STRATEGIC FIT: MATCHING STRATEGY TO STRUCTURE AND THE SITUATION

1. STRATEGIC FIT: MATCHING STRATEGY TO STRUCTURE AND THE SITUATION Payne (7)

2. FIT WITH INDUSTRY OR MARKET CONDITIONS – external fit Strategies for Emerging Industries Strategies for High Velocity Markets Strategies for Maturing Industries Strategies for Declining Industries Strategies for Fragmented Industries FIT WITH ORGANIZATIONAL STRUCTURE – internal fit Two Primary Types of Fit

3. The Industry Life Cycle Industry Sales Introduction Growth Maturity Decline Time

4. The Law of Diminishing Returns Output Labor Negative Returns Diminishing Returns Increasing Returns

5. The Industry Life Cycle Industry Sales Introduction Growth Maturity Decline Time

6. Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 250 200 150 No. of firms 100 50 0 1895 1905 1915 1925 1935 1945 1955 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

7. Growth Maturity Decline Strategy and Performance at across the Industry Life Cycle 12 10 8 6 4 2 0 Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle. ROI Change Technical Product R&D/Sales Equip. Age of Plant & New Products % Sales from New Products Added/Revenue Value Advertising/Sales Investment/Sales

8. New and unproven market Proprietary technology Low entry barriers Experience curve effects may permitcost reductions as volume builds Buyers are first-time users Marketing involves inducing initial purchase and overcoming customer concerns Possible difficulties in securing raw materials Firms struggle to fund R&D, operations and build resource capabilities for rapid growth 1. Features of an Emerging Industry

9. Win early race for leadership by employing abold, creativestrategy Push hard to: Perfect technology Improve product quality Develop attractive performance features Move quicklywhen technological uncertainty clears and a dominanttechnologyemerges Form strategic alliances Capture potential first-moveradvantages Pursue: New customersand user applications Entry into new geographicalareas Focus advertising emphasis on: Increasing frequency of use Creating brand loyalty Use price cutsto attract price-sensitive buyers Prepare for entry ofestablished firmswhen industry future clears and risk lessens 1. Options in an Emerging Industry

10. Rapid-fire technological change Short product life-cycles Rapidly evolving customer expectations Frequent launches of new competitive moves Entry of important new rivals Examples: Smart Phones Industry Biotechnology Industry Gaming Industry 2. Features of High Velocity Markets

11. Invest aggressively in R&D Develop quick responsecapabilities Match rivals Shift resources Adapt competencies Create new competitive capabilities Speed new products to market Use strategic partnershipsto develop specialized expertise and capabilities Keys to success: Cutting-edge expertise Speed in responding to new developments Collaboration with others Agility Innovativeness Opportunism Resource flexibility First-to-market capabilities 2. Options in the High Velocity Markets

12. Slowing demand generates stiff competition More sophisticated buyers demand bargains Greater emphasis on cost and service “Topping out” problem in adding production capacity Product innovation and new end uses harder to come by International competition increases Industry profitability falls Mergers and acquisitions reduce the number of industry rivals 3. Characteristics of Industry Maturity

13. Prune product line Emphasize process innovation Strong focus on cost reduction Increase salesto present customers Purchase rivalsat bargain prices Expand internationally Build new, more flexible competitive capabilities 3. Strategy Options for Competingin a Mature Industry

14. Demand grows more slowly than economy as whole (or even declines) Competitive pressures intensify--rivals battle for market share To grow and prosper, firm must take market share from rivals Industry consolidates to a smaller number of key players via mergers and acquisitions 4. Characteristics of Stagnant or Declining Industries

15. Pursue focus strategyaimed at fastest growing market segments Stress differentiationbased on quality improvement or product innovation Work diligently to drive costs downby Outsourcing Redesign internal processes Consolidate under-utilized production facilities Close low-volume, high-cost distribution outlets Cut marginal activities from value chain 4. Options for Competingin a Stagnant or Declining Industry

16. No seller has a sizable market share (sometimes because the industry is so new that no large firms have yet emerged) Exploding technologies force firms to specialize just to keep up in their area of expertise Low entry barriers Absence of scale economies Buyers require small quantities of customized products (a condition that allows small firms to serve the special needs of a few buyers) Market is so big or diverse that it requires many firms to satisfy buyer needs Examples: 1) Landscaping 2) Auto repair 3) Meat packing. 5. Characteristics of a Fragmented Industry

17. Construct and operate “formula” facilities Become a low-cost operator Increase customer value via backward or forward integration Specialize by product type Specializeby customer type Focus on limited geographicarea 5. Options for a Fragmented Industry

18. Strategy & Structure Fit Concepts: Strategy and Structure Relationship Structure Characteristics Dealing with Size Issues

19. Coordination create activities towards a productive goal while still operating separately mechanisms for coordination include rules and procedures hierarchical referral liaison personnel Integration come together and create something new by combining knowledge and operating as a unit mechanisms for integration include teams and task forces Purposes of Structure

20. Structure and Strategy Old Strategy New Strategy Old Structure New Structure Old Performance New Performance *This is a cyclical process where the past informs the future.

21. Organizational Structure • ORGANIZATIONAL STRUCTURE determines how the work efforts of individuals and teams are orchestrated and how resources are distributed • A key part of organizational design • Defines how jobs and tasks are divided and integrated • Delineates reporting relationships up and down the hierarchy • Three (3) key dimensions of an organizational structure • Complexity • Control • Formalization

22. Complexity: Creation of distinct tasks and responsibilities within the organization Types of Complexity Degree of Specialization Levels of Hierarchy Geographic Spread or Dispersion Control: Design of hierarchy to supervise various differentiated elements of the organization Extent to which authority for decision making is held at higher levels of the organization Higherlevels- Centralization Lower levels- Decentralization Formalization: Extent to which rules and procedure govern the actions of individuals and groups within the organization Balancing act Too Low - Uncertainty about authority and responsibility Too High - Limit innovation and creativity Dimensions of Structure

23. Organizational Structure • COMPLEXITYdefines the amount of differentiation that exists within all of the elements that constitute an organization. • Can be operationalized as the number of different specializations within the organization. • Hospital complexity > school complexity • Can also be viewed as differentiation in structure, authority, and in terms of attributes • Contingency theory argues that organizational complexity is a reaction to environmental complexity. -Dooley, K. (2002)

24. Organizational Structure • FORMALIZATION captures the extent to which employee behavior is steered by explicit and codified rules/procedures • To what extent are the policies and rules written? • Texas Tech University formalizes some, but not all, faculty behaviors in their handbook • High formalization can help firms achieve consistent and predictable results • It can also slow decision-making, reduce creativity, and hinder the customer experience

25. Organizational Structure • CONTROLguides the use of strategy, allows for comparison of actual vs. expected results, and offers a plan for correcting deficiencies • Fewer differences between actual & expected outcomes => effective controls • Effective controls are needed to successfully exploit competitive advantages • To implement strategies firms utilize: • Strategic controls • Financial controls

26. Governing Body President / CEO Senior Vice President Senior Vice President President / CEO VP VP VP VP Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Director Tall vs. Flat Organizations Tall Organization Flat Organization

27. Need to focus on task efficiency Functional Structure Matrix Structure Divisional Structure Multidivisional Structure Grouping by function Grouping by function and purpose Primary grouping by purpose; secondary grouping by function Primary grouping by purpose; secondary grouping by purpose; lowest grouping by function Need to focus on purpose Types of Structures

28. Growth Patterns of Large Corporations Phase 1 Strategy: Low revenue base; simple product-market scope Structure: Simple Phase 2 Strategy: Increase in revenues; engage in vertical integration (backward and/or forward) Structure: Functional Phase 3 Strategy: Expand into new, related product-markets and/or geographical areas Structure: Divisional Phase 4 Strategy: Expand into international markets Structure: International Division, Geographic Area, Worldwide Product Division, Worldwide Functional, or Worldwide Matrix

29. Chief Executive Officer or President Manager Production Manager Engineering Manager Marketing Manager R&D Manager Personnel Manager Accounting Lower-level managers, specialists, and operating personnel Functional Structure

30. Chief Executive Officer or President Corporate Staff Division A General Manager Division B General Manager Division C General Manager Manager Production Manager Engineering Manager Marketing Manager R&D Manager Personnel Manager Accounting Lower-level managers, specialists, and operating personnel Organized similarly to Division 1 Organized similarly to Division 1 Divisional Structure

31. MatrixStructure Board of Trustees CEO Project D Design Functional Managers Program/Project Managers Project C Testing Project B Admin Project A Manufacturing

32. Functional, Divisional, and Matrix Structures: Advantages and Disadvantages Functional Structure Divisional Structure Matrix Structure