Strategy and its Influence on Organization Structure

Published by MBA Skool Team, Published on March 27, 2015

Strategy is about understanding market and technology evolution and transformation. With this understanding, develop capabilities which enables us to differentiate our products or services better than that of our competitors and create unique value proposition. Competency required for sustaining in the competition is becoming increasingly dynamic and it is very essential for a firm to adapt to the latest changes and reflect the same in their capability to sustain in the competition. The biggest problem with many successful companies is they are complesent about their capability and fail to understand the latest dynamics in the market and build their capabilities further.(Eq: Microsoft lost to Google. Apple leveraged their technical capability to mobile business and Nokia, Samsung lost in the race.)

However in many cases, the strategy framed by the organization is not successful because:

• The team which formulates the strategy is not the team executing it. Also the execution of the strategy is not well documented. Because of which their exist a communication gap between these teams leading to poor implementation.

• Strategy formulation team does not have a proper understanding of the operational aspects of the organization. So they tend to provide strategies which is hard to implement with the existing organization structure and capabilities at different levels of the organization.

• The business is becoming increasingly dynamic and competence required to sustain in the competition is also dynamic. However in many organizations, strategy formulation meeting is done anually and by the time it is implemented, it would be implemented by the competitors and will not be benefited by the changes proposed.

• Strategy execution phases is generally undervalued in the organization and also the managers involved in the execution are not given enough incentives to keep them motivated.

There are a few companies who sense the market dynamics and restructure their organization to develop capabilities efficiently:

1. L&T understood that the business in which it is operating is reaching maturity phase and many specialised players are entering the market. So it is planning to split the organization into sub-units and have corporate control over those units. Doing this, all the units can develop specialised capabilties required at each of the units and compete in the market.)

2. IBM was not much profitable in 1980-1990. Then after understanding the market better, they understood that the market is moving from computing devices to computing services. So they decided to restructure their organization and also strived to develop the capabilities to adapt to the latest changes because in selling services, we are not selling products but our capabilities our capabilities to satisfy the customer needs. It also realised that the strategy framed by the organization was nothaving much influence in the toplines of the organization. So they restructured the the strtegy formultion process by including generalists along with strategy formulation team so that the strategy formulated would be more realistic (generalists in the divisional levels would have better understanding operational aspects and can provide deep insights during formulation phase.)

3. McKensey understood that having generalists for solving business issues of its customers was not sustainable becase many specialised players entered the market (BCG) and were providing specialised domain consulting. So they restructured their organization by having generalists at the front end (client interface) becase they will be in a position to understand the cutomer issues better and functional/domain consultants at the backend to understand the customer issues and provide superior solution to its customers.

So we can conclude that to sustain in the competition, it is imperative to:

• Sense accuratekly changes in the market(technology, competency required, customer needs & regulations.)

• Structute the organization to be flexible so that it can channel its resources (tangibles & intangibles) to match the competency required to outperform the competitors.

So once the strategy is formulated, the execution of it requires a particular organization structure and culture to make a condusive environment for implementation. Organization like Google gives more important for innovative ideas of its employees. Hence it gives flexibility to its employees to work on the projects of their interest(20% of working hours). However in an assembly line industries which is has more emphasis on cost efficiency may not provide such a flexibilty to its employees since their USP is being cost leader. So once the strategy is decided, the way in which the organization has to be structured (centralised or decentralised)and how the employees at different levels has to be renumerated has to be decided so that the employees would be kept motivated

If the organization structure is decided to be decentralised, it is also very essential to decide what needs to be kept under corporate scope & business scope. Organizations operating in different geographical locations are less likely to perform well if they have a centralised structure and follow a common strategy at each of its divisions. Instead they can set goals for each of its divisions and can leave the strategy for different divisions at divisional level because they would have a better understanding of competition in their geographical location and also have better understanding of what their competitors are doing. These strategies can be reviewed by the corporate management and provide corrective actions if required.

Compensation of employees and other benefits has to be done at divisional level rather than centralised approach because different geographical locations have differences in culture and renumeration methodology. A few aspects like pension & insurance, it is better to have a centralised structure rather than making it decentralised to have optimal utilization of resources and reduce the overall cost structure because these are firm specific.

However if their is a mismatch in positioning of the company (Centralised/decentralised)& compensation/ benefit structure, there will be a lot of issues. For instance a company operating in diverse set of unrealtted business cannot offer uniform renumeration across all of its divisions. A few of the divisions in which it is operating might be in emerging phase and hence may not be much profitable despite putting the best efforts possible. At the same time a few units business units would be in mature state and acts as cash cow for the organization. So a proper analysis of the renumeration provided in the industry has to be considered in addition to the current phase of the industry in which the organization is operating has to be considered in deciding the renumeration for the employees of the organization across different business divisions.

This article has been authored by Venkatesh KG from Great Lakes Institute Of Management,Chennai

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