Lecture - 12Strategy - II
Welcome to this module 12 of this course on Organization Theory/Structure and Design.Now, as you can see from this slide, module 11, 12 and 13 are dedicated to strategy. Wehave talked about module 11 and now, we will talk about module 12. And we are stilltalking about the Strategy and we are discussing how the strategy and structure they arelinked.(Refer Slide Time: 00:53)
So, in this module, we will talk about classifying strategic dimensions; then describeChandler’s “structure follows strategy” thesis. And then explain Miles and Snow’s fourstrategic types and strategy-structure theory.
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To start with this module, research on the strategy-structural relationship has mostlyfocused on a rather narrow aspect of strategy that is the degree of product differentiation.But as noted in our definition, strategy encompasses a lot more than whether anorganization chooses to diversify or not and if so the number and types of diversifiedproducts or services the organization decides to offer.(Refer Slide Time: 01:40)
For instance, the decision by owners of a private family business to take theirorganization public by selling stocks to the public is clearly a significant change in astrategy.Top management will now have to disclose more information to external constituencies.And these external constituencies include stock exchange officials, brokerage firms andstock holders and more decisions will require board members’ approval. (Refer SlideTime: 02:16)
Now, let us classify the strategic dimensions. Researchers have developed a richer andmore complete analysis of the content of corporate strategies. So, we discussed thefollowing four dimensions of a strategy in this module. And these four dimensions areinnovation, marketing differentiation, breadth and cost control.
(Refer Slide Time: 02:39)
The following four dimensions are not assumed to depict comprehensively all thecomplex aspect of strategy. But they do encompass the dimensions of strategic contentthat have received the most attention. At this point, we present them to demonstrate thediversity in strategic dimensions. However, later in the next module, we will come backto these four dimensions and consider each’s implications on organization structure.(Refer Slide Time: 03:11)
So, we will start with the first one that is innovation. An innovation strategy does notmean a strategy for simple or cosmetic changes from previous offerings; but rather one
for meaningful and unique innovations. Here, we seek to address the question to whatdegree does an organization introduce major new products or services? Obviously, notall firms pursue innovation. This strategy may appropriately categorize 3M Corporationor Apple Computers, but it certainly is not a strategy that is pursued by Kodak.(Refer Slide Time: 03:53)
The second strategic dimension is the marketing differentiation. So the marketingdifferentiation strategy strives to create customer loyalty by uniquely meeting aparticular need. This does not necessarily mean the organization is producing a higherquality or more up to date product.The organization seeks to create a favourable image for its product through advertising,market segmentation and prestige pricing. This would describe the strategy used bypremium beer producers and designer label apparel manufacturers.
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Yet another strategic dimension is breadth; the strategy refers to the scope of the marketto which the business caters. So, this is in the context of the variety of customers; theirgeographic range and 3 the number of products. So, the scope of market is defined on thebasis of these three.So, the breadth strategy refers to the scope of market to which the business caters. Andthis scope of market is defined in these three terms. Some grocery chains such as StarBazaar have chosen to operate only in a given community. Others like Big Bazaar extendtheir operations to the regional national or even international level.
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Another type of strategic dimension is cost control; the cost control strategy considersthe extent to which the organization tightly controls cost, refrains from incurringunnecessary innovation or marketing expenses and cut prices in selling a basic product.This would describe the strategy pursued by Wal-Mart or generic grocery products.(Refer Slide Time: 05:56)
Now, we will see what this Chandler’s strategy-structure thesis is. The classic work onthe relationship between an organization strategy and its structure was done by Harvardhistorian Alfred Chandler and published in the early 1960s.
All the current work on the strategy-structure relationship has been clearly influenced byChandler’s research. Chandler studied close to a hundred of America’s largest firmstracing the development of these organizations from 1909 to 1959. This includedextensive case histories of companies like DuPont, General Motors, Standard Oil of NewJersey and Sears.(Refer Slide Time: 06:48)
Chandler concluded that changes in corporate strategy preceded and led to changes in anorganization structure that is its structure follows strategy and unless its structure followsstrategy inefficiency results.As Chandler put it, a new strategy required a new or at least refashioned structure, if theenlarged enterprise was to be operated efficiently. He found that companies he studiedbegan as centralized structures, this reflected the fact that they offered limited productlines. As demand for their products grew the company’s expanded. They increased theirproduct lines and had to develop different structures to cope with their changingstrategies.
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For instance, they integrated vertically by purchasing many of their own sources ofsupply; this reduced their dependency on suppliers. To produce a greater variety ofproducts more efficiently, they have created separate product groups within theorganization.The result was structures that were fundamentally different. Chandler essentially arguedthat organizations typically begin with a single product or line; they do only one thingsuch as manufacturing, sales or warehousing. The single product or line strategy iscompatible with a loose or simple structure.
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Decisions can be centralized in the hands of a single senior manager. Because theorganizations strategy is narrowly focused, the structure to execute it can be low in bothcomplexity and formalization. So, Chandler concluded the efficient structure of anorganization with a single product strategy is one that is simple. And how he definedsimple? That is, it is high on centralization, low on formalization and low on complexity.
(Refer Slide Time: 09:14)
As the organization seeks to grow; companies typically expand activities within theirsame industry. So, the vertical integration strategy makes for increased interdependenceamong organizational units and creates the need for a more complex coordinative device.The highly centralized structure become inefficient and impractical for dealing with thesignificantly greater complexity. This desired complexity is achieved by redesigning thestructure to form its specialized units based on functions performed.(Refer Slide Time: 09:58)
Finally, if growth proceeds further into product diversification, again a structure must beadjusted if efficiency is to be achieved. And a product diversification strategy demands astructural form that allows for the efficient allocation of resources accountability forperformance and coordination between units.This can best be achieved through the creation of a multiple set of independent divisions;each responsible for a specified product line. Growth and diversification give rise to theneed for an autonomous multidivisional structure. This evolution is depicted in figure12.1.(Refer Slide Time: 10:51)
So, this is the figure 12.1 and you see that here we have time t, t+1, t+2 and then we haveproduct differentiation strategy that varies from low to high and a structure that goesfrom simple functional and divisional.So you see that at time t the product diversification strategy was low and obviously thestructure that they used was simple. At time t+1, the product diversification strategy wassomething between low and high and the structure that was used was functional. And attime t+2 when the product diversification strategy was high, the structure use wasdivisional.
(Refer Slide Time: 11:39)
This also means that successful organizations that diversify should have a differentstructure from that of successful firms that follow a single product strategy.General motors for instance adopted a product diversification strategy and followed witha multidivisional form. In contrast Alcoa, World’s 8th largest aluminium producer,maintained a vertical integrational strategy and has matched it with a functionalstructure.Now, we come back to this debate of “structure follows strategy”. Chandler’s claim thatthe strategy influences structure seems well supported; but this generalization isconstrained by the limitations and definitions inherent in Chandler’s work.
(Refer Slide Time: 12:26)
So, what are these limitations in the chandler’s work? The first is he looked only at largeprofit making organizations; the second is he focused on growth as a measure ofeffectiveness rather than profitability. And the third is his definition of strategy is farfrom all-inclusive.(Refer Slide Time: 12:53)
First Chandler’s sample of organization was not a cross section of organizations ingeneral. He looked only at very large and powerful industrial business firms, so that wasthe first problem with his work.
Whether his findings would be applicable to small and medium sized organizations,service companies and those in the public sector could not be answered from this sample.Next when he used the term strategy he actually meant growth strategy; growth was hismajor concern, not profitability.(Refer Slide Time: 13:29)
In organizational effectiveness terms, a proper strategy structure fit according tochandler’s thesis is more likely to lead to growth than increased profitability.Additionally, his definition is not all inclusive. Its strategy can for instance also includeconcern with market segmentation, financial strengths and leverage opportunities, actionof competitors, assessment of the organization’s competitive advantage.Nevertheless, within the parameters set by Chandler several studies have confirmed hisconclusion specifically relating to a strong relationship between product diversificationand the multi division form.
(Refer Slide Time: 14:16)
There appears to be little question that a strategy influences structure at the top level ofbusiness firms; the evidence on this point is overwhelming.(Refer Slide Time: 14:34)
As we noted previously, strategy is a broad concept and can be dissected along a numberof dimensions. Since Chandler’s work in the early 1960s, the most important research onthe strategy-structure relationship has been undertaken by Miles and Snow. Apart fromthis other landmark work includes Porter’s competitive strategies and Miller’s integrativeframework.
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Now, let us look at the Miles and Snow’s four strategic types. Raymond Miles andCharles Snow classify business organizations into one of the four strategic types. Thefirst strategic type is the defenders, the second is the prospectors, the third is theanalyzers and the forth is the reactors. This classification is based on the rate at whichorganizations change their products or markets.(Refer Slide Time: 15:34)
Now, we will look at each of these four strategic types starting with defender. Defenderseeks stability by producing only a limited set of products directed at a narrow segment
of the total potential market. Within this limited niche or domain, defenders striveaggressively to prevent competitors from entering their turf. Organizations do thisthrough standard economic actions such as competitive pricing or production of highquality products. But defenders tend to ignore developments and trends outside theirdomains, choosing instead to grow through market penetration and perhaps some limitedproduct development.(Refer Slide Time: 16:26)
There is little or no scanning of the environment to find new areas of opportunity; butthere is intensive planning oriented towards costs and other efficiency issues. The resultis structure made up of highly horizontal differentiation; centralized control andelaborate formal hierarchies for communication. Over time true defenders are able tocarve out and maintain small niches within their industries that are difficult forcompetitors to penetrate.
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The second types are prospectors. Prospectors are almost the opposite of defenders.Their strength is finding and exploiting new product and market opportunities. Thisdescribes for instance several magazine publishers who introduced new magazine titlesalmost monthly, constantly attempting to identify new market segments. Anotherexample of prospector organization could be 3M corporation; the complete 3M has builtits reputation and long term profitability on the following 3 things.(Refer Slide Time: 17:41)
The first is developing innovative products; the second is getting quickly to the marketwith those products and third is exploiting opportunities while they are still innovativeand then getting out. The prospector’s success depends on developing and maintainingthe capacity to survey a wide range of environmental conditions, trends and events.Therefore, prospectors invest heavily in personnel who scan the environment forpotential opportunities.Since flexibility is critical to prospectors, the structure will also be flexible; it will relyon multiple technologies that have a low degree of routinization and mechanization.(Refer Slide Time: 18:37)
There will be numerous decentralized units; the structure will be low in formalization,have decentralized control with lateral as well as vertical communications.
(Refer Slide Time: 18:46)
The third strategic type are analyzers. Analyzers try to capitalize on the best of both thepreceding types that is prospectors and defenders. They seek to minimize risk andmaximize opportunity for profit; their strategy is to move into new products or newmarkets only after viability has been proved by prospectors. Analyzers live by imitation.So, their basic go to market strategy is imitation. They take the successful ideas ofprospectors and copy them. The manufacturers of mass marketed fashion goods that arerip offs of designer styles follow the analyzers’ strategy.(Refer Slide Time: 19:54)
This label also probably categorizes well known firms like digital equipmentcorporation, IBM and caterpillar. They follow their smaller and more innovativecompetitors with superior products; but only after the competitors have demonstrated theviability of market. Analyzers must have the ability to respond to the lead of keyprospectors yet at the same time maintain operating efficiency in their stable productsand market areas.(Refer Slide Time: 20:20)
Analyzers will tend to have a smaller profit margins in the products and services thatthey sell than prospectors, but they are more efficient.Prospectors have to have high margins to justify the risk that they take and theirproductive inefficiencies. Analyzers seek both flexibility and stability; they respond tothese goals by developing structure made up of dual components.
(Refer Slide Time: 20:52)
Parts of these organizations have high levels of standardization, routinization, andmechanization for efficiency. Other parts are adoptive to enhance flexibility. In this waythey seek structures that can accommodate both stable and dynamic areas of operations.But this could involve incurring some heavy costs. If situations change rapidly,demanding that organizations move fully in either direction, their ability to take suchaction is severely limited.(Refer Slide Time: 21:34)
Now, the fourth strategic type is reactors. Reactors represent a residual strategy. Thelabel is meant to describe the inconsistent and unstable patterns that arise when one ofthe other three strategies is pursued improperly.In general, reactors respond inappropriately, perform poorly and as a result are reluctantto commit themselves aggressively to specific strategy for the future. But the question iswhat can cause this?(Refer Slide Time: 22:14)
The reasons for following reactor strategy can be; one, top management may have failedto make the organization’s strategy clear. Two, management may not have fully shapedthe organization structure to fit the chosen strategy. The three is management may havemaintained its current strategy-structure relationship despite overwhelming changes inenvironmental conditions.
(Refer Slide Time: 22:43)
Whatever be the reason, the outcome of following this strategy is the same. Theorganization lacks a set of response mechanisms with which to face a changingenvironment. Table 12.1 summarizes the Miles and the Snow’s strategic typologies; itshows the goals of each, the type of environment that each faces and the structuralmechanism that management would choose to achieve their goals. The reactor strategy isomitted for the obvious reason that it results in ineffective performance.So therefore we are talking about these three strategic types and not the fourth one that iswe are not talking of reactors in this table 12.1. So, this table 12.1, it shows Miles andSnows strategic typologies. So, it starts with the strategy that is defender analyzer andprospects, then it talks about goals, stability and efficiency, stability and flexibility andflexibility.
(Refer Slide Time: 23:57)
And then we are talking of an environment, stable, changing and dynamic and then wetalk about the structural characteristics. Now, let us look at each one of them. So, whenthe strategy is that of defender the goals are stability and efficiency and the environmentin which they are is stable.Their structural characteristics involve tight control, extensive division of labour, highdegree of formalization and centralized. While in strategy, the goals are stability andflexibility and the environment is changing. The structural characteristics includemoderately centralized contro,l tight control over current activities, loser controls fornew undertakings.In the third strategic type that is prospector, the goals are flexibility environment isdynamic. And the structural characteristics include loose structure, low division of labor,low degree of formalization and decentralization.The key elements in Miles and Snow’s strategy-structure theory is management’sassessment of environmental uncertainty. If management selects a defender strategy forinstance, it suggests that it perceives the environment as stable. Perceptions ofenvironmental uncertainty are not objective interpretations.
(Refer Slide Time: 25:24)
Managers in two organizations can face exactly the same environment and perceive itvery differently.(Refer Slide Time: 25:36)
This is precisely what happened in the tire industry in the early 1980’s; Good yearassessed its environment and saw increased demand for replacement tires. In spite ofhigh prices for gasoline, Good year's management predicted that more fuel efficient carswould stimulate more driving. Also, the rise of two income families would require more
driving. Good year therefore took a prospector strategy and invested several hundredmillions of dollars in new tire plants.(Refer Slide Time: 26:26)
In contrast firestone saw the same environment but interpreted it quite differently. Itforecasted significantly less driving and hence less demand for replacement tires owingto the increased cost of driving each mile. The replacement of automobile by airline forintercity travel and a significantly expanded use of car pools and public transportationfault day to day travel.(Refer Slide Time: 26:41)
Based on this interpretation, firestone's strategy was that of defender; it shelved plans tobuild new factories and actually closed down a number of its plants. The result was thatfirestone reduced its U. S tire capacity by one third.Figure 12.2 describes Miles and Snow’s four strategies as falling along a continuum thatranged from low to high in terms of environmental change and uncertainty. So, this isthat figure 12.2.(Refer Slide Time: 27:18)
So, now, it is you can see that here the environment is little change and uncertainty; hereit is a rapid change and high uncertainty. So, when the change is little and the uncertaintyis also low, then we have defender and then we move on to reactor analyzer. While whenthere are rapid changes and high uncertainty, it is appropriate to follow this prospector.
(Refer Slide Time: 27:44)
Following the logic of this theory the more uncertainty and change the managementforecasts, the more it would move to the right along the continuum. Similarly, as thestrategies move to the right along the continuum, the organization’s structure should bemodified or redesigned to be increasingly flexible and adaptive.(Refer Slide Time: 28:07)
Management perceives little or no change and uncertainty in the environment under thedefender strategy. Thus successful structure under such conditions should be designedfor optimum efficiency.
This efficiency can best be achieved through high division of labour, its standardizationof operations, high formalization and centralized decision making. Organizationsfollowing a reactor strategy respond to change reluctantly.(Refer Slide Time: 28:46)
Management perceives some change and uncertainty but they are not likely to make anysubstantial adjustments until forced by environmental pressures. So, this structure islikely to look very much like the one described for defenders.(Refer Slide Time: 29:05)
Managers pursuing an analyzer strategy perceive a considerable degree of change anduncertainty; but wait until competitors develop a viable response and then they quicklyadopt it. As for a structure analyzers tried to combine the best of both worlds by; onetightly structuring their current and more stable activities, and developing flexiblestructure for new activities that face greater uncertainties.(Refer Slide Time: 29:45)
Finally, prospector strategies require the greatest degree of structural flexibility. There isa lot of change and uncertainty so, structures should be highly adoptive. This wouldtranslate into low complexity, low formalization and decentralized decision making.
(Refer Slide Time: 30:01)
So, to conclude this module we started the discussion with four strategic dimensionsnamely innovation, marketing differentiation, breadth and cost control. Next wediscussed about Chandler’s thesis; which concluded that structure follows a strategy.While there is a considerable support for the thesis, the limitations in his researchrestricts any wide generalization of his findings.Finally, we understood four-category strategy-structure typology offered by Miles andSnow that allowed for specific structural predictions. And these are the four books fromwhich the material for this module was used.Thank you.
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