Strategy And Structure in Organizations

Strategy is an integrated and coordinated set of commitments & actions designed to exploit core competencies & gain a competitive advantage.
Organization structure
Organisation structure specifies the firm’s formal reporting relationships, procedures, controls and authority, & decision making process.
So organisation structure includes three components:
Administrative structure: This structure signifies division of labour in the organization. This includes dividing work into tasks or roles such as operations, logistics and transportation, and training, and recombining them into administrative units, e.g., branches, departments or divisions according to mission, function, and/or region. The structure depicted in organization charts, including tables of organization and equipment is the administrative structure.
Responsibility structure: This includes division of responsibility & authority to individuals within the organisation.
Control structure: This includes organisations system of measuring and evaluating performance on the basis of administrative structure & responsibility structure.
Relationship between Strategy and Structure
There are two main views on the relationship between strategy and structure. According to Alfred Chandler ‘structure follows strategy’.
Recent research has questioned the view that ‘structure always follows strategy’, and argued instead that ‘strategy often follows structure’. This second view, that ‘strategy follows structure’, is based on the idea that managers already working within a particular organisational structure will take the structure for granted and only consider strategies that will ‘fit’ with the existing structure.
Combining these two arguments we can say that ‘Strategy & structure’ have a reciprocal relationship. Organization structure is a critical component of effective strategy implementation process. Success of a firm depends on how well a firm’s business strategy is matched to its organizational structure. Developing an organization structure that effectively supports the firm’s strategy is difficult. For successful implementation of organization strategy, an organisation structure should have following characteristics:
Structural stability
This provides the firm a capacity to effectively manage its daily work routines.
Structural flexibility
This provides the firm an opportunity to explore competitive possibilities & then allocate resources to activities that will shape the competitive advantages the firm will need to be successful in future.
However strategy has a much more important influence on structure than reverse. But at the end organisation structure should provide adequate stability & flexibility that is necessary for successful implementation of strategy. Strategy that a firm decides to follow will govern the decision about the organisation structure that will be suitable for the firm but once in place organization structure influences the choice about future strategies because of organizational inertia derived from organization structure that inhibits efforts to change.
Evolutionary pattern of organizational structure & strategy
Pre-bureaucratic structures
This is the simplest form of structure & is usually based on traditional or charismatic dominance. Structure is totally centralised & lacks standardisation of tasks. This is useful in managing simple tasks.
Bureaucratic structures
It has certain degree of standardisation & is useful in managing slightly more complex & large scale organizations.
Functional structures
Structure is more standardised & centralised. Organisation is divided into separate functional divisions & employees within a particular division perform specific functions. This type of structure is useful in firms that provide standardised goods & services at low cost & in high volume.
Divisional structure
This is also called as product structure. Organisation is divided into divisions & each division has its own resources & functions. Divisions can be based on geographies or products/services.
Matrix structure
This structure combines the features of both functional & divisional structure.
Defining the strategy & strategy implementation process
Strategy formulation
As discussed earlier strategy has more important influence on structure than reverse. So whenever a firm starts a business it decides about what strategy it wants to follow. Broadly there are four different business strategies that firms follow:
Prospector- The primary challenge that these firms face is to identify & exploit new opportunities of industry & their primary capability is innovation.
Analyser- Analysers are fast followers. They closely monitor customer reactions & competitor activities & either improve upon successful competitor product offerings or offer comparable products at reduced cost.
Low cost defenders- These firms usually target stable segments of market. Their main emphasis is on efficiency through standardised practices & providing low cost products rather than innovation.
Differentiated defenders- These firms also target stable segments of market but their emphasis is on high quality differentiated products rather than low cost.
Strategy implementation
Organization structure forms a critical implementation dimension. Three important features upon which organization structure is based are formalisation, centralisation, & standardisation.
Formalization- This is the degree to which decisions & working relations are governed by formal rules. Formal rules lower the administrative cost & increase efficiency. Firms that have greater number of formal rules & regulations are called ‘mechanistic’ & firms with fewer formal rules are called ‘organic’.
Centralization- This defines the degree to which decision making authority is held by top management. In centralised organizations lines of communication & responsibility are clear defined. Decisions are usually made by top management & implementation path is clearly defined. This type of structure is followed in relatively stable, non-complex environments.
In decentralised organizations views & ideas may originate from different groups. Decision making power is dispersed in the organisation. This type of structure is effective in complex environments.
Specialization- This defines degree to which tasks and activities are divided in the organization. ‘Specialist’ firms direct their efforts to a well defined set of activities. ‘Generalist’ firms on the other hand are more diverse in their activities.
Firms following different business strategies usually differ on degree of formalization, centralization & specialization of organizational structure.
Relationship between Environment, Resources, Strategy and Structure
Strategy and structure are dynamically related according to classical model. E= Environment, R=Resource(capabilities) S=Strategy St=Sttructure Ti= Time
The nature of the environment (Et1) and the Resources (Rt1) of the organization influence the strategy (St1) chosen at time t1, and in this turn determines the organizational structure (St1). Then the evolution of the environment and/or of the organization brings about a new strategy and a new structure.
The dotted lines indicate that very often firms try to meet the environmental and structural demands without realizing that they have implicitly adopted a new strategy. Strategy grows out of structure and in turn may lead to its modification.
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Burns and Stalker (1961) view structure as a process in itself – a means of holding together an organization so that it is able to determine its own destiny. Organizations that operate in dynamically changing and uncertain environments tend to need organic/flexible structures and processes while more stable environments lend themselves to more familiar mechanistic bureaucratic structures. Eccles et al. (1997) list some of the main functions of organizational structure which provide:
a formal allocation of work rules;
channels for collaborative working;
boundaries of authority and lines of communication;
a means of allocating power and responsibility;
prescriptive levels of formality and complexity.
Strategy and Structure Alignment
Source: Emerald database “Strategy-Structure Alignment”
An important management responsibility is to design and implement the strategic organizational form best suited to the demands of its marketplace, customers, and business model. Since your competitors essentially have access to the same information and may have developed similar strategies, it is important to consider organizational design as one of your most powerful strategic weapons.
Strategy-Structure Alignment follows four phases:
Assessment: Data is gathered on strategy, organization and the business environment using interviews, archival research (of planning documents, performance studies, etc), and observations. Data is organized into issue categories and fed back to management in a way that supports validation and learning. Management reaches an agreement on key issues and problems, causal factors and organizational requirements.
Design: The design process goes through a series of design steps including scale and leverage assessment, the design of vertical alternatives and lateral processes and structures, impact analysis, etc. Each step is geared to execute strategy and address organization and cultural issues.
Alternatives – Choice: Changes in organization are based on a selection from among a set of alternatives. Because any organizational structure calls for trade-offs, the alternatives are worked through discussions that focus on the advantages and disadvantages of each, their fit with requirements, and the impact of implementation, etc. Frequently the organizational design that is.
The types of problems that can be addressed include:
• Changes in strategy causing poor alignment with the original organization design
• Needing to restructure parts of organization due to competitive pressures, introduction of
new technology, etc.
• Organizational growth is causing a reexamination of the organization design
• Poor execution and organizational effectiveness
The primary objective in Strategy-Structure Alignment is for management to design and decide upon an organizational structure that best supports its strategy and to develop a preliminary transition plan for next steps.
The concept of co-alignment
If strategy is about realizing a plan, then in implementing it, a suitable means of structuring resources and activities must be found and maintained. Olsen (1993) uses the term “co- alignment” to describe the “best fit” relationship between strategy and organizational structure. He observes that without co-alignment between structure, strategy and the environment, organizations may experience difficulty in achieving long-term success. The concept of co-alignment is depicted in Figure.

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Alignment is a systematic methodology for designing these capabilities in a fully rational and informed way. Strategy-Structure Alignment is strategy-driven and performance-oriented. It begins with a reaffirmation (and sometimes recalibration) of business strategy, explores the implications of that strategy for organizational structure, considers changing conditions in the environment, and through diagnosis identifies organizational problems and performance gaps. A sequential design process generates alternatives for organization design. A preliminary transition plan of a preferred alternative and its alignment then follow.
Relationship between Organizational Control, Structure and Strategy
There is a close relationship between organizational control, structure and strategy. The organizational control is one of the prime drivers for the organizational change whenever the organization changes its structure. As explained earlier; as organization grows the control of the organization becomes more complex and hence the structure of the organization is changed to cope with the changed environment. Organization structure itself is used as a control mechanism in implementing strategy.
For e.g.
large diversified firms using cost leadership strategy emphasize financial controls and usually will have some centralized financial reporting mechanism or financial department to exert more control over the cost
Single business companies and business units using a differentiation strategy will be emphasizing on strategic control and the mechanisms will be developed accordingly
Corporate Level Strategy and Structure
Depending on the type of corporate level strategy the organization is following the link between structure and strategy can be compiled as following.
Strategy
Structure
Major features
Related Constrained Strategy
Co – operative structure (M-form)
Structural integration, centralized strategic planning, human resource and marketing,R&D etc.
Cultural emphasis on corporate sharing.
Rewards are subjective , tend to follow overall corporate performance and divisional performance
Related Linked Strategy
Strategic Business Unit (M-form)
Structural integration, centralized strategic planning, human resource and marketing, R&D etc.
Cultural emphasis on corporate sharing.
Rewards are subjective , tend to follow overall corporate performance and divisional performance
Unrelated Diversification
Competitive form (M-form)
Small corporate head quarters with Finance and auditing as the most prominent functions. headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions
The legal affairs function becomes important when the firm acquires or divests assets
Divisions are independent and separate for financial evaluation purposes
Divisions retain strategic control, but cash is managed by the corporate office
Divisions compete for corporate resources
Latest Empirical Studies
Strategy and Structure in Context: Universalism versus Institutional Effects
Jose I. Galan and Maria J. Sanchez-Bueno
Tried to study the Chandler’s proposition that large organization evolve in to multi divisional forms as they grow in case of Spain. Spain being a newly developing market and with slowly integrating with EU and world market was studied to test whether the cultural factors has impact on the emergence of structure as organizations globalise and evolve. Their studies corroborated that as organizations evolve its complexity rather than culture that drives the emergence of the structure. Spanish organizations too followed the global trend of emergence of multi divisional structure. The same has been corroborated in case of other countries by
Researcher
Country
Dyas &Thanheiser
France
Whittington &Mayer
U.K
Whittington &Mayer
Germany
Institutional Forms and Organizational Structures: Homology, Trust and Reputational Capital in Professional Service Firms
Gerard Hanlon
Explores how professional service organizations has used a set of clan and bureaucratic controls to manage the organizational changes; both set of controls being present throughout the life span of an organizations but with varying levels of importance. Previous studies by Ouchi et. al says about the “clan structure” of professional services ,legal practices and accounting where there is high centrality of decision making and you belonging to that particular group or profession bringing you some privileges. Socialization aspect of clan structure was central to the success of organizations in that particular setup. Clan structure induces homology and trust based partner autonomy. Reputational capital is essential in making large and complex deals .
But as the services expanded the need for institutional forms also emerged and institutional controls started taking place. This need for formal interactions and following of norms undermined the “clan” nature of the services. There is a constant power struggle between the bureaucratic controls and clan /social and informal norms of control in professional organizations.
Exploring Strategy and Board Structure in Non-profit Organizations
William A Brown & Joel O Inverson
Applying Miles and Snow typology of strategy Brown and Inverson tries to understand the structure of the organizations of the various non-profit organizations in U.S. Their key findings are
Prospectors : have broader inclusive structure
Defenders : have tighter more focused structure
Environmental Turbulence, Organizational Stability, and Public Service Performance
George A Boyne & Kenneth J Meier
A turbulent external environment is widely believed to have damaging effects on public service performance. Much less consensus has been reached on whether the best response to turbulence is to retain or alter existing organizational structures.
They analysed these issues by testing the links between turbulence, structural stability, and performance in a large sample of public organizations. Results show that turbulence has a negative effect on performance, and that this is compounded by internal organizational change. Thus public managers can mitigate the harmful effects of volatility in the external
environment by maintaining structural stability.
Emerging trends in organisation structure
By the end of 20th centaury trend of large organizations was over. The environment in which firms were operating changed to great extent. The factors that are responsible in today’s environment are entirely different from traditional factors.
Due to change in factors responsible for success of organizations, organizations are changing their structure.
Major factors that have contributed to this change are:
Globalisation
Due to changes in technology & changes in international trade laws, more & more companies are competing in more & more number of markets. This has increased both the opportunities & threats present in external environment.
Change in Technology
Technology is evolving at a very fast rate & organizations have to constantly adapt to this change. Technological change has the biggest impact on organizations among all the factors.
Internet as a technology has provided a new distribution & marketing channel which has led to a change in the way organizations compete.
Information technology has also changed the internal working process of organizations. Technologies like ERP, SAP & Oracle have facilitated the information flow in the organizations which in turn has changed the way organizations work.
Einstein’s famous formula has been modified in modern days of technological advancement.
E = MC2
M is the Mastery of each individual (human capital).
C are the Connections that join individuals into a community (social capital).
C is the Communication that flows through those Connections.
E is the resulting Effectiveness of the team or organization
According to a paper ‘Do Org Charts Still Matter?’ by Thornton A May organizations are a combination of responsibilities, accountabilities, knowledge, process, interactions & future. Organization charts depict only first element of organization i.e. responsibilities & accountabilities. All other elements of organization are missing from the organization charts. Informal organizations that are existing because of web based interactions are not shown in these charts.
Constant change
As competition is increasing day by day so organisations can’t depend on what they do today to be successful tomorrow. Environment in which industries are competing is also very uncertain & dynamic. This uncertainty demands structural flexibility. Technological change is one of the factors that are leading to environment change. As no company is confined to geographic boundaries so this has increased exposure to different emerging markets & side by side it has also increased the competition from different players entering into the market. So companies have to adapt themselves to ever changing demands of consumer markets.
Mergers & acquisitions
In recent years many mergers & acquisitions happened in global economy. When two organisations combine it is mandatory that organisation structure provided by the management should be conducive to culture of both the organizations. Most of the failures in case of mergers & acquisitions are due to cultural clash.
Diversity in the workforce
People from diverse backgrounds in terms of geographies & cultures are working in organizations. So organization structure should be such that it increases the productivity, improve morale, heighten creativity and enhance decision-making power among the employees.
Emerging organisation structure trends
Because of above mentioned factors the structure of many companies has become flatter, less hierarchical, more fluid and even virtual. Increasing use of IT enabled conventional organization structures to transform into more fluid form. Few of the emerging trends in organisation structure are:
Teams
This is the new trend of organization structure. Entire organization may work as a team or it may be a combination of few teams which coordinate with each other.
Xerox, Motorola are among the few companies that follow team organization structure.
Network
Network structure is also an emerging trend in organization structure. The main reason for using this type of organization structure is that firms outsource the tasks & activities to other firms that can perform those tasks in a better & cost effective way. Success of this type of structure depends upon the coordination & control of external relations. Structural flexibility is one of the major success criteria for this type of organization structure.
Partnership & alliances
As competition is increasing in the economy so firms realise that it is very difficult to survive in this highly competitive environment alone. So firms go for partnership & alliances with other firms to diversify the risk.
Virtual organizations
This is the most radical form of organization structure. It is also called as boundary-less organization. This means while the core of the organization can be small but still the company can operate globally be a market leader in its niche. Because of the unlimited shelf space of the Web, the cost of reaching niche goods is falling dramatically. The success of this type of structure depends on information technology.
Self organised communities
The structure followed by latest web 2.0 technologies is self organised communities. In this case the job of top management is just to maintain the motivation level of employees to participate in the community.
The TATA Group
Introduction: Activities of the Organization
The Tata Group is a multinational company with its head-quarter located in Mumbai, India. The Tata Group is one of the largest private employers in India employing more than 350000 employees. Tata companies operate in seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. Every Tata company or enterprise operates independently. Each of these companies has its own board of directors and shareholders, to whom it is answerable. There are 28 publicly listed Tata enterprises and they have a combined market capitalization of some $60 billion, and a shareholder base of 3.5 million. The major Tata companies are Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Tea, Indian Hotels and Tata Communications.
Tata Steel became the sixth largest steel maker in the world after it acquired Corus. Tata Motors is among the top five commercial vehicle manufacturers in the world and has recently acquired Jaguar and Land Rover. TCS is a leading global software company, with delivery centers in the US, UK, Hungary, Brazil, Uruguay and China, besides India. Tata Tea is the second largest branded tea company in the world, through its UK-based subsidiary Tetley. Tata Chemicals is the world’s second largest manufacturer of soda ash and Tata Communications is one of the world’s largest wholesale voice carriers.
Rationale for selection
Tata, with its long history, is synonymous with the Indian economy. Its growth has been a prime index to be watched for gauging India’s growth. With a history of over 100 years, Tata has grown leaps and bounds by diversifying into different businesses. These businesses are so diversified and different that it presents us an opportunity to draw contrast between the different kinds of structures adopted in these businesses. Tata’s solid presence in major industries like Automobiles (Tata Motors), Steel Industry (Tata Steel), IT Industry (TCS), Hospitality Industry (Taj Hotels) and many others is evident of their successful strategy formulation and implementation. All these businesses are driven by a single level corporate level strategy.
Also with the increasing globalisation there is an increased pressure on the Tata group companies to expand their operations beyond the nation’s boundaries. There has been the realization for the same and the Tatas have been proactive in sensing and capturing the internationalization opportunities. The widely known Corus acquisition by Tata Steel, the TCS foray into international markets, Tata Tea’s acquisition of U.K based Tetley tea have helped Tata to establish the brand Tata in the international arena. This has not been an independent event. In fact these steps have had serious implications to the structure of the organization.
The study of Tata aims at obtaining insights into the impact of strategy change (diversification, internationalization) on the structure of the organization as a whole (reconstructionist approach). Also the impact of structural change on the firm’s strategy (structuralist approach) could effectively be studied with respect to Tata given its long history. So the Tata group presented an exciting opportunity to draw the relationship between strategy and structure of an organization.
TAJ Hotels Resorts and Palaces
The Indian Hotels Company (IHCL) and its subsidiaries are collectively known as Taj Hotels Resorts and Palaces, which is recognized as one of Asia’s largest and finest hotel companies. Incorporated by the founder of the Tata group, Jamsetji Tata, the company opened its first property, the Taj Mahal Palace hotel, Bombay in 1903. Taj Hotels Resorts and Palaces comprises 64 hotels in 45 locations across India with an additional 15 international hotels.
Areas of Business
Luxury
Premium
Mid-Market
Value
Vivanta
Ginger
Gateway
Taj
IHCL operates in the luxury, premium, mid-market and value segments of the market
In addition, IHCL has Taj Exotica (resort and spa brand found in the most exotic and relaxing locales of the world ) and Taj Safari (wildlife lodges that allow travelers to experience the unparalleled beauty of the Indian jungle amidst luxurious surroundings) which provide services to different segments of the market.
With its diversification strategy revolving both around products and markets, the Taj Group of Hotels follow Cooperative Form of Multidivisional Structure to implement its Related Constrained Strategy of diversification.
In this Cooperative Form of Multidivisional Structure, IHCL uses Structural Integration devices to create tight links among all divisions. The Corporate Office located in Mumbai emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions. IHCL has a well laid out procedures for working and conduct of business. These governance mechanisms are clear and unambiguous. Everyone in the company is expected to follow the procedures followed in the company and anyone found violating them is questioned for the breach and suitable action is taken.
The TATA Code of Conduct governs all the policies, procedures and behaviors desired from its associates across all its Hotels. There is more of formalization as most of these policies and norms are written down. The customer also feels at home when he is familiar with the brand and its level of commitment and service, making it the customers first choice at any location where its available. It also helps the company control the costs as there is a high degree of standardization of products and services. The transaction costs are also lower since most of the duties are well defined and less reason for conflict within organization.
The culture of the IHCL emphasizes cooperative sharing. All the divisions and subsidiaries of IHCL share the corporate strengths of IHCL. The TATA/Taj Brand provides the trust from its customers to all its subsidiary units. Also, sharing divisional competencies facilitates the IHCL’s effort to develop economies of scope which is very well achieved by its multidivisional structure. Sometimes temporary teams or task forces are formed around certain projects/events which is facilitated by sharing competencies that are embedded within several divisions.
So, to align its structure with its Related Linked Strategy of Diversification, the IHCL has developed a matrix kind of organization from the multidivisional structure. Here, as can be seen in the figure below there is a dual structure combining both functional specialization and business product specialization.
So, measuring the organizational structure of IHCL on the dimensions of Formalization, Centralization, and Specialization we have:
Tata Steel
The Tata Steel division is the oldest business unit under the Tata group. Established in 1907, Tata Steel has evolved over the years to become an extremely competitive steel manufacturer.
Evolution of the Strategy and Structure
During the pre liberalization period (before 1991), Tata Steel faced a low levels of competition. SAIL was the only major competitor. The period was also reflective of the following: quantitative restrictions (license raj) on the levels of production, the control over the price and the selection of customers. The tight regulatory nature of the government bodies over the manufacturing units had implications over the strategy of the firm. The main aim of the unit was to meet the levels of production as set by the government and there was no motive to increase productivity/efficiency or reduce the cost. Thus the firm had a centralized structure. The various functions