the messages compelling and convincing. When a
top team has been talking about a change for weeks or months, it’s all too easy to forget
that lower-ranking employees remain in the dark.
One financial-services company encouraged employee buy-in for an organizational
redesign by staging a town-hall meeting that was broadcast in real time to all regional
offices and featured all its new leaders on a single stage. The virtual gathering gave them
an opportunity to demonstrate the extent of their commitment and allowed the CEO to
tell her personal story. She shared the moment when she realized that the organization
needed a new design and the changes she herself was making to ensure that it was
successful. All employees affected by the changes could simultaneously talk to their
former managers, their new managers, and the relevant HR representatives.
9. Manage the transitional risks
In the rush to implement a new organizational design, many leaders fall into the trap of
going live without a plan to manage the risks. Every organizational redesign carries risks
such as interruptions to business continuity, employee defections, a lack of personal
engagement, and poor implementation. Companies can mitigate the damage by
identifying important risks early on and monitoring them well after the redesign goes
live. The CPG company mentioned earlier, for example, realized that rolling out its
reorganization of sales and marketing ahead of the holiday season might unsettle some of
those involved. By waiting, it made the transition with no impact on revenues.
Tracking operational, financial, and commercial metrics during a design transition is
helpful, as are “pulse checks” on employee reactions in critical parts of the company.
Clear leadership account-ability for developing and executing risk-mitigation plans is so
important that this should be built into regular appraisals of managers.
In our experience the most successful organizations combine stable design elements with
dynamic elements that change in response to evolving markets and new strategic
directions. Corporate redesigns give organizations a rare opportunity to identify the
stable backbone and set up those elements ripe for dynamic change. Successful leaders
2/9/2018 Getting organizational redesign right | McKinsey & Company
https://www.mckinsey.com/business-functions/organization/our-insights/getting-organizational-redesign-right 12/12
and successful companies take advantage of such changes to “rebuild the future”—but a
landscape littered with failed efforts is a sobering reminder of what’s at stake. Following
the nine simple rules described in this article will increase the odds of a happy outcome.
1. Mina Kimes, “What admired firms don’t have in common,” Fortune, March 6, 2009,
archive.fortune.com.
About the author(s)
Steven Aronowitz is an associate principal in McKinsey’s San Francisco office, Aaron De
Smet is a principal in the Houston office, and Deirdre McGinty is an associate principal
in the Philadelphia office.
The authors wish to thank McKinsey’s Wouter Aghina, Lili Duan, Monica Murarka, and
Kirsten Weerda for their contributions to this article.
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 1/8
Article
February 2005
McKinsey Quarterly
Leadership as the starting point of
strategy
By Tsun-Yan Hsieh and Sara Yik
W
Even the best strategy can fail if a corporation doesn’t have a cadre of
leaders with the right capabilities at the right levels of the
organization.
hen it comes time to implement a strategy, many companies find themselves
stymied at the point of execution. Having identified the opportunities within
their reach, they watch as the results fall short of their aspirations. Too few companies
recognize the reason.
Mismatched capabilities, poor asset configurations, and inadequate executioncan all play
their part in undermining a company’s strategic objectives. Although well-regarded
corporations tend to keep these pitfalls squarely in their sights, in our experience far
fewer companies recognize the leadership capacity that new strategies will require, let
alone treat leadership as the starting point of strategy. This oversight condemns many
such endeavors to disappointment.
McKinsey uses cookies to improve site functionality, provide you with a better browsing experience, and to
enable our partners to advertise to you. Detailed information on the use of cookies on this Site, and how you
can decline them, is provided in our cookie policy. By using this Site or clicking on “OK”, you consent to the
use of cookies.
OK
https://www.mckinsey.com/quarterly/overview
https://www.mckinsey.com/cookie-policy
https://www.mckinsey.com/
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 2/8
What do we mean by “leadership”? Whereas good managers deliver predictable results as
promised, as well as occasional incremental improvements, leaders generate
breakthroughs in performance. They create something that wasn’t there before by
launching a new product, by entering a new market,or by more quickly attaining better
operational performance at lower cost, for example. A company’s leadership reaches well
beyond a few good men and women at the top. It typically includes the 3 to 5 percent of
employees throughout the organization who can deliver breakthroughs in performance.
Since bold strategies often require breakthroughs along a number of fronts,a company
needs stronger and more dominant leadership at all levels if these strategies are to
succeed. A defining M&A transaction, for example, requires leadership throughout an
organization’s business units and functions in order to piece together best practices and
wring out synergies while striving to carry on business as usual. In addition, leaders
throughout both companies must transcend the technical tasks of the merger to rally the
spirits of employees and to communicate a higher purpose.
As the number of strategic dimensions and corresponding initiatives increases, so does
the pressure on leadership. Not surprisingly, our work in many industries with
companies of all sizes has shown that high-performers, especially those with lofty
aspirations, have the most difficulty meeting their leadership needs. Of course,
companies that perform poorly are also lacking in leadership capacity. The higher a
company’s aspirations or the more radical its shift in strategic direction, the larger the
leadership gap. This rule holds true for high performers and laggards alike.
The consequences of inattention
Most CEOs will agree that leadership is important, yet few assess their leadership gap
precisely. Fewer still build an engine to develop the right quantity of leaders with the
right mix of capabilities, at the right time, to match opportunities.
If the number of leaders needed to achieve a strategic goal—for example, expanding
current operations or developing new businesses—were set against the number of
existing leaders, a company could uncover the numeric leadership gap it must address.
Even if an organization has enough leaders, it may discover a shortfall in their
capabilities. A company expanding internationally, for example, could find that its
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 3/8
current leaders lacked the cultural sensitivity to operate in unfamiliar geographies. Or a
corporation entering new markets could find it had too many engineers and not enough
business builders.
The failure to assess leadership capacity systematically before launching strategic
initiatives can leave top executives scrambling to fill gaps at the last minute—with
significant consequences.
In the short term, companies that undertake new strategies without the right leaders in
place are forced to burden their existing ones with additional responsibilities. As such
leaders take on the new challenges, the demands from day-to-day operations invariably
increase, leaving less time for other tasks. Often these leaders drop the activities with less
tangible outcomes, such as staff development, for which the effects are not immediately
evident. If a company stretches its existing leaders too far, their overall effectiveness
takes a nosedive. From the start, this trade-off compromises strategic objectives.
Companies executing strategies under these circumstances assume either that they can
get by with suboptimal leadership or that achieving just part of their initial objectives will
capture a corresponding percentage of the strategy’s net present value. We know from
experience that these assumptions can be fatally wrong: one critical misstep can
jeopardize the entire investment.
In the longer term, a persistent leadership gap will be responsible for an inexorable
decline in the number and quality of leaders. Companies create a vicious cycle in which
good leaders become overextended or are moved haphazardly and thus have less time to
develop younger talent. The day will come when they hand over the reins to a less
experienced, ill-prepared group of successors. Left unchecked, this cycle can ultimately
put the company’s core operations and strategic growth at risk.
Leadership first
Given the severe consequences of a leadership gap—the best-planned strategy is no more
than wishful thinking if it can’t be translated from concept to reality—why do so many
companies discover their leadership shortfall only when executing their strategies? This
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 4/8
question raises another, more fundamental one regarding strategy and leadership: which
is the chicken and which is the egg? Companies have taken a number of useful
approaches to this puzzle.
One successful US conglomerate with global operations routinely holds discussions that
integrate both strategy and leadership. Any consideration of a strategic initiative
invariably includes the question, “Who exactly will get this done?” If the company does
not have a sufficient number of the right leaders, the plan does not proceed.
Another approach is to weigh a corporation’s strategic options against its ability to launch
new businesses, new approaches, and other forms of breakthrough performance—in
other words, its leadership. Consider, for example, the global-expansion strategy for a
successful resource company. The effort included identifying the leadership required to
drive breakthrough performance over five years in areas such as running and expanding
existing businesses, developing new ones, renovating corporate processes such as risk
management, and providing overall change leadership. The company then gauged its
leadership gap by comparing these requirements with the qualities of its current
leadership bench. It made a number of strategic decisions to determine, among other
things, which path was best for realizing the strategy, whether to revise its aspirations,
and whether to develop leaders internally or hire them from outside.
A third approach is to plan the path toward a predetermined strategic goal by taking into
account the quantity, timing, and mix of leaders that the various alternatives require.
Companies using this framework may rule out some possibilities if developing the
requisite depth of leadership is unrealistic in the time frame dictated by the marketplace.
A leading food company in Asia, for example, aspired to become the dominant regional
player. With five strong national brands, it had at least three clear options for how to
achieve that goal: take a cautious approach by launching one brand as a pilot in each
overseas market before introducing other brands; focus on China by building a
beachhead with one brand in a single city, then sequentially rolling that brand out region
by region within China; or, finally, acquire a player in one regional Chinese market, thus
gaining outlets and local expertise, and use this opening to roll out all five brands to more
markets in China over time.
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 5/8
While many factors, including the company’s appetite for risk, weigh on these decisions,
in this case each option had distinct leadership requirements. The first, for example,
would initially require at least five to ten well-rounded leaders—entrepreneurs capable of
establishing local networks, operating under unfamiliar conditions, and managing all five
brands. The second option called for a business builder who was deeply familiar with the
beachhead city to direct a team of four to six emerging leaders who could spearhead the
subsequent expansion. A business-development leader would also be helpful in seeking
an alliance partner to speed up the company’s pace and bolster its confidence during the
regional expansion. The third possibility, by contrast, would immediately require an
expert to structure, valuate, and negotiate deals and, in the medium term, a few
executives capable of operating in each of the regional Chinese markets. After the
company critically reviewed its current and potential leaders, it made the decision to
adopt the third of those options.
These three cases illustrate how thinking about leadership up front can affect a strategy’s
direction, path, and outcome. But can a company bring leadership considerations into its
strategic discussions even earlier, before it chooses a general direction? To do so, the
company must think rigorously about its current leadership pool—the types of leaders
and their mix of capabilities—and lay out the strategy accordingly. If a manufacturer’s
strong suit is leaders with superb marketing capabilities, for example, a market-driven
strategy would be implied and might include selling another manufacturer’s products.
Taken to this level, leadership becomes the true starting point for strategy.
Filling the gap
A clear picture of the leadership gap can help guide strategic thinking, but to retain as
many options as possible, companies must also consider ways to fill that gap. To reduce
the risk of strategic failure, they need to direct their approach to leadership with three
time horizons in mind.
Long term: Position
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 6/8
Companies need to position themselves today to meet their strategic objectives during
the next three to five years. In an 18-month period, for example, a South Korean
consumer goods company successfully expanded its core business into Japan, where it
diversified into noncore sectors such as low-cost lodging. It achieved such deep
penetration of this notoriously closed and mature market so quickly by building its
leadership bench in advance. At least five years before the initiative’s launch, the
company began hiring managers and sending them to Japan—through exchanges with
friendly Japanese partners—thereby creating a cadre of South Korean leaders trained to
operate in Japan.
In many of Asia’s key growth markets, local leaders with a global perspective are highly
sought after and often unavailable at almost any price. Returning nationals, typically
trained in Europe or the United States, may be another option, but many companies have
found these prospects to be expensive and lacking in the tacit knowledge needed to
operate successfully in the cultures of many corporations—and the industries they
compete in. A company must hire and groom potential leaders as much as a decade or
more ahead of market need and then help them build the internal networks necessary for
long-term success.
To cite another example, for decades a US financial-services giant systematically hired
the best global talent, regardless of the market, and rotated these leaders through every
critical aspect of its operations. This investment in human assets paid off handsomely. In
most of the new economies the company enters, it enjoys an almost unparalleled ability
to field full-service teams with strong leaders in the vanguard. Competitors, by contrast,
are forced to expand more selectively or to offer expensive packages to lure top talent.
Medium term: Cultivate
Companies must also begin cultivating leaders for specific roles one to two years down
the road. This effort requires recognizing the skills, behavior, and mind-set that leaders
must possess to be prepared for future roles. Many executives spend years building their
technical skills and industry knowledge but rarely develop expertise in areas such as
managing stakeholders and building networks. In a prominent resources company, for
example, top executives identified potential successors for key leadership positions. It
highlighted the measures needed to bring each one up to speed, including counseling,
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 7/8
training, and new assignments, by considering individual profiles (strengths and
weaknesses, past experience, and skills) as well as the key success factors for upcoming
leadership positions (industry or functional expertise, personal or change-management
skills, and local knowledge).
Another company informed appointees of their next assignment six months ahead of
time and then enrolled them in self-directed preparatory programs. All of the leaders
wrote a personal-development contract related to the challenges of the new role and
created a list of learning opportunities and developmental activities that would prepare
them for their new responsibilities. These tasks could include, for instance, seeking
advice from veterans or drawing up a plan for the first 100 days in the new role. The
company also provided four categories of learning modules: “lead self,” for self-
awareness, skill mastery, and developmental planning; “lead others,” for getting the best
performance from colleagues in specific settings; “lead context,” for understanding and
identifying trends in the competitive environment; and “lead change,” for aligning key
stakeholders, steering the organization to breakthroughs, and challenging conventional
approaches and thinking.
Short term: Match
Job experiences and stretch assignments are the primary development vehicles for
leaders. Opportunities to achieve performance breakthroughs are critical not just for
reaching a company’s performance goals but also for developing its best people.
Unfortunately, corporations that are particularly risk-averse often match their people to
opportunities by looking at track records and job experiences, which they see as
indicators of future performance. But such an approach is unlikely to succeed, since the
experience and skills needed for earlier successes are not necessarily precursors for those
required to achieve performance breakthroughs in subsequent opportunities.
A better approach is to use corporate-performance objectives and personal-development
goals to match current and potential leaders with opportunities. This multifaceted
approach uncovers a better fit between the individual and the opportunity. For this
process to be successful, top managers need to acquire a holistic understanding of each
individual, including professional abilities, such as leadership qualities, track record, and
potential, as well as key personal traits, such as style and preferences, character and
2/9/2018 Leadership as the starting point of strategy | McKinsey & Company
https://www.mckinsey.com/global-themes/leadership/leadership-as-the-starting-point-of-strategy 8/8
motivation, and current attitudes and mind-set. Companies can assess these qualities
through information—objective and subjective—from superiors, peers, mentors, and
other sources.
To help leaders develop throughout any of these three time horizons, a company must
first accurately identify who its leaders are and then convince them of an opportunity’s
potential. Companies often underestimate this challenge. Top managers typically assume
they know which of their best people are willing and able to take on new challenges, but
the reality is often very different. At one multinational corporation with an ambitious
growth agenda, the CEO asked the 20 members of his management committee for written
nominations to fill leadership positions for 30 initiatives. Most committee members
couldn’t confidently name more than five to ten candidates, and large overlaps existed
among the members’ lists. Each had nominated the “usual suspects”—managers who
were well known in the executive suites. If the company pursued all 30 initiatives
simultaneously, it would overload these candidates while denying other potential leaders
the chance to develop and shine. Corporations must instead look out along the three time
horizons we have described to build a more systematic leadership engine.
Strategy will not succeed in a void, and leadership often makes the difference between
merely reaching for great opportunities and actually realizing their potential. Top
managers must assess their company’s leadership gap and find ways to close it over the
short, medium, and long term. Better still, they should integrate leadership with strategy
development and thoughtfully match their portfolio of leaders with opportunities.
About the author(s)
Tsun-yan Hsieh is a director and Sara Yik is a consultant in McKinsey’s Singapore office.
2/9/2018 It’s Not The CEO, It’s The Leadership Strategy That Matters.
https://www.forbes.com/sites/joshbersin/2012/07/30/its-not-the-ceo-its-the-leadership-strategy-that-matters/#45179d6d6db8 1/3
Leadership
JUL 30, 2012 @ 05:14 PM
/
It’s Not The CEO, It’s The Leadership Strategy
That Matters.
Josh Bersin , CONTRIBUTOR
I analyze corporate HR, talent management and leadership. FULL BIO
Opinions expressed by Forbes Contributors are their own.
Let’s face it. CEOs come and go. But leadership, if developed in a comprehensive
way, endures.
In the last few years we’ve seen new CEO’s at Yahoo, HP, Apple, and other
prominent companies, and in each case we watch to see if the CEO can “pull it off.”
Well, while the CEO is a very important person, our research shows that enduring
business performance is really driven at much deeper levels: a focus on leadership
strategy. Long term business performance comes from leadership culture and
careful and continuous development of leadership at all levels. It’s not all about the
CEO.
In this research we looked at hundreds of companies over the last few years and
correlated their business performance to a variety of different people and talent
practices.
After looking at many talent management practices (including the purchase of
expensive software), we found that a company’s level of maturity in their leadership
development has a greater impact on their long term business performance than
almost all else. And this impact transcends changes in the CEO.
Let me share some of these findings and best practices.
1. HighPerforming organizations directly link leadership strategy to
business strategy.
https://www.forbes.com/leadership
https://www.forbes.com/
https://www.forbes.com/sites/joshbersin/
http://www.forbes.com/companies/yahoo/
http://www.forbes.com/companies/apple/
https://www.forbes.com/sites/joshbersin/
2/9/2018 It’s Not The CEO, It’s The Leadership Strategy That Matters.
https://www.forbes.com/sites/joshbersin/2012/07/30/its-not-the-ceo-its-the-leadership-strategy-that-matters/#45179d6d6db8 2/3
Regardless of who the CEO may be, operational execution takes place at the mid-
level and supervisory level. When these individuals are well aligned, coached, and
trained, the business thrives.
High-performing companies understand this, and they build a leadership
development program which uniquely trains, supports, and selects people who drive
their business’s strategy. By doing this, they build execution into the culture.
Fig 1: Leadership Linkage Model
A great example of this is UPS. UPS is a company which has outperformed other
express companies for many years and it continues to transform itself from its origin
as a horse and buggy delivery company. The company promotes from within and
continues to promote a leadership culture of customer service, safety, and
entrepreneurship. If the CEO were replaced, he or she would come into a company
with a deep rooted leadership culture.
At times this culture needs to change. During my years at IBM the company went
through a wrenching transformation as Lou Gerstner came in and changed the
company from a “seller of solid technology” to a “deliverer of high value services.”
This meant bringing in many new leaders, building a consulting mindset, and
driving a different type of innovation and creativity into the management team.
(Xerox is going through this process today.)
http://blogs-images.forbes.com/joshbersin/files/2012/08/ld-550w2
http://www.forbes.com/leadership/
http://www.forbes.com/companies/ibm/
http://www.forbes.com/companies/xerox/
2/9/2018 It’s Not The CEO, It’s The Leadership Strategy That Matters.
https://www.forbes.com/sites/joshbersin/2012/07/30/its-not-the-ceo-its-the-leadership-strategy-that-matters/#45179d6d6db8 3/3
While I’m sure Sam Palmisano had much to do with driving this forward, now the
company has deep roots of leadership from which to grow this base. And Ginny
Rometti can build and evolve this leadership into the future.
2. HighPerformers develop leaders at all levels.
High performing companies understand that execution takes place at the grass roots
level. It is the line managers, supervisors, and middle managers who make things
happen. If the CEO doesn’t push his or her leadership strategy down effectively, it
wont take hold. In fact our research shows that the best companies develop leaders
from the bottom up. Senior executives “serve” the needs of line leaders, like an
inverse pyramid.
Recommended by Forbes
The “inverse pyramid” of leadership is one now widely used by many agile
organizations. In our company we have a philosophy that “everyone is a leader”
and each individual is given the responsibility to understand the business and
make decisions which support the mission of the entire organization. Accenture
calls this “stewardship” and they reinforce to managers that they must “leave
work each day making Accenture a better organization.”
“
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 1/7
In collaboration with BCG, Sep 23, 2015 Partner Collaborations, Strategic Management, Video Global Focus
BCG
Does Your Strategy Need a Strategy? Part I
DOWNLOADABLE PDF
Does Your Strategy Need a Strategy? Part I
Does Your Strategy Need a Strategy Part 1
http://knowledge.wharton.upenn.edu/category/partner-collaborations/
http://knowledge.wharton.upenn.edu/category/strategic-management/
http://knowledge.wharton.upenn.edu/category/video/
http://knowledge.wharton.upenn.edu/region/global-focus/
http://knowledge.wharton.upenn.edu/sponsor/bcg/
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 2/7
� Download the PDF
Business environments have become so diverse that companies today need di�erent
approaches to strategy in di�erent circumstances, says Martin Reeves, senior partner and
managing director of BCG’s Bruce Henderson Institute and author of the recently released
book, Your Strategy Needs a Strategy. Large companies in particular should deploy separate
strategies for di�erent parts of business, and when they do so, research shows they perform
better. In Part I of this Knowledge@Wharton interview, Reeves looks at the most common
approaches to strategies and the biggest traps companies fall into when trying to formulate and
implement them. Part II will cover connecting strategy to execution, the kind of leadership
needed to implement di�erent approaches to strategy and how large companies can deploy the
right strategic approaches.
An edited transcript of the conversation appears below.
What is Your Strategy Needs a Strategy based upon?
Your Strategy Needs a Strategy is based on 10 years of research on strategy in the BCG Bruce
Henderson Institute. We did a detailed survey of 150 multinationals, on their perceptions of
their environments, their elected approaches to strategy and their actual strategizing behaviors.
We also analyzed performance data for all U.S. public companies since 1950. We did in-depth
case studies and interviews with CEOs, which you see featured in the book. Finally, we validated
our conclusions by constructing what we call our “universal strategy simulator,” which is a
http://d1c25a6gwz7q5e.cloudfront.net/reports/092215-Does-Your-Strategy-Need-Strategy-Part1
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 3/7
simulation of what strategies work in what environments. That’s the evidence on which the
book is based on.
What are the headline conclusions?
I’d say there are three main headline conclusions from the book.
Firstly, business environments are now so diverse that we need di�erent approaches to strategy
in di�erent circumstances. And more particularly, the classical style of strategy – analyzing,
planning and executing – is still perfectly �ne for some situations, but it’s no longer a panacea.
Secondly, especially large companies need to deploy multiple approaches to strategy in
di�erent parts of their business. We call this ambidexterity.
Thirdly, we need to modify our concept of leadership. Leaders need able to lead, direct and
design the mosaic of strategies that are required by large companies.
All of these things result in a demonstrable performance bene�t for corporations.
The classical style of strategy – analyzing,
planning and executing – is still perfectly �ne for
some situations, but it’s no longer a panacea.
What are the most common strategies?
The most well known approach to strategy and implementation is what we call the classical
approach. This is the one that most of us probably learned about in business school.
Its key components are analyzing and planning, implementing in a disciplined manner and
�nally following the plan. This is an approach which works well in predictable environments
that are not shapeable. In these industries, demand grows roughly at GDP levels, and volatility
is relatively low.
The second approach to strategy is what we call the adaptive approach. This approach works
really well in highly unpredictable industries that are also not easily shapeable. A good example
could be the software industry, in particular, say, the gaming industry. Here, the competitive
conditions are highly volatile and the technology is constantly changing. As this environment
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 4/7
doesn’t allow us to plan, we use a more biological approach. Essentially, we create variation, we
select what works, we implement that and scale it. Then, the cycle begins again. One could say
that this adaptive strategy emerges continuously from experiments.
The third approach to strategy is what we call the visionary approach. Here, conditions — at
least in the eyes of the entrepreneur — are both predictable and shapeable. So this is not about
participating in an industry, but creating an industry. The approach here is to envision a
possibility that others have not seen, then to realize it and �nally to scale it.
We’ve all known entrepreneurs that have followed the visionary approach. In our book, we give
the example of 23andme, which is a new genomics testing services company with a novel
business concept. Large corporations are increasingly vulnerable to upstart challenger
companies. In order to defend themselves, large corporations need to master the visionary
style, which was probably present at their inception decades ago.
Large corporations are increasingly vulnerable to
upstart challenger companies. In order to defend
themselves, large corporations need to master
the visionary style, which was probably present
at their inception decades ago.
The fourth approach to strategy is probably the most exotic and unfamiliar one. It is what we
call the “shaping approach.” Here, conditions are both shapeable and unpredictable. That
sounds almost like a contradiction, but it isn’t: This environment it not based on single
companies competing against each other, but a whole ecosystem of companies that are
collaboratively reshaping an industry. Good examples of this are two-sided market places like
Alibaba, or ecosystem-based companies like Red Hat or Amazon.
These companies have not only deployed a strategy at the level of an individual company, but
they’ve created a successful position within a successful ecosystem. Here, the recipe for
thinking about strategy is very di�erent: to orchestrate the contributions of others in the
ecosystem and then to co-evolve that collaborative system.
The �fth approach to strategy is what we call “renewal.” It applies to situations where
companies have gotten out of step with their competitive environment. As a result, their
competitive or �nancial performance is su�ering. Renewal is usually a very big bet for
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 5/7
companies. Seventy-�ve percent of renewal projects fail. The di�erence between failure and
success in NPV (net present value) terms is roughly the enterprise value of
the company.
One should think about a renewal strategy in three steps. Firstly, it’s important to anticipate the
need for renewal early. The sooner you start the renewal exercise, the more successful you’re
likely to be. Secondly, it’s important to think about economizing. It’s necessary to free up
resources, but not only for the purposes of �nancial viability, but also to fund the journey back
to growth. The third critical stage is growth and innovation. The company cannot cut its way to
success, it needs to fund the journey back to growth and innovation. There are many examples
of successful renewal approaches: Amex, for example, did this very well during the recent
�nancial crisis and pivoted very quickly back to growth and innovation.
What is the biggest mistake companies make with strategy?
We deal with tricks and traps in the book. We looked closely at how companies perceived their
environments and the strategies that they choose. We found that there is a very human bias
towards perceiving business environments as more predictable and more controllable than they
actually are. It’s very comforting to believe that one can control and predict the surroundings.
The second big trap is to be stuck in one way of doing strategy. Most often, it’s the classical
approach: analyze, plan, execute. Again, that’s not a bad approach under the right
circumstances. However, if you are in a very fast-moving part of your business, then it’s totally
inappropriate.
In particular, there are a couple of capabilities that large corporations need to have in order to
succeed. One of them is the adaptive capability, the ability to undertake disciplined
experimentation. Another one is the shaping capability, the ability not just to participate in
their environments, but actually to shape them to their advantage. And the third one is the
capability of ambidexterity, which is the ability to run di�erent approaches to strategy in
di�erent parts of the organization.
So let me just expand on some of those capabilities. A company building an adaptive capability
needs to create a process for experimentation. That includes metrics for measuring the
e�ectiveness, speed and the return on investment from their experimentation e�orts. In
addition, managers need to empower their employees to take risks and to experiment.
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 6/7
We found that there is a very human bias
towards perceiving business environments as
more predictable and more controllable than
they actually are.
The second capability, shaping, is essentially an obsession with what’s going on outside of the
company. What’s new in technology, what’s new with customers, what’s new with disruptive
mavericks on the edge of the industry, what’s new with regulation? Typically, large companies
are very introverted, they mainly care about what’s going on inside them. But the strategic plan
of a shaping company consists in large part of a very deep understanding of what’s going on
outside the company.
The third key capability for large companies is ambidexterity, which means to run di�erent
types of strategy in di�erent parts of the company. Take the digital industry in China, for
example. As a very fast-growing environment, successful companies will either employ a
shaping or an adaptive approach. In any case, it will be a very dynamic approach to strategy. The
printing industry, for example, is more stable and slow-growing. Hence, it will typically be
more classical in nature.
So how do you achieve ambidexterity? The book outlines four ways. The most common way is by
separation, for example separate business units that are allowed to have di�erent cultures,
di�erent metrics, di�erent goals and di�erent performance contracts.
The second way is switching. When products progress very rapidly in their lifecycle, it may not
be expedient to actually separate the exploratory from the exploitative. Therefore, we need what
we call a switching strategy: The same group of people need to modify and modulate their
behaviors over time.
A third way of achieving ambidexterity is to employ an internal ecosystem. For example, take,
Haier, the Chinese white goods manufacturer. Haier essentially created an ecosystem of
hundreds of small business units that all negotiate with each other to create a very �exible
enterprise system.
The last example of an ambidextrous strategy is to create an external ecosystem. How could
Apple, a company that had never made a smart phone before, defeat a 60% market share leader,
Nokia, in a highly technology-intensive, high-�xed cost, global regulated complex industry?
2/9/2018 Business Need Different Strategic Approaches In Different Circumstances
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-i/ 7/7
All materials copyright of the Wharton School (http://www.wharton.upenn.edu/) of the University of
Pennsylvania (http://www.upenn.edu/).
Well, the answer is they didn’t. Their multi-hundred company collaborative ecosystem beat
Nokia. This shows the diversity that they employed. The approaches to strategy and
implementation, if you like, were ‘outsourced’ to an ecosystem.
Additional BCG resources:
iPad game
Your Strategy Needs A Strategy on bcg.perspectives
Martin Reeves’s TED talk
http://www.upenn.edu/
https://itunes.apple.com/us/app/your-strategy-needs-strategy/id951248714?mt=8
https://www.bcgperspectives.com/yourstrategyneedsastrategy
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 1/6
In collaboration with BCG, Oct 19, 2015 Partner Collaborations, Strategic Management, Video Global Focus
BCG
Does Your Strategy Need a Strategy? Part II
DOWNLOADABLE PDF
Does Your Strategy Need a Strategy? Part II
Does Your Strategy Need a Strategy Part 2
� Download the PDF
http://knowledge.wharton.upenn.edu/category/partner-collaborations/
http://knowledge.wharton.upenn.edu/category/strategic-management/
http://knowledge.wharton.upenn.edu/category/video/
http://knowledge.wharton.upenn.edu/region/global-focus/
http://knowledge.wharton.upenn.edu/sponsor/bcg/
http://d1c25a6gwz7q5e.cloudfront.net/reports/2015-10-19-Does-Your-Strategy-Need-Strategy-Part-2
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 2/6
In Part II of this Knowledge@Wharton interview Martin Reeves, senior partner and managing
director of the BCG Henderson Institute for strategy and author of the recently released book,
Your Strategy Needs a Strategy, discusses how leaders can connect strategy to execution. He
also looks at how large companies need to devise a variety of strategies for di�erent parts of
their business.
An edited transcript of the conversation follows.
You spoke in our previous discussion about strategy. Why is it critical to link strategy to
execution?
What we really need is not just di�erent approaches to strategizing in di�erent environments,
but di�erent approaches to all aspects of business in each environment: strategizing,
implementing, innovation, culture and leadership.
How can leaders follow the ideas in the book?
We deal with leadership in the book. Why would we cover leadership in a book on strategy? It’s
because we’re interested in winning outcomes — the whole point of strategy — and that
requires the execution and the orchestration of these approaches in the ambidextrous
organization.
The problem is that the classical model of leadership — cascading instructions based on
experience and judgment down a hierarchical organization, and then managing execution
against those instructions — works perfectly �ne in a classical environment. But it won’t work
in, say, an adaptive environment that is much more unpredictable and where it’s simply not
possible for the leader to have a stable instruction set.
So the question becomes: How does a leader animate multiple approaches across one
organization? In the book we deal with eight facets of leadership that need to be considered in
the new environment. Let me just touch on a few of them.
Somebody needs to diagnose and segment these di�erent approaches to strategy in order to
determine which approach applies to which part of the organization. And somebody needs to
disrupt–in other words, to say, “that approach to strategy is not the approach that we need
right now.” Somebody needs to coach and deploy — pick the right people and develop them so
that they can be deployed against the right approach to strategy. After all, each approach
requires a di�erent cognitive skill set.
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 3/6
We also talk about the need for inquisition, for questioning. That is critical where we can’t have
a stable instruction set. In that case, leaders need to be really good at getting to the bottom of
things by asking the right questions. All of this essentially de�nes the skill set of the
ambidextrous leader.
How does a leader animate multiple approaches
across one organization? In the book we deal
with eight facets of leadership that need to be
considered in the new environment.
How does strategy connect to execution?
The title of the book is Your Strategy Need a Strategy and it mentions the word “strategy” twice.
But in fact the book is not simply about strategy, it’s about e�ective approaches to strategy.
And just as we have said that strategy is not one thing, we think that implementation is also not
one thing.
The actions required to implement strategy vary according to the situation. And the relationship
between implementing and strategizing also varies according to the environment.
Let me give you two examples. In the classical environment, strategizing may consist largely of
analyzing opportunities and deriving a plan. And implementation may consist of remote
execution against that stable plan and monitoring of that execution against the plan.
Now let’s think about a software company that’s implementing an adaptive strategy. There the
equation is turned upside down and inside out because it starts with experiments by empowered
employees on the company’s front lines. Some of those new things work and are picked up,
communicated and ampli�ed. And what is the strategy? It is the continuous stream of improved
ideas that result from those actions. So in this particular case strategizing cannot be separated
from action. Actually, the action — the experiment — comes before the strategy. The strategy is
a result of the implementation.
If we went through each of the styles of strategy, you’d �nd that this relationship between
strategy and implementation, and the nature of implementation, varies in each case.
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 4/6
The analysis in the book shows quite clearly that
the durability and the value of leadership
positions is increasingly tenuous.
How does the game created for the book work?
In the process of writing the book, we had a little strategic problem of our own — in fact, two
problems. One of them was that our research showed that CEOs would probably be interested in
what we had to say, but they may not read the whole book. We needed a more concise form of
communication.
The second inconvenient truth, which we found in our survey of 150 multinationals, is that the
right beliefs about the environment and about the choice of approaches to strategy did not
correlate perfectly with the right behaviors. So, understanding the environment and which
strategy approach was appropriate was insu�cient – necessary, but insu�cient — to ensure
companies are doing the right things.
The solution to these problems was really twofold. First, we wrote a very compact, introductory
chapter to the book that could be read in its own right. Second, we built a game for the iPad,
where we led with experience.
The game is quite fun. We take the �ve boroughs of New York City. Why New York City? Because
it has �ve boroughs—and that’s the number of approaches to strategy! And the idea is to win
against a �ctional opponent “Bruce”(named after our founder, and a great strategist, Bruce
Henderson) in running a lemonade stand in each of these environments.
The tricky part is that Bruce is a very �erce competitor and each environment requires you to
not only identify, but more importantly, to implement, a very di�erent approach to strategy. So
by experiencing these di�erent environments, you develop a muscle memory for what an
adaptive strategy or a visionary strategy feels like. And that allows you to essentially back into
the content. You can ask what happened in that game, you can read a little bit about the
particular approach to strategy that was required in that environment, and you can even click
through and buy the book if you’re interested.
What does this mean for large companies?
https://itunes.apple.com/us/app/your-strategy-needs-strategy/id951248714?mt=8
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 5/6
All materials copyright of the Wharton School (http://www.wharton.upenn.edu/) of the University of
Pennsylvania (http://www.upenn.edu/).
Many of the approaches that we detail in the book are challenging, but not so challenging if
you’re doing them fresh, as a start up. If you’re an e-commerce company and you’re putting in
place a digital marketplace, that may be hard in its own right. But you don’t have to forget your
own history to do it.
Large corporations have an additional challenge: They have to move away from a previously
successful recipe and adopt a new and unknown one. And they have to pick the right timing and
the right rate of progression in doing so, both of which are tough to do. So you might call it
“rejuvenating the corporation.”
I think the �rst success factor in this rejuvenation is to really understand that need. The
analysis in the book shows quite clearly that the durability and the value of leadership positions
is increasingly tenuous. So there really is a need for large corporations to look ahead at new
ways of doing strategy.
And the second success factor boils down to having the right capabilities. One of them is
adaptiveness or experimentation. The second is the capability of shaping, which is not just
participating in environments, but actually shaping ecosystems. And the third is ambidexterity,
which is comfort with diversity, comfort with a mosaic of approaches, rather than a single
monolithic approach.
We recently saw the announcement that Google was dividing itself into pieces under a new
holding called “Alphabet”. This is a great example, actually, of structural ambidexterity. All of
this has to be managed not only as change in the organization, but also as a change in people’s
minds. It requires familiarity with new ways of thinking that we detail in the book.
Additional BCG resources:
iPad game
Your Strategy Needs A Strategy on bcg.perspectives
Martin Reeves’s TED talk
http://www.upenn.edu/
https://itunes.apple.com/us/app/your-strategy-needs-strategy/id951248714?mt=8
https://www.bcgperspectives.com/yourstrategyneedsastrategy
2/9/2018 Corporations Need New Ways of Doing Strategy
http://knowledge.wharton.upenn.edu/article/does-your-strategy-need-a-strategy-part-ii/ 6/6
2/9/2018 Chapter 1 – Strategy and Corporate Culture – YouTube
https://www.youtube.com/watch?v=zC13IaTFtXg 1/3
Chapter 1 – Strategy and Corporate Culture
2,208 views
Fish Can’t See Water
Published on Sep 12, 2013
Category People & Blogs
License Standard YouTube License
Up next AUTOPLAY
Aligning Culture and Strategy
Greg Lane
1.5K views
5:37
What Is Corporate Culture?
strategyandbusiness
102K views
2:32
What is Organisational Culture ?
Why Culture Matters To Your
Denison Consulting
143K views
5:52
Culture vs. Strategy
6 0 SHARE
SUBSCRIBE 38
https://www.youtube.com/channel/UCI8zIvCpHAftLISBiqPZWww
https://www.youtube.com/channel/UCI8zIvCpHAftLISBiqPZWww
https://www.youtube.com/channel/UC1vGae2Q3oT5MkhhfW8lwjg
https://www.youtube.com/watch?v=gficoigz1xs
https://www.youtube.com/watch?v=gficoigz1xs
https://www.youtube.com/watch?v=XDNyiS7zORI
https://www.youtube.com/watch?v=XDNyiS7zORI
https://www.youtube.com/
https://www.youtube.com/upload
Structure and Strategy in Multinational Corporations:
A Reexamination of the Stopford and Wells Model
William G. Egelhoff, N e w York University
ABSTRACT
The Stopford and Wells study of structure in multi-
national corporations produced a model relating
certain types of international structure to cer-
tain types of international strategy. This paper
reexamines the important relationships expressed
by the model, using data from a recent study of
50 large European and U.S. multinationals. Since
the data fail to support some important implica-
tions of the model, a revised model is developed.
INTRODUCTION
that the organization’s structure also change to
support implementation of the new strategy. Ad-
ditional studies by Channon (1973), Rumelt (1974),
and Dyas and Thanheiser (1976) have also demon-
strated that certain strategies need to be sup-
ported by certain structures.
A number of empirical studies have also attempted
to describe the relationship between strategy and
structure for multinational corporations (Brooke
and Remmers, 1970; Stopford and Wells, 1972;
Franko, 1976). Of these, the Stopford and Wells
study was the largest and most comprehensive and
developed the most explicit theory linking stra-
tegy and structure in multinational corporations.
Designing an organization’s structure has general-
ly been viewed as an important part of its strate-
gy implementation process (Christensen, Andrews,
and Bower, 1978). Despite this fact, relatively
little empirically supported theory exists to spe-
cify which elements of an organization’s strategy
need to be considered when selecting the macro
structure of an organization. Macro structures of
organizations are generally characterized as func-
tional division structures, product division
structures, area or geographical region struc-
tures, and matrix or mixed structures.
Appropriate macro structure is important, since it
exerts a major influence on other features of the
organization’s design and ultimately on its func-
tioning and performance. It defines the lines of
authority and much of the communications flow
within the organization, since it prescribes how
functions and responsibilities are divided among
major subunits.
The first empirical work which sought to relate
structure to the strategy of an organization was
Chandler’s (1962) study of 70 large U.S. corpora-
tions. It tended to show that as a company’s
product-market strategy changed, it was important
THE STOPFORD AND WELLS STUDY AND MODEL
While there were numerous findings associated
with the study, the model shown in Figure 1, or
some variant of it, is the best known and most
frequently reproduced result (Stopford and Wells,
1972:65). It depicts a contingency model linking
three different types of structure to two ele-
ments of the firm’s international strategy. Whe-
ther a multinational firm possesses an interna-
tional division, worldwide product division, or
area division structure was observed to be large-
ly a function of the firm’s foreign product di-
versity and the relative size of its foreign
sales. Although the model in Figure 1 expresses
a dynamic growth model for multinational compa-
nies, it was developed from cross-sectional data,
and it is the static strategy-structure fit or
congruence that is the issue in this paper.
This model was empirically derived from data col-
lected from 187 large U.S. multinational corpor-
ations. The sample consisted of those companies
in the Fortune 500 list in 1963 and 1964 that
owned 25% or more of the equity in manufacturing
facilities in six or more foreign countries.
FIGURE 1
The Stopford and Wells Model Showing the Relationship Between
Strategy and Structure in Multinational Corporations
PD Path
AO Path
AD Area Divisions
ID International Division
PD Product Divisions
Foreign Sales (as % of total sales)
231
Foreign product diversity was measured by the
number of two digit SIC codes contained within
the product line the company offered for sale in
foreign markets.
Below the ID Boundary in Figure 1, foreign product
diversity and foreign sales are both relatively
low. Multinational corporations employing this
strategy tend to support it with an international
division structure. As foreign product diversity
increases, companies in the sample tended to use
product division structures, as reflected by the
PD Path. Similarly, companies pursuing strategies
leading to a relatively high percentage of for-
eign sales tended to use area division structures,
as depicted by the AD Path. As the two paths con-
verge and a company’s strategy contains both high
foreign product diversity and a high percentage of
foreign sales, Stopford and Wells indicate that
multinational companies will tend to employ ma-
trix or mixed structures.
THE PRESENT STUDY
Sample Characteristics
While the present study also collected empirical
data on the strategies and structures of a number
of multinational companies, the sample differed
from the Stopford and Wells sample in two impor-
tant respects. First, it contained both U.S. and
E.uropean headquartered multinationals (24 U.S. and
26 European), while the earlier study had only in-
cluded U.S. headquartered companies. Second, the
present study attempted to select only the most
prominent and successful multinationals for inclu-
sion in the sample. Generally these companies
tended to be large and to have had extensive for-
eign operations for a considerable period of time.
It seems reasonable to assume that these companies
could not have achieved and maintained such promi-
nent international positions unless their struc-
tures tended to fit and support the international
strategies they were pursuing. In comparison, the
Stopford and Wells sample represented a somewhat
different population, that of U.S. multinational
corporations in general.
Data for the present study was collected through
interviews conducted at each company headquarters
and from published company documents. The study
measured both foreign product diversity and per-
centage of foreign sales, but also measured a
third potentially important contingency variable,
the percentage of foreign sales manufactured
abroad. Product diversity was measured by the num-
ber of broad product groups a company offered for
sale in foreign markets.
Among the 50 companies in the sample, 29 had one
of the three structures contained in the Stopford
and Wells model. Table 1 indicates that those
with an international division or area divisions
tended to be U.S. companies while those with world-
wide product divisions tended to be European.
As a result of differences in goals and environ-
ments, European companies may consistently possess
TABLE 1
Structure and Nationality of Companies
U.S. Europe Total
International Division 6 1 7
Area Divisions 8 2 10
Product Divisions 2 10 12
16 13 29
different international strategies than U.S. com-
panies, and, as a result, they may frequently re-
quire different structures than U.S. companies.
This is not an issue of the study. Rather, all
multinational companies must achieve a satisfactory
fit or congruence between their strategies and
structures if they are to be successful. There is
no reason why the nature of this fit between stra-
tegy and structure should differ with nationality
of the parent company, even though strategies and
their elements (such as the percentage of foreign
sales) will clearly vary with nationality.
Bivariate Analysis of the Data
Two types of analyses were performed on the data
from the present study. First, t-tests were used
to test two hypotheses developed from the Stopford
and Wells model. Then a multivariate discriminant
analysis was used to simultaneously examine the re-
lationship between structure and all three of the
contingency variables (elements of strategy). Ta-
ble 2 shows the correlation among the three contin-
gency variables.
TABLE 2
Pearson Correlation Among the Contingency Variables
1 2 3
1 Foreign product diversity .A3* -.22
2 Percentage foreign sales n=28 -.26
3 Percentage foreign mfg. n=2A n=2A
*p<.05
As one might expect in relatively mature, success-
ful multinational companies, there is a significant
positive correlation between foreign product diver-
sity and the percentage of foreign sales, but they
are still sufficiently independent elements of a
company’s strategy to be considered separately.
One important hypothesis from the Stopford and
Wells model can be stated as follows:
H-1 Companies with international division and area
division structures will tend to have low le-
vels of foreign product diversity, while com-
panies with worldwide product division struc-
tures will tend to have relatively high levels
of foreign product diversity.
Table 3 examines the mean levels of foreign product
232
diversity associated with each type of structure
to see if data from the present study support this
hypothesis.
TABLE 3
Mean Number of Product Lines by Type
of Structure
ID AD PD
Number of product lines 1.7 3.A 5.8*
*Significantly different from both ID and AD at
p<.01 level.
The sample data tend to support this hypothesis.
Companies with world-wide product division struc-
tures have significantly more foreign product
lines than do companies with either an internation-
al division or area division structure.
A second important hypothesis from the model can
also be tested with the sample data.
H-2 Companies with area division structures will
have a greater percentage of foreign sales
than companies with international division or
product division structures.
Table A examines the mean percentages of foreign
sales for each structural group to test this hy-
pothesis.
TABLE A
Mean Percent of Foreign Sales by Type of Structure
ID AD PD
Percent Foreign Sales 3A 47* 61
*Significantly different from both ID and PD at
p<.10
The hypothesis is only partially supported by the
data. Companies with area division structures do
have a significantly greater percentage of foreign
sales than companies with international division
structures, but less than companies with world-
wide product division structures. The Stopford
and Wells study found that companies with area di-
vision structures tended to have a greater per-
centage of foreign sales than companies with pro-
duct division structures. This was reflected in
the model, which further implied that if companies
possess both high product diversity and a high
percentage of foreign sales, they should tend to
have matrix or mixed structures. In the present
study, however, the group of prominent multina-
tional corporations operating with worldwide pro-
duct division structures tend to possess both high
foreign product diversity and a high percentage of
foreign sales.
The reason why multinationals in the present sample
with product division structures possess such a
high percentage of foreign sales undoubtedly lies
in the fact that the majority are European head-
quartered, while those in the Stopford and Wells
study were all U.S. headquartered. It is difficult
for European companies to become large, prominent
multinationals without having a high percentage of
foreign sales, due to the limited size of most home
country markets. While this explains, the relati.ve-
ly higher percentage of foreign sales in European
multinationals, it does not explain why these com-,
panies operate with worldwide product division
structures instead of matrixing or mixing world-
wide product divisions with area divisions as the
model would predict. A third contingency variable •
(element of strategy) helps to clarify th^ situa-.
tion. . .
The extent to which a multinational company sup-
ports its foreign sales with foreign manufacturing
versus exports from the parent country was inclu-
ded in the present study because conceptually it
should have an important influence on certain in-
terdependencies between the parent and foreign sub-
sidiaries and between the foreign subsidiaries
themselves. When companies support foreign sales
with exports, the primary interdependency is be-
tween a foreign subsidiary and the parent. When
the strategy is to support foreign sales with ex-
tensive local manufacture, important interdepen-
dencies usually develop between foreign subsidiar-
ies within a region, as the company now attempts to.
realize regional economies of scale to replace the
global economies of scale which were formerly pro-‘
vided by centralizing production of the product in
the parent. As these two strategies produce dif-
ferent interdependencies within multinational com-
panies, it is reasonable to expect that they might
also be associated with different structures.
Table 5 shows how the percentage of foreign manu-
facturing varies across the three structures in
the sample.
TABLE 5
Percentage of Foreign Sales Manufactured Abroad by
Type of Structure
ID AD PD
Percent Manufactured
Abroad
76 91* 61
*Significantly different from PD at p<.01.
Multinationals with area division structures tend
to be associated with significantly higher levels
of foreign manufacturing than companies with
worldwide product division structures. Strategies
which provide for a high level of foreign manufac-
turing create high interdependencies between for-
eign subsidiaries within a region and reduce in-
terdependency between foreign subsidiaries and the
parent. The area division structure fits this
kind of interdependency. It provides a high level
of information processing capacity between subsi-
diaries within a region. A lower percentage of
foreign manufacturing and more exports means there
is less opportunity for economies of.scale.through
regional coordination and integration. Following
this strategy implies less interdependency.among
subsidiaries within a region and more interdepen-
233
dency between a subsidiary and the parent. The
worldwide product division structure provides the
kind of information processing which fits this
kind of interdependency.
Multivariate Analysis of the Data
In order to test the fit between structure and the
three elements of strategy simultaneously, a mul-
tiple discriminant analysis was run using the
three types of structure as the groups and the
three elements of strategy as the independent var-
iables. The results of this run appear in Table 6.
TABLE 6
Multiple Discriminant Analysis of the Three
Elements of Strategy on Type of Structure
Dependent Variable: Type
Independent Variable
Foreign product
diversity
Percentage foreign
sales
Percentage foreign mfg.
Canonical Correlation
Wilks Lamda
of Structure
Discriminant
Function
1 2
-.75 -.21
-.54 -.28
.38 -.93
.83 .49
.2A*** .76*
F-Value
12.93***
8.19***
5.62**
All values under the two discriminant functions
are standardized discriminant coefficients.
* p< .10 ** p< .05 *** p< .01
The standardized discriminant coefficients indi-
cate the relative contribution of an independent
variable to the discriminant function. Both for-
eign product diversity and the percentage of for-
eign sales load heavily on the first function.
While there was significant correlation between
the two (R=.A3), both contribute significantly to
the discriminant model. The second discriminant
function can largely be associated with the size
of foreign manufacturing.
Table 7 shows how successful the discriminant
functions are in predicting the type of structure
for each company, given measures of the elements
of strategy. In 79% of the cases, the discrimi-
nant model could accurately predict the actual
structure of the company from knowledge of its
strategy. This is significantly better than the
chance probability of predicting only 35% of the
cases correctly.
TABLE 7
Predicted Type of Structure From Coefficients of
Discriminant Functions
Actual Group Membership
Predicted
Group Membership
ID AD PD
International Division ^ 1 0
Area Divisions 2 2 1
Product Divisions 1 1 10
Percent Correctly Classified 79%
Previously, bivariate analysis had indicated that
each of the three elements of strategy possessed
an important fit relationship with a firm’s struc-
ture. Now the multivariate analysis confirms that
companies in the sample generally realize a high
level of simultaneous fit with these three pivotal
elements of strategy and in so doing, uniquely de-
fine their structures.
REVISING THE STOPFORD AND WELLS MODEL
The sample data of the present study have support-
ed some of the implications of the Stopford and
FIGURE 2
Revised Model Showing the Relationship Between Strategy
and Structure in Multinational Corporations
Low Percentage of
Foreign Sales
High Percentage of
Foreign Sales
4
o
r>
T3 >)
O 4>
I- T-
CL. (/I
S-
c
ai o
o
Product
Divisions
International
Division
od
uc
t
ty
F
or
ei
gn
P
r
D
iv
er
si
Product
Divisions
PD X AD
Matrix
Area
Divisions
Percent Foreign Manufacturing
234
Wells model and failed to support others. Based
on these findings. Figure 2 shows a revised model
linking strategy and structure in multinational
corporations.
International strategies which involve a relative-
ly low percentage of foreign sales and low foreign
product diversity tend to fit international divi-
sion structures. Both the Stopford and Wells and
the present study supported this relationship.
The international division structure is a low cost
structure. It centralizes international capabili-
ties in one sector of the company, avoids duplica-
tion, and buffers domestic operations from having
to be concerned with foreign operations. The rel-
atively low information processing capacity it
provides between the parent and foreign subsidiar-
ies fits strategies involving small size and low
complexity.
Strategies involving high foreign product diversity
and a low percentage of foreign sales probably
tend to be transitional strategies for successful
companies, as they attempt to increase their per-
centage of foreign sales by introducing more pro-
duct lines. The Stopford and Wells study found
these strategies to be associated with worldwide
product division structures, while the present
study had no data to test this relationship.
When international strategies involve relatively
high percentages of foreign sales, supporting
structures tend to be high integration struc-
tures, which provide high levels of information
processing capacity between a foreign subsidiary
and other sectors of the company. It is in this
area that the revised model based on the present
study alters and extends the Stopford and Wells
model. As already discussed, worldwide product
division structures provide a high level of infor-
mation processing capacity between a company’s
foreign operations and its domestic product oper-
ations. This tends to fit strategies involving
high foreign product diversity and substantial
exports from the parent to the foreign subsidiar-
ies. The latter increases operating interdepen-
dency between the company’s foreign and domestic
operations and requires an appropriate structure
to provide the necessary coordination.
When the strategy involves manufacturing a high
percentage of the goods needed to support foreign
sales abroad, foreign subsidiaries become rela-
tively more interdependent with each other and
interdependency between the foreign and domestic
operations of the company decreases for operation-
al matters. The revised model shows that area
division structures provide the type of informa-
tion processing capacity to handle the interde-
pendency associated with this strategy.
When the international strategy involves both
high levels of foreign product diversity and for-
eign manufacturing, foreign subsidiaries will tend
to be highly dependent on the parent for product
and technical knowledge and highly interdependent
with neighboring subsidiaries in the area for op-
erating synergies and economies of scale. This
requires the dual information processing capaci-
ties provided by worldwide product divisions and
area divisions. The model shows that matrix
structures containing both product divisions and
area divisions should fit such strategies. It is
interesting to note that two companies in the
present study had such structures, aiid both had
high foreign product diversity and a high percent-
age of foreign manufacturing.
SUMMARY
The revised model has attempted to extend on the
relationships between strategy and structure or-
iginally contained in the Stopford and Wells model.
The present study has also sought to develop some
conceptual framework to relate strategy and struc-
ture. It has largely done this be describing the
intra-organizational interdependencies stemming
from certain strategies and the information pro-
cessing capacities provided by certain structures.
Both conceptually and empirically, the study has
established the importance of a third element of
strategy not included in the Stopford and Wells
study, the percentage of foreign sales supported
by foreign manufacturing. Inclusion of this ele-
ment has allowed the revised model to substantial-
ly alter a portion of the Stopford and Wells model.
REFERENCES
1. Brooke, M.Z. and Remmers, H.L. The Strategy
of Multinational Enterprise. New York:
American Elsevier Publishing, 1970.
2. Chandler, A.D. Strategy and Structure:
Chapters in the History of Industrial Enter-
prise. Cambridge: M.I.T. Press, 1962.
3. Channon, D.F. The Strategy and Structure of
British Enterprise. Boston: Division of Re-
search, Graduate School of Business Adminis-
tration, Harvard University, 1973.
4. Christensen, C.R., Andrews, K.R. and Bower,
J.L. Business Policy. Homewood, 111.:
Richard D. Irwin, 1978.
5. Dyas, G.P. and Thanheiser, H.T. The Emerging
European Enterprise: Strategy and Structure
in French and German Industry. London: Mac-
millan, 1976.
6. Franko, L.G. The European Multinationals: A
Renewed Challenge to American and British Big
Business. Stamford, Conn.: Greylock Pub-
lishing Co., 1976.
7. Rumelt, R.P. Strategy, Structure, and Eco-
nomic Performance. Boston: Division of Re-
search, Graduate School of Business Admin-
istration, Harvard University, 1974.
8. Stopford, J.M. and Wells, L.T. Jr. Managing
the Multinational Enterprise. New York:
Basic Books, 1972.
235
Saylor URL: http://www.saylor.org/books Saylor.org
273
Chapter 9
Executing Strategy through Organizational Design
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are the basic building blocks of organizational structure?
2. What types of structures exist, and what are advantages and disadvantages of each?
3. What is control and why is it important?
4. What are the different forms of control and when should they be used?
5. What are the key legal forms of business, and what implications does the choice of a business form have
for organizational structure?
Can Oil Well Services Fuel Success for GE?
Chapter 9 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
274
General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the
sixth largest in the United States.
Image courtesy of The General Electric Company,
http://en.wikipedia.org/wiki/File:Early_General_Electric_logo_1899 .
In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of
John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides
services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities
of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was
acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it
clear that they had big plans within the oil well services business.
While many executives would struggle to integrate three new companies into their firms, experts expected
GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group PLC,
for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE.”[1] In other words, this
analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The
way that GE was organized fueled this belief.
GE’s organizational structure includes six divisions, each devoted to specific product categories: (1)
Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions,
(4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three
subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire
organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser
into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions
within the Energy division.
In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations.
This division was responsible for all sales of GE products and services outside the United States. The
Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt
expected that countries other than the United States will account for 60 percent of GE’s sales in the
Saylor URL: http://www.saylor.org/books Saylor.org
275
future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth
& Operations was further divided into twelve geographic regions: China, India, Southeast Asia,
Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan. [2]
Finally, like many large companies, GE also provided some centralized services to support all its units.
These support areas included public relations, business development, legal, global research, human
resources, and finance. By having entire units of the organization devoted to these functional areas, GE
hoped not only to minimize expenses but also to create consistency across divisions.
Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well
services operations would need the help of GE’s public relations and legal departments in the future.
Other important questions about GE’s acquisitions remained open as well. In particular, would the
organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the
culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect,
and the incompatibility of organizational cultures is one reason why.
GE fits a dizzying array of businesses into a relatively simple organizational chart.
Saylor URL: http://www.saylor.org/books Saylor.org
276
Adapted from company document posted at
http://www.ge.com/pdf/company/ge_organization_chart
The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly
intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless
professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay
was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in
favor of it.”
In the context of business, execution refers to how well a firm such as GE implements the strategies that
executives create for it. This involves the creation and operation of both an appropriate organizational
structure and an appropriate organizational control processes. Executives who skillfully orchestrate
structure and control are likely to lead their firms to greater levels of success. In contrast, those executives
who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same
way Coach McKay viewed his offense: as worthy of execution.
[1] Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg
Businessweek. Retrieved fromhttp://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-
service-unit-shares-surge.html
[2] GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release]. 2010, November 8.
GE website. Retrieved from http://www.genewscenter.com/ Press-Releases/GE-Names-Vice-Chairman-John-Rice-
to-Lead-GE-Global-Growth-Operations-2c8a.aspx
Saylor URL: http://www.saylor.org/books Saylor.org
277
9.1 The Basic Building Blocks of Organizational Structure
L E A R N I N G O B J E C T I V E S
1. Understand what division of labor is and why it is beneficial.
2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an
organizational structure.
Division of Labor
General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines,
and loans. One way that GE could produce its lightbulbs would be to have individual employees work on
one lightbulb at a time from start to finish. This would be very inefficient, however, so GE and most other
organizations avoid this approach. Instead, organizations rely ondivision of labor when creating their
products. Division of labor is a process of splitting up a task (such as the creation of lightbulbs)
into a series of smaller tasks, each of which is performed by a specialist.
Saylor URL: http://www.saylor.org/books Saylor.org
279
The leaders at the top of organizations have long known that division of labor can improve efficiency.
Thousands of years ago, for example, Moses’s creation of a hierarchy of authority by delegating
responsibility to other judges offered perhaps the earliest known example.
In the eighteenth century, Adam Smith’s book The Wealth of Nations quantified the
tremendous advantages that division of labor offered for a pin factory. If a worker performed all the
various steps involved in making pins himself, he could make about twenty pins per day. By breaking the
process into multiple steps, however, ten workers could make forty-eight thousand pins a day. In other
words, the pin factory was a staggering 240 times more productive than it would have been without
relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford
and other industrial pioneers who sought to create efficient organizations.
Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.
While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate
different tasks and the people who perform them. The solution is organizational structure, which is
defined as how tasks are assigned and grouped together with formal reporting relationships. Creating a
structure that effectively coordinates a firm’s activities increases the firm’s likelihood of success.
Meanwhile, a structure that does not match well with a firm’s needs undermines the firm’s chances of
prosperity.
Saylor URL: http://www.saylor.org/books Saylor.org
280
Division of labor was central to Henry Ford’s development of assembly lines in his automobile
factory. Ford noted, “Nothing is particularly hard if you divide it into small jobs.”
Image courtesy of the Ford Company, http://en.wikipedia.org/wiki/File:A-line1913 .
Vertical and Horizontal Linkages
Most organizations use a diagram called an organizational chart to depict their structure. These
organizational charts show how firms’ structures are built using two basic building blocks: vertical
linkages and horizontal linkages.Vertical linkages tie supervisors and subordinates together. These
linkages show the lines of responsibility through which a supervisor delegates authority to subordinates,
oversees their activities, evaluates their performance, and guides them toward improvement when
necessary. Every supervisor except for the person at the very top of the organization chart also serves as a
subordinate to someone else. In the typical business school, for example, a department chair supervises a
set of professors. The department chair in turn is a subordinate of the dean.
Most executives rely on the unity of command principle when mapping out the vertical linkages in an
organizational structure. This principle states that each person should only report directly to one
supervisor. If employees have multiple bosses, they may receive conflicting guidance about how to do
Saylor URL: http://www.saylor.org/books Saylor.org
281
their jobs. The unity of command principle helps organizations to avoid such confusion. In the case of
General Electric, for example, the head of the Energy division reports only to the chief executive officer. If
problems were to arise with executing the strategic move discussed in this chapter’s opening vignette—
joining the John Wood Group PLC with GE’s Energy division—the head of the Energy division reports
would look to the chief executive officer for guidance.
Horizontal linkages are relationships between equals in an organization. Often these linkages are called
committees, task forces, or teams. Horizontal linkages are important when close coordination is needed
across different segments of an organization. For example, most business schools revise their
undergraduate curriculum every five or so years to ensure that students are receiving an education that
matches the needs of current business conditions. Typically, a committee consisting of at least one
professor from every academic area (such as management, marketing, accounting, and finance) will be
appointed to perform this task. This approach helps ensure that all aspects of business are represented
appropriately in the new curriculum.
Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages.
As noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal
groupings to maximize familiarity and trust. We organize our stores and company into a variety of
interlocking teams. Most teams have between 6 and 100 Team Members and the larger teams are divided
further into a variety of sub-teams. The leaders of each team are also members of the Store Leadership
Team and the Store Team Leaders are members of the Regional Leadership Team. This interlocking team
structure continues all the way upwards to the Executive Team at the highest level of the
company.” [1] This emphasis on teams is intended to develop trust throughout the organization, as well as
to make full use of the talents and creativity possessed by every employee.
Informal Linkages
Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In
the long-running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—
employee at a nuclear power plant. In one episode, Homer gains power and influence with the plant’s
owner, Montgomery Burns, which far exceeds Homer’s meager position in the organization chart, because
Saylor URL: http://www.saylor.org/books Saylor.org
282
Mr. Burns desperately wants to be a member of the bowling team that Homer captains. Homer tries to use
his newfound influence for his own personal gain and naturally the organization as a whole suffers.
Informal linkages such as this one do not appear in organizational charts, but they nevertheless can have
(and often do have) a significant influence on how firms operate.
K E Y T A K E A W A Y
The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of
the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps
managers to organize better the different individuals and job functions within a firm.
E X E R C I S E S
1. How is division of labor used when training college or university football teams? Do you think you could
use a different division of labor and achieve more efficiency?
2. What are some formal and informal linkages that you have encountered at your college or university?
What informal linkages have you observed in the workplace?
[1] John Mackey’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved
fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/
Saylor URL: http://www.saylor.org/books Saylor.org
283
9.2 Creating an Organizational Structure
L E A R N I N G O B J E C T I V E S
1. Know and be able to differentiate among the four types of organizational structure.
2. Understand why a change in structure may be needed.
Within most firms, executives rely on vertical and horizontal linkages to create a structure that they
hope will match the needs of their firm’s strategy. Four types of structures are available to executives:
(1) simple, (2) functional, (3) multidivisional, and (4) matrix. Like snowflakes, however, no two
organizational structures are exactly alike. When creating a structure for their firm, executives will
take one of these types and adapt it to fit the firm’s unique circumstances. As they do this,
executives must realize that the choice of structure will influence their firm’s strategy in the future.
Once a structure is created, it constrains future strategic moves. If a firm’s structure is designed to
maximize efficiency, for example, the firm may lack the flexibility needed to react quickly
to exploit new opportunities.
Simple Structure
Many organizations start out with a simple structure. In this type of structure, an organizational chart is
usually not needed. Simple structures do not rely on formal systems of division of labor.
If the firm is a sole proprietorship, one person performs all the tasks the organization
needs to accomplish. For example, on the TV series The Simpsons, both bar owner Moe Szyslak and the
Comic Book Guy are shown handling all aspects of their respective businesses.
Saylor URL: http://www.saylor.org/books Saylor.org
284
There is a good reason most sole proprietors do not bother creating formal organizational charts.
If the firm consists of more than one person, tasks tend to be distributed among them in an informal
manner rather than each person developing a narrow area of specialization. In a family-run restaurant or
bed and breakfast, for example, each person must contribute as needed to tasks, such as cleaning
restrooms, food preparation, and serving guests (hopefully not in that order). Meanwhile, strategic
decision making in a simple structure tends to be highly centralized. Indeed, often the owner of the firm
makes all the important decisions. Because there is little emphasis on hierarchy within a simple structure,
organizations that use this type of structure tend to have very few rules and regulations. The process of
evaluating and rewarding employees’ performance also tends to be informal.
The informality of simple structures creates both advantages and disadvantages. On the plus side, the
flexibility offered by simple structures encourages employees’ creativity and individualism. Informality
has potential negative aspects, too. Important tasks may be ignored if no one person is specifically
assigned accountability for them. A lack of clear guidance from the top of the organization can create
confusion for employees, undermine their motivation, and make them dissatisfied with their jobs. Thus
when relying on a simple structure, the owner of a firm must be sure to communicate often and openly
with employees.
Functional Structure
Saylor URL: http://www.saylor.org/books Saylor.org
285
As a small organization grows, the person in charge of it often finds that a simple structure is no longer
adequate to meet the organization’s needs. Organizations become more complex as they grow, and this
can require more formal division of labor and a strong emphasis on hierarchy and vertical links. In many
cases, these firms evolve from using a simple structure to relying on a functional structure.
Within a functional structure, employees are divided into departments that each handle activities related
to a functional area of the business, such as marketing, production, human resources, information
technology, and customer service. Each of these five areas would be headed up by a manager
who coordinates all activities related to her functional area. Everyone in a company that works on marketing
the company’s products, for example, would report to the manager of the marketing department. The marketing
managers and the managers in charge of the other four areas in turn would report to the chief executive officer.
An example of a functional structure
Reproduced with permission
Using a functional structure creates advantages and disadvantages. An important benefit of adopting a
functional structure is that each person tends to learn a great deal about his or her particular function. By
being placed in a department that consists entirely of marketing professionals, an individual has a great
opportunity to become an expert in marketing. Thus a functional structure tends to create highly skilled
specialists. Second, grouping everyone that serves a particular function into one department tends to keep
costs low and to create efficiency. Also, because all the people in a particular department share the same
Saylor URL: http://www.saylor.org/books Saylor.org
286
background training, they tend to get along with one another. In other words, conflicts within
departments are relatively rare.
Using a functional structure also has a significant downside: executing strategic changes can be very slow
when compared with other structures. Suppose, for example, that a textbook publisher decides to
introduce a new form of textbook that includes “scratch and sniff” photos that let students smell various
products in addition to reading about them. If the publisher relies on a simple structure, the leader of the
firm can simply assign someone to shepherd this unique new product through all aspects of the
publication process.
If the publisher is organized using a functional structure, however, every department in the organization
will have to be intimately involved in the creation of the new textbooks. Because the new product lies
outside each department’s routines, it may become lost in the proverbial shuffle. And unfortunately for
the books’ authors, the publication process will be halted whenever a functional area does not live up to its
responsibilities in a timely manner. More generally, because functional structures are slow to execute
change, they tend to work best for organizations that offer narrow and stable product lines.
The specific functional departments that appear in an organizational chart vary across organizations that
use functional structures. In the example offered earlier in this section, a firm was divided into five
functional areas: (1) marketing, (2) production, (3) human resources, (4) information technology, and (5)
customer service. In the TV show The Office, a different approach to a functional structure is used at the
Scranton, Pennsylvania, branch of Dunder Mifflin. As of 2009, the branch was divided into six functional
areas: (1) sales, (2) warehouse, (3) quality control, (4) customer service, (5) human resources, and (6)
accounting. A functional structure was a good fit for the branch at the time because its product line was
limited to just selling office paper.
Saylor URL: http://www.saylor.org/books Saylor.org
287
Multidivisional Structure
Many organizations offer a wide variety of products and services. Some of these organizations sell their
offerings across an array of geographic regions. These approaches require firms to be very responsive to
Saylor URL: http://www.saylor.org/books Saylor.org
288
customers’ needs. Yet, as noted, functional structures tend to be fairly slow to change. As a result, many
firms abandon the use of a functional structure as their offerings expand. Often the new choice is
a multidivisional structure. In this type of structure, employees are divided into departments based on
product areas and/or geographic regions.
General Electric (GE) is an example of a company organized this way. As shown in the organization chart
that accompanies this chapter’s opening vignette, most of the company’s employees belong to one of six
product divisions (Energy, Capital, Home & Business Solutions, Health Care, Aviation, and
Transportation) or to a division that is devoted to all GE’s operations outside the United States (Global
Growth & Operations).
A big advantage of a multidivisional structure is that it allows a firm to act quickly. When GE makes a
strategic move such as acquiring the well-support division of John Wood Group PLC, only the relevant
division (in this case, Energy) needs to be involved in integrating the new unit into GE’s hierarchy. In
contrast, if GE was organized using a functional structure, the transition would be much slower because
all the divisions in the company would need to be involved. A multidivisional structure also helps an
organization to better serve customers’ needs. In the summer of 2011, for example, GE’s Capital division
started to make real-estate loans after exiting that market during the financial crisis of the late
2000s. [1] Because one division of GE handles all the firm’s loans, the wisdom and skill needed to decide
when to reenter real-estate lending was easily accessible.
Of course, empowering divisions to act quickly can backfire if people in those divisions take actions that
do not fit with the company’s overall strategy. McDonald’s experienced this kind of situation in 2002. In
particular, the French division of McDonald’s ran a surprising advertisement in a magazine called Femme
Actuelle. The ad included a quote from a nutritionist that asserted children should not eat at a McDonald’s
more than once per week. Executives at McDonald’s headquarters in suburban Chicago were concerned
about the message sent to their customers, of course, and they made it clear that they strongly disagreed
with the nutritionist.
Another downside of multidivisional structures is that they tend to be more costly to operate than
functional structures. While a functional structure offers the opportunity to gain efficiency by having just
Saylor URL: http://www.saylor.org/books Saylor.org
289
one department handle all activities in an area, such as marketing, a firm using a multidivisional structure
needs to have marketing units within each of its divisions. In GE’s case, for example, each of its seven
divisions must develop marketing skills. Absorbing the extra expenses that are created reduces a firm’s
profit margin.
GE’s organizational chart highlights a way that firms can reduce some of these expenses: the
centralization of some functional services. As shown in the organizational chart, departments devoted to
important aspects of public relations, business development, legal, global research, human resources, and
finance are maintained centrally to provide services to the six product divisions and the geographic
division. By consolidating some human resource activities in one location, for example, GE creates
efficiency and saves money.
An additional benefit of such moves is that consistency is created across divisions. In 2011, for example,
the Coca-Cola Company created an Office of Sustainability to coordinate sustainability initiatives across
the entire company. Bea Perez was named Coca-Cola’s chief sustainability officer and was put in charge of
the Office of Sustainability. At the time, Coca-Cola’s chief executive officer Muhtar Kent noted that Coca-
Cola had “made significant progress with our sustainability initiatives, but our current approach needs
focus and better integration.” [2] In other words, a department devoted to creating consistency across
Coca-Cola’s sustainability efforts was needed for Coca-Cola to meet its sustainability goals.
Matrix Structure
Within functional and multidivisional structures, vertical linkages between bosses and subordinates are
the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships. [3] In particular,
these structures create cross-functional teams that each work on a different project. This offers several
benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and
creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers.
In particular, a person without managerial experience can be put in charge of a relatively small project as
a test to see whether the person has a talent for leading others.
Saylor URL: http://www.saylor.org/books Saylor.org
290
Using a matrix structure can create difficulties too. One concern is that using a matrix structure violates
the unity of command principle because each employee is assigned multiple bosses. Specifically, any given
individual reports to a functional area supervisor as well as one or more project supervisors. This creates
confusion for employees because they are left unsure about who should be giving them direction.
Violating the unity of command principle also creates opportunities for unsavory employees to avoid
responsibility by claiming to each supervisor that a different supervisor is currently depending on their
efforts.
The potential for conflicts arising between project managers within a matrix structure is another concern.
Chances are that you have had some classes with professors who are excellent speakers while you have
been forced to suffer through a semester of incomprehensible lectures in other classes. This mix of
experiences reflects a fundamental reality of management: in any organization, some workers are more
talented and motivated than others. Within a matrix structure, each project manager naturally will want
the best people in the company assigned to her project because their boss evaluates these managers based
on how well their projects perform. Because the best people are a scarce resource, infighting and politics
can easily flare up around which people are assigned to each project.
Given these problems, not every organization is a good candidate to use a matrix structure. Organizations
such as engineering and consulting firms that need to maximize their flexibility to service projects of
limited duration can benefit from the use of a matrix. Matrix structures are also used to organize research
and development departments within many large corporations. In each of these settings, the benefits of
organizing around teams are so great that they often outweigh the risks of doing so.
Saylor URL: http://www.saylor.org/books Saylor.org
291
Strategy at the Movies
Office Space
How much work can a man accomplish with eight bosses breathing down his neck? For Peter Gibbons, an
employee at information technology firm Initech in the 1999 movie Office Space, the answer was zero.
Initech’s use of a matrix structure meant that each employee had multiple bosses, each representing a
different aspect of Initech’s business. High-tech firms often use matrix to gain the flexibility needed to
manage multiple projects simultaneously. Successfully using a matrix structure requires excellent
communication among various managers—however, excellence that Initech could not reach. When
Saylor URL: http://www.saylor.org/books Saylor.org
292
Gibbons forgot to put the appropriate cover sheet on his TPS report, each of his eight bosses—and a
parade of his coworkers—admonished him. This fiasco and others led to Gibbons to become cynical about
his job.
Simpler organizational structures can be equally frustrating. Joanna, a waitress at nearby restaurant
Chotchkie’s, had only one manager—a stark contrast to Gibbons’s eight bosses. Unfortunately, Joanna’s
manager had an unhealthy obsession with the “flair” (colorful buttons and pins) used by employees to
enliven their uniforms. A series of mixed messages about the restaurant’s policy on flair led Joanna to
emphatically proclaim—both verbally and nonverbally—her disdain for the manager. She then quit her job
and stormed out of the restaurant.
Office Space illustrates the importance of organizational design decisions to an organization’s culture and
to employees’ motivation levels. A matrix structure can facilitate resource sharing and collaboration but
may also create complicated working relationships and impose excessive stress on employees. Chotchkie’s
organizational structure involved simpler working relationships, but these relationships were strained
beyond the breaking point by a manager’s eccentricities. In a more general sense, Office Spaceshows that
all organizational structures involve a series of trade-offs that must be carefully managed.
Boundaryless Organizations
Most organizational charts show clear divisions and boundaries between different units. The value of a
much different approach was highlighted by former GE CEO Jack Welch when he created the term
boundaryless organization. A boundaryless organization is one that removes the usual barriers between
parts of the organization as well as barriers between the organization and others. [4] Eliminating all
internal and external barriers is not possible, of course, but making progress toward being boundaryless
can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of
fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids
organizational charts, management layers, and supervisors despite having approximately nine thousand
employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L.
Gore emerge based on performance and they attract followers to their ideas over time. As one employee
noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.” [5]
Saylor URL: http://www.saylor.org/books Saylor.org
293
The boundaryless approach to structure embraced by W.L. Gore drives the kind of creative
thinking that led to their most famous product, GORE-TEX.
Image courtesy of adifansnet, http://www.flickr.com/photos/adifans/3706215019.
An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During
2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders
from the National Guard (who are controlled by state governments) and from active-duty military units
(who are controlled by federal authorities). According to one National Guard officer, “It was just like a
solid wall was between the two entities.” [6]Efforts were needlessly duplicated in some geographic areas
while attention to other areas was delayed or inadequate. For example, poor coordination caused the
evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The
results were immense human suffering and numerous fatalities.
Saylor URL: http://www.saylor.org/books Saylor.org
294
In 2005, boundaries between organizations hampered rescue efforts following Hurricane Katrina.
Image courtesy of Kyle Niemi,
http://upload.wikimedia.org/wikipedia/commons/3/3d/KatrinaNewOrleansFlooded_edit2 .
To avoid similar problems from arising in the future, barriers between the National Guard and active-duty
military units are being bridged by special military officers called dual-status commanders. These
individuals will be empowered to lead both types of units during a disaster recovery effort, helping to
ensure that all areas receive the attention they need in a timely manner.
Reasons for Changing an Organization’s Structure
Saylor URL: http://www.saylor.org/books Saylor.org
295
Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s
structure over time and make changes to it if certain danger signs arise. For example, a structure might
need to be adjusted if decisions with the organization are being made too slowly or if the organization is
performing poorly. Both these problems plagued Sears Holdings in 2008, leading executives to reorganize
the company.
Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by
Ben Franklin also illustrates a fundamental truth about structure: If the parts that make up a firm do not work
together, the firm is likely to fail.
Image courtesy of Wikipedia, http://upload.wikimedia.org/wikipedia/commons/9/9c/Benjamin_Franklin_-
_Join_or_Die .
Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as
clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and
finance), (3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer,
Craftsman, and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S.
Lampert noted that “by creating smaller focused teams that are clearly responsible for their units, we
Saylor URL: http://www.saylor.org/books Saylor.org
296
[will] increase autonomy and accountability, create greater ownership and enable faster, better
decisions.” [7] Unfortunately, structural changes cannot cure all a company’s ills. As of July 2011, Sears’s
stock was worth just over half what it had been worth five years earlier.
Sometimes structures become too complex and need to be simplified. Many observers believe that this
description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical
emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For
any given project, a small team of people reported to one of forty-seven boards. The boards averaged
fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council
also averaged fourteen members. The councils reported to an operating committee consisting of
Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and
reported directly to the operating committee. These arrangements are so complex and time consuming
that some top executives spend 30 percent of their work hours serving on more than ten of the boards,
councils, and the operating committee.
Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive
moves quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-
Packard (HP) started promoting a warranty service that provides free support and upgrades within the
computer network switches market. Because Cisco’s response to this initiative had to work its way
through multiple committees, the firm did not take action until April 2009. During the delay, Cisco’s
share of the market dropped as customers embraced HP’s warranty. This problem and others created by
Cisco’s overly complex structure were so severe that one columnist wondered aloud “has Cisco’s John
Chambers lost his mind?” [8] In the summer of 2011, Chambers reversed course and decided to return
Cisco to a more traditional structure while reducing the firm’s workforce by 9 percent. Time will tell
whether these structural changes will boost Cisco’s stock price, which remained flat between 2006 and
mid-2011.
K E Y T A K E A W A Y
Executives must select among the four types of structure (simple, functional, multidivisional, and matrix)
available to organize operations. Each structure has unique advantages, and the selection of structures
involves a series of trade-offs.
Saylor URL: http://www.saylor.org/books Saylor.org
297
E X E R C I S E S
1. What type of structure best describes the organization of your college or university? What led you to
reach your conclusion?
2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from
movies that provide examples or insights relevant to understanding organizational structure?
[1] Jacobius, A. 2011, July 25. GE Capital slowly moving back into lending waters. Pensions & Investments.
Retrieved fromhttp://www.pionline.com/article/20110725/PRINTSUB/110729949
[2] McWilliams, J. 2011, May 19. Coca-Cola names Bea Perez chief sustainability officer.Atlantic-Journal
Constitution. Retrieved from http://www.ajc.com/business/coca-cola-names-bea-951741.html
[3] This discussion of matrix structures is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from
facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.
[4] Askenas, R., Ulrich, D., Jick, T., & Kerr, S. 1995. The boundaryless organization: Breaking down the chains of
organizational structure. San Francisco, CA: Jossey-Bass.
[5] Hamel, G. 2007, September 27. What Google, Whole Foods do best. CNNMoney. Retrieved from
http://money.cnn.com/2007/09/26/news/companies/management_hamel. fortune/index.htm
[6] Elliott, D. 2011, July 3. New type of commander may avoid Katrina-like chaos. Yahoo! News. Retrieved from
http://news.yahoo.com/type-commander-may-avoid-katrina-chaos-153 143508.html
[7] Sears restructures business units. Retail Net. Retrieved from http://www.retailnet.com /story.cfm?ID=41613.
[8] Blodget, H. 2009, August 6. Has Cisco’s John Chambers lost his mind? Business Insider. Retrieved
from http://www.businessinsider.com/henry-blodget-has-ciscos-john- chambers-lost-his-mind-2009-8
Saylor URL: http://www.saylor.org/books Saylor.org
298
9.3 Creating Organizational Control Systems
L E A R N I N G O B J E C T I V E S
1. Understand the three types of control systems.
2. Know the strengths and weaknesses of common management fads.
In addition to creating an appropriate organizational structure, effectively executing strategy
depends on the skillful use of organizational control systems. Executives create strategies to try to
achieve their organization’s vision, mission, and goals. Organizational control systems allow
executives to track how well the organization is performing, identify areas of concern, and then take
action to address the concerns. Three basic types of control systems are available to executives: (1)
output control, (2) behavioral control, and (3) clan control. Different organizations emphasize
different types of control, but most organizations use a mix of all three types.
Output Control
Output control focuses on measurable results within an organization. Examples from the business world
include the number of hits a website receives per day, the number of microwave ovens an assembly line
produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 “Output
Controls”). In each of these cases, executives must decide what level of performance is acceptable,
communicate expectations to the relevant employees, track whether performance meets expectations, and
then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida,
were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The
corrective action was simple: they started receiving their pay via direct deposit rather than through the
mail.
Many times the stakes are much higher. In early 2011, Delta Air Lines was forced to face some facts as
part of its use of output control. Data gathered by the federal government revealed that only 77.4 percent
of Delta’s flights had arrived on time during 2010. This performance led Delta to rank dead last among the
major US airlines and fifteenth out of eighteen total carriers. [1] In response, Delta took important
corrective steps. In particular, the airline added to its ability to service airplanes and provided more
Saylor URL: http://www.saylor.org/books Saylor.org
299
customer service training for its employees. Because some delays are inevitable, Delta also announced
plans to staff a Twitter account called Delta Assist around the clock to help passengers whose flights are
delayed. These changes and others paid off. For the second quarter of 2011, Delta enjoyed a $198 million
profit, despite having to absorb a $1 billion increase in its fuel costs due to rising prices. [2]
Output control also plays a big part in the college experience. For example, test scores and grade point
averages are good examples of output measures. If you perform badly on a test, you might take corrective
action by studying harder or by studying in a group for the next test. At most colleges and universities, a
student is put on academic probation when his grade point average drops below a certain level. If the
student’s performance does not improve, he may be removed from his major and even dismissed. On the
positive side, output measures can trigger rewards too. A very high grade point average can lead to
placement on the dean’s list and graduating with honors.
While most scholarships require a high GPA, comedian David Letterman created a scholarship for
a “C” student at Ball State University. Ball State later named a new communications and media
building after its very famous alumnus.
Image courtesy of Kyle
Flood,http://upload.wikimedia.org/wikipedia/commons/e/eb/David_Letterman_building .
Saylor URL: http://www.saylor.org/books Saylor.org
300
Behavioral Control
While output control focuses on results, behavioral control focuses on controlling the actions that
ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate
behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees
that they must wash their hands before returning to work. The dress codes that are enforced within
many organizations are another example of behavioral control. To try to prevent employee theft, many firms
have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile
factories dictate to workers how many minutes they can spend in restrooms during their work shift.
Behavioral control also plays a significant role in the college experience. An illustrative (although perhaps
unpleasant) example is penalizing students for not attending class. Professors grade attendance to dictate
students’ behavior; specifically, to force students to attend class. Meanwhile, if you were to suggest that a
rule should be created to force professors to update their lectures at least once every five years, we would
not disagree with you.
Outside the classroom, behavioral control is a major factor within college athletic programs. The National
Collegiate Athletic Association (NCAA) governs college athletics using a huge set of rules, policies, and
procedures. The NCAA’s rulebook on behavior is so complex that virtually all coaches violate its rules at
one time or another. Critics suggest that the behavioral controls instituted by the NCAA have reached an
absurd level. Nevertheless, some degree of behavioral control is needed within virtually all organizations.
Creating an effective reward structure is key to effectively managing behavior because people tend to focus
their efforts on the rewarded behaviors. Problems can arise when people are rewarded for behaviors that
seem positive on the surface but that can actually undermine organizational goals under some
circumstances. For example, restaurant servers are highly motivated to serve their tables quickly because
doing so can increase their tips. But if a server devotes all his or her attention to providing fast service,
other tasks that are vital to running a restaurant, such as communicating effectively with managers, host
staff, chefs, and other servers, may suffer. Managers need to be aware of such trade-offs and strive to align
Saylor URL: http://www.saylor.org/books Saylor.org
301
rewards with behaviors. For example, waitstaff who consistently behave as team players could be assigned
to the most desirable and lucrative shifts, such as nights and weekends.
Although some behavioral controls are intended for employees and not customers, following them
is beneficial to everyone.
Image courtesy of Sterilgutassistentin,
http://en.wikipedia.org/wiki/File:Manhattan_New_York_City_2009_PD_20091130_209.JPG.
Clan Control
Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral
control), clan control is an informal type of control. Specifically, clan control relies on shared traditions,
expectations, values, and norms to lead people to work toward the good of their organization.
Clan control is often used heavily in settings where creativity is vital, such as many high-
tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The
creativity of a research scientist would be likely to be stifled, for example, if she were given a quota of
Saylor URL: http://www.saylor.org/books Saylor.org
302
patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral
control).
Google is a firm that relies on clan control to be successful. Employees are permitted to spend 20 percent
of their workweek on their own innovative projects. The company offers an ‘‘ideas mailing list’’ for
employees to submit new ideas and to comment on others’ ideas. Google executives routinely make
themselves available two to three times per week for employees to visit with them to present their ideas.
These informal meetings have generated a number of innovations, including personalized home pages
and Google News, which might otherwise have never been adopted.
As part of the team-building effort at Google, new employees are known as Noogles and are given
a propeller hat to wear.
Image courtesy of Tduk Alex Lozupone,http://en.wikipedia.org/wiki/File:Noogler .
Saylor URL: http://www.saylor.org/books Saylor.org
303
Some executives look to clan control to improve the performance of struggling organizations. In 2005,
Florida officials became fed up with complaints about surly clerks within the state’s driver’s license
offices. The solution was to look for help with training employees from two companies that are well-
known for friendly, engaged employees and excellent customer service. The first was The Walt Disney
Company, which offers world-famous hospitality at its Orlando theme parks. The second was regional
supermarket chain Publix, a firm whose motto stressed that “shopping is a pleasure” in its stores. The goal
of the training was to build the sort of positive team spirit Disney and Publix enjoy. The state’s highway
safety director summarized the need for clan control when noting that “we’ve just got to change a little
culture out there.” [3]
Clan control is also important on many college campuses. Philanthropic and social organizations such as
clubs, fraternities, and sororities often revolve around shared values and team spirit. More broadly, many
campuses have treasured traditions that bind alumni together across generations. Purdue University, for
example, proudly owns the world’s largest drum. The drum is beaten loudly before home football games
to fire up the crowd. After athletic victories, Auburn University students throw rolls of toilet paper into
campus oak trees. At Clark University, Rollins College, and Emory University, time-honored traditions
that involve spontaneously canceling classes surprise and delight students. These examples and
thousands of others spread across the country’s colleges and universities help students feel like they
belong to something special.
Management Fads: Out of Control?
Don’t chase the latest management fads. The situation dictates which approach best accomplishes the
team’s mission.
– Colin Powell
The emergence and disappearance of fads appears to be a predictable aspect of modern society. A fad
arises when some element of popular culture becomes enthusiastically embraced by a group of people.
Over the past few decades, for example, fashion fads have included leisure suits (1970s), “Members Only”
jackets (1980s), Doc Martens shoes (1990s), and Crocs (2000s). Ironically, the reason a fad arises is also
Saylor URL: http://www.saylor.org/books Saylor.org
304
usually the cause of its demise. The uniqueness (or even outrageousness) of a fashion, toy, or hairstyle
creates “buzz” and publicity but also ensures that its appeal is only temporary. [4]
Fads also seem to be a predictable aspect of the business world. As with cultural fads, many
provocative business ideas go through a life cycle of creating buzz, captivating a group of
enthusiastic adherents, and then giving way to the next fad. Bookstore shelves offer a seemingly
endless supply of popular management books whose premises range from the intriguing to
the absurd. Within the topic of leadership, for example, various books promise to reveal the “leadership
secrets” of an eclectic array of famous individuals such as Jesus Christ, Hillary Clinton, Attila the Hun,
and Santa Claus.
Beyond the striking similarities between cultural and business fads, there are also important differences.
Most cultural fads are harmless, and they rarely create any long-term problems for those that embrace
them. In contrast, embracing business fads could lead executives to make bad decisions. As our quote
from Colin Powell suggests, relying on sound business practices is much more likely to help executives to
execute their organization’s strategy than are generic words of wisdom from Old St. Nick.
Many management fads have been closely tied to organizational control systems. For example, one of the
best-known fads was an attempt to use output control to improve
performance. Management by objectives (MBO) is a process wherein managers and employees work
together to create goals. These goals guide employees’ behaviors and serve as the benchmarks for
assessing their performance. Following the presentation of MBO in Peter Drucker’s 1954 book The
Practice of Management, many executives embraced the process as a cure-all for organizational problems
and challenges.
Like many fads, however, MBO became a good idea run amok. Companies that attempted to create an
objective for every aspect of employees’ activities eventually discovered that this was unrealistic. The
creation of explicit goals can conflict with activities involving tacit knowledge about the organization.
Intangible notions such as “providing excellent customer service,” “treating people right,” and “going the
extra mile” are central to many organizations’ success, but these notions are difficult if not impossible to
Saylor URL: http://www.saylor.org/books Saylor.org
305
quantify. Thus, in some cases, getting employees to embrace certain values and other aspects of clan
control is more effective than MBO.
Quality circles were a second fad that built on the notion of behavioral control. Quality circles began in
Japan in the 1960s and were first introduced in the United States in 1972. A quality circle is a formal
group of employees that meets regularly to brainstorm solutions to organizational problems. As the name
“quality circle” suggests, identifying behaviors that would improve the quality of products and the
operations management processes that create the products was the formal charge of many quality circles.
While the quality circle fad depicted quality as the key driver of productivity, it quickly became apparent
that this perspective was too narrow. Instead, quality is just one of four critical dimensions of the
production process; speed, cost, and flexibility are also vital. Maximizing any one of these four dimensions
often results in a product that simply cannot satisfy customers’ needs. Many products with perfect quality,
for example, would be created too slowly and at too great a cost to compete in the market effectively. Thus
trade-offs among quality, speed, cost, and flexibility are inevitable.
Improving clan control was the aim of sensitivity-training groups (or T-groups) that were used in many
organizations in the 1960s. This fad involved gatherings of approximately eight to fifteen people openly
discussing their emotions, feelings, beliefs, and biases about workplace issues. In stark contrast to the
rigid nature of MBO, the T-group involved free-flowing conversations led by a facilitator. These
discussions were thought to lead individuals to greater understanding of themselves and others. The
anticipated results were more enlightened workers and a greater spirit of teamwork.
Research on social psychology has found that groups are often far crueler than individuals. Unfortunately,
this meant that the candid nature of T-group discussions could easily degenerate into accusations and
humiliation. Eventually, the T-group fad gave way to recognition that creating potentially hurtful
situations has no place within an organization. Hints of the softer side of T-groups can still be observed in
modern team-building fads, however. Perhaps the best known is the “trust game,” which claims to build
trust between employees by having individuals fall backward and depend on their coworkers to catch
them.
Saylor URL: http://www.saylor.org/books Saylor.org
306
Improving clan control was the basis for the fascination with organizational culture that was all the rage
in the 1980s. This fad was fueled by a best-selling 1982 book titled In Search of Excellence: Lessons from
America’s Best-Run Companies. Authors Tom Peters and Robert Waterman studied companies that they
viewed as stellar performers and distilled eight similarities that were shared across the companies. Most
of the similarities, including staying “close to the customer” and “productivity through people,” arose from
powerful corporate cultures. The book quickly became an international sensation; more than three million
copies were sold in the first four years after its publication.
Soon it became clear that organizational culture’s importance was being exaggerated. Before long, both
the popular press and academic research revealed that many of Peters and Waterman’s “excellent”
companies quickly had fallen on hard times. Basic themes such as customer service and valuing one’s
company are quite useful, but these clan control elements often cannot take the place of holding
employees accountable for their performance.
The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment,
“good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are
likely to enjoy performance improvements. Empowerment, for example, builds on important research
findings regarding employees—many workers have important insights to offer to their firms, and these
workers become more engaged in their jobs when executives take their insights seriously. Relying too
heavily on a fad, however, seldom turns out well.
Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s
executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some
Companies Make the Leap…and Others Don’t as a detailed blueprint for running their companies.
Overall, executives should understand that management fads usually contain a core truth that can help
organizations improve but that a balance of output, behavioral, and clan control is needed within most
organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who
yield to trends and fads and popular opinion.”
K E Y T A K E A W A Y
Saylor URL: http://www.saylor.org/books Saylor.org
307
Organizational control systems are a vital aspect of executing strategy because they track performance
and identify adjustments that need to be made. Output controls involve measurable results. Behavioral
controls involve regulating activities rather than outcomes. Clan control relies on a set of shared values,
expectations, traditions, and norms. Over time, a series of fads intended to improve organizational control
processes have emerged. Although these fads tend to be seen as cure-alls initially, executives eventually
realize that an array of sound business practices is needed to create effective organizational controls.
E X E R C I S E S
1. What type of control do you think works most effectively with you and why?
2. What are some common business practices that you predict will be considered fads in the future?
3. How could you integrate each type of control intro a college classroom to maximize student learning?
[1] Yamanouchi, K. 2011, February 10. Delta ranks near bottom in on-time performance.Atlanta-Journal
Constitution. Retrieved from http://www.ajc.com/business/delta-ranks-near-bottom-834380.html
[2] Yamanouchi, K. 2011, July 27. Delta has $198 million profit, says 2,000 took buyouts.Atlanta-Journal
Constitution. Retrieved from http://www.ajc.com/business/delta-has-198-million-1050461.html
[3] Bousquet, S. 2005, September 23. For surly license clerks. a pound of charm. St Petersburg Times. Retrieved
fromhttp://www.sptimes.com/2005/09/23/State/For_surly_license _cle.shtml
[4] This discussion of management fads is adapted from Ketchen, D. J., & Short, J. C. 2011. Separating fads from
facts: Lessons from “the good, the fad, and the ugly.” Business Horizons, 54, 17–22.
Saylor URL: http://www.saylor.org/books Saylor.org
308
9.4 Legal Forms of Business
L E A R N I N G O B J E C T I V E S
1. Know the three basic legal forms of business.
2. Know the two specialized types of corporations.
Choosing a Form of Business
The legal form a firm chooses to operate under is an important decision with implications for how a firm
structures its resources and assets. Several legal forms of business are available to executives. Each
involves a different approach to dealing with profits and losses (Figure 9.10 “Business Forms”).
There are three basic forms of business. A sole proprietorship is a firm that is owned by one person. From
a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means
that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however,
the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a
sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal
assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for
example, there are a number of self-employed repair people, plumbers, and electricians who work alone
on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses
associated with operating an office.
In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole
proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also
responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise
complements the others. For example, an accountant who specializes in preparing individual tax returns
and another who has mastered business taxes might choose to join forces to offer customers a more
complete set of tax services than either could offer alone.
From a practical standpoint, a partnership allows a person to take time off without closing down the
business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida.
Saylor URL: http://www.saylor.org/books Saylor.org
309
When Lawrence suffered a serious injury a few years ago, Sander was able to take over supervising his
projects and see them through to completion. Had Lawrence been a sole proprietor, his customers would
have suffered greatly. However, a person who chooses to be part of a partnership rather than operating
alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up
costing you a lot of money. Thus developing trust and confidence in one’s partner is very important.
Most large firms, such as Southwest Airlines, are organized as corporations. A key difference between
a corporation on the one hand and a sole proprietorship and a partnership on the other is that
corporations involve the separation of ownership and management. Corporations sell shares of ownership
that are publicly traded in stock markets, and they are managed by professional executives. These
executives may own a significant portion of the corporation’s stock, but this is not a legal requirement.
Another unique feature of corporations is how they deal with profits and losses. Unlike in sole
proprietorships and partnerships, a corporation’s owners (i.e., shareholders) do not directly receive
profits or absorb losses. Instead, profits and losses indirectly affect shareholders in two ways. First, profits
and losses tend to be reflected in whether the firm’s stock price rises or falls. When a shareholder sells her
stock, the firm’s performance while she has owned the stock will influence whether she makes a profit
relative to her stock purchase. Shareholders can also benefit from profits if a firm’s executives decide to
pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and any dividends
that these profits support are both taxed. This double taxation is a big disadvantage of corporations.
A specialized type of corporation called an S corporation avoids double taxation. Much like in a
partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with
each owner’s share of the firm. Although this is an attractive feature, an S corporation would be
impractical for most large firms because the number of shareholders in an S corporation is capped,
usually at one hundred. In contrast, Southwest Airlines has more than ten thousand shareholders. For
smaller firms, such as many real-estate agencies, the S corporation is an attractive form of business.
A final form of business is very popular, yet it is not actually recognized by the federal government as a
form of business. Instead, the ability to create a limited liability company (LLC) is granted in state laws.
LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not personally
Saylor URL: http://www.saylor.org/books Saylor.org
310
responsible for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible
manner (like in a partnership). When paying federal taxes, however, an LLC must choose to be treated as
a corporation, a partnership, or a sole proprietorship. Many home builders (including Sander &
Lawrence), architectural businesses, and consulting firms are LLCs.
K E Y T A K E A W A Y
The three major forms of business in the United States are sole proprietorships, partnerships, and
corporations. Each form has implications for how individuals are taxed and resources are managed and
deployed.
E X E R C I S E S
1. Why are so many small firms sole proprietorships?
2. Find an example of a firm that operates as an LLC. Why do you think the owners of this firm chose this
form of business over others?
3. Why might different forms of business be more likely to rely on a different organizational structure?
Saylor URL: http://www.saylor.org/books Saylor.org
311
9.5 Conclusion
This chapter explains elements of organizational design that are vital for executing strategy. Leaders
of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make
decisions about the delegation of authority and responsibility when organizing activities within their
firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting
point for more complex decisions that lead to the creation of formal organizational charts. While
small businesses rarely create organization charts, firms that embrace functional, multidivisional,
and matrix structures often have reporting relationships with considerable complexity. To execute
strategy effectively, managers also depend on the skillful use of organizational control systems that
involve output, behavioral, and clan controls. Although introducing more efficient business practices
to improve organizational functioning is desirable, executives need to avoid letting their firms
become “out of control” by being skeptical of management fads. Finally, the legal form a business
takes is an important decision with implications for a firm’s organizational structure.
Saylor URL: http://www.saylor.org/books Saylor.org
312
E X E R C I S E S
1. The following chart is an organizational chart for the US federal government. What type of the four
structures mentioned in this chapter best fits what you see in this chart?
2. How does this structure explain why the government seems to move at an incredibly slow pace?
3. What changes could be made to speed up the government? Would they be beneficial?
