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Introduction to Strategy

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Lecture - 11Strategy - I
Welcome to the course on Organization Theory Structure and Design. We are startingwith part 2 of this course that is the determinants of organizational structure. Module 11to 23 will cover the various components of the determinants of organizational structure.Specifically speaking module 11, 12 and 13 will cover the components of strategy in thiscourse.So let us start with module 11 and these are the things that will be covered in thismodule. So we will start with defining a strategy and understanding how it is differentfrom organization goals. Then we will understand different views on organizationalstrategy, thereafter we will explain different types of strategy and its impact onorganization structure and thereafter then we will study comparing business levels withcorporate level strategy.So to start and to introduce this module. In part 2, we are trying to understand thedeterminants of organization structure.(Refer Slide Time: 01:33)
To understand this let us begin our discussion with the following question: whatdetermines structure? So basically we are concerned with the determinants oforganization structure. So if you had studied organization theory almost three fourdecades ago, a single answer to this question would have been the organization’s goalsand strategies.But in the last few decades, researchers have identified a number of variables asdeterminants of structure and strategy is just one of these variables. Therefore, in thismodule and the next two we will discuss about strategy. The early acceptance of goalsand strategy are determinants of an organization’s structure and was found onassumption inherent in classical economic theory.(Refer Slide Time: 02:33)
And these assumptions are 1 the organization has a goal or goals towards which it drives.The 2nd assumption is organization moves towards its goals in a rational manner. The3rd is the organization exists to transform economic input to outputs. The 4th is theenvironment within which the organization operates is a given.
(Refer Slide Time: 03:05)
Now if these assumptions are valid an organization’s structure can be interpreted as theoutcome of a rational process. As Peter Drucker has noted, structure is a means forattaining the objectives and goals of an institution.Any work on a structure must therefore start with objectives and its strategy. Thisapproach takes a closed system perspective where the environment is given. A structureis seen as just a rational means by which inputs are translated to outputs.Now let us look at this example of a strategy at Hewlett Packard which is in short calledas HP. So HP is the world’s largest manufacturer of test and measurement instrumentsand a major producer of electronic calculators and computers.
(Refer Slide Time: 04:05)
HP’s strategy is to pursue actively a given product line and market as long as thecompany has a distinctive technological or design advantage. But when products reachthe stage where success depends primarily on low costs and highly competitive prices,HP typically moves out of that market. The company then turns its attention to a newdesign or an entirely new product. HP’s strategy of technological innovation is supportedby a highly flexible organization structure.It is organized around integrated self contained product divisions that are given a greatdeal of independence. New divisions arise when a particular product line becomes largeenough to support its continued growth out of the profit it generates.
(Refer Slide Time: 05:05)
New divisions also tend to be created when single divisions get to about two thousandpeople. HP has found that above this number people start to lose identification with theproduct line. A lot of factors go into the success of any company but a large part of HPssuccess has been the development of a flexible structure that facilitates the company'sinnovation strategy. That is HPs success lies in the right fit between its corporate strategyand its organization structure.(Refer Slide Time: 05:49)
In a layman’s term strategy is often used interchangeably with goals however they areinterrelated but are not the same. As discussed in earlier modules goals refers to endswhereas strategy refers to both means and ends. As such goals are part of anorganization’s strategy. In a more formal sense strategy can be defined as thedetermination of the basic long term goals and objectives of an enterprise, the adoptionof courses of action and the allocation of resources necessary for carrying out thesegoals.(Refer Slide Time: 06:28)
Defining new basic goals involves decisions such as the following 1st expanding thevolume of activities, 2nd setting up distant plants and offices, 3rd moving into neweconomic functions or to become diversified along many lines of business. New coursesof action must be devised and resources allocated and reallocated in order to achievethese goals.
(Refer Slide Time: 07:01)
New course of action is also needed to maintain and expand the firm’s activities in thenew areas in response to the following factors 1 shifting demand, 2 changing sources ofsupply, 3 fluctuating economic conditions, 4th new technological developments and the5th one is the action of competitors.(Refer Slide Time: 07:27)
Now let us look at the different views on strategy the definition of strategy does not tellus whether strategy has to be premeditated or whether it can just emerge. This questionin fact represents two views on its strategy. One view can be called as planning mode
while the other view is called as evolutionary mode. The planning mode describestrategy as the plan or explicit sets of guidelines developed in advance. Managersidentify where they want to go that is they identify goals.(Refer Slide Time: 08:11)
Then they develop a systematic and structured plan to get there that is devise a course ofaction. Few years back this planned viewpoint dominated the organizational theoryliterature. A more current perspective is the evolutionary mode. Here strategy is notnecessarily well thought out and systematic plan. Rather, it evolves over time as a patternin stream of significant decision.For instance, a manufacturer of women's clothing brought a local hotel because it waspriced right and generated a high rate of return. This purchase was followed by theacquisition of more hotels. Success in the hotel business led to acquisition of a restaurantchain.
(Refer Slide Time: 09:08)
Today the company is essentially in the hospitality and fast food business with less than10 percent of its revenues coming from the manufacture of women's wear, the originalobjective of the firm.(Refer Slide Time: 09:14)
While the company's executives never developed a formal strategy to pursueopportunities in hotels and fast food, it evolved as if it has been planned ahead of time. Asimilar example in real world would be Amazon which started as an online books store
and expanded into e-commerce, cloud computing, digital streaming and artificialintelligence.(Refer Slide Time: 09:49)
As we have seen earlier that goals can be something that are pre established and guidesubsequent behavior or considered as explanations developed after the behavior to justifyit. Similarly, strategy can be viewed as premeditated or as something that can becomeclear only over time. The early writers discussing about strategy structure relationshipsassumed the planning mode to be the proper way to view strategy.(Refer Slide Time: 10:19)
However, in recent years the broader evolutionary perspective has been gaining moreacceptance. Its major advantage lies in being able to cope with both static and dynamicstrategies. In summary strategy considers both means and ends and an organizationsstrategy may be planned ahead of time or may just evolve over time. Now let us look atthe strategy imperative.(Refer Slide Time: 10:54)
If there is a strategy imperative then strategy should predict structure. Also as strategychanges whether explicitly planned or implicitly evolving a structure should follow. Inboth cases the advocates of the strategy determines structure position perceive decisionmaker makes as choosing the structure they have.
(Refer Slide Time: 11:43)
Even though variables such as organizations transformation processes environment aremajor determinants of a structure it is the strategy that links it to structure. Let us look atfigure 11.1. Now this figure shows the organization’s transformation processes,environment and other factors are one step removed from the actual change process andthey are not ‘givens’. They are chosen by the organizations dominant decision makers.So you see we started from the left hand side so there are these environmental factorsand organizational capabilities. Now these lead to strategy which in turn leads tostructure. Now we will talk about the various types of strategy. If all organizationsproduced a single product or service, the management of any organization could developa single strategy that encompassed everything it did.
(Refer Slide Time: 12:24)
Many organizations are in diverse lines of businesses many of which are only vaguelyrelated. A firm like general electric for instance make multimillion dollar power systemsfor hydroelectric dams as well as consumer products like microwave ovens and lightbulbs. Organizations that are in multiple businesses therefore need to develop differentstrategies for different level of activities.(Refer Slide Time: 13:09)
Thus it is necessary to differentiate between different levels of strategy and there arethese four levels of strategy which are 1st functional level strategy, then business levelstrategy, the corporate level strategy and the global expansion strategy.(Refer Slide Time: 13:21)
So these are the four levels of strategy. Now let us start with each one of them. So wewill start with the functional level strategy. It is a plan to strengthen an organization'sfunctional and organizational resources as well as its coordination capabilities in order tocreate core competencies.The strategic goal of each organization is to create a core competence that gives theorganization a competitive advantage. Core competencies are the skills and abilities invalue creation activities that allow a company to achieve superior efficiency, quality,innovation and customer responsiveness.
(Refer Slide Time: 14:08)
To gain a competitive advantage an organization must be able to do at least one of thefollowing out of these two at least one is to be done. The 1st one is to perform functionalactivities at a cost lower than that of its rivals or 2 perform functional activities in a waythat clearly differentiates its goods and services from those of its rivals. Themanufacturing function can lower the costs of production by pioneering the adoption ofthe most efficient production method.(Refer Slide Time: 14:41)
The human resource management function can lower costs by designing appropriatecontrol and reward systems to increase employee motivation and reduce absenteeism andturnover. The skills and expertise of sales and marketing can contribute directly to a lowcost of differentiation advantage. R and D can reduce cost by developing cheaper waysof making a product.The low cost of differentiation advantage can be developed in materials management by1 just in time inventory systems, 2 computerized warehousing, 3 purchasing managers’skills in developing long term links with suppliers and distributors and 4th fostering ofan organization's reputation can lead to a low cost or differentiation advantage.(Refer Slide Time: 15:24)
(Refer Slide Time: 15:34)
Now let us look at the link of function level strategy and structure. The strength of afunction’s core competences depends not only on the function’s resources but also on itsability to coordinate the use of its resources. According to a contingency theory eachfunction should develop a structure that suits its human and technical resources.(Refer Slide Time: 16:01)
Now we come to the next level of strategy that is called as business level strategy. Sobusiness level strategy seeks to answer the question. How should we compete in each ofour businesses? For the small organization in only one line of business or the large
organization that has avoided diversification, business level strategy is typically the sameas corporate strategy. But for organizations in multiple businesses each division willhave its own strategy that defines the products or services that it will offer. Thecustomers it wants to reach and the like.(Refer Slide Time: 16:47)
The business level strategy involves selecting and managing the domain the organizationwill compete in, positioning the organization so that it can use its resources and abilitiesto manage its specific and general environments to protect and enlarge that domain. Lowcost business level strategy uses skills in low cost value creation to produce for acustomer group that wants low priced goods and services.
(Refer Slide Time: 17:22)
Differentiation business level strategy involves use of skills to differentiate products forcustomer groups that want and can afford differentiated products that command a high orpremium price. Focus business level strategy involves specialization in one segment of amarket and focusing all of the organization’s resources on that segment. So these are thethree types of strategies business level strategies A B C.(Refer Slide Time: 17:52)
(Refer Slide Time: 17:55)
Now let us look at how this business level strategy is linked with structure or how itaffects structure. Three factors affect an organizations choice of a structure to create acompetitive advantage. The first is, as an organization produces a wide range of productsit needs greater control over the development, marketing and production of theseproducts. The second is, as an organization seeks to find new customer groups for itsproducts it needs a structure that allows it to serve the needs of its customers.(Refer Slide Time: 18:31)
The three factors affect an organization’s choice of a structure to create a competitiveadvantage. As the pace of new product development in an industry increases anorganization will need a structure that increases coordination among its functions.(Refer Slide Time: 18:51)
For instance, with a differentiation strategy companies must be able to develop productsquickly; therefore, close cooperation between functions is required. An organic structurepermits the development of a decentralized cross functional team approach to decisionmaking. A low cost strategy is associated with the need for close control of functionalactivities to monitor and lower the costs of production a mechanistic structure is oftenthe more appropriate choice.
(Refer Slide Time: 19:25)
Now let us look at this figure 11.2 and it talks about characteristics of organizationstructure associated with business level differentiation and low cost strategies. So nowyou see at the top there are these structures, matrix structure, product team structure,product market or geographic structure and functional structure.Now when we are talking of differentiation strategy we are generally talking about thematrix structure and product team structure. So that becomes a complex structure saydecentralize decision making, higher differentiation, high integration and which leads toorganic structure. While in the next two that is a product market or geographic structurefunctional structure we follow the low cost strategy or low costs strategy is moreappropriate in this kind of situation.Which is a simple structure, centralized decision making, low differentiation, lowintegration and mechanistic structure.
(Refer Slide Time: 20:32)
The next level of strategy is the corporate level strategy. If an organization is in morethan one line of business it will need a corporate level strategy. This strategy seeks toanswer the question in what set of businesses should we be in. Corporate level strategydetermines the roles that each business in the organization will play.It involves to seek for new domains in which to exploit and defend the ability to createvalue from its core competencies.(Refer Slide Time: 21:07)
One type of corporate level strategy is vertical integration. A strategy in which anorganization takes over and owns its supplies backward vertical integration or itsdistributors which is called as forward vertical integration. It may be more profitable,may lead to production cost savings, may differentiate its products, may avoidopportunistic behavior of suppliers and may lead to savings in distribution.(Refer Slide Time: 21:37)
Another is diversification; diversification is a preferable strategy when goodopportunities exist outside the present businesses. This involves two types ofdiversification; one is a related diversification, the entry into a new domain in which itcan exploit one or more of its existing competencies. And the second is, unrelateddiversification. The entry into new domains that have nothing in common with its coredomain.
(Refer Slide Time: 22:12)
So this is figure 11.3 and it shows corporate level strategies for entering new domains.So now you see that here we have input domains, related domains, unrelated domainsand output domain. And in between is the core domain. So when in input domain we gofor backward vertical integration in related domain we go for a related diversification inunrelated domains it is called as unrelated diversification and in output domain it iscalled as forward vertical integration.(Refer Slide Time: 22:55)
Now let us look at the relationship between corporate level strategy and structure. Fororganizations operating in more than one domain a multidivisional structure isappropriate conglomerate structure and unrelated diversification. Now we will look atthe corporate structure, the conglomerate structure and unrelated diversification.Conglomerate structure is a structure in which each business is placed in a self containeddivision and there is no contact between divisions.So that we will look at figure 11.4. It develops in an organization following unrelateddiversification strategy as the new domains do not have common competencies with coredomain of the organization.(Refer Slide Time: 23:49)
So this is what a conglomerate structure looks like at the top is the CEO then we havecorporate headquarters staff and then there are several divisions underneath thiscorporate headquarter structure.
(Refer Slide Time: 24:01)
But they are all independent. Related diversification creates value by sharing resourcesor transferring skills from one division to another. It requires lateral communicationbetween divisions as well as vertical communication between divisions and headquarters.Integrating roles and teams of functional experts are needed to coordinate skills andresource transfers.(Refer Slide Time: 24:34)
Multidivisional structures or matrix allows for the coordination needed. The fourth typeof strategy is the global expansion strategy. Now there are four principal strategies in
this, the first is multi domestic strategy. So what is this multi domestic strategy? It isoriented towards local responsiveness by decentralizing control to subsidiaries anddivisions in each country.Then comes the international strategy, it involves decentralization of all value creationfunctions except for R and D and marketing.(Refer Slide Time: 25:14)
Another one is the global strategy, it is oriented towards cost reduction but all theprincipal value creation functions centralized at the lowest cost global location. Andtransnational strategy in this strategy some functions are centralized while others aredecentralized at the global location best suited to achieve these objectives to achieve bothlocal responsiveness and cost savings.
(Refer Slide Time: 25:36)
Now we will look at the relationship between global expansion strategy and structure.Choice of structure and control systems for managing a global business is a function ofthe decision of how to distribute and allocate responsibility and authority betweenmanagers at home and abroad.So that effective control over a company's global operations is maintained. The selectionof the organization’s structure that groups divisions both at home and abroad is the waythat allow for two things, one is the best use of resources and second is to serve the needof foreign customers most effectively.
(Refer Slide Time: 26:14)
The selection of the right kinds of integration and control mechanism and organizationculture to make the overall global structure function effectively.(Refer Slide Time: 26:30)
Now this figure 11.5 it differentiates between business level and corporate levelstrategies. So you see that when we start with corporate level strategy they are concernedwith what business or businesses we should be in. It also determines how does the parentcompany add value to the subsidiaries and then it also tells how does being in onebusiness help us compete in our other businesses.
While the business strategy tells how should we compete.(Refer Slide Time: 27:05)
So we are trying to differentiate between business level strategy and corporate levelstrategy. Most contemporary strategy structure theories we discuss focus on businesslevel strategies. But the original research on this topic began by looking at the corporatelevel strategy of such companies as DuPont, Sears and Roebuck. To the degree thatstrategy actually determines structure strategy level is an important point to keep inmind. Why?(Refer Slide Time: 27:38)
For small organizations in only one line of business or non diversified largeorganizations, business and corporate strategy will be the same and the organizationshould have a relatively uniform organization structure. But organizations with diversebusiness strategies should be expected to have a variety of structural configurations thatis management will design structures to fit with the different strategies.(Refer Slide Time: 28:10)
Now this is what we are talking of. This is figure 11.6 and it talks of levels of strategy.So at the top we start with multi business corporation. Now you see that this multibusiness corporation has various business units 1, 2, 3 and each business unit has product1, 2, 3 underneath it. So for this we have a business level strategy and for this we have acorporate level strategy. So they are all interlinked.
(Refer Slide Time: 28:41)
So to conclude this module, in this module strategy was defined as including both thelong term goals of an organization plus a course of action that will provide the meanstowards their attainment. To some it is seen as planned in advance and to others theyview it as evolving over time as a pattern in stream of significant decisions.The two views on strategy are planning mode and evolutionary mode. We then moved onto discuss about different levels of strategy namely functional level, business level,cooperate level and global expansion strategy and their resulting structures.(Refer Slide Time: 29:32)
And these are the four books from which the material for this module was taken.Thank you.