STRUCTURE & STRATEGY
A key issue in strategy is the need to allocate scarce resources efficiently to realize the organizations
Vision. The structure of the organization is a resource that must also be applied in the most effective way
to drive towards realization of the vision. For this reason, a number of scholars have offered several
theories to explain the link between the two. Two key theories are considered here below.
Chandler’s Theory
Chandler examined four case studies of American conglomerates that dominated their industry from the
1920’s onward. He described how the chemical company Du Pont, the automobile manufacturer General
Motors, the energy companies Standard Oil of New Jersey and the retailer Sears Roebuck developed over
time by identifying four sequential stages:
1. Acquisition of resources such as employees and raw materials and the buildup of marketing and
distribution channels;
2. Establishment of functional structures to increase efficiency;
3. Adoption of growth and diversification strategy: diversification into new markets and products to
overcome limits of the home market;
4. Creation of the then-revolutionary divisional form to manage large conglomerates.
The multi-division form (also often named M-Form) is an organisation model corporate federation of
semi-independent product or geographic groups plus a headquarters that oversees the corporate strategy
and coordinates interdependencies. Although the organizational multi-division form was implemented
independently by each of the organizations, Chandler showed that the need to restructure arose from a
strategic shift driven by new technologies and market changes. This new form emerged because of the
limits of purely functional structures when different products, different markets, different selling channels
or different technologies (or a combination of these) where put under the same organisation. The multi-
division form then emerged and co-evolved with the development of the transportation and
communication industries, thereby creating the opportunity to manage across time and space.
Chandler describes strategy as the determination of long-term goals and objectives, the adoption of
courses of action and associated allocation of resources required to achieve goals. For him, structure is the
design of the organisation through which strategy is administered. In simple terms, his theory is that
changes in an organization’s strategy led to new administrative problems which, in turn, required a new or
refashioned structure for the successful implementation of the new strategy. His three step approach
designs an organizational structure to match a defined strategy:
1. Select a basic organisation design;
2. Modify the design as needed;
3. Supplement it with coordinating mechanisms & communication arrangements.
Conclusion
Chandler’s key addition to management theory was to connect strategy and structure. Since a
restructuring effort is a result of a change in strategy, a company must first review its strategy, and then
pursue a different structure.
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Of course, today, we know that the relationship between Strategy and Structure is more complicated.
Since at least the work of Mintzberg, we also know that often the existing form of an organisation can be
a limit to strategic change. But what is impressive out of Chandler’s work is the fact that he studied 4
cases of companies where the new organizational structure was almost entirely designed internally. And
the consistency between this form of organisation and their strategy was visible. Too often after instead,
we have seen organizations adopted purely out of fashion or due to benchmarking, creating issues.
Another critical lesson (today often forgot) is that professional management is essential to increase the
chance of successful strategy implementation. And, above all, management must devote constant
attention to develop the most appropriate organisation that is aligned with the strategy. Chandlers view of
the relationship between Strategy and Structure might seem simplistic but is grounded in an era where this
was the realm of managers, not (yet) consultants. This fact was key in unleashing the consistency between
these two dimensions.
Miles & Snow Theory
Organizations show incredible diversity in the ways that they operate and compete. For example, consider
the various restaurants in your area. Each has its unique way of attracting new customers. Some
frequently change their menus, based on the latest trends (think of wheatgrass juice and protein shakes),
while others have offered the same menus for years. Neither approach is necessarily right or wrong – each
restaurant may be successful in doing different things. Similarly, your organization may choose to launch
a new product every quarter, or you may focus all your energies on one 'star' product. What's important;
however, is that the type of competitive strategy you choose needs to be aligned with how your
organization is structured.
Raymond Miles and Charles Snow studied the relationship between structure and strategy. In 1978, they
published "Organizational Strategy, Structure, and Process," which identified four types of organizations
– defenders, prospectors, analyzers, and reactors. Collectively, these types show us how companies
compete.
- Defenders
These organizations seek stability by producing a limited set of products, directed at a narrow segment of
the total potential market. These companies tend to ignore developments and trends outside their defined
area, and they choose to grow through market penetration. Within this niche or narrow area, defender
organizations aggressively try to prevent other companies from entering their territory. They don't spend
time examining the environment or planning for changes. Instead, they use long-term planning to improve
efficiencies and reduce costs. Tactics include competitive pricing, integrating vertically to control costs,
and producing superior products. Organizational elements that support this strategy include the following:
- Centralized control of strategic decisions.
- Formal hierarchy.
- Horizontal differentiation (lots of specialists).
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Defenders function best in stable business environments where change isn't necessary for success.
Producers of high-priced goods – like carmaker Rolls-Royce, or luxury watch brand Rolex – are examples
of companies that defend their current niches, and aren't particularly interested in serving a different
market.
- Prospectors
At the other end of the spectrum, prospectors respond well to change. Their strength is in finding and
taking advantage of new product and market opportunities. For many of these companies, innovation is
just as important as profitability. One example of a highly successful prospector is technology company
3M. The success of prospector organizations depends on developing and maintaining the ability to
monitor a wide range of environmental conditions, trends, and events. They end up with a broad range of
products and services, and they continually try to keep up with consumer demand. Prospectors need a lot
of flexibility, and their organizational structure typically uses the following elements:
- Decentralized control of strategic decisions.
- Low formalization (lots of generalists).
- Flat structure (few layers of management).
Typical prospectors can seem inefficient, because they're always changing. However, their success is
determined not by efficiency, but by their ability to be flexible, and respond to the needs of tomorrow.
- Analyzers
This type of organization tries to capitalize on the strengths of both defenders and prospectors. Analyzers
look for ways to maximize their opportunities while minimizing their risks. They won't be the first to
move into a new market – they wait until a prospector has proven that the market can be profitable.
Analyzers live by imitating and copying – using the successful ideas of prospectors. Clothing
manufacturers that copy designer fashions are a great example. They follow smaller, more innovative
competitors that produce superior products. Because analyzers are slower to change, they have time to
build efficiencies in their stable product and market areas. To support both flexibility and stability, the
analyzer organization needs these elements:
- High standardization and routinization to control costs.
- Moderate centralized control of strategic decisions – tighter for stable products/areas, and looser
for new products/areas.
- A structure that allows collaboration across departments.
Analyzers are forced to make compromises, while seeking a structure that balances both stable and
dynamic areas of operation. If the external environment changes dramatically, demanding a switch to one
side or the other, the analyzer cannot switch quickly.
- Reactors
This type of organization doesn't have a set strategy, design, or structure. The reactor category essentially
describes the inconsistent and unstable patterns seen when one of the other three strategies is pursued
ineffectively. Reactors respond poorly to environmental change, their performance suffers, and they aren't
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able to commit to long-term plans. Because these companies can't decide how they want to position
themselves, they simply react to what's happening. This inadequate response to a changing environment
causes them either to (a) formally adopt one of the other strategies, or (b) go out of business. Failing to
communicate a strategy clearly – or not fully shaping a strategy in the first place – is often at the root of
reactor organizations. Also, attempting to avoid change, despite overwhelming changes in the market, is
another characteristic.
Environment/Strategy Continuum
Miles and Snow's Defender, Analyzer and Prospector strategies are all good approaches, when used in the
appropriate environment. The Reactor strategy, however, is more or less doomed to failure as it relies on
the environment remaining unchanged – which is unrealistic. The more uncertainty and change that
management predicts, the more flexible the strategy must be. And as strategies move toward higher
flexibility, the organization's structure has to move with those strategies to remain adaptive.
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