Strategy Implementation (I): Organizing for Advantage pdf

297 CHAPTER OUTLINE CASE 1 Ford Motor Company CASE 2 Asea-Brown-Boveri (ABB) Introduction Why Study Strategy Implementation? Strategy Implementation and the Firm’s Managers Strategy Implementation and the Firm’s Employees A Framework for Understanding Organizational Structure Basic Ingredients of Organizational Structure Specialization Standardization Centralization Broad Forms of Organizational Structure Functional Structures Product Divisions Variants of the Product Division Structure Geographic Division Structures Matrix Structures Organizing for Global Operations International Division Structures Worldwide Product Divisions Worldwide Geographic Division Structures Worldwide Functional Structures Worldwide Matrix Structures Worldwide Hybrid or Mixed Structures Corporate Application to Ford Motor Company and ABB Ford Motor Company Asea-Brown-Boveri (ABB) No Single Structure Is Perfect An Overview of Organizational Structure Ethical Dimension Summary Discussion and Exercise Questions Strategy Implementation (I): Organizing for Advantage WHAT YOU WILL LEARN • Why strategy implementation is important • How strategy implementation contributes to a firm’s competitive advantage • Why organizational issues are a significant part of strategy implementation • How organizational structure lays the foundation for strategy implementation • The broad types of organizational structures that companies are likely to use • Why no single type of organizational structure is likely to fit all companies 298 PART 3 Organizing for Advantage Following more than ninety years of growth, Ford Motor Com- pany has become one of the largest manufacturers of automo- biles in the world (1997 revenues of $153 billion, profits of $6.9 billion). Throughout its long history, Ford has prided itself on its innovation and the creative flair used to design some of the world’s most popular and best selling cars. For example, in the late 1960s, Ford revolutionized automobile design with its orig- inal Mustang sports car that took the world by storm. Other leg- endary Ford nameplates developed during the 1960s and 1970s, such as the Thunderbird (T-Bird), Fairlane, Galaxy, Mustang, and Lincoln Continental, remain distinctive in the annals of U.S. automobile manufacturing history. All of the three major U.S. automobile companies (Ford, General Motors, and Chrysler) grew very fast in the twenty years that followed World War II. The American automobile industry was expanding rapidly not only in the United States, but also around the world. General Motors and Ford especially invested heavily in their European operations after the war because of the rapidly growing economic prosperity of those markets, the sophistication of their customers, and the fact that countries such as France, Germany, and Italy had a strong base of engineering talent that made many European car companies significant competitors (e.g., BMW, Daimler-Benz, Fiat, Fer- rari, and Renault). Throughout the 1960s and 1970s, both GM and Ford set up product development centers and factories in Europe to begin designing and developing cars for different national markets by tapping into the strong pool of local engi- neering talent and expertise. Ford, in particular, devoted a con- siderable amount of effort and resources to building a large European operation that would design and develop new auto- motive technologies and products that appealed to a very dis- tinctive set of preferences, tastes, weather conditions, driving habits, and operating requirements that were more specific to a European environment. Because European roads tend to be more narrow than American roads, and road conditions often varied significantly from one region to another, cars targeted for European customers often required a different set of design, manufacturing, and performance requirements than cars sold in U.S. markets. In particular, engines, transmissions, suspension, safety features, and other components manufactured for Euro- pean cars often had very different design and manufacturing specifications from those used for cars designed for American markets. In addition, cars developed for a European customer base often focused on maximizing fuel efficiency and economy, since gasoline costs were significantly higher than those in the United States. Thus, European cars typically housed a smaller, more fuel-efficient (and oftentimes more powerful) engine than those found in American cars. Also, European transmissions and suspensions were often more “tight” than those found in U.S. cars, meaning that the car gave a feeling to the driver that it would “hug” the road more closely. This was an especially important design feature, since narrow European roads and fre- quent bad weather spells meant that drivers would potentially encounter a high range of different and possibly hazardous driv- ing conditions, especially in different countries. Thus, the designs, components, and operating requirements for European cars were often very different from those that guided automo- bile development and manufacture for cars in U.S. markets. Early Organizational Structure To manage the significant differences in the way cars are designed, developed, and manufactured in the United States and Europe, Ford employed a geographical division form of organ- ization for over four decades. Ford’s European operations were responsible for all aspects of automotive development, manu- facture, and sales in Europe. In turn, Ford’s North American headquarters was responsible for developing, manufacturing, and selling cars in the United States and elsewhere. In this way, Ford Europe and Ford North America operated autonomously from one another. For all practical purposes, Ford Europe acted as if it were almost a completely separate car company from Ford North America. Each part of the company designed and implemented its own set of product development centers, design centers, factories, and purchasing operations according to its respective market needs. Within the United States, how- ever, Ford utilized a product division structure to manage two separate car divisions, Ford and Lincoln/Mercury. Each of these product divisions offered a line of cars tailored for a different market segment (Ford—smaller and midsize cars; Lincoln/ Mercury—larger, luxury cars). Ford’s sales to the Asia/Pacific region were quite small after the war, so this region reported directly to North American headquarters through a small inter- national division. Over time, the long separation of Ford Europe from Ford North America resulted in extensive duplication of effort and activities between the two subunits. In many cases, the same Ford car design developed in the United States was often com- pletely reengineered from the ground up in Europe, thus con- suming significant design time and development effort to reach the market. Even auto parts and components made in the United (Case 1) Ford Motor Company 1 CHAPTER 9 Strategy Implementation (I): Organizing for Advantage 299 States became increasingly incompatible with the separate design and manufacturing specifications created by Ford Europe. The separation of European and American operations also meant that innovations created in one part of the world could not be readily transferred to the other. For example, design innovations and improvements in fuel-efficient engines made by Ford Europe were not readily adapted by Ford North America during the 1970s. Also, steady improvements in the introduction of new paint and assembly techniques in Ford’s U.S. automobile plants did not flow to Ford’s European opera- tions as well, thus leaving the company in a situation where experience, talent, and skills in one part of the world could not readily be used in another. This separate division of effort between the two regions made it difficult for the entire company to respond quickly to the onslaught of better quality, lower-cost Japanese car imports in the U.S. and European markets during the past two decades. Moreover, even the same model name used for a Ford car had very different components, design spec- ifications, and even target market between the two parts of the company. For example, the Ford Escort in the United States appealed to a market segment that is interested in basic trans- portation with few of the features that are found in mid-size or other performance-oriented models. On the other hand, the Ford Escort in Europe is a mid-range family car that typically comes with a full range of options absent on the U.S. model. This duplication of design, development, and manufacturing activities between the two regions carried over to the entire range of Ford’s products. Moreover, maintaining fully autonomous vehicle design and development centers in Europe meant that Ford’s overall cost structure became bloated and a real burden on financial performance during the same time period. Duplication of design and development activities became so profound during the 1980s that at one point, the company realized that it had over eighty-two different automo- bile models, none of which shared even the same size radiator cap. Thus, the separation of Ford Europe from Ford North America represented an organizational approach that the com- pany could no longer afford, especially as the automobile industry itself became more global in scope. Creating a Global Organization In April 1994, then CEO Alex Trotman put forth a new organi- zational architecture for the entire company. Known as Ford 2000, the company’s reorganization combines its European and North American automotive operations into one unit. By inte- grating these once-separate divisions into a single unit, Trotman hopes to transform Ford into a much more nimble company that can compete with fast-moving Japanese and other competitors around the world. This single automotive division will be organized around five product vehicle development centers, four in the United States and one in Europe. Each vehicle devel- opment center will be responsible for a particular type of vehi- cle platform (e.g., small car, mid-sized car, luxury car, sport- utility vehicle, commercial truck) that would then be developed and sold around the world under its authority. Under this new structure, for example, the European vehicle development cen- ter will focus on designing small, front-wheel, fuel-efficient cars that can be sold in any global market that wants that type of car. Mid-size and larger cars, trucks, and sport-utility vehi- cles will be developed in Ford’s four vehicle development cen- ters based in the United States. Each of these vehicle develop- ment centers will then oversee product design, manufacture, and marketing for various car or truck models that fall under its platform category. The objective of the reorganization is to create a company in which global product teams will design around a central type of car platform a series of car models that can then be sold around the world with minor modification. As currently con- ceived, Ford’s engineers and technical staff will likely have two types of responsibilities: an individual expertise in a given technical or functional area (e.g., engines, powertrains, sus- pensions, or cooling systems) and a vehicle platform center to which they report (small car, mid-sized car, luxury car, sports- utility vehicle, or commercial truck). Ultimately, they will report to their superiors in the vehicle platform center under which they are assigned. Instead of designing two separate lines of Taurus mid-sized cars for sale in the United States and Europe, the company intends to create one basic mid-sized vehicle platform in North America and then modify it for indi- vidual markets anywhere around the world. Conversely, Ford’s European vehicle development center will concentrate its efforts on designing all of Ford’s small car needs and then modifying it according to road conditions and customer needs in individual markets as well. By the end of the century, CEO Trotman hopes that Ford’s small car engineers (based in Europe) will be creating small cars for all of Europe, the United States, and other worldwide markets using the same basic vehicle template. To ensure that the company is capable of fully implement- ing the vision of Ford 2000, Trotman is aggressively investing in new vehicle platforms that can carry over more parts from one model to another. Also, the company has begun to invest heavily in new types of computer-assisted design and manufac- turing (CAD/CAM) technologies that enable engineers to test design prototypes for vehicle ruggedness, reliability, and per- formance before they are actually produced in the factory. Once an underlying platform meets the company’s stringent quality, safety, operating, and manufacturability requirements, engi- neers in the factory would be able to directly download design data and other bits of information from the development center 300 PART 3 Organizing for Advantage into the factory, thus saving considerable amounts of time and engineering effort. This powerful combination of using more common vehicle platforms and computer-integrated manufac- turing is the basis for Ford’s ambition to reduce the number of basic car designs from twenty-four to sixteen, and yet increase the number of actual car models from those platforms by over 50 percent. By using the same basic platform for a variety of different car models, the company seeks to spend much less time and money on redesigning each model separately every year. By more closely linking Ford’s design, engineering, and manufacturing activities, Trotman hopes that the company will be better able to respond quickly to changing customer tastes and the rise of new market segments in different parts of the world. In addition, by using more common parts throughout Ford’s operations, the company also hopes to save over $1 bil- lion by reaping greater economies of scale in purchasing and improved negotiations with key suppliers. The transformation of Ford into one of the world’s most powerful automobile companies continues into the new millen- nium. Under its newest CEO, Jacques Nasser (who took over in 1997), Ford is aggressively seeking to grow in all automobile categories, both in the United States and abroad. With the global automobile industry consolidating, Ford has begun to make some major moves that will begin to give it significant new strength in Europe and Asia. In January 1999, for example, Ford paid $6.45 billion to purchase the automobile businesses of Volvo of Sweden, thus helping Ford compete more effec- tively in the upper range of the mid-sized car market. The acquisition of Volvo is important to Ford because it allows the company to gain access to many innovations in safety, ergonomics, and advanced manufacturing techniques developed by the Swedish firm. (Ford, however, did not elect to purchase the truck division of Volvo). With the acquisition of Volvo, Ford is much better positioned to compete in Europe against the likes of DaimlerChrysler and the newly formed alliance between France’s Renault and Japan’s Nissan. The acquisition of Volvo complements Ford’s European buyout of Jaguar and Aston- Martin earlier in the 1990s. Many analysts believe that Ford will manage Volvo in such a way that it will preserve its Euro- pean heritage and styling, while adapting Volvo’s assets to help Ford compete better around the world. In Asia, Ford’s growing strength in marketing, financial management, and technology has given it the upper hand in working with its Japanese partner Mazda. In the late 1990’s, Ford took on a de facto controlling interest in Mazda by own- ing 33 percent of the Japanese firm, and by placing many Amer- icans in the most senior management positions within the Japanese company. Many analysts have commented that Ford’s closer relationship and cash injection into Mazda saved the Japanese firm from the brink of potential financial disaster with the downturn in the Japanese and Southeast Asian economies. In March 1999, Ford announced that it would work much more closely with Mazda to co-develop a new line of car platforms that would enable both companies to accelerate their product development times and simultaneously share key product com- ponents to gain even greater economies of scale. In effect, Mazda has become an important Ford affiliate in helping the U.S. auto giant become more competitive in the Far East. Asea-Brown-Boveri (ABB) is one of Europe’s leading produc- ers of power generation equipment, factory automation sys- tems, robotics and machine tools, high-speed trains, and envi- ronmental monitoring systems. The company is becoming well known for its wide range of high-quality products and for its organizational structures. In 1997, the company’s revenues exceeded $31 billion. It has close to 200,000 employees world- wide. ABB spends nearly 8 percent of sales on R&D ($265 bil- lion) per year. It is an important technological leader in the development of factory automation systems. Recently it extended its market share gains in power transmission and dis- tribution systems. Originally, ABB was two separate companies, Asea (a Swedish engineering group) and Brown-Boveri (a Swiss manu- facturer of electrical motors). The current ABB came into being in 1987 with a merger of the companies. Despite the long history and growth that both companies enjoyed on their own, the new ABB is a model for managing operations around the world. Dur- ing the past ten years, ABB has restructured its European oper- ations to achieve lower-cost economies of scale for its products. It has also undertaken an aggressive acquisition strategy to build market share abroad. In 1989, ABB purchased Westinghouse Electric’s power transmission and distribution business. In the same year, it purchased Combustion Engineering, an innovative U.S. firm with specialized technologies in the turbine and the power automation field. In 1991, it acquired the robotics busi- ness from Cincinnati Milacron, one of the largest U.S. produc- ers of machine tools and integrated factory systems. Throughout (Case 2) Asea-Brown-Boveri (ABB) 2 CHAPTER 9 Strategy Implementation (I): Organizing for Advantage 301 INTRODUCTION So far, we have focused on ways a firm can build and extend its sources of competitive advantage. We have analyzed how companies from various industries formulate specific strategies to create new sources of value from their activities. However, strategy formula- tion is only part of the equation in developing competitive advantage. Once a particular strategy has been chosen, the firm must then devote considerable effort to ensure that man- agers and employees are united in their efforts to execute the strategy. Managers must see that individual activities within an organization work together to help achieve competitive advantage. This task is referred to as strategy implementation. This chapter is the first of two that focus on the ingredients of effective strategy imple- mentation. In its simplest definition, strategy implementation refers to converting strate- gies into desired actions and results. In a broader sense, strategy implementation is con- cerned with efforts to build a more effective organization. 3 Understanding strategy implementation is crucial because the success of any organization depends upon how well people work together to translate strategies into action. Managers and employees are the ultimate source of a firm’s competitive advantage, because competitive advantage arises only when managers and employees in an organization work together in an integrated manner to achieve high performance. Thus, the issues of strategy implementation and competitive advantage are inextricably linked. We begin by providing some reasons why strategy implementation is an imperative issue. Effective strategy implementation occurs when people from different parts and the mid-1990s, ABB has expanded its market reach around the world by forming strategic alliances and other partnerships with governments and other firms to tap into the growing market for power generation and distribution systems in Latin America and Southeast Asia. As recently as October 1998, ABB spent over $1.5 billion to purchase engineering and manufacturing firms in the Netherlands that will give the company greater access to tal- ent and markets around the world. Through these acquisitions, ABB has numerous factories, R&D centers, and other facilities around the world, so it now manages a global empire of compa- nies. The company continues to expand and look for new busi- ness and market opportunities. The organizational tasks and pressures facing ABB managers are enormous. On the one hand, they need to ensure that each ABB business remains responsive to the individual markets it serves. On the other hand,ABB must develop and produce prod- ucts at a cost low enough to compete against other global elec- trical equipment giants. In other words, ABB needs to balance low-cost production with fast response to local markets. This daunting task represents a major organizational challenge. To accommodate these two goals (low cost and fast response), ABB is organized along a global matrix or grid organization. The idea behind a matrix is to develop core tech- nologies and low-cost production without sacrificing the firm’s ability to respond to local markets. The essence of ABB’s matrix is that each person reports to two bosses simultaneously: a country manager and a product manager. Each country manager runs local operations with their own set of strategies to deal with local markets, customers, competitors, legal regulations, and other issues. Each product manager deals on a worldwide basis with the technical specifications and costs of product design and manufacture. Both kinds of managers must work together to design leading-edge products that fit local market conditions. In practice, the matrix system is often “tilted” towards the product or country manager depending on the strategy needed by a par- ticular product at different times. As ABB moves into the next century, CEO Goeran Lindahl is building upon his predecessor’s effort in this direction. Previ- ous ABB CEO Percy Barnevik believed that the global matrix gives ABB a competitive advantage, despite the fact that it requires more meetings and consultations among managers from different product and geographic areas. The matrix format allows ABB to coordinate its operations against General Elec- tric, Siemens, Toshiba, Hitachi, and Mitsubishi. These compa- nies compete directly with ABB in many markets. Also, the matrix encourages a diversity of perspectives, ideas, and cul- tures. This diversity becomes vital to stimulate new product and market ideas. By using the matrix carefully, ABB is trying to become a truly global firm with both technological leadership and a strong local presence. ABB has been described as neither Swiss nor Swedish, not even European; the primary language spoken is English. strategy implementation: the process by which strategies are converted into desired actions. 302 PART 3 Organizing for Advantage activities of an organization work and act together to achieve the desired strategy. In the second section, we focus exclusively on the topic of organizational structure. We look at how a firm may select a particular organizational structure to support its strategy. In the third section, we examine how firms with extensive global operations may modify their organizational structures. Finally, we revisit Ford and ABB to see how they have used spe- cific organizational structures to support their strategies. WHY STUDY STRATEGY IMPLEMENTATION? Strategy implementation is an important topic for managers and employees at all levels to understand. Successful strategy implementation depends upon both a well-managed organization and a solid base of committed, competent personnel. Management can for- mulate any number of strategies to build competitive advantage, but the success of any given strategy is only as good as the organization and the people behind it. Without a solid base of competent people who understand and support the firm’s strategy, it remains noth- ing more than words on paper. The effectiveness of implementation ultimately determines the success or failure of any given strategy. Strategy Implementation and the Firm’s Managers A key implementation task for senior managers is to design an organization that allows peo- ple to use their talents, capabilities, and insights to the fullest in supporting the firm’s strat- egy. Companies, especially large companies, are complex organizations composed of many functions, activities, businesses, and most importantly, people. Many people, through no fault of their own, will not always understand the value and role of how individual parts of the organization contribute to the firm’s overall strategy. Through a well-designed organi- zation, senior managers can guide and channel their people’s efforts to work together in an integrated, cohesive manner that best supports the firm’s strategy. Building an organization in which many people work together smoothly is not an easy task. First, managers themselves must take steps to carefully understand how different types of strategies will require specific organizational configurations or designs to achieve suc- cessful implementation. Just as every firm’s strategy is likely to be distinctive, so will be its need for an appropriately fitting organization. The organization—structure, systems, staff—represents the bricks and mortar that implement and sustain a strategy. Each firm will likely require a customized set or arrangement of organizational “building blocks” that best fit its strategy. In other words, the choice of how to design and build an organization will depend heavily upon the firm’s strategy. For example, firms whose business units are pursuing low-cost leadership strategies will likely require a type of organizational frame- work unlike that of businesses competing through differentiation or focus. Conversely, highly diversified firms will not require the same type of organizational setup as those firms that are less diversified. Effective strategy implementation depends on a close fit between the firm’s strategy and the shape or structure of the organization supporting it. Second, managers must ensure that their choice of an organizational setup is internally consistent. In other words, all ingredients of the organization must fit tightly together, in much the same way as the parts of a high-performance combustion engine. Organizational consistency means that the various components of an organization fit together and make logical sense. All parts of the organization must be arranged, put together, and fine-tuned in a coherent way in order to make strategy implementation smooth and powerful. Imple- mentation, as an ongoing task, requires management to monitor how well the firm’s many functions, activities, and people are coordinated smoothly to support a given strategy. This CHAPTER 9 Strategy Implementation (I): Organizing for Advantage 303 task is almost equivalent to an onboard automobile computer that monitors and controls the various parts of the engine—the fuel/air mixture, the temperature, the RPMs, and the idle speed—all of which must work together to achieve balance, control, and fast response to provide smooth performance. 4 Strategy Implementation and the Firm’s Employees For employees, their value to the firm hinges directly on how well they understand and support the firm’s strategy in the conduct of their own jobs. Talented and capable employ- ees are the bedrock of any organization. These employees are people who work on a daily basis to translate the firm’s strategy into tangible products or services for customers. Equally important, employees represent much more than simply a company’s head count or staff. They represent vital sources of knowledge and are the “eyes and ears” of the organization. Employees’ close and continuing contact with customers and operational activities makes them a wellspring of knowledge and ideas for the firm. Their daily contact with cus- tomers gives them an edge over senior managers in sensing whether the firm appears to be moving in the right direction. These same competent people can quickly identify potential areas of improvement among the firm’s activities. For example, factory workers on an assembly line are in a perfect position to spot potential weaknesses and defects in an air- craft or automobile. They are also the people who would be most likely to know how best to deal with the problem and suggest ways for improvement. Japanese companies are leg- endary in their efforts they take to listen and gather ideas from their employees. Employ- ees are the source of continuing quality and process improvement in Japanese factories. Thus, strategy implementation in its most effective form is a joint effort. Ideally, man- agers and employees work together in understanding and supporting the firm’s strategy to the best of their efforts. Sustained strategy implementation is more than selecting the right type of organizational framework; it is managers and employees working together in a clear and coherent direction. Successful implementation depends upon the coordinated efforts of many people from all parts of the firm. A FRAMEWORK FOR UNDERSTANDING ORGANIZATIONAL STRUCTURE The basis for successful strategy implementation rests on designing an effective organiza- tion. People working within an organization must be able to understand how their actions interrelate with the actions of others to support and execute the firm’s strategy. Yet, in many instances, talented people in even the best-managed firms are sometimes left grop- ing to understand their own roles in supporting the firm’s strategy. Organizational struc- ture is vital in clarifying the roles of managers and employees that hold the company together. Although the word structure often conjures up images of rigid control and tight rules, the concept of organizational structure is actually much richer. Developing an appropriate structure that tightly fits and supports the firm’s strategy is one of senior management’s primary tasks. In some ways, the choice of organizational structure is so important and enduring to the firm that it can markedly influence the way the firm will formulate and implement strategies in later time periods. Structure refers to the formal definition of working relationships within an organiza- tion. Structure is a vital component in any organization and serves a two-fold purpose. On the one hand, structure distinguishes and separates the specific tasks that make up the structure: the formal definition of working relationships between people in an organization. 304 PART 3 Organizing for Advantage firm’s activities: what people should do. On the other hand, structure provides the basis to integrate these tasks into a coherent whole: how people should work together. Structure balances the need for separating and integrating tasks within an organization. 5 Structure is vitally concerned with the relationships among activities. Grouping together critical core activities into organizational units forms the basis for a sustainable strategy. In this way, management can better understand the ingredients of what constitutes the major sources of its competitive advantage. A well-designed structure that facilitates the execution of the firm’s central value-adding activities can greatly assist management to build and extend the firm’s distinctive competence into new areas of activity in later time periods. Firms will choose a structure that best suits their particular grouping of activities. For example, consider the illustrations of Exxon and AT&T from an earlier chapter on corporate strategy. The explo- ration, production, and refining of petroleum products is Exxon’s single-most important busi- ness. On the other hand,AT&T is increasingly involved in various telecommunications-based products and services that are in many ways significantly different from its historic core busi- ness. One would expect that Exxon’s management would prefer one kind of structure to organize Exxon’s closely related activities while AT&T’s management would choose another in managing its broader array of businesses and technologies. Thus, any given strategy will require a particular form of organizational structure to best lend support to implementation. In other words, the firm’s strategy is a big factor that influences how senior managers choose to organize and group their key value-adding activities and tasks. The strategy a firm selects will, in large measure, determine the group- ing of activities and tasks, the choice of practices and procedures to attain consistency of performance, and the delegation of authority within the firm. Once a firm’s organizational structure is in place, however, it can be extremely costly to modify or replace it. BASIC INGREDIENTS OF ORGANIZATIONAL STRUCTURE Three important ingredients, or dimensions, compose organizational structure: (1) special- ization, (2) standardization, and (3) centralization. Each of these ingredients of organiza- tional structure influences how managers and employees interact (see Exhibit 9-1). Specialization Specialization refers to identifying and assigning particular activities or tasks to the appro- priate individuals, teams, or units capable of performing them. When used effectively, exhibit(9-1) Key Dimensions of Organizational Structure Specialization • Matching activities with people who are best able to perform them • Found at all levels within an organization Standardization • Practices, procedures, and guidelines that provide the basis for consistent performance • Focused on achieving internal order within a given structure Centralization • Delegation of authority throughout the organization’s ranks specialization: the assignment of particular tasks and activities to those people who are best able to perform them. CHAPTER 9 Strategy Implementation (I): Organizing for Advantage 305 specialization enables an organization to divide many activities and tasks and allocate them to those people best equipped to handle them. The dimension of specialization can be found at all levels within an organization. Every company uses the concept of specialization in some way. For example, within an automobile factory, welders perform only those tasks that relate to welding; assemblers do their jobs by putting the parts of the car together; painters work the specialized machinery that paints each car to a glowing finish. The skills of painters are different (specialized) from those of assemblers. In a fashion salon, customers can also find specialization at work. For example, some stylists are particularly skilled at cutting and shaping hair to cur- rent styles or perms; other stylists are better trained at choosing the right mix of dyes to modify hair color according to a customer’s skin complexion or tone; while other stylists specialize in care for the hands and feet as manicurists and pedicurists. People conduct par- ticular activities according to their skills and capabilities. Specialization is also found when we examine larger units of a firm. For example, an automobile manufacturer may decide to group all of its assembly activities in one part of the factory, while placing the specialized paint machinery in another. On an even larger scale, the same automobile company can group all of its assembly operations in one unit that reports to senior management, while placing all of its engine manufacturing operations in another specialized unit dedicated to producing engines. In the hair salon example, a company such as Supercuts could group all of its U.S. salons and shops in one unit, while placing all of its Latin American salons in another unit. Supercuts may choose to do this because the fashion and hair-styling requirements of U.S. customers (time spent on make- up, time spent on perms, type of shampoos used, type of advertising) may vary from those of Latin American customers. Thus, for Supercuts as a company, dividing up its markets may help management to better understand specific market conditions. Specialization is vital to any organization, because it matches activities with people and units best able to perform them. Standardization Standardization is the process of defining the organization’s work, procedures, and prac- tices in such a way that people do their jobs in a consistent manner. Standardization is con- cerned with achieving internal order and performance within a given structure. The concept of standardization focuses on ensuring that people, teams and larger units perform “up to a given standard.” It is found in many forms and at all levels, even within a single company. For example, standards for quality and ethical behavior exist at the personal level, while financial performance standards are used for larger units in a company. Regardless of level, the purpose behind standardization is to attain and to measure consistency of performance. Standardization can take the form of rules, practices, procedures, and the criteria by which people are evaluated and measured on their performance. For example, the qual- ity of welding and assembly in the automobile factory will be evaluated according to exacting, precisely defined measures of the car’s fit, while the quality of a paint job will be assessed according to the luster and consistency of the car’s appearance. In the fash- ion salon example, hair stylists are evaluated according to a quite challenging set of stan- dards—those of the customer. Customers can tell if their hair “looks and feels right” when they look in the mirror. Yet, in both the car factory and fashion salon examples, a defined set of practices, procedures, and criteria is used to measure and ensure consis- tent performance. The concept of standardization also applies to larger units within a company. Here, the focus of standardization tends to be on gauging consistency of financial or operating standardization: the process of defining the organization’s work practices and procedures so that people can repeatedly perform them at a given level or measure of performance. 306 PART 3 Organizing for Advantage performance. For example, a division in an automobile company producing luxury cars is likely to have a different standard for profitability as compared to a division produc- ing subcompact, economy cars for young people in their first jobs. For example, at Ford, senior managers will probably hold the division producing luxury cars to a higher stan- dard of profitability than the division producing economy cars for a less wealthy group of customers. Thus, standardization is concerned with organizational practices, proce- dures, and criteria that provide the basis for consistent performance. Centralization Centralization refers to the degree to which senior managers have the authority to make decisions for the entire organization. Delegating authority to lower-level personnel is an important aspect of organizational structure because it involves choosing which people have the right to decide and act. In a highly centralized organization, senior management retains most of the authority to decide how subunits will act. Senior managers in a cen- tralized company decide strategy and objectives, even for smaller subunits within the firm. In contrast, a highly decentralized organization places wide discretion with lower-level managers and employees. Senior management plays a lesser role in setting goals and objectives for the company’s subunits. By delegating authority to lower-level managers and personnel, senior management can harness the decision-making capabilities of many people throughout the company. Companies differ widely in the amount of authority they delegate to lower-level subunits. For example, in chemical and pharmaceutical companies such as Dow, DuPont, Monsanto, American Home Products, Merck, Schering-Plough, and Pfizer, top managers make many key decisions and communicate them to lower-level man- agers and employees. On the other hand, many high-tech and software firms such as Microsoft, Adobe Systems, Apple Computer, Hewlett-Packard, and Sun Microsystems prefer a high degree of decentralization that encourages their lower-level managers to make decisions on their own. Centralization is concerned with the degree of delegation of authority throughout the organization’s ranks. BROAD FORMS OF ORGANIZATIONAL STRUCTURE In the preceding section, we examined the three basic ingredients of any organizational structure. Specialization deals with how managers assign activities and tasks to the peo- ple, teams, or units best capable of performing them. Standardization deals with the practices, procedures, and criteria used to attain and ensure consistent performance. Centralization deals with the delegation of authority throughout the organization. These three ingredients can be combined in many different ways to build the right type of organization to implement strategy. Activities and tasks to achieve specialization can be divided in many ways. Also, managers can utilize any number of practices, procedures, and criteria to achieve consistent performance. In addition, senior managers have few predetermined limits as to how they may wish to decentralize and delegate authority. The interaction of these three ingredients—specialization, standardization, and central- ization—will vary according to the firm’s strategy. Accordingly, managers need to find the right combination of specialization, standardization, and centralization to implement their firm’s strategy most effectively. Four common combinations of these elements are: (1) functional, (2) product, (3) geo- graphic, and (4) matrix structures. Each of these broad structures involves different choices with respect to specialization, standardization, and centralization to implement a given strategy. 6 centralization: the degree to which senior managers have the authority to make decisions for the entire organization. [...]... support strategy implementation is a complex task Understanding the differences between various types of structure is 329 330 PART 3 Organizing for Advantage essential because each offers certain strengths and weaknesses in supporting strategy implementation No single organizational structure is suitable for all strategies Any given strategy requires a particular kind of structure to achieve high performance... management may consider using another performance standard for a fast-growing business, such as CHAPTER 9 Strategy Implementation (I): Organizing for Advantage medical equipment or plastics In these businesses, GE must continue to invest large sums of money building new factories and laboratories Consequently, these divisions may be evaluated along other performance criteria, such as growth in market... worldwide product or SBU structure is best suited for those firms pursuing a global strategy Examples of companies that have given worldwide authority to their product division or SBU managers include General Electric, CHAPTER 9 Strategy Implementation (I): Organizing for Advantage United Technologies, and Texas Instruments In fact, most large U.S firms in the Fortune 500 that use product or SBU structures... Functional CHAPTER 9 Strategy Implementation (I): Organizing for Advantage e x h i b i t (9-3) Key Characteristics of a Functional Structure Advantages • Economies of scale in administrative costs/activities • Good for small-sized firms • Easy to identify talent • Fosters high centralization of decision making • Promotes high task and activity specialization • Supports a low-cost leadership strategy • Supports... around the globe SUMMARY • Strategy implementation is a vital issue because any strategy is only as good as the • • • • • • • effort behind it to move it forward Strategy implementation is intimately concerned with building the right kind of organization that can support a chosen strategy One of the most important organizational building blocks that is needed to implement strategy is organizational... final advantage of the geographic structure is its flexibility Senior management can easily consolidate smaller regions to become bigger ones Conversely, it is easy to divide up a large region into a series of smaller ones as market conditions change or fragment CHAPTER 9 Strategy Implementation (I): Organizing for Advantage e x h i b i t (9-10) Key Characteristics of Geographic Structures Advantages... and function) in attempting to gain the benefits of both All these structures have been used in some form by U.S firms as they seek to build and extend their sources of competitive advantage However, when firms seek to expand operations globally, these 323 Strategy Implementation (I): Organizing for Advantage CHAPTER 9 structures are often modified in varying degrees because of the market-specific economic,...307 Strategy Implementation (I): Organizing for Advantage CHAPTER 9 Functional Structures In a functional structure, each subunit is assigned responsibility for firm-wide activities related to a particular function Functions are the broad tasks that every organization performs to create value: production, marketing, engineering, finance,... cases Ford Motor Company Ford 2000, or the transformation of Ford that began under then CEO Alex Trotman and continuing under Jacques Nasser, reflects the growing need by the company to compete increasingly on a global basis Ford’s earlier preference for a geographic form of organization is now giving way to a modified SBU/product-based organization that will increasingly have worldwide responsibility for. .. then can be modified for sale and use in any part of the world For example, requirements for designing new small car models will fall under Ford’s small car vehicle platform center (which is now based in Europe) This center will be responsible for ensuring that all of Ford’s small cars, no matter where they may ultimately be sold, are designed and manufactured according to vehicle platform specifications . Questions Strategy Implementation (I): Organizing for Advantage WHAT YOU WILL LEARN • Why strategy implementation is important • How strategy implementation contributes to a firm’s competitive advantage • Why. and development effort to reach the market. Even auto parts and components made in the United (Case 1) Ford Motor Company 1 CHAPTER 9 Strategy Implementation (I): Organizing for Advantage 299 States. given strategy. 6 centralization: the degree to which senior managers have the authority to make decisions for the entire organization. CHAPTER 9 Strategy Implementation (I): Organizing for Advantage