OD_C7 (Organizational Design & Strategy) (OD_C7 ...



Organizational Design and Strategy

Alan S. Gutterman

This chapter focuses on the relationship between organizational design and strategy. Peter Drucker wrote: “Structure is a means for attaining the objectives and goals of institutions. Any work on structure must therefore start with objectives and strategy.”[1] The notion of structure, an important element of organizational design, following strategy has been embraced by many others, as described below, and it is clear that “strategy” and “organizational design” are widely recognized as co-equal determinants of organizational success. The following observations by Bryan and Joyce are compelling:

“Executives invest enormous energy in product designs and long-range strategic plans, though many of these initiatives become obsolete as markets and competitors adapt, social norms and regulations evolve, and technologies advance.” Yet most corporate leaders overlook a golden opportunity to create a durable competitive advantage and generate high returns for less money and with less risk: making organizational design the heart of strategy. It’s time for executives to recognize the strategic need to develop organizational capabilities that help companies thrive no matter what conditions they meet. … Our research convinces us that in the digital age, there is no better use of a CEO’s time and energy than making organizations work better.”[2]

Bryan and Joyce based their arguments on what they believe have been fundamental changes in the external environment for companies that have made traditional principles of organizational design obsolete. For example, while they concede that hierarchical authority and vertically integrated structures made sense when capital was the scarce resource and interaction costs were high, these structures no longer make sense in an environment where tapping into the knowledge, “mind power”, relationships and other talents of the workforce is the key to value creation. They believe that companies must adopt organizational design practices that increase the productivity and motivation of workers and enable them to create sources of significant new wealth. They also stress that “remaking” the design of organizations is a relatively low risk way to undertake fairly dramatic shifts in competitive strategy.

Both organizational strategy and organizational design fall squarely into the duties and responsibilities of top management. The model and flow is quite familiar[3]:

• The CEO and other members of the top management team scan and evaluate both the external environment of the organization (i.e., opportunities, threats, uncertainty and resource allocation) and the “internal situation’ of the organization (i.e., strengths, weaknesses, distinctive (“core”) competencies, leadership style and past performance) and use that information to determine the appropriate “strategic direction” for the organization, which includes an overall mission, official goals and objectives, operational goals and competitive strategies.

• Decisions regarding the strategic direction of the organization influence decisions regarding the elements of organizational design, such as structure, information and control systems, production technology, human resources policies and incentives, organizational culture and inter-organizational linkages. Existing elements of the organizational design may also influence the strategies selected by top management. For example, an “innovative” organizational culture may cause top management to be influenced toward emphasizing new product development rather than undertaking relatively small changes to existing products. In addition, organizational structure may be influenced by other elements of organizational design, particularly the form of production technology relied on by the organization.

• The effectiveness of the organizational design can/should be measureable in terms of “outcomes”, including measures of efficiency and productivity and performance against goals established as part of the strategic direction.

• The “outcomes” inevitably cause changes in the “internal situation” of the organization that must be continuously assessed to identify necessary changes in the strategic direction of the organization. The best result, of course, is an organizational design that creates new core competencies and/or strengthens existing core competencies so that the organization can compete effectively in its environment (e.g., by seizing opportunities and/or fending off threats and managing uncertainties).

Elements of Organizational Strategy

Jones has described “organizational strategy” as the plan of action that a company designs and executes in order to create value for its stakeholders and gone on to explain that a company’s strategy includes the decisions made, and actions taken, by its management to shape and manage its organizational domain in order to effectively use its existing core competencies and develop new core competencies so that the company can achieve a competitive advantage, increase the value the company creates for its various stakeholder groups and become a better competitor for scarce resources.[4] Successful definition and execution of company strategy is an essential element to the continuous process of creating value that is necessary in order for a company to grow and survive in a changing environment. If a company does not regularly evaluate its position within its chosen domain and establish new value-creation goals and objectives it will likely be overrun by competitors vigorously pursuing the same scarce resources that the company needs to flourish.

When a company is first launched it must muster the scarce resources contributed by the founders and other initial stakeholders and develop a strategy to use those resources to create core competencies that can be converted into a competitive advantage in the company’s target market. If the strategy is successful the company can attract new resources needed for it to grow and escape the risky start-up stage—capital, more experienced and qualified employees, customers and strategic alliance partners—and can use those resources to retool its strategy and long-term goals and objectives. Among other things, the company can use its newly acquired resources to strength its original core competencies and develop new ones, thus creating an even more formidable competitive advantage that increases its ability to obtain scarce resources and start the cycle once again.[5] Obviously, resources and distinctive core competencies are key ingredients for success; however, sustainable long-term growth turns on the ability of the company, through its management, to strategically deploy and exploit those resources and competencies.

Core Competencies

A company’s core competencies include its skills and abilities in specific value-creation activities (e.g., research and development (“R&D”), manufacturing or marketing) and Hill and Jones have observed that for companies “[t]he strength of its core competencies is a product of the specialized resources and coordinated abilities that it possesses and other organizations lack”.[6] Jones has broken down “specialized resources” into two categories: functional resources, which include the skills of the company’s functional personnel in value-creation activities and managing new technology and the assets that the company has invested in developing and exploiting those skills; and organizational resources, which include the skills and talents of the company’s senior management team, the vision of the company’s founder(s) or CEO, valuable and unique tangible and intangible assets (e.g., land, capital, plant equipment and patents and other forms of intellectual property), brand names and the good reputation of the company.[7] In order to create value from their functional and organizational resources, and maintain the ability to continuous access new resources, companies must ensure that all the elements of their organizational design are properly aligned and this includes alignment between their business strategies and their organizational structure and culture.

Comments such as those cited above from Bryan and Joyce suggest that an organization’s ability to align all of its organizational design elements and coordinate its functional and organizational resources can become still another important core competency when done well. In order to achieve a competitive advantage through its coordination abilities, an organization must develop control systems that can be used to coordinate and motivate members of its workforce at all levels in the organizational hierarchy. Effective coordination also involves striking the appropriate balance between centralization and decentralization of authority and establishing and promoting shared cultural values that can fill in any gaps in formal rules and procedures and provide employees with a foundation upon which to make moment-to-moment decisions regarding operational issues and problems. Finally, decisions regarding coordination allow organizations to keep up with their external environment. For example, organizations operating in dynamic and rapidly changing industries can coordinate product development activities through the use of small teams in order to accelerate development and launch of new products at a rate demanded by the market.

Structuralist and Reconstructionist Strategies

The traditional process for identifying and executing strategy championed by Porter and others calls for companies to first conduct an analysis of the environmental conditions in which they operate and then carve out a competitive advance based on their distinctive core competencies by following either a “differentiation” or “low cost” strategy.[8] In fact, the discussion below of strategies for the various organizational levels relies heavily on this approach, which Kim and Mauborgne have labeled as the “structuralist” approach because it assumes that the structure of the environment confronting the company determines the strategy that the company must follow—in their words, “structure shapes strategy”.[9] While noting that this approach has obviously dominated the study and practice of strategy for decades, they argue that one cannot ignore the examples of situations where firms adopted and implemented strategies that shaped the structures of the industries in which they were involved and cited Ford’s Model T and Nintendo’s Wii as two illustrations. Kim and Mauborgne suggest that companies do have two choices: “structuralist strategies that assume that the operating environment is given and reconstructionist strategies that seek to shape the environment”. Reconstructionist strategies, popularly referred to by Kim and Mauborgne as “blue ocean strategies”, are based on the presumption that it is possible and preferable in the right circumstances for companies to “reverse the structure-strategy sequence” and reshape their operating environment in a way that is most favorable to them.[10]

Kim and Mauborgne describe the optimal conditions for each of the two strategies and argue that the choice depends on structural conditions, the resources and capabilities of the organization and, finally, the organization’s “strategic mind-set”. For example, they claim that a structuralist approach is a good fit when[11]:

• Structural conditions are attractive and the organization has the resources and capabilities to build a distinctive differentiation or low cost position.

• Structural conditions are less than attractive but the organization has the resources and capabilities to outperform competitors based on differentiation or cost.

• The organization has a bias toward defending current strategic positions and a reluctance to venture into unfamiliar territory.

On the other hand, a reconstructionist approach is recommended when[12]:

• Structural conditions are attractive but players are well-entrenched and the organization lacks the resources or capabilities to outperform them.

• Structural conditions are unattractive and they work against an organization regardless of its resources and capabilities.

• The organization has an orientation toward innovation and a willingness to pursue new opportunities.

Regardless of which strategic approach is selected, Kim and Mauborgne maintain that the chances of success for the strategy hinge on the company’s ability to develop and align three strategic “propositions”, which they describe as follows[13]:

• A “value” proposition that attracts buyers and is measured by the utility that buyers receive from an offering minus the price they are asked to pay for the offering.

• A “profit” proposition that enables the company to make money out of the value proposition and is measured by first identifying revenues generated from an offering and then deducting the costs associated with producing and delivering the offering.

• A “people” proposition” that motivates persons working for (or with) the company to execute the strategy and is measured by the existence and success of the positive motivations and incentives that the company puts in place for those persons.

Kim and Mauborgne observe that alignment of these three propositions is important for both the structuralist and reconstructionalist strategies; however, a key different between those strategies is that companies following the structuralist approach choose to compete on the basis of either differentiation or low cost while companies following the reconstructionalist approach will pursue both differentiation and low cost at the same time. As an illustration of how the reconstructionalist approach might work, Kim and Mauborgne referred to the strategies adopted by the city-state of Dubai to create, in the midst of seemingly impossible conditions, one of the fastest-growing economies in the world over the last two decades[14]:

• The “value” proposition to buyers, in this case foreign investors, included creating an environment for “doing business” that differentiated Dubai from other emerging markets and reduced the costs that investors could expect to incur when establishing business activities in Dubai. Among other things, Dubai created a dozen world-class free zones with substantial incentives for investors, allowed 100% foreign ownership and free repatriation of capital and profits, eliminated import and re-export duties, granted an extended tax holiday for corporate profits, expedited registration processes, created world-class logistics capabilities and established a transparent legal system.

• The “profit” proposition for the state included the use of differentiated ways of generating revenues and reduction of its cost structure. Unlike its neighbors, Dubai avoided heavy dependence on volatile oil revenues and focused on non-oil-based businesses, including investments in the infrastructure created to support the investors’ activities (e.g., shipping and port services, transport, tourism, aviation, real estate development, export commerce and telecommunications). Dubai also restricted citizenship, which allowed the state to minimize its social liabilities. Finally, Dubai outsourced military, diplomatic and security activities to the United Arab Emitrates, thereby avoiding substantial burdens on the national budget.

• The “people” proposition for the citizens of Dubai included “learning and money-making opportunities, social security benefits, job guarantees and international recognition. In addition, Dubai differentiated itself from other Arab countries in the region by striking a “balance between traditional values and a cosmopolitan environment”.

Kim and Mauborgne maintain that firms with multiple businesses must make separate decisions for each business on the best type of strategic approach to pursue for that business. They argue that “[d]ifferent business units face different structural conditions with different resources and capabilities and have different strategic mindsets”[15] and, as such, managers must be prepared to follow a structuralist approach with some businesses and a reconstructionalist approach with others.

Multiple Levels of Strategy

While we often speak generally of a company’s “strategy” and provide detailed prescriptions regarding the process of “strategic planning”, from an organizational design perspective it is helpful and important to recognize that a strategy must be developed for each of several different levels in the organizational structure—functional, business, corporate and global[16]:

• Functional-level strategies focus on creating and sustaining functional-based core competencies (e.g., R&D, marketing or manufacturing). Among the tactics that managers can use are training and development of personnel and scanning the functional environment to maintain awareness of trends and innovations that can be used to manage the company’s participation in that environment and build and sustain a competitive advantage. Functional-level strategies also include heavy investment in maintenance and expansion of specific functional resources.[17] Functional-level strategies should be prepared by the managers of each functional department and should also address how the function intends to support the achievement of business-level strategies.

• Business-level strategies involve the combination and exploitation of functional-based core competencies—the output of the functional-level strategies—to put the company in a position where it has a competitive advantage within its specific domain. Business-level strategies are determined by the members of the senior management team and require decisions about which domains the company should enter and how the core competencies should be deployed within those domains in order to position the company so that it can achieve and sustain a competitive advantage.[18] A business’ strategic plan should demonstrate how its activities will meet the goals and objectives established for it in the the corporate-level plan and describe how the business will compete in each of its domains.

• Corporate-level strategies focus on developing and exploiting all of the company’s function-based core competencies to protect and enlarge the company’s existing domain(s) and expand and grow operations by successfully entering new domains (i.e., markets). As with business-level strategies, corporate-level strategies are the responsibility of the senior management team and require identification and combination of value-creation skills in all of the company’s business units and at the corporate headquarters to improve the position of all of the business units and the total combined value and competitiveness of the company.[19] Corporate-level strategies determine which businesses and markets the company wishes to engage in and provide an overriding framework for strategy-making at all other levels.

• Global-level strategies involve identification and selection of opportunities for expanding operations into foreign markets in order to gain access to scarce resources, enhance existing core competencies and develop new core competencies. Global-level strategies cannot be made and executed in isolation and must be integrated with operational activities, and strategies established at other levels, in the domestic market. For example, when launching a new product that will be marketed around the world a decision must be made between a global strategy (i.e., a standard product design and marketing scheme that will be used in every country) and a multi-domestic strategy (i.e., customized product designs and marketing schemes for each country). Standardization is generally less costly; however, it may ignore important national differences that make the product less competitive in large foreign markets.

Strategic Planning Processes

Business plan preparation and establishing formal processes for strategic planning are important topics in their own right and business strategies at all levels should be created, reviewed and updated as part of the company’s formal planning process.[20] Plans should include long-term (i.e., five years or more), intermediate-term (i.e., one to five years) and short-term (i.e., less than one year) goals and tactics. Business- and corporate-level plans generally have both long- and intermediate-term goals and functional-level plans focus on the intermediate- and short-term. The formal planning process should anticipate continuous review and amendment of plans at all levels. Corporate-, business- and functional-level planning should be led, respectively, by senior executives, divisional managers and functional managers; however, senior executives should ultimately review and approve business- and functional-level plans after receiving input from all management levels. Properly done, the process of planning and setting strategies at the various levels should provide all managers with an opportunity to get involved in setting the goals and objectives of the company and provide them with a sense of direction and purpose that can guide their communications with subordinates and their day-to-day management activities. Strategy definition also facilitates the fundamental organizational design objectives of better coordination and control throughout the company.

Even as he or she continuously delegates authority and discretion to make decisions in a number of areas, the CEO must be continue to be primarily responsible for strategic planning, although he or she certainly can and should solicit the views of others before finalizing or changing strategies. It also should be emphasized that strategic planning should be seen as a daily, rather than an episodic, exercise that requires ongoing attention and monitoring from the CEO. While organizations can, and should, engage in formal strategic planning activities such as the development and approval of annual strategic plans and budgets, the output from the planning process should be continuously revisited and, if necessary, modified quickly in order to take into account unforeseen changes in the environment.[21]

Strategy and Structure

In the following sections, a fair amount of attention is paid to selecting the organizational structure that is most closely aligned with the chosen strategy for the particular level. This focus follows the well-known adage of “structure follows strategy” that was first popularized by Alfred Chandler, who studied the evolution of large US corporations over a number of decades and concluded that changes in the organizational structure of those firms occurred as a result of changes that they made in their strategies (i.e., adding new products and/or markets) as time went by.[22] Theories regarding the relationship of strategy to structure have continued unabated over the years. For example, strategic frameworks or models that assume that firms choose from among “innovation”, “cost minimization” and “imitation” strategies include the following prescriptions as to what type of organizational structure is best suited to each strategy: innovators should use an organic structure since it is best suited to creating the flexible environment and free flow of information that is required for innovation to occur; cost minimization requires the efficiency, stability and tight controls associated with a mechanistic structure; and imitators need a structure that combines elements of the mechanistic, to reduce costs and maintain controls over production, and organic structures, to identify the best paths for new and innovative products.

While the influence of strategy on structure is clear and important, it is not the only contingent variable that managers must take into account. The size of an organization will definitely have an impact on its structure and evidence indicates that as an organization grows the structure will change to accommodate more and more specialization, departmentalization, centralization and formal rules and procedures. The technology that an organization uses in its production process has also been shown to influence its organizational structure. Woodward found that firms relying on unit or process production are best advised to use organic structures while firms relying on mass production are most efficient when operating through a mechanistic structure.[23] Others looking at the relationship between technology and structure have focused on the degree of “routineness” in a firm’s production process and argued that when technology is routine the optimal organizational structure is mechanistic, since standardization is important, and when the technology is non-routine the preferred path is an organic organizational structure.[24] Finally, the level of stability and certainty in a firm’s external environment also influences its organizational structure. In general, a firm operating in a dynamic and rapidly changing environment needs the flexibility afforded by an organic organizational structure while a firm confronted with a relatively stable and simple environment can compete effectively with a mechanistic organizational structure.[25]

Theorists such as Miles and Snow have suggested that organizations formulate strategies that will be congruent with their external environment and then design their organizational structures in ways that fit well with both strategy and environment. They argued that, for example, a so-called “prospector” organization would be more willing to take risks in pursuit of innovation and thus emphasized R&D activities in an organizational context that is flexible and decentralized. In contrast, a “defender” organization preferred to compete on reducing and controlling costs and production efficiency and thus used an organizational structure that was more mechanistic with centralized authority, close supervision and low levels of employee empowerment or autonomy.[26] Miles and Snow that organizations might, in addition to “prospector” and “defender” strategies, elect an “analyzer” strategy, which balanced cost controls with flexibility and adaptability; or a “reactor” strategy, which, as the name implies, came with no clear organizational approach and resulted in continuous and abrupt design changes that were difficult to execute and which often lead to confusion and poor morale. Miles and Snow point out that, in addition to organizational structure, the choice of strategy impacted other elements of organizational design such as recruitment policies.[27]

Strategy and Control Systems

While the discussion below focuses on two elements of organizational design—organizational structure and culture—and their relation to organizational strategy, there are other elements of organizational design that are relevant to proper execution of strategic decisions. Hill and Jones have focused on how strategic control systems can and should be used in the course of implementing organizational strategy and control systems are part of the “business processes” that are generally recognized as an element of organizational design.[28] For Hill and Jones, strategic control systems include the formal target-setting, measurement and feedback systems used to whether or not a company is successfully implementing its chosen strategies. Effective control systems are flexible provide accurate information and timely and are based on measures that are tied to organizational goals of developing distinctive competencies in efficiency quality innovativeness and responsiveness to customers.

Hill and Jones suggest that there are several types of strategic control systems, including the following:

• “Personal control”, which involves questioning and probing by managers to better understand their subordinates. Personal control activities will hopefully create opportunities for learning and development of competencies.

• “Output controls”, which include setting appropriate performance targets for each division, department and employee and then measure actual performance against those targets.

• “Behavior controls”, which involve establish a system of rules and procedures to direct the activities and/or behaviors of divisions, departments and employees. The primary objective of behavior controls is establishing standards, predictability and accuracy.

More and more, “technology”, still another element of organizational design, has revolutionized the way in which each of the aforementioned controls are established and administered. For example, use of a consistent, cross-functional software program supports standardization of behavior and entry and analysis of information needed to measure performance. Technology also serves as an integration tool by facilitating sharing and dissemination of information throughout the organization.

Hill and Jones suggest that controls should be established at each level within the organizational hierarchy and that levels set at the higher levels should provide the basis for designing the control systems at lower levels. For example, controls begin with the board of directors and then proceed continuously downward through the corporate, divisional and functional levels to the first-level managers who are on the “front line” working directly with employees, customers, vendors and other business partners. At each level the process of designing an effective control system is largely the same: first, establish standards and targets; second, create measuring and monitoring systems; third, compare actual performance against the established targets; and, finally, evaluate results and take action, if necessary, including modifications to standards and targets and/or altering methods used to achieve desired performance.

Strategy and Human Resources Management

Recruitment and motivation of talented human resources is one of the commonly mentioned elements of “organizational design” and many have argued that human resources management, including integrating decisions about people with decisions about how the strategic objectives of the organization can be attained is a crucial issue for companies around the world. Traditional notions about the role of the human resources function (i.e., legal compliance and efficient human resources processes and programs in areas such as compensation and benefits) have been replaced with the idea that human resources management is too important to be left to just one department and must be driven by senior executives as part of the overall strategic planning process. Integration of organizational strategy and human resource management makes sense because, quite simply, the success of any strategy depends on the people asked to carry it out.[29]

Bryan and Joyce, who were referred to above, made a number of suggestions for changes that companies should consider when retooling their organizational design elements to “mobilize minds”. For example, they believed that companies should create and support formal networks or communities of mutual interest, which they refer to as “communities of practice” for collaboration among members who share common interests rooted in similar jobs, skills, or needs for knowledge. In addition, they called for companies to establish “knowledge marketplaces” where professional and managers could go to exchange and transfer knowledge that is needed in order to solve problems that arise as efforts are made to implement the organizational strategy. Companies were also instructed to establish “talent marketplaces” to improve the efficient allocation of human resources throughout the organization. Talent marketplaces would allow employees to “explore alternative assignments” throughout the organization, thereby enhancing their experience and, hopefully, improving their morale and job satisfaction. At the same time, talent marketplaces would facilitate staffing of important projects with the “best people” regardless of where they might normally be located within the organizational structure.[30]

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Managing and Supporting Communities of Practice

Harris discussed the leadership and management skills that are required in order for “communities of practice” to thrive within an organization. Harris described these communities as “naturally occurring groups of people that share similar goals and interests, and, in pursuit of these goals and interests, apply common practices, use the same tools and express themselves in a common language”. Harris observed that support for communities of practice should be in the form of developing and implementing an organizational architecture that preserved and enhanced the “healthy autonomy” of the communities while also connecting those communities to the rest of the organization in order to be sure that there was a path for disseminating the results of the experiments conducted within the communities. Harris cautioned that managers should resist seeking to exert control over the composition and activities of communities of practice and should instead employ a participative and facilitative management style, provide a framework for the actions of community members and allow the group to develop its own processes and rules for internal leadership.

‌Source: C. Harris, Characteristics of Effective Managers (2010), [accessed June 28, 2015], 7-8.

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Using Organizational Design as a Competitive Advantage

In addition to “structure supporting strategy”, effective selection and execution of an organizational design, including structure, can be a valuable strategic tool in and of itself to the extent that it allows the organization to establish and maintain a competitive advantage. Structure is needed in order to allow the organization to execute its strategy—organizational structure establishes the roles for everyone in the organization and guides them as to how they are expected to collaborate internally and interface with customers and markets. Deloitte Consulting LLP has argued that a tight alignment between organizational design and strategy can help the organization achieve a number of common and important strategic goals, including efficiency, improved performance, improved ability to meet customer requirements and generation of shareholder value.[31] Other, more specific, advantages of effective organizational design cited by Deloitte included the following:

• Effective organizational design creates a new working environment within the organization, one that not only is better able to execute the current strategy but also better positioned to identify and exploit new opportunities.

• Effective organizational design leads to faster decision making, improved organizational metrics, increased productivity and profitability, all important strategic goals and objectives. In addition, however, organizational design done well can generate a wide range of “soft benefits”, including improved reputation, branding, quality and customer and employee satisfaction.

• Effective organizational design can reduce costs by eliminating unnecessary hierarchical levels and inefficient processes. At the same time, organizational design can increase efficiency by empowering managers to act quickly and decisively and providing them with the resources needed to do their jobs and execute the organizational strategy.

• The organizational design process is an opportunity to redesign jobs and create new career paths within the organization, thereby increasing the motivation of the workforce and facilitating their ability to tap into their creativity and pursue innovation. An improved environment for employees allows the organization to generate new ideas—and new value in the form of products and processes—and compete for global talent.

• Organizational redesign in the context of a change in organizational strategy can be a powerful sign to employees, customers, shareholders and other stakeholders of the decision of senior executives to make significant changes in strategic priorities.

The bottom line assessment from Deloitte is that organizational design should be continuously assessed to measure the degree to which the design facilitates the achievement of the strategic goals and objectives of the organization. In particular, the roles and responsibilities of the executive team need to be well defined and supportive of the organization’s mission and goals and utilization of human and other resources should be evaluated to ensure consistency with organizational strategy. In addition, decision making processes should be well-defined, clearly understood and followed and the capabilities and processes required for competitive advantage should be effectively grouped and managed.[32]

Functional-Level Strategy

Each function within a company (e.g., R&D, marketing or manufacturing) should strive to acquire and develop the resources necessary for it to become a functional-level core competency that can be converted into a competitive advantage for the company as a whole. For example, companies can become market leaders based on their unique skills and competencies in efficient production and/or on the strength of their brand name and associated good reputation. Functional-level core competencies generally fall into one of two major areas: the ability of the company to execute specific functional activities more efficiently and a lower cost than competitors (“low cost advantage”); and the ability to perform specific functional activities in a way that clearly and positively differentiates the products and services of the company from those offered by competitors (“differentiation advantage”). A low cost advantage from reducing manufacturing costs obviously allows the company to reduce its prices in relation to those quoted by competitors. A differentiation advantage that is valued by the customer allows the company to increase the profit margin on its products because it is able to charge and collect a higher price from customer.[33] However, it is difficult to simultaneously differentiate products and reduce costs and functional-level priorities must be guided by business-level strategies as to what path should be taken in positioning and promoting specific products. The main tools that a company can use to support its functional-level strengths and build them to the point where they become a core competency is identifying the most appropriate organizational structure for the functional activities and creating the proper culture within the function to develop the desired skills and methods of interaction.[34]

Each function relies on different and specific techniques for lowering costs and differentiating products and, taken together, these become the foundation for their functional-level strategies. In general, the most important goals and objectives for a functional-level strategy are achieving superior efficiency, quality, innovation and customer responsiveness. In order to measure the success of a functional-level strategy the company should identify and track specific performance metrics. For example, efficiency can be measured by looking at the volume of output for a given unit of input, product quality can be determined through measures of defects, innovation can be gauged by the number and value of novel features integrated into the company’s products, and responsiveness can be evaluated through customer surveys and objective measures of support activities (e.g., average time required to respond to customer queries).

General Strategies for Creating Low-Cost and Differentiation Advantages

Some of the general strategies that various value-creating functions might use to create and maintain low-cost and differentiation advantages include the following[35]:

• The manufacturing function can reduce costs by developing skills and acquiring resources in flexible manufacturing technology and can achieve differentiation advantages by improving the quality and reliability of finished products.

• The human resources function can contribute to cost savings by reducing turnover and absenteeism and can support creation of a differentiation advantage by recruiting skilled personnel and implementing innovative training programs.

• The materials management function can reduce costs through technology (e.g., implementing a just-in-time inventory system and/or computerized warehousing) and developing long-term relationships with suppliers and customers and those relationships can also be used to create a differentiation advantage through the ability of the company to integrate high-quality materials into its products and provide suppliers with reliable and efficient distribution of their products.

• The sales and marketing function can lower production costs by increasing demand and can create differentiation advantages by creating and implementing sales and marketing strategies for targeted customer groups, tailoring product designs and features to customer requirements, and developing and promoting brand names.

• The R&D function can reduce costs by improving the efficiency of the company’s manufacturing technology and can contribute to creation of differentiation advantages by developing new products and improvements and enhancements to the company’s existing products.

Each of these strategies warrants extended discussion in the context of assessing the direction of specific functional activities; however, it is useful to look at one functional area—materials management—as an illustration. Strategies established for the materials management function can have a significant impact on both inputs and outputs in a company’s value creation process. Managers in the materials management function can use cutting-edge business processes and technology to reduce the costs associated with inventory management (i.e., storing and shipping), such as by implementing a just-in-time inventory system and/or computerized warehousing. Just as importantly, specialists in the materials management function can use their negotiating skills and experience to develop and nurture long-term relationships with suppliers and distributors that can be converted into both low cost and differentiation advantages.

On the supplier (input) side, a strong vendor relationship based on trust and communication can lead to more favorable pricing and payment terms and expedited shipping and in some cases suppliers are willing to invest in specialized assets that can be used to produce inputs that are customized to their customer’s particular specifications and quality requirements.[36] With respect to distribution (output), the materials management function can make a significant contribution to sales performance by establishing computerized links with major customers that can track customer inventory levels. Whenever a customer sells a product a record of the transaction is electronically transmitted to the company and when the customer’s inventory of the product falls to a pre-established level a restocking order is automatically placed with the company so that shipments can be made on a timely basis to ensure that the customer always has sufficient stock-on-hand of fast-moving items to meet the demand established by end users and capitalize on immediate sales opportunities.[37]

Inventory control systems established and managed by the materials management function can also enhance efficiency through stronger integration of the activities of business partners up and down the value creation chain. For example, when the automatic restocking order is received from a customer in the example above the inventory control system can also be configured to simultaneously send reports to suppliers so that they are able to arrange their production activities so that they are properly synchronized with fulfilling the restocking requirements of the company’s customers. This type of arrangement makes the entire supply chain process more efficient, thus creating a low-cost advantage for all parties—the supplier, the company and the customers acting as the distributors of the company’s products. In addition, a strong inventory control system can also create a differentiation advantage for the company in the eyes of its suppliers and customers since the system reduces the likelihood that sales will be lost because product is not where it needs to be when the end user is ready to purchase. One way that this differentiation advantage can be measured is through the calculation of the “in-stock rate,” which analyzes whether a product is actually in stock at a customer’s location when requested by an end user.[38]

Role of Structure in Functional-Level Strategy

The efficacy and strength of functional resources depends heavily on the ability of the company to coordinate the deployment and use of those resources, which means that structure must be also recognized as an important element of functional-level strategy.[39] There is no single structure that be considered optimal for every functional area and it is important for each function (e.g., R&D, manufacturing and sales/marketing) to create an internal organizational structure that is specifically suited to its resources (i.e., personnel, technology, plant and equipment, etc.) and the functional domain in which it operates.

The relationship between functional-level strategies and structure can be understood by reference to the choices made by different types of functions with regard to the well-recognized basic characteristics of organizational structures, including “mechanistic” versus “organic” structures, “tall” versus “flat” organizations, “centralized” versus “decentralized” decision making processes and “standardization” versus “mutual” adjustment.[40] Traditionally manufacturing functions in the US tended to have a tall hierarchy with centralized decision making and relied heavily on standardized procedures. The result was a relatively mechanistic structure that fit well with the production line approach to the pace of work. On the other hand, effective R&D is more likely to occur with an organic structure with a minimum of hierarchy and tolerance for decentralized decision making that empowers skilled engineers and scientists to use and trust their skills and knowledge when solving problems that arrive in the course of the innovation process.[41] In any event, the likelihood that a functional department will demonstrate the coordination skills necessary for the department to become a core competency of the company depends in large part on the skills and talents of the functional management team in designing a functional structure that is closely and positively aligned with the resources the department uses in its value-creation activities.[42]

When designing their own functional-level organizational structure the managers of each department need to ask several fundamental questions:

• How many hierarchical levels of management control are necessary to achieve the optimal level of control and coordination for the department’s activities? The opposite ends of the spectrum on this characteristic are tall and flat organizations.

• What amount of decision making authority can and should be decentralized and pushed lower in the departmental managerial hierarchy?

• How much reliance should be placed on standardized rules and operating procedures as opposed to granting managers and employees throughout the department the flexibility to make choices regarding the use of the department’s resources based on the specific circumstances they are confronting at that time, a management choice often referred to as “mutual adjustment”?

How these questions are answered, and the design decisions that follow, determine whether the functional structure leans more toward “mechanistic” (i.e., predictable behavior supported by a tall organization, centralized decision making and standardization) or “organic” (i.e., flexibility and mutual adjustment supported by a flat and decentralized organizational structure). As noted above, the most suitable type of organizational structure for R&D is “organic” (i.e., flat and decentralized and heavily reliant on the creation and use of smaller teams to conduct the necessary R&D activities) since this allows and encourages people to proactively initiate change as needed in order to cope with the unforeseen situations that typically arise when developing new technologies and products. In the manufacturing area, the traditional preference for a mechanistic structure alluded to above has eroded in the face of evidence from Japanese firms that development of a core competency in the manufacturing function is more likely to occur in an organic environment in which the hierarchy is flattened and managers and employees on the production line are empowered through decentralization and encouragement of mutual adjustment. The organizational structure for the sales function generally tends to be relatively flat and decentralized and managers and employees rely on standardized reporting systems to exchange information on sales activities and the changing requirements of customers. Salespeople do have some discretion in tailoring the tone and content of their sales pitch when dealing with specific types of customers; however, standardization still plays a dominant role in that salespeople must adhere to the messages developed by the marketing group and follow uniform guidelines regarding pricing and bundling of products and services.[43]

Role of Organizational Culture in Functional-Level Strategy

Another important element of creating core competencies through the development and execution of a functional-level strategy is establishing the proper culture within the functional department. In general, organizational culture in this context can be thought of as the set of shared values that the members of the functional department (i.e., the managers and employees) use and rely upon when interacting with one another and with other stakeholders outside of the department. Functional culture is important and potentially valuable because it is extremely difficult, if not impossible, for a competitor to imitate given that the values and practices are deeply imbedded and often intangible. While companies often duplicate the organizational structure used by competitors, including operating systems and compensation plans, they may fail to achieve the same results (e.g., more effective control and coordination) simply because they cannot replicate the cultural norms and values that managers and employees within the competitor rely on to operate efficiently and collegially within their chosen structure.[44]

One of the elements of organizational culture is indeed the structure and operating procedures implemented by the managers. For example, a large firm seeking better control over its widespread operations may establish a multi-divisional structure and a company looking to attain certain performance goals may implement a new incentive-based compensation system to motivate employees to act in ways that are consistent with achieving those goals. However, formal structures and incentive plans are just one piece of the puzzle and the contribution of the department culture to creating a core competency is a function of several other factors including allocation of property rights, ethical norms and values within the department and the talents and personal characteristics of the senior departmental managers. For example, companies looking to establish an entrepreneurial culture in their R&D departments supplement their choice of a flat, decentralized and organic organizational structure with strong cultural norms that emphasize hard work, cooperation and tolerance for experimentation and informed failure. In addition, all functional departments can strive for improved performance, such as high product quality in the manufacturing area, by establishing cultural values that emphasize participation and commitment and allocating property rights (e.g., stock ownership, profit-sharing plans and/or job tenure) in a way that directly rewards performance and builds and maintains loyalty to the department and the company as a whole.[45] Finally, the HR department can contribute to the cultural aspects of each functional-level strategy by assisting with the recruitment of new employees who share the terminal values of the company and contributing to creation and implementation of functional orientation and training programs that socialize new recruits and educate them about the desired core values within the functional department.[46]

Managerial Implications

The first thing that functional managers need to do is identify the specific functional resources and/or coordination abilities that serve as the foundation for an actual or potential core competency of the function. Once that step is completed the manager should develop and implement plans to improve or strengthen these resources and abilities. All plans should be accompanied by specific performance metrics that can be tracked in order to ensure that satisfactory progress is being made toward elevating the functional core competencies to the level at which they become a true competitive advantage for the company as a whole.[47] Functional managers should also look outside of their own companies to benchmark their performance against competitors and identify industry-wide best practices that can be applied to management of their own departments or units. Specifically, functional managers should select several competitors and attempt to learn as much as possible about the way that they collect and allocate resources and organize and control their activities. The information derived from this survey can be used as part of the planning process for strengthening the competencies within the manager’s own function and can be particularly valuable in setting measurable performance objectives.[48] Finally, functional managers should pay specific attention to how the function’s current resources and coordination abilities are being impacted by the organizational structure within the function and the function’s prevailing cultural norms and values. Using information about best practices of competitors the manager should consider whether changes in structure and/or culture can be successfully implemented in a way that improves the function’s core competencies.[49]

Functional managers should also be prepared to develop and implement detailed action plans for their strategies, a process which should include the following[50]:

• Describe the specific strategy to be followed and make sure that it supports the overall strategy and vision for the organization.

• Define the anticipated outcomes expected from following the strategy, such as improvement in the efficiency of workflow and/or increased market share or profitability. Outcomes should be defined as specifically as possible and, of course, should support the chosen strategy for the function (i.e., “low-cost” or “differentiation” advantage).

• Define your time schedule for implementing and completing execution of the strategy including the beginning and ending dates for the project and all key milestones.

• Describe the resources necessary to implement the plan (e.g., staffing, capital, information, raw materials and equipment) and how these resources will be provided.

• Outline the specific steps be followed to execute the strategy and assign the person responsible for overseeing the action plan.

• Develop a feedback system that includes reports from the responsible person on a timely basis regarding the progress of the project and makes that person accountable for the success of the project. Reports should cover actions taken, resources used, milestones achieved and, most importantly, surprises and problems that might dictate a change in direction.

Many organizations develop their strategic and operational plans using inputs from the various key functions; however, no function should be allowed to follow a plan that has not been vetted by senior management to ensure that it is properly aligned with the overall strategic plan for the organization and the goals and objectives of other units.[51]

Business-Level Strategy

Senior executives and managers involved in the development and implementation of business-level strategies are tasked with identifying the core competencies within the various functional departments of the company and combining them in a way that provides the company with the best opportunity for achieving and sustaining a competitive advantage in its chosen environment. The key choices that must be made when setting business-level strategy include: (1) selecting the domain(s) in which the company will be competing for scarce resources (e.g., capital, personnel, technology, inputs and customers) and (2) positioning the company in each chosen domain so that its function-based core competencies are most effectively leveraged to establish a competitive advantage. The overall goal of business-level strategy is to protect the company’s position in its current domain and, if possible, enlarge the domain in which the company can operate with a competitive advantage. The tools available to business-level strategists are created at the functional level and may include core competencies in one or more key functional areas such as manufacturing, HR, materials management, sales and marketing and/or R&D.[52]

Steps for Creation of the Business-Level Strategy

As discussed above, companies can create a core competency at the functional level either by reducing the costs of performing the value-creation activities that occur within the function (“low cost advantage”) or performing the value-creation activities that occur within the function to differentiate its products from those offered by competitors in a way that customers perceive as having value (“differentiation advantage”). Creation of a business-level strategy builds on functional-level strategies and involves two steps: (1) selecting the domain(s) in which the company will compete, a decision that should be based on where the company’s core competencies can be best leveraged; and (2) for each domain that is selected, deciding whether to compete using a low cost strategy, a differentiation strategy, or both. If a company has developed a core competency in low cost production of its products (i.e., a low cost advantage) it can adopt a “low-cost business-level strategy” based on selling low priced products to all of the target customers in the domain. The initial strategies deployed by Dell Computer are an example of attempting to use a low cost advantage to capture a significant share of a broadly defined market. On the other hand, if there are target customers within the domain that are willing to pay higher or premium prices the company may use a “differentiation business-level strategy” that emphasizes product quality, customer services, image of prestige and other features that distinguish the company’s products from competitors. This is the path chosen by Starbucks when it entered the market and transformed expectations of consumer regarding their morning cup of coffee, and other examples of various differentiation strategies include Mercedes (exceptional quality and image of prestige or exclusivity) and IBM (customer service). It is also possible, albeit difficult, for a company to use both strategies simultaneously and offer differentiated goods and services produced at lower costs due to the innovative use of technology and business processes such as supply chain management.[53]

In addition to balancing low cost and differentiation advantages, senior management must also decide whether to serve the entire market or focus company efforts on selected segments of a larger market. If a focused approach is used the company can either attack the segment as the “lowest cost” competitor or alternatively can seek to compete in that market on the basis of offering clearly differentiated products or services that will be valued by customers in that segment. In either case, the company that adopts this so-called “focus strategy” has made a conscious decision to focus all of its available resources on one specific segment and seek to become a “specialist” in identifying and serving the needs of customers in the chosen segment. One example of this approach would be the way that Kentucky Fried Chicken decided to specialize in chicken rather than other areas of the broader fast food market, an example of what is called “focused low-cost leadership”. Similarly, Rolls Royce made a conscience choice to limits its activities within the automobile manufacturing market to customers in the high price segment, an example of “focused differentiation”. Other examples of focused low-cost leadership and focused differentiation include Enterprise Rent-a-Car and Edward Jones Investments, respectively.[54]

Two companies may be in the same broadly defined industry, such as retail clothing; however, they may opt to compete in different domains which are defined by specific target customer groups. For example, Target produces and sells clothing in its retail stores with an eye toward appealing to customers looking for modestly priced items of predictable quality, which means that Target has selected a low-cost business-level strategy that can be supported by Target’s functional core competencies in low cost production. On the other hand, a high-end clothing retailer such as Nordstrom has traditionally focused on customers willing and able to pay premium prices and has been successful with this differentiation business-level strategy because it has been able to forge relationships with exclusive clothes designers that allow it to offer items with differentiated appeal.[55]

McDonald’s is an example of that rare company that has successfully executed a combined differentiated and low-cost business-level strategy in its chosen domain—the fast food industry. Using its functional core competencies in marketing McDonald’s has had a long-standing practice of creating and disseminating sophisticated advertising and marketing messages that have established the company as a unique brand name in the industry and successfully differentiated it from its competitors. At the same time McDonald’s has developed legendary core competencies in supply chain management, including manufacturing and distribution, to carefully control its costs. For example, McDonald’s has entered into a number of strategic alliances with outside parties based on long-term contracts that ensure availability of food items and the supplies and furnishings necessary to operate the extensive network of McDonald’s outlets around the world. In addition, in some cases McDonald’s actually owns the sources of its inputs, such as herds of cattle in Brazil and other countries. The execution of each strategy is tightly and carefully managed through a rigorous standardization process applied throughout the company’s franchise system that allows the company to control the content and quality of the experience that customers have whenever they visit a McDonald’s outlet, regardless of its location.[56]

Amazon is another example of a company that used its core competency in new information technology to successfully launch a combined differentiated and low-cost business level strategy that has upset the dual competitive environment that had co-existed before Amazon entered the retail bookselling domain. Historically there were two types of business-level strategies for attracting the interest of customers interested in purchasing books—the large book chains, such as Barnes & Noble, pursued a low-cost strategy to negotiate substantial discounts with publishers based on the volume of purchases and passed the savings along to customers in the form of lower prices available at their conveniently located outlets in large shopping malls; and independent bookstores, large and small, and smaller specialized stores, all of which competed through a differentiated strategy based on offering selections not readily available through the mega-stores and providing patrons with personalized service that created a strong sense of customer loyalty. Amazon’s strategy of selling books over the Internet simultaneously created a differentiated and low-cost competitive advantage that has significantly challenged both the large book chains and the independents. From the perspective of a differentiation strategy Amazon’s online catalog of literally every available book in the English language provided choices for customers that could not be matched by even the most specialized book store. In addition, Amazon used its elaborate and innovative IT structure to dramatically reduce the costs associated with procurement, marketing and distribution of books and created opportunities for customers to obtain the same discounted pricing offered by large book chains along with the convenience of shopping from their home or office with prompt delivery. Initially “prompt delivery” meant same day shipment of books arranged through elaborate fulfillment arrangements; however, Amazon took things even further through the development of its e-reader, the “Kindle”, which has allowed customers to immediately access the works of their favorite authors in a convenient format suited to the increasing popularity of mobile devices.[57]

Role of Structure in Business-Level Strategy

The ability of a company to create value with its business-level strategy depends on how well senior management is able to combine its functional-based core competencies. A strong set of skills and talents in R&D will be of limited value unless and until the company is able to establish a structure, processes and supporting culture that facilitates coordination between R&D and the members of marketing function who are in touch with customer needs and able to provide R&D with the information necessary to develop new products that will have be perceived as valuable by customers. Obviously the combination of core competencies depends in large part on the choices that are made with regard to design of the organizational structure at the business level and those choices will vary depending on the type of business-level strategy selected for use by the company. For example, the optimal structure for a low-cost strategy will likely be different than the structure used when the company is pursuing a differentiation strategy. In addition, a “focused” low-cost or differentiation strategy, in which the company is competing in one market segment or a very small number of market segments, will call for a different organizational structure than if the company was pursuing the same type of strategy in many different segments.[58] In any event, strategic choices will lead to different approaches with respect to specialization, centralization and formalization when creating the appropriate organizational structure.

In order for a company to successfully execute a low-cost strategy it must develop and maintain core competencies in those functional areas that make the greatest contribution to reducing the costs associated with product development and manufacturing.[59] In general, the key functional areas for these types of companies are materials management and manufacturing and other functions, such as research and development and marketing, are expected to focus their specific activities on supporting the goal of lowering production costs and converting the savings into higher sales revenues. Accordingly, it is not surprising that a simple mechanistic structure is thought to be most appropriate for a company that has selected a low-cost strategy. These companies are not interested in engaging in expensive and highly risky new product development projects and usually wait until a competitor has introduced a new or improved product and a market for that product has been established. At that point the low-cost company focuses on imitating the competitor’s product and achieving a competitive advantage through lower production costs that allow the company to undercut the prices being charged by competitors who had been first in the market. Centralized decision making and standardized rules and procedures for production activities, including highly structured job roles, are the best way to achieve the necessary control over costs and there is little need for the cross-departmental integration and mutual adjustment associated with organic structures. Contingency theory also supports the notion that simple structures are generally the best choice for companies pursuing low-cost strategies in relatively stable and slowly evolving business environments.[60]

On the other hand, a company following a differentiation strategy is heavily reliant on its ability to design new and innovative products and get them into the marketplace before its competitors. Cost reduction is less important for this type of company and the primary goal is to complete the development and launch of new products as quickly as possible. Accordingly, the marketing function plays a key role in tracking new product ideas and new product R&D is a primary activity. In order for the differentiation strategy to be successful an organic structure is the preferred approach since it lays the necessary organizational foundation for efficient communication among all functional areas and facilitates the rapid decision making required to keep product development projects on track. For example, companies seeking differentiation need close collaboration among all of the functional groups in the value-creation process—research and development, manufacturing, marketing and sales—and this is best achieved by deploying autonomous cross-functional teams that manages all aspects of the product development and launch process free of the tall hierarchy, centralization and rigid job specifications and rules associated with a mechanistic structure. Contingency theory predicts that companies in relatively unstable and rapidly changing business environments, which require continuous development of new differentiated products, are most likely to be pushed toward complex organic organizational structures that are most conducive to coordination and integration of functional activities.[61]

Business-level strategy also includes decisions about which of the main types of organizational structure—functional, divisional or matrix—is best suited for successful execution of the company’s operational activities in each of its target markets. In general, three factors are most relevant to the choice that must be made by the senior management team. First, as the range of products and services offered by the company expands the organizational structure must be able to provide increasing levels of control and coordination with respect to development, production and marketing activities. Second, as the company increases its focus on specific customer segments it will need an organizational structure that can quickly and efficiently satisfy the unique requirements of each segment. Finally, if and when the pace of new product development accelerates within the domains in which the company is competing, it must establish an organizational structure that facilitates the type of cross-functional coordination necessary for continuous innovation and refreshment of the company’s product line.[62]

There is evidence of strong correlations between business-level strategy (i.e., low-cost or differentiated) and the optimal form of organizational structure. For example, a low-cost strategy is typically used by companies that limit the size of their product line as part of their effort to remain focused on reduction of production and marketing expenses. These companies do not have to worry about managing expansive and diverse product lines nor do they typically attempt to cater to specific customer groups. They also avoid the race to be first to market with new products and generally follow a strategy of low-price imitation once competitors have established the market that reduces the need for cross-functional coordination. Because of all these factors a low-cost business-level strategy can usually be implemented and sustained with a fairly simple functional-based organizational structure. On the other hand, a differentiated strategy calls for a large product line, customization to the needs of specific customer groups, and continuous innovation with respect to product development. As such, a company pursuing a differentiated business-level strategy will generally find it best to use a more complex organizational structure, with the type of structure being driven by the factor that is more important in the company’s specific differentiation strategy. For example, if product diversity is paramount the company should adopt a product division structure; if identifying and satisfying the needs of customer segments is most important than a market or geographic structure would serve the company best; and a matrix structure or product teams should be used when success depends primarily on rapid development and introduction of new technologies and products.[63]

Companies may design their organizational structure in ways that allow them to simultaneously pursue different business-level strategies based on what the managers of a particular unit believe is best suited for the products that they oversee. It is possible for a company to create two separate product divisions and have one of those divisions pursue a differentiated strategy for its products while they other manages a group of products that will compete through low-cost business-level strategies. In many cases the products that emerge from each group will be complimentary and it may be possible to bundle them when approaching potential customers. For example, a company engaged in the development and commercialization of printers for computers may create one division that follows a differentiated strategy with respect to its hardware products (i.e., the printers) and another division that pursues a low-cost strategy in developing and improving ancillary products such as toner and paper that the consumers will typically purchase to use with the printers. A similar approach may be taken by firms in the photography market by dividing activities up into two product groups—one division develops and markets digital cameras and accessories and follows a differentiated strategy to keep up with changing technology and the other division handles ancillary products such as film and paper and follows a low-cost strategy. In any event, the elements of the organizational structure within each division will differ and be customized to suit the specific business-level strategy for the division. The overriding objective is for the company to remain competitive in markets where innovation is necessary while still pursuing appropriate opportunities to reduce costs.[64]

While there has been much discussion of creating and using organizational structures that facilitate differentiation and/or cost reduction, managers must not forget the need to satisfy the unique requirements of key customer groups. Simply put, customers don’t care how companies organize their businesses, they simply want to know that contracts will be performed and expectations will be fulfilled. Business-level strategists need to be mindful of the drawbacks associated with the traditional practice of using function-based alignments of people and other resources (e.g., sales and marketing, procurement, or manufacturing departments). While using functions as the primary dimension when organizing a company’s business activities can be useful in achieving the benefits of task-based specialization, including the development of function-based core competencies, and can result in substantial savings through economies of scale, it also can quickly become a hindrance in developing new products and services if a functional department continues to focus on its own goals and ignores the need to cooperate with other departments in order to deliver the new product or service to customers at the lowest price and highest level of quality. For example, the procurement department may decide to purchase the raw materials for a new product from a particular vendor because the vendor provided the lowest price and this fits the specific goals and budget of that department. However, if the materials turn out to be defective that means that other departments, such as manufacturing and technical service, will be forced to “overspend” in relation to their budgets to make up for the decision made by the procurement department. At the end of the day the entire project may be delayed and over budget even though the procurement department achieved its budget goals.

Companies must not forget that customers do not care whether the procurement department meets it budget objectives nor do they care whether other departments had to work overtime in order to overcome problems created by bad decisions made elsewhere in the organizational structure.  Moreover, customers are not interested in paying for extra costs that arise because companies don't push their departments to cooperate with one another. Companies need to bring all departments on to the “same page” in the development process. One way to do this is to carefully evaluate and define the “flow” for the development and commercialization of a new product or service as it moves throughout the company. The goal is to determine which functional departments will need to be involved and when decisions that will impact more than one department will need to be made. Companies should then make sure that a cross-functional team is put in place to manage the process and make decisions with an eye toward the greater good of the company rather than specific departments. As part of this process, incentives should be created for each department to cooperate and collaborate with other departments. When dealing with significant customers—customers that are expected to provide a large percentage of the projected sales in a particular market—consideration should be given to bringing them directly into the organizational design process to get their views on what the ultimate goals for both parties should be in managing the relationship.

Role of Organizational Culture in Business-Level Strategy

Another challenge in establishing and executing the business-level strategy for a company is setting and disseminating values, norms and rules that are understood and followed throughout the organization so that functional resources can be combined effectively and that members of each business units can communicate and collaborate in a way that maximizes the advantages of the company’s core competencies. Organizational values can and should be developed in a manner that is consistent with the choice made between pursuing either a low-cost or a differentiation strategy. In order to be successful in executing a low-cost strategy a company should encourage the development of values that are consistent with reducing and managing expenses and the practices of managers and employees in discharging their duties should reflect those values (i.e., small offices with no frills and flying economy class when traveling on business). These values should also be part of functional-level strategies and performance measures. For example, rewards and incentives for the marketing department should be based on identifying the most cost-effective methods for attracting and maintaining customers. On the other hand, a company following a differentiation strategy needs to establish a family of core values that includes innovation, excellence and quality and cultivate a culture that celebrates risk-taking and thinking “out of the box” in a way that leads to the development of cutting-edge products that keeps the company ahead of its competitors.[65]

The cultural values that a company adopts in order to support its business-level strategy can also be further advanced through the proper design of the organizational structure of the company. For example, if the company has selected a low-cost strategy it will make sense for it to use a mechanistic organizational structure since it increases the focus of managers and employees on making existing work systems more efficient (i.e., cost-effective). A mechanistic structure relies heavily on formal rules and standard operating procedures that reduce the likelihood that employees will deviate off course and cause the company to incur unanticipated expenses. Japanese manufacturing systems are a good illustration of the perceived correlation between a mechanistic flow of work activities and reduction of costs. On the other hand, a differentiated business-level strategy generally calls for a more organic organizational structure since the company needs to create an overall environment in which innovation is more likely to occur.[66]

The cultural values that support the business-level strategies of two firms should also be considered before those firms decide to combine their activities in a merger or other form of acquisition. For example, at first blush a merger between a company that is known for its success in pursuing a strategy of innovative new product development and a competitor that has thrived through creation of efficient manufacturing techniques that have reduced production costs will seem like an attractive proposition. It can reasonably be expected that the combined firm would be able to tap into both differentiated and low-cost advantages by expanding its product line and innovative activities while taking advantage of economies of scale and best practices with respect to respect to manufacturing processes. However, a crucial factor in the success of such a merger will be the ability of the parties to reconcile their dominant cultural values. There is a real risk of conflict between the managers of a firm in which innovation is the driving force and their counterparts within a prospective merger partner who have been concentrating on controlling costs during the periods leading up to the transaction. If the merger does proceed the group of managers from the party that has been following a low-cost strategy may continue to push for projects that are low risk and tightly controlled from a cost perspective in order to achieve short-term profits; however, the managers from the other party who thrive on differentiation will likely agitate for high risk and relatively expensive development projects to create truly innovative projects that can only be evaluated over a much longer time horizon. If the managers from the two merger participants cannot reconcile their different cultural backgrounds the promised benefits of the merger will not be realized.[67]

Managerial Implications

It is important for every functional manager throughout the company to understand the business-level strategy that the company is pursuing (i.e., low-cost or differentiated) and the role that his or her functional unit is expected to play in contributing to the success of that particular strategy. Managers and employees in each department should not only review their intra-department activities to identify way to lower costs or differentiate products but should also think about how they can collaborate with other departments to achieve the applicable strategic objective. For example, the R&D and manufacturing functions can work together to create a product design that reduces production costs and thus allows the company to offer the products at prices below those charged by competitors.[68]

All managers should be encouraged and motivated to take an entrepreneurial approach to setting and modifying their business-level strategies by continuously seeking and evaluating promising opportunities to strengthen the company’s position in its current domains and use the company’s core competencies to successfully enter new domains. Among the possible actions that can be taken are identifying and pursuing new markets within the company’s existing organizational domain, adapting and modifying existing products so that they provide higher and different levels of value to customers, developing new products, and increasing emphasis a previously ignored or under-exploited type of business-level strategy (i.e., low-cost or differentiated). For example, a television broadcasting network generally has several business units that each focus on specific types of programming—news, documentaries, comedy and drama—and the responsibility of the managers for each of these business units is to scan their specific environments to determine the types of programming that are most likely to be perceived as valuable by their prospective customers (i.e., viewers). This information is then collected and discussed by the top management team in order to provide directions to each business unit regarding the type and amount of programming that each of one of them will be responsible for commissioning. The business-level strategy not only drives the activities of each business unit it also identifies how the network intends to create a competitive advantage through a specific mix of programming and the image that the network seeks to portray to the audience.[69]

Since the success of any specific business-level strategy is heavily dependent on the choices that managers make with respect to organizational structure and culture it is essential for those managers to continuously and carefully evaluate how well the structure and culture of each business unit is supporting the strategy being pursued by that unit. If problems are identified the managers must be prepared and empowered to make the necessary changes. For example, in order for a differentiated business-level strategy to succeed it may be necessary to reduce the number of hierarchical levels, disburse decision-making authority to lower levels in the business units and consciously modify the message transmitted to employees to encourage and motivate them to act in a entrepreneurial and innovative manner.[70]

Corporate-Level Strategy

The corporate-level strategy of a company focuses on identifying and exploiting opportunities to use the company’s low-cost or differentiation core competencies outside of its current domain. Corporate-level strategy is an obvious and necessary extension of the company’s business-level strategies and is based on the recognition that the time will eventually come when the company is unable to find suitable ways to continue to add value in its current domain and thus must begin to compete for resources in one or more new domains in order to continue to create new value for its stakeholders.[71] Identifying and executing a corporate-level strategy is the responsibility of the CEO and other senior executives of the company as they are presumably in the best position to see how all the functional competences and business units fit together. Among other things, corporate level strategy focuses on coordinating and integrating the activities of the existing businesses and scanning the company’s broader environment to identify new businesses and markets that the company can enter with existing resources or with new resources acquired through one of the corporate-level strategies described below. Corporate-level strategy also requires setting an overall direction or “vision” for the company—the appropriate path for the company as a whole to follow in navigating its environment—and determining the appropriate role of headquarters in “parenting” the activities of the business units.

General Types of Corporate-Level Strategies

Corporate-level strategies are concerned with identifying the appropriate portfolio of businesses and markets for the company’s activities and adjusting the company’s resources in order to compete effectively in those businesses and markets. This section discusses several common corporate-level strategies available to companies including vertical integration—both forward and backward; diversification—both related and unrelated; and global expansion.[72] This is not, however, an exclusive list and companies may adjust their business portfolio in a number of ways including internal development and expansion and strategic alliances. It should also be noted that commentators often analyze corporate-level strategies in different ways. For example, reference might be made to “concentration” strategies, including horizontal integration through geographic expansion and/or expanding the range of products and services and vertical integration (both “backward” and “forward”), and “diversification”, which can be broken out into “concentric” (related) and “conglomerate” (unrelated) initiatives.

Obviously, a key decision for corporate-level strategists is deciding whether to concentrate on a single business or diversify into new businesses and markets. A company that focuses on a single business (e.g., McDonalds and fast food) can become a strong and sometimes insurmountable player in its market; however, there is a substantial amount of risk attached to marching down a single path. Diversification provides an opportunity to spread risks over several business areas but also requires substantial investment in order to acquire the resources and talent necessary to be competitive in multiple businesses. Many companies opt for a strategy of related diversification which is based on having existing divisions expand into new but similar areas. New diversification opportunities may also be created by having two existing divisions work together synergistically to enter a different market. Unrelated diversification, often executed by acquiring existing businesses operating in new areas, allows a company to quickly build a diversified portfolio of businesses to reduce the risk of having “all of the eggs in one basket”; however, the resulting conglomerate structure can be extremely difficult to manage.

Vertical Integration

Vertical integration is one of the most common forms of corporate-level strategy and involves acquisition of the resources of suppliers (“backward” vertical integration) and/or distributors (“forward” vertical integration). Companies pursue vertical integration in order to garner control over the production and availability of its inputs and/or the disposal of its outputs. Vertical integration is considered to be a corporate-level strategy since the company is expanding beyond its core domain into new, although neighboring, domains in order to create opportunities to exploit, enhance or protect its low-cost or differentiation core competencies in the following ways[73]:

• By taking over control of its inputs and/or the manner in which its outputs are disposed the company can control costs and accumulated financial resources by retaining the profits that had previously been conceded to suppliers and distributors.

• Cost savings can be obtained through control over inputs by designing inputs in a way that reduces the costs of production. Similarly, control over raw materials and production of other inputs can improve their quality and reliability and thus save money for the company through lower costs of repairs and warranty services.

• Control over inputs also supports differentiation core competencies by providing the company with greater flexibility to develop inputs—and products that integrate those inputs—that are unique and proprietary. Better quality control during the production process can also lead to differentiation advantages that allow the company’s products to command a higher price in the marketplace.

• Acquiring control over input production activities also insulates that company from the possibility that a small number of suppliers can take advantage of the company by inflating production costs or reducing the quality of the items sold to the company.

• In addition to appropriating the profits that would otherwise have been paid to outside distributors a company that establishes its own network of retail outlets can create a differentiation advantage by effectively controlling the quality of service and support provided to customers in a way that builds and sustains customer loyalty.

The possible uses of a vertical integration strategy can be illustrated by looking at some of the way that a firm engaged in the soft drink business can devise and execute a corporate-level strategy based on moving into new domains that overlap with its core business. On the input side the company can acquire firms that control necessary raw materials, such as sugar plantations, or provide containers (e.g., bottle makers) or other packaging items. On the output side the company can acquire other businesses that perform essential activities in the marketing and distribution of the soft drink products including bottling and trucking companies and fast-food restaurants.[74]

While there are significant advantages available to companies through vertical integration it is important to remember that assuming full ownership, and control over all of the activities, of a supplier or distributor can be expensive and time-consuming and may unduly tax the financial and managerial resources of the company. Before embarking on a full acquisition, the company should fully evaluate all of the costs associated with the completing the transaction and integrating the target and carefully consider the availability and viability of other alternatives such as minority ownership, strategic alliances or long-term contracts. For example, some form of strategic alliance may allow the company to obtain most of the benefits of vertical integration without having to assuming the burdens and risks of actually operating the alliance partner. A strategic alliance also allows the company to avoid unduly expanding the overall size of its organizational structure and thus increasing the possibility that serious communication and collaboration issues will arise. Finally, a strategic alliance can be an attractive alternative to an expensive investment in a new group of managers that may be needed to oversee the operational activities that were previously carried out by the supplier or distributor.[75]

Diversification

As noted above, diversification strategies are often categorized as either “related” or “unrelated”. Related diversification refers to a corporate-level strategy that involves entering a new domain that is related in some way the company’s core domain and in which the company has a reasonable expectation that it will be able to use and leverage an existing core competency to achieve a sustainable competitive advantage in the new domain. The goal of a related diversification strategy is to transfer the company’s core competencies to a new domain and use them in a way that allows the company to achieve a low-cost or differentiation advantage in the new domain that creates new value for the company’s stakeholders. For example, if a company has developed specialized functional skills in engineering and manufacturing it may be able to use those resources in related markets to create and commercialize new products that will be successful in those markets because of a low-cost advantage. Similarly, a soft drink company can exploit its brand name and marketing skills and resources to expand into related domains such as candy and snack foods.[76]

In contrast, unrelated diversification refers to a corporate-level strategy based on attempting to exploit a company’s core competencies in a new domain that is unrelated to the company’s core domain. For example, a high-end automobile manufacturer such as Mercedes-Benz, which has established a reputation for sophisticated and reliable technology and product design, can use those core competencies as a means for entering other markets such as household products and aerospace. Similarly, Honda used its core competence in engine production to enter, and create value in, multiple product markets including automobiles, motorized skis and lawnmowers.[77]

Not every core competency can be successfully deployed in executing a strategy of unrelated diversification and the most typical example is when a company relies on the skills and talents of its top management team to exercise control over the resources of another firm in an unrelated domain better than the existing managers of that firm. In that situation the company, through its management group, identifies companies in unrelated domains that are underperforming and operating inefficiently, acquires those companies at heavily discounted prices, and uses its management skills to restructure those companies and thus create value for its own stakeholders. For example, unrelated diversification may be an appropriate and profitable strategy for companies with a management group that has experience in reducing costs and increasing efficient communication and collaboration within business organizations. Restructuring alone, even without a deep knowledge of the business of the target firm, may be sufficient to generate an acceptable return on investment for the company. Once the target increase in value has been achieved the company seeks to divest itself of operating responsibility through some form of liquidity event such as a spinoff public offering or sale of the business to its management team or a third party.[78]

Global Expansion

When companies expand into global markets and launch business activities in foreign countries, they are embarking on new paths to potentially developing and strengthening their core competencies. Specifically, a company can create value for its stakeholders through globalization in the following ways[79]:

• A company can transfer a functional core competence to a foreign market in order to reduce costs or improve quality and thus produce products that will have a competitive advantage in that market and generate additional revenues that can be used to increase value and acquire more scarce resources. For example, Microsoft was able to deploy its core competencies in software design to quickly and efficiently create customized programs for customers in different countries and revenues from foreign sales ultimately exceeded those generated from domestic activities.

• A company can establish a global network that links the centers for “value creation” activities that have been established around the world in order to take advantage of opportunities for cost reduction or other forms of differentiation. For example, a company may transfer the bulk of its resources for certain functional activities, such as procurement and manufacturing, to foreign countries where business conditions are most favorable; however, in order to achieve the benefits of this strategy the company must create reporting relationships and communications paths that link these resources and ensure that worldwide activities are being properly coordinated.

• Global expansion provides a company with access to resources and skills from all around the world and allows the company to tap into resources and skills located in countries where a significant competitive advantage is available. For example, a US company seeking to decrease the costs associated with its manufacturing activities can partner with firms in foreign countries that specialize in “lean” production techniques. This allows the company to immediately lower its production costs and gain access to know-how and technology that can be deployed in the US and in other foreign countries. In addition, companies may rely on their foreign manufacturers to design and produce new products that might appeal to customers in the US.

• A company can establish offices and research centers in foreign countries to expand its knowledge network and improve the quality and breadth of its core competencies. For example, a company can literally globalize its innovation processes by establishing multiple R&D laboratories around the world and connecting scientists and engineers from different countries through networks that allow them to collaborate on continuous development of new technologies and product concepts.

• A company can forge international strategic alliances to gain first-hand access to, and knowledge of, innovative ideas in a diverse range of functional areas such as research and development, manufacturing and marketing. For example, by participating in a joint venture with a foreign partner a company can expose its personnel to manufacturing techniques that can be transferred to other countries and activities provided the legal rights of the foreign partner are not infringed.

The way that companies are expanding globally in the 21st century represents a radical departure from traditional strategies. In the early 20th century companies followed what was essentially a “colonial” method for establishing operational locations in foreign countries. Headquarters activities, including ultimate responsibility for the management of capital and the functional departments, remained in one place and international outreach generally was limited to dispatching managers from headquarters to set branch offices in foreign countries that typically concentrated solely on local sales and marketing. As time went by companies pursued different approaches, including “multi-domestic” strategies, which involves creating self-contained subsidiaries and divisions (i.e., each subsidiary or division has its own full array of functional resources) in each country where the company intends to operate and customizing the company’s products to suit local tastes and requirements; “international” strategies, which involves centralizing research and development and marketing activities in the United States and decentralizing the remaining functional activities into national or regional subsidiaries or divisions; and “global” strategies, which involves centralizing each of the key value-creation functions at the domestic or foreign location (i.e., either in the United States or in a foreign country) where the applicable functional activities can be carried out with the highest level of efficiency and quality.

Today globalization means becoming a “transnational” company that can quickly and efficiently transfer functional activities to any place in the world where the company can find the talent and other resources necessary to reduce costs and differentiate itself from competitors. For example, the global structure adopted by Lenovo is based on maintaining executive offices in several cities around the world and organizing its functional activities around “hubs of expertise” (e.g., hardware designers in Japan and marketing gurus in India) that are tightly linked through global communications networks that allow the company to operate virtually and perpetually as if everyone were in the same time zone. Globalization no longer means distributing managers and employees from the U.S. to foreign postings; instead, companies must be ready and able to create and manage a mobile global workforce that effortlessly transfers people and know-how across borders.[80]

Globalization, including exporting global competencies into foreign markets, is not a strategy for the faint at heart and there are obviously significant risks involved and difficult challenges associated with managing and controlling resources located in remote locations. For example, when a company transfers technology to a foreign partner as part of an effort to reduce manufacturing costs there is always the possibility that the partner may appropriate and improve the technology and then use it for its own account as a competitor. In addition, if a company outsources management and maintenance of a functional core competency it may begin to lose focus on the continuous investment and attention that is required to sustain the corresponding competitive advantage. As such, successful globalization requires that a balance be struck between protecting and sharing those scarce resources that are most essential to the company’s competitive advantage.[81]

Role of Structure in Corporate-Level Strategy

As with functional- and business-level strategies, the successful execution of corporate-level strategy requires selection and implementation of the appropriate organizational structure. Each of the corporate-level strategies discussed above call for the company to operate in multiple domains simultaneously and it is generally believed that some form of multidivisional structure is most appropriate in those situations. The multidivisional structure creates a separate self-contained division for all businesses operating in a particular domain and a corporate headquarters staff that is responsible for setting corporate-level strategy, providing support to the operating divisions and controlling and coordinating the activities of each of the operating divisions. Separate operating divisions provide the autonomy and flexibility required to be responsive to competitive conditions in each domain. The corporate headquarters staff ensures that the operating divisions collaborate and communicate as necessary and facilitates the transfer of resources among the divisions so that each of them has access to the same core competencies. The corporate headquarters staff can also assume primary responsibility for certain functional activities (i.e., basic research and development, marketing and finance) that are most efficiently provided in a centralized manner in order to take advantage of the benefits of economies of scale. While the building blocks of the multidivisional structure—separate operating divisions and a corporate headquarters staff—are present regardless of the form of corporate-level strategy there are discernable differences in the roles and responsibilities of these business units depending on the particular strategy that is selected.[82]

Unrelated Diversification and Conglomerate Structures

Companies that select a corporate-level strategy of unrelated diversification are most likely to select a conglomerate structure that provides for each unrelated business to be operated in its own self-contained division with little or no contact with the other operating divisions. Each operating division would have its own dedicated functional resources and would be expected to develop and exploit the core competencies that are uniquely necessary and appropriate for the separate domain in which it is operating and competing. A conglomerate structure is notable for its relatively small corporate headquarters staff and this follows from the fact that there is little need for coordination of activities among the operating divisions. In general, the corporate headquarters staff limits its activities to establishing rules and procedures to control bureaucratic costs throughout the organization, analyzing the financial performance of the operating divisions, and collecting the information necessary for the senior management group to make informed decisions regarding acquisitions of new unrelated businesses and divestiture of businesses that can no longer benefit from the company’s value-creation skills and resources. Unless a significant problem arises the corporate headquarters staff in a conglomerate structure does not get directly involved in the operational activities of its divisions.[83]

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Google to Alphabet: An Ambitious New Conglomerate Experiment

In August 2015 Google Inc. announced a dramatic and sweeping change in its organizational structure: Google would become one of several autonomous subsidiaries of a newly-formed holding company named “Alphabet”. The restructuring would separate, at least on paper, the company’s wildly successful search business, which was quite profitable and generated significant amounts of cash, from a handful of other initiatives focusing on ambitious and difficult problems such as developing a driverless car and life-extension technology. While the company’s efforts outside of the search business had attracted a good deal of publicity and scrutiny, they were far from profitable and quite risky. The company’s founders, Larry Page and Sergey Brin, argued that by putting Google and the other businesses into separate subsidiaries, and forming new subsidiaries for other businesses the company launched or acquired in the future, the operations of the entire company could be made cleaner and more accountable and they could avoid getting too “comfortable”, relying on incremental changes, and continue to pursue the revolutionary ideas that would drive the new growth areas that Alphabet needed to stay relevant. According to Page, “Alphabet is about business prospering through strong leaders and independence”, and Page explained that each subsidiary would have a strong CEO and that the role of the founders would be to “rigorously handle capital allocation and work to make sure each business is executing well”.

Initially the portfolio of Alphabet subsidiaries would include Nest (smart homes), Fiber (affordable and super-fast Internet and cable television for consumers), Calico (life-extension technology), Google X (drones and self-driving cars), Sidewalk Labs (new technologies to improve urban life) and Google Ventures and Google Capital (early and late-stage investments) apart from the Google subsidiary itself, which would still have a sprawling mandate covering search, apps, Android, You Tube, ads, maps and technical infrastructure. The company enjoyed a modest bump up in its market capitalization after the restructuring was announced and, not surprisingly, the move was subjected to a high level of scrutiny and analysis. An article in The New York Times written just after the announcement of the restructuring noted that many pundits had been struck by the decision of the company’s founders to create what amounted to a “conglomerate” and set out to explore what the experiences of three well known 20th century conglomerates—Berkshire Hathaway, General Electric (“GE”) and AT&T/Bell Labs—might tell us about what could be in store for Alphabet and some of the issues that Page and Brin will likely need to address.

Berkshire Hathaway has been guided for decades by Warren Buffett, who has made himself one of the wealthiest people in the world and turned his company into one of the most valuable in the world through a continuous stream of acquisitions of businesses in a wide array of industries and markets. While insurance is the largest sector in the Berkshire Hathaway portfolio, Buffett has also been willing to place bets on mobile homes, private jets, Heinz ketchup, Duracell batteries and aerospace parts. One of the apparent similarities between Berkshire Hathaway and the proposed Alphabet structure is the practice, rigorously followed by Buffett, of providing management of the various businesses with broad discretion to manage day-to-day operations. In fact, Buffett keeps only 24 employees in Berkshire Hathaway’s corporate office in Omaha to watch over businesses that employ 340,000 people worldwide. A key difference, however, is that Berkshire Hathaway’s portfolio of businesses was carefully culled to emphasize companies that were “well established, with proven models for profitability, at favorable prices” and which were based on proven and/or reasonably projectable business models. In fact, Buffett rarely invested in businesses that represented large bets on a particular technology. While Page and Brin promise Buffett-like autonomy for the Alphabet subsidiaries, for now at least they will all be seeking to create products and services that do not exist and for which the markets are far from certain. As such, Alphabet shareholders cannot expect the same sort of smooth ride that Buffett has provided to his investors, especially since nobody can credibly predict the outcome of the innovative activities the subsidiaries will be undertaking. There is the possibility that Page and Brin will fold established businesses into future subsidiaries, as Buffett has done, but this would clearly be a radical see change from where they were at the time they announced the restructuring.

The initial similarities between GE and Alphabet follow from the diverse range of technologies and businesses that GE has been involved with since the company was launched with the help of Thomas Edison. GE researchers, designers, manufacturers and marketers have played an innovative and pivotal role in the development, improvement and commercialization of light bulbs, locomotives, X-ray machines, electrical appliances, radios and televisions, fiber optic cables and M.R.I. body scanners, to name just a handful of the technologies that bear the imprint of GE. The businesses of the initial Alphabet subsidiaries—for example, search and driverless cars—are certainly as different as light bulbs and locomotives; however, for Alphabet to be able to tap into GE’s secret formula it will need to find a way to make its various business lines stronger under the Alphabet umbrella than they would be standing on their own. GE did this by maintaining a strong organizational culture among independently operated businesses by creating and vigorously guardian linkages between the businesses and the people that worked in them that benefitted everyone. GE was also adroit at leveraging a centralized research and development capacity to create and disseminate technologies that could be applied across a range of businesses (e.g., laser technology developed by GE researchers was used by business units active in medical devices and telecommunications). The question for Alphabet, as posed in the article: “… is whether it becomes a centralized innovation machine or a bunch of separate projects that happen to have the same corporate parent but not much else in common. Can it make its various initiatives more than the sum of their parts?”

AT&T/Bell Labs aligns well with Alphabet’s aspirations for successfully solving difficult and life-changing technological problems. Just as Alphabet can reasonably expect to generate significant revenues from the Google search business, AT&T could rely on a continuous stream of cash from its position as the monopoly provider of telephone services in the US. In 1925 AT&T set up Bell Labs as a free-standing research unit and over the next 70 years Bell Labs, using money provided by AT&T, was a preeminent center of basic research that developed technologies that were central to a wide range of inventions including the transistor, the laser, communications satellites and solar cells. It was not always clear that AT&T shareholders benefitted significantly from the work done at Bell Labs, particularly when the work was basic research that was accessible to other companies; however, the parent company’s support of Bell Labs was not overly concerning to its shareholders as long as the profits coming from the monopoly continued to pour in. In other words, there was plenty to go around. The profits from Google might serve a similar purpose within Alphabet: a lot of the research in the relatively new and unknown fields occupied by the other subsidiaries is essentially “basic”. The founders will need to strike the appropriate balance in allocating Google-generated profits and will need to be mindful that while Google is strong in search right now there are no shortage of competitors and regulators around the world clearly have reigning in Google’s actual or perceived monopoly on their agendas.

Google and its founders are not strangers to being compared to iconic businesses frm the past. For example, in a December 2014 article in The New Yorker, Lemann described some parallels between the “pre-Alphabet” Google and General Motors (“GM”) in its early days. First, both Google and GM accelerated their growth paths through aggressive acquisition of small companies that provided technology and, in the case of Google, large crowds of users that could be usefully integrated into their larger businesses. Second, Alfred P. Stone, GM’s iconic leader from the early 1920s, foreshadowed Google’s fixation on “the user” by offering a range of styles and prices for consumers that allowed GM to tap into the subtleties of demand rather than relying on the on-color, one-style and one-price approach used by competitors such as Ford. Third, Sloan, Page and Brin were all in agreement that they oversaw “engineering” companies. Finally, the three men also shared a hunger for pursuing high-risk, high-reward projects that flew in the face on the demands for short-term earnings and profits that came from the investment community. Lemann noted that Sloan actually launched a technical center that looked a lot like something one would see in Silicon Valley decades later, complete with what Sloan called “fine cafeterias”, and implemented programs that tied managerial compensation to the performance of GM stock.

The Google to Alphabet restructuring was welcomed in many parts of the investment community as a means for achieving more transparency about the financial situation of the company’s “Hail Mary” businesses. Presumably reporting profits and losses for each of the subsidiaries, as well as the transfers of capital between subsidiaries, will make it easier for investors to understand how the Alphabet portfolio approach is working. Interestingly, this is another area where Page and Brin are making moves similar to those made by Sloan after he had completed his own “organization study” of GM to find ways to address financial and administrative chaos left by his predecessor. Sloan was one of the pioneers of new organizational design techniques and decided that the best approach was to establish autonomous divisions based on “product lines” (e.g., Chevrolet, Buick, Cadillac etc.), each of which would have its own president and operating budget. As autonomy was being disbursed among these new business units the headquarters office would, much like the parent company in the Alphabet structure, monitor performance of the divisions and take the lead in providing specialized services that all of the divisions might need at some point such as finance and research. While the reorganization at GM did distribute large numbers of employees into different groups, Sloan remained mindful of the advantages of commonality and implemented uniform training and supervisorial programs overseen by professional managers to improve and maintain productivity and instill in all of the employees a sense that they were valued contributors to a larger endeavor that bound all of the divisions together.

It is fair to suggest parallels and similarities between the initial visions and promises for Alphabet sketched out by Page and Brin and the positive experiences of Berkshire Hathaway, GE and AT&T/Bell Labs; however, Page and Brin will continue to face the classic tradeoffs between doing what is best in the short-term for shareholder value and making long-term bets on extremely risky innovation. Doubling down on big ideas is not new for the company—it’s already made big investments in the businesses that will be operated in the new subsidiaries and the company’s organizational culture has always included explicit permission for employees to set aside time to work on personal projects. But, the restructuring invariably changes the entire picture and some of the things that will be watched closely as the Alphabet experiment begins are the following:

• Loose supervision, lack of formality and “ship and iterate” have been mainstays of Google’s organizational culture and managerial practices since the very beginning. All of this obviously worked very well as the core business grew and prospered; however, maintaining some semblance of order has become a higher priority and the restructuring likely represents an effort to clarify who does what and how decisions will be made. It is imperative that the found clearly and cleanly demarcate the boundaries of the businesses and construct the links between them that will facilitate communication and tap into the value of having small groups collaborate to solve mutual problems.

• While Alphabet enjoys substantial cash reserves built up from Google’s past successes, Google’s path remains crucial to the progress of all of the businesses until they reach a point where they can sustain themselves on their own and attract investor capital independently without the search business being offered as collateral. Google is under a lot of pressure to keep users engaged, which means finding ways to continuously add new users, more information, new reasons to engage with Google, and new search features. To be determined is whether or not Google will need to continue its strategy of acquiring small companies, most of which have been unprofitable or barely profitable, at obscene valuations in order to maintain the growth path of audience share and/or applications that will help keep existing users from straying.

• While the ambitions of the founders are clearly sprawling, doubts have been raised about the company’s ability to internally develop groundbreaking new products and critics have often pointed out that the products that have been most successful for the company—Page Rank and AdWords, YouTube, Google Maps and the Android operating system—came into the fold through acquisitions. All of this raises questions about the value that the “parent” can provide to its subsidiaries apart from cash and close attention will be paid to how delegation and autonomy is handled. Early indications were that the founders were indeed committed to selecting strong CEOs for the subsidiaries and following the approach they took after acquiring NEST of leaving them alone to carry on with what had worked well in the past.

• All of the letters in Alphabet, perhaps none more so than Google, will operate in a turbulent external environment that is rapidly changing and populated by competitors and stakeholders from all over the world. Google must fend off threats to its market dominance, which is solidly but tenuously based on its intellectual property, and appears to be destined to decades of arm-wrestling with regulators. Google cannot reasonably expect to fend off the rise of large competitors in the search area in enormous markets such as China. One must wonder how much time the founders will have to divert their attention from the Google business.

• While an “alphabet” implies order, the letters can be moved around to form new words and letters can be added and subtracted. Will the founders add new areas and challenges to their list and, if so, how will those be supported and how will that impact other pieces of the structure. Will the founders follow the path of Bell Labs and throw money at basic research to generate ideas to refresh the structure? What will be the growth and exit strategies for each of the subsidiaries: spinoff, public offering, alliances or what?

• A uniform culture is difficult to maintain even when employees remain in close proximity but in different buildings spread out among several locations. While the founders see Alphabet as a noble pursuit to better many parts of our world, it will be difficult to create and maintain an Alphabet organizational culture that will provide the foundation for collaboration and communication. The burden falls heavily on the founders to make this happen. Will that culture track the early days of Google? Difficult to see that given that company is now much larger and those who have stayed on and become managers have graduated to middle age. Moreover, identifiable sub-cultures will like emerge in each of the businesses in the subsidiaries.

• Google, like many other modern companies in the technology space, lacks the social vision that bound employees to their companies for decades and organizational culture must be built in an environment in which both the company and its employees do not expect that employees will remain with the company for long and both side will do what is best for them in terms of economic efficiency. As such, work-life balance has seemingly not been a priority at Google and the line from the Google evangelists has been that employees get to focus on things that are so interesting and meaningful that they rarely see any of it as being “work”. Smart people come there to work with other smart people, experience what they need for themselves, and then move forward on their own.

The questions and challenges above are specific to Alphabet and its founders; however, all growth-oriented entrepreneurs should recognize a universal set of imperatives that apply regardless of the size and scope of the enterprise: striking the proper balance between autonomy and collaboration across businesses, managing formality and establishing and maintaining the “parenting value” to be provided by headquarters and the founders, maintaining a lazar focus on the core business and competitive advantage, guarding tested values and norms of the organizational culture while skillfully executing appropriate acquisitions of technologies and human resources and allowing sub-cultures to emerge and flourish, continuously scanning the external environment, making sure that the customer’s expressed needs rather than founders’ notions of how their lives should be remain the focus of product development, tracking and appreciating legitimate concerns about the social impact of the products being incubated, and forging a social contract with knowledge workers which respects and meets the needs of both sides.

Sources: J. Yarow, “Google just announced a massive overhaul of its business structure”, Business Insider (August 10, 2015); N. Irwin, “Alphabet, Viewed Through the Lens of 3 Companies”, The New York Times (August 12, 2015), B3; L. Page “G is for Google” (blog post to employees and investors at ); and N. Lemann, “When G.M. was Google”, The New Yorker (December 1, 2014), 76.

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Structures for Related Diversification

One of the primary motivating factors for selecting and pursuing a corporate-level strategy of related diversification is to generate additional value through the sharing and/or transfer of functional skills and resources among divisions. In order for this type of strategy to be successful the company must design an organizational structure that supports and facilitates coordination and integration as well as communication between divisions and between the corporate headquarters staff and each division. The company must be prepared to face and overcome significant challenges including the real possibility of conflicts between divisions for resources and unwillingness within the divisions to share information and resources unless there is a direct incentive for cooperation. Because of all these issues it is not surprising that companies engaged in related diversification have a much larger corporate headquarters staff that includes executive and managers who are expected to devote most of their time and effort to serving in integrating roles to make sure that skill and resource transfers between divisions occur efficiently. As for the overall organizational structure in this situation the pressing need for coordination and integration generally leads to the use of a multidivisional matrix structure since this is the best way to bring functional, divisional and corporate leaders together to plot strategy and hammer out any issues that might impede the flow of resources within the organization. However, the need for a large corporate staff and the complex multidivisional matrix structure increased the bureaucratic costs of related diversification in comparison to other corporate-level strategies and this must be considered whenever the company contemplates adding a new domain to its portfolio.[84]

Companies that pursue a corporate-level strategy of related diversification will create a number of a number of divisions focused on specific domains. Each division will share a reliance on a common core competency, such as a particular technology; however, the business activities of each division will be relatively independent of the other divisions and each division will have its own dedicated set of functional resources—research and development, manufacturing, marketing and sales—and be responsible for product development and commercialization projects and strategies within its domain. Each division is given a substantial amount of autonomy; however, in order for the strategy of related diversification to be successful mechanisms must be put in place to nurture the company’s core competencies upon which each division depends and ensure that knowledge and information flows freely among the divisions so that each group has access to the company-wide resources required for it to remain innovative. Methods that can be used to increase coordination within the organizational structure of a company pursuing related diversification include the following:

• Assign a number of executives and senior managers within the corporate headquarters groups to focus on monitoring the activities of the divisions and ensuring that those activities are integrated and that knowledge and information generated or otherwise received by the divisions is quickly and efficiently transferred to other divisions.

• Create a centralized research and development function that oversees the selection and execution of basic R&D projects leading to technology that enhances the core competencies of the company and which can be used to support the activities of all of the divisions. This corporate R&D department can also serve as a clearinghouse for coordinating the R&D activities of the divisions and facilitating transfer of technology within the company.

• Establish a comprehensive communication network, including the necessary telecommunications equipment, to link scientists and engineers working in the various divisions to allow them to share information and knowledge and collaborate as needed on joint R&D projects. In this way the company can continue to strengthen its functional-based core competencies even as functional specialists are spread across the company’s network of domain-focused divisions.

• Establish and nurture company-wide cultural values of teamwork, cooperation and innovation to serve as a foundation for the open communication that is necessary for coordination among the divisions and transfer of knowledge and information.

As noted above, a corporate-level strategy of related diversification involves substantial bureaucratic costs due to the need to establish and maintain a large corporate headquarters staff and invest in the communications tools required to transfer information and knowledge among the various divisions. Clearly these costs can have a negative impact on the overall profitability of the entire company and each of the divisions and must be taken into account when setting the performance goals and objectives for each business unit. For example, one division may make a substantial investment in R&D that leads to an invention that can also be exploited by a number of other divisions. In order to encourage the division to share the invention within the company it should not be penalized for the initial adverse impact to its divisional profit-and-loss statement due to the costs of the successful R&D effort that benefited so many divisions within the company. In fact, an effort should be made to reward divisions and their managers that make significant contributions to the shared core competencies of all of the divisions within the company. Companies that pursue related diversification should accept they may need to sacrifice short-term profitability in exchange for creating an organizational structure and culture that is built for long-term sustainability and a continuous flow of innovation.[85]

Role of Organizational Culture in Corporate-Level Strategy

Each corporate-level strategy requires the creation and maintenance of suitable cultural values and norms. The challenges in this area are obviously less daunting when a company pursues unrelated diversification and builds a conglomerate structure since there is little or no contact between the various divisions and thus no need for a high level of concern about facilitating communications within the organizational structure except for the principles that guide interactions between the corporate headquarters staff and the managers of each division. On the other hand, a corporate-level strategy of related diversification can only be successful if the multidivisional matrix structure typically associated with that strategy is support by cultural values that emphasize the collaboration and communication necessary for continuous flow of knowledge and information among the various divisions.[86]

In order for a company to successfully pursue a corporate-level strategy of unrelated diversification through the creation of a conglomerate structure the corporate headquarters group must establish and enforce a minimal set of cultural values that reward efficiency and control over bureaucratic costs. While a conglomerate structure does not require a substantial amount of communication across the operating divisions that are active in various unrelated domains it is necessary for each division to understand the requirements the senior executives in the corporate parent with respect to value creation and profitability. Accordingly, the dominant cultural values in this situation will typically emphasize cost savings and efficiency and division managers will be limited in their ability to make substantial investments without first obtaining corporate approval. On the other hand, when the corporate-level strategy is related diversification the appropriate cultural values are cooperating and open exchange of information. While each division will necessarily develop its own unique internal culture in order to respond effectively to competitive conditions in its specific domain the corporate headquarters group should work hard to identify and disseminate company-wide cultural values and norms that ease the process of coordinating and integrating divisional activities. For example, managers and employees should be celebrated and rewarded for sharing innovations that can be used by multiple divisions and contribute to the improvement of the company’s overall core competencies.[87]

Inter-Organizational Strategies

Each of the corporate-level strategies discussed above are based on the assumption that the company will assume responsibility for control and management of an entire organization (e.g., through the acquisition of a controlling interest in another firm) in a new related or unrelated domain as a means for creating new value through the exploitation of the company’s core competencies. While there are obvious advantages to unfettered control over the activities undertaken in other domains companies must be mindful of the bureaucratic costs that must be borne including the need to recruit and retain qualified and experienced managers who are familiar with the unique issues and challenges in those domains. Before proceeding with selection and execution of a particular corporate-level strategy consideration should be given to inter-organizational strategies such as strategic alliances, joint ventures, minority investments and long-term contracts which can provide opportunities to reap the benefits of cooperation without fully underwriting all of the costs and assuming all of the risks. [88]

One of the traditional examples of an inter-organizational arrangement is a joint venture that is formed by two otherwise unrelated companies to pursue a common business objective. Each party to the joint venture is expected to contribute specific resources including capital, assets, personnel and technology and the ideal scenario is for parties to have complementary strengths that allow them to use the joint venture as an efficient way to fill in resource gaps without having to incur substantial investment costs in acquiring or otherwise developing those resources on their own. The viability of a joint venture as an alternative to one of the corporate-level strategies described above can be illustrated by assuming that a company enters into a joint venture with an unrelated firm to develop and market a line of new products in a domain that is new to both parties. If one party can contribute skills and resources that support a low-cost strategy, such as competencies in efficient procurement and manufacturing, and the other party can contribute resources necessary for an effective differentiated strategy, such as expertise in research and development and marketing, then each party is positioned to competitively participate in the new domain without have to incur the cost of creating on its own the resources available from the other party. Minority ownership and long-term contracts can also be used to tap into needed resources without the overhead associated with acquiring another firm and integrating it into the acquirer’s existing organization.[89]

Guidelines for Corporate-Level Strategies

Companies and their managers should develop the capabilities to continuously monitor their environments to identify opportunities for using their core competencies to strengthen their position in existing domains and enter new domains to appropriate additional value. Before entering any new domain companies and their managers must carefully weigh the potential benefits and the associated bureaucratic costs and business risks. An important part of this analysis is assessing whether entry should be attempted through the acquisition of control of an existing firm or by entering into an inter-organizational arrangement such as a strategic alliance, joint venture or long-term contract. In addition, once a decision has been made to move forward with one of the corporate-level strategies or an inter-organizational arrangement the senior executive group must ensure that the company’s organizational structure and culture is fixed in a way that can facilitate successful entry into the new domain.[90]

____________________

About the Author

This chapter was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace. His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business. Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA. Alan is currently a partner of GCA Law Partners LLP in Mountain View CA () and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development. He has also launched and oversees projects relating to sustainable entrepreneurship and ageism. He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge. For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at alangutterman@, follow him on LinkedIn () and visit his website at .

About the Project

The Sustainable Entrepreneurship Project () was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet. The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole.

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman. All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at .

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[1] P. Drucker, “New templates for today's organisations”, Harvard Business Review (January-February, 1974).

[2] L. Bryan and C. Joyce, “Better Strategy through Organizational Design”, McKinsey Quarterly, No. 2: May 1, 2007, 21-29.

[3] Adapted from A. Lewin and C. Stephens, “CEO Attributes as Determinants of Organization Design: An integrated Model”, Organization Studies, 15:2 (1994), 183-212.

[4] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 205, 232 (citing A. Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, MA: MIT Press, 1962) (“An organization’s strategy is a specific pattern of decisions and actions that managers take to use core competences to achieve a competitive advantage and outperform competitors.”)).

[5] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 205 (describing “The Value Creation Cycle” as “[t]he ability to obtain scarce resources allows an organization to create an organizational strategy and invest resources to develop core competencies which enable the organization to create a competitive advantage which increases its ability to obtain scarce resources and start the cycle all over again.”). For further discussion of “specialized resources” and “coordinated abilities”, see A. Gutterman, Strategic Planning (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[6] C. Hill and G. Jones, Strategic Management: An Integrated Approach 4th Edition (Boston, MA: Houghton Mifflin, 1998).

[7] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 205-206.

[8] See, e.g., M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).

[9] W. Kim and R. Mauborgne, “How Strategy Shapes Structure”, Harvard Business Review, September 2009, 73-80, 73.

[10] Id. at 74. For more on “blue ocean strategy”, see W. Kim and R. Mauborgne, Blue Ocean Strategy (Cambridge, MA: Harvard Business Press, 2005).

[11] Id. at 75.

[12] Id.

[13] Id. at 74-76.

[14] Id. at 76-78.

[15] Id. at 80.

[16] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 209-210.

[17] Id. at 209. See also M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).

[18] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 209. See also R. Ruekert and O. Walker, “Interactions Between Marketing and R&D Departments in Implementing Different Business Strategies,” Strategic Management Journal, 8 (1987), 233-248.

[19] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 209. See also M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).

[20] For further discussion of business plan preparation and strategic planning, see A. Gutterman, Strategic Planning (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[21] L.U. Hendrickson and J. Psarouthakis, Dynamic Management of Growing Firms: A Strategic Approach (Second Edition) (The University of Michigan Press, Ann Arbor, MI: 1998), 25.

[22] A. Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, MA: MIT Press, 1962).

[23] For definition and discussion of “organic” and “mechanistic” structures, see A. Gutterman, Organizational Structure (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[24] For further discussion of the influence of production technology on organizational structure, including the research conducted by Joan Woodward, see “Organizational Design and Technology” in A. Gutterman, Organizational Design (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[25] See, e.g., T. Burns and G. Stalker, The Management of Innovation (London: Tavistock, 1961). For further discussion of environmental uncertainty and dynamism, see A. Gutterman, Strategic Planning (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[26] See R. Miles, C. Snow, A. Meyer and H. Coleman, Jr., “Organizational Strategy, Structure and Process,” Academy of Management Review, 3 (1978), 546-562; and M. Hitt, R. Ireland and R. Hoskisson, Strategic Management (St. Paul, MN: West, 1995).

[27] For further discussion, see A. Gutterman, Human Resources (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[28] The discussion in this section is adapted from C. Hill and G. Jones, Strategic Management: An Integrated Approach (Boston MA: Houghton Mifflin, 2008).

[29] See, e.g., J. Pfeffer, The Human Equation: Building Profits by Putting People First (Boston, MA: Harvard Business School Press, 1998), 16 (“Successful organizations understand the importance of implementation, not just strategy . . . and, moreover, recognize the crucial role of their people in the process”).

[30] L. Bryan and C. Joyce, “Better Strategy through Organizational Design”, McKinsey Quarterly, No. 2: May 1, 2007, 21-29.

[31] Deloitte Consulting LLP, “Boosting business performance through organizational design”, [accessed October 18, 2011]

[32] Id.

[33] A core competency is only valuable if it creates a competitive advantage. Accordingly, product differentiation should be pursued only if it results in products with unique features that customers actually value and are willing and eager to purchase. G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 210. See also M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).

[34] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 210-212.

[35] Id. at 210.

[36] Id. at 211. See also E.S. Buffa, “Positioning the Production System--A Key Element in Manufacturing Strategy,” in Fahey, The Strategic Planning Management Reader, 387-395.

[37] Id. at 211.

[38] Id.

[39] Id. at 212 (citing also D. Miller, “Strategy Making and Structure: Analysis and Implications for Performance” Academy of Management Journal, 30 (1987), 7-32).

[40] Id. at 213. For further discussion of each of these characteristics of organizational structure, see A. Gutterman, Organizational Structure (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[41] Id. at 213-214. See also P.R. Lawrence and J.W. Lorsch, Organization and Environment (Boston: Graduate School of Business Administration, Harvard University, 1967).

[42] Id. at 214.

[43] Id. at 213.

[44] Id. at 214. See also J.B. Barney, “Organization Culture: Can It Be a Source of Sustained Competitive Advantage?” Academy of Management Review, 11 (1986), 791-800. For further discussion of organizational culture generally, see A. Gutterman, Organizational Culture (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[45] Id. at 214-215.

[46] Id. at 214. See also S.M. Oster, Modern Competitive Analysis (New York, Oxford University Press, 1990).

[47] Id. at 215.

[48] Id.

[49] Id.

[50] L.U. Hendrickson and J. Psarouthakis, Dynamic Management of Growing Firms: A Strategic Approach (Second Edition) (The University of Michigan Press, Ann Arbor, MI: 1998), xxxii.

[51] L.U. Hendrickson and J. Psarouthakis, Dynamic Management of Growing Firms: A Strategic Approach (Second Edition) (The University of Michigan Press, Ann Arbor, MI: 1998), 25.

[52] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 215. See also M.E. Porter, Competitive Strategy (New York: The Free Press, 1980), Chapter 2.

[53] Id. at 216. See also M.E. Porter, Competitive Strategy (New York: The Free Press, 1980), Chapter 2.

[54] Id. at 217.

[55] Id. at 216.

[56] Id. at 216. See also R.E. White, “Generic Business Strategies, Organizational Context and Performance: An Investigation,” Strategic Management Journal, 217-231; and G.R. Jones and J.E. Butler, “Costs, Revenue, and Business-Level Strategy,” Academy of Management Review, 13 (1988), 202-213.

[57] Id. at 216-217.

[58] Id. at 217. See also White, “Generic Business Strategies, Organizational Context and Performance”; D. Miller, “Configurations of Strategy and Structure,” Strategic Management 7 (1986), 223-249.

[59] Id. at 218. See also S. Kotha and D. Orne, “Generic Manufacturing Strategies: A Conceptual Synthesis,” Strategic Management Journal, 10 (1989), 211-231.

[60] Id. at 218-219. See also P.R. Lawrence and J.W. Lorsch, Organizational Environment (Cambridge, MA: Harvard University Press, 1967).

[61] Id.

[62] Id. at 219.

[63] Id.

[64] Id. at 220.

[65] Id at 220. See also T.J. Peters and R.H. Waterman, Jr., In Search of Excellence (New York: Harper and Row, 1982); and E. Deal and A.A. Kennedy, Corporate Cultures (Reading, MA: Addison-Wesley, 1985).

[66] Id. at 221.

[67] Id.

[68] Id.

[69] Id. at 209.

[70] Id. at 221.

[71] Id. at 222.

[72] Id. See also M.E. Porter, “From Competitive Advantage to Competitive Strategy,” Harvard Business Review (May-June, 1987), 43-59.

[73] Id. at 222-223.

[74] Id. at 222.

[75] Id. at 223. See also Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, MA: MIT Press, 1962); and J. Pfeffer and G.R. Salancik, The External Control of Organizations (New York: Harper and Row, 1978). For further discussion of strategic alliances, see A. Gutterman, Strategic Alliances (Eagan, MN: Thomson Reuters, 2019).

[76] Id. at 222-223.

[77] Id. at 209-210.

[78] Id. at 224. See also M.E. Porter, “From Competitive Advantage to Competitive Strategy,” Harvard Business Review (May-June, 1987), 43-59.

[79] Id. at 207-208.

[80] J. McGregor and S. Hamm, “Managing the Global Workforce”, Business Week (January 28, 2008), 034.

[81] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 208. For further discussion of globalization strategies and organizational design and structure issues for global companies, see A. Gutterman, Organizational Design (Oakland, CA: Sustainable Entrepreneurship Project, 2019), which is available at .

[82] G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007), 224.

[83] Id.

[84] Id. at 225. See also G.R. Jones and C.W.L. Hill, “Transaction Costs of Strategy-Structure Choice,” Strategic Management Journal, 9 (1988), 159-172.

[85] Id. at 226.

[86] Id. at 227.

[87] Id. at 226.

[88] Id. at 227.

[89] Id.

[90] Id.

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