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Limitations to Strategy

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Lecture - 13Strategy - III
Welcome to Organization Theory/Structure and Design. Now, we will talk about module13. So we are talking about the part 2 that is the determinants of organization structureand we had talked about in module 11 and 12 about the strategy and we will continuethis discussion on strategy in this module that is module 13 also. Now, let us look at whatare the things that we will talk about in this module. So we will start with explaining thestructural implications from Porter's competitive strategies.(Refer Slide Time: 01:09)
Then we will describe Miller's integrative strategy-structure framework thereafter wewill identify the limitations of strategy imperative and then explain the industry-structurerelationship. To introduce we ended the discussion in the last module with the Snow andMill’s strategy structure theory. In this module we will start with the real life example ofits applicability.
(Refer Slide Time: 01:34)
The tobacco industry in United States provides an excellent example of Miles andSnow’s strategies in practice. Beginning in the early 1950’s with the report that linkedcigarette smoking to heart and lung diseases., tobacco firms have faced consistent levelsof high environmental uncertainty.Tobacco firms have been in the target of health and consumer action groups. A series ofgovernment regulations have restricted their ability to do business. Their access to thepublic broadcast media has been significantly limited.And in response to this changing environment major tobacco firms choose very differentstrategies. Philip Morris that is one tobacco company chose the prospector route forexample it was the first to design products specifically to bring women into the smokingmarket and has been a pioneer in product packaging.
(Refer Slide Time: 02:36)
R.J. Reynolds that is another tobacco company which is part of RJR Nabisco was theanalyzer. Its strategy has been to become an early adopter of successful innovations ofothers. As an analyzer, it operated in two product market spheres simultaneously; onerelatively stable and the other changing.In this stable sphere (established brand names) Reynolds has routine operations. In itsmore turbulent sphere 2 top managers watch competitors for new ideas and then rapidlyadopt those that look most promising.(Refer Slide Time: 03:21)
American brands which is yet another tobacco company was the defender. In anenvironment of rapid change, American focused on a narrow product market segmentand lost market share badly.(Refer Slide Time: 03:32)
Liggett and Myer represented the reactor strategy. Top management consistentlyperceived changes and uncertainty in its product markets but was unable to respondeffectively. In contrast to its competitors Liggett demonstrated substantially less internalconsistency.Given the common dynamic environment the tobacco firms faced, Miles and Snow’stheory would suggest the greatest success would be achieved by analyzers andprospectors, with defenders and reactors bringing up the rear. And that is precisely whathad happened. Between 1950 and 1975, Reynolds that was categorized as the analyzer.
(Refer Slide Time: 04:19)
Philip Morris that was categorized as the prospector, generated respective compoundedgrowth rates in earning per share of 9.16 and 8.35 percent, while American that is thedefender and Liggett the reactor registered a compounded growth rate in earnings pershare of 5.61 and 0.75 percent respectively. Between 1986 and 1988 Philip Morrisovertook Reynolds but American and Liggett were still significantly behind the twoleaders.(Refer Slide Time: 05:00)
Now let us look at the Porter's competitive strategies. The landmark work of Michaelporter on competitive strategies has direct relevance to the strategy-structure relationship.He argues that no firm can successfully perform at an above average level by trying to beall things to all people. He proposes that management must select a strategy that willgive its organization a competitive advantage. The choice of strategy will depend on theorganization's strengths and competitor’s weaknesses.(Refer Slide Time: 05:46)
So we are talking about our strengths and competitor’s weaknesses. So managementshould avoid a position in which it has to compete with everybody in the industry. So weare not looking to compete with everyone in this industry rather the organization shouldput its strength where the competition is not putting various strength. So managementcan focus from among three different strategies. First is the cost leadership, the second isdifferentiation and the third is focus.
(Refer Slide Time: 06:28)
So, these are the three generic business strategies as proposed by Michael Porter. So letus look at each of this strategy one by one though for the first one is the cost leadership.When an organization sets out to be the low cost producer in its industry it is following acost leadership strategy.So, when an organization sets out to be the low cost producer in its industry, it isfollowing a low cost leadership. Success with this strategy requires that the organizationbe the cost leader and not merely one of the contenders for that position. So, theorganization has to be the cause reader not one amongst them. Additionally, the productor service being offered must be perceived as comparable to be offered by rivals or atleast acceptable by the buyers. So cost leadership does not mean that the product is notacceptable by the buyers.The product is acceptable by the buyers, it is similar to what rivals are offering, but thenthis company is giving that at a low cost. So how does the firm gain such a costadvantage? So that is a big question giving the same product at a lesser cost. So howshould a company do that?
(Refer Slide Time: 07:47)
Typical means through which a firms gains competitive advantage includes efficiency ofoperations, economies of scales, technological innovation, low cost labor and preferentialaccess to raw material. Examples of firms that have used this study include Gallo Wines,largest exporter of California Wines and Hyundai automobiles.(Refer Slide Time: 08:26)
The second strategy as given by Michael Porter is differentiation. So the firm that seeksto be unique in its industry in ways that are widely valued by the buyer is following a
differentiation strategy. It might emphasize high quality, extraordinary service,innovative design, technological capability or an unusual positive brand image.The key is that the attribute chosen must be; one different from those offered by therivals, two significant enough to justify a price premium that exceeds the cost ofdifferentiation.So the benefits should be more than the cost and therefore this company is can chargemore. So there is no shortage of firms that have found at least one attribute that allowsthem to differentiate themselves from competitors. For example, Cray Researchdifferentiates itself on the supercomputer technology.(Refer Slide Time: 09:27)
Toyota has differentiated itself on a reliability. IBM differentiates itself on superiorlytrained personnel. Haagen Dazs differentiates on quality ingredients in ice creams andFerrari has differentiated itself on performance.
(Refer Slide Time: 09:47)
And the third type of his strategy proposed by Michael Porter is focus. The first twostrategies sought a competitive advantage in a broad range of industry segments. Thefocus strategy aims at the cost advantage that is the cost focus or differentiationadvantage that is the differentiation focus in a narrow segment.So this third strategy that of focus is different from the earlier two on the basis of thenarrow segment that it caters to. The earlier two were catering to broader marketsegments broader industry segments. The management will select a segment or a groupof segments in an industry such as product variety, type of end buyers, distributionchannels or geographical locations and tailor the strategy to serve them.
(Refer Slide Time: 10:46)
The goal is to exploit a narrow segment of a market. Whether a focus of strategy isfeasible or not depends on the size of a segment and whether it can support the additionalcost of focusing.Stouffer’s used a cost focus strategy in its Lean Cuisine line to reach calorie consciousconsumers seeking both high quality products and convenience. Similarly, colleges thatappeal to working students by offering only night classes hope to gain a competitiveadvantage over their rivals by following a differentiation focus strategy.(Refer Slide Time: 11:27)
So Porter uses the term stuck in the middle to describe organizations that are unable togain a competitive advantage by one of the previous strategies. Such organizations willfind it very difficult to achieve long term success. When they do it is usually a result ofcompeting in a highly favorable industry or having all these rivals similarly stuck in themiddle.(Refer Slide Time: 11:55)
Porter notes that successful organizations frequently get themselves into trouble byreaching beyond their competitive advantage and ending up is stuck in the middle. LakerAirways provides such a case. It began in 1977 by offering no-frills flights betweenLondon and New York at rock bottom prices.
(Refer Slide Time: 12:27)
This cost leadership strategy resulted in a resounding success. In 1979 however the firmbegan to add new routes and offer upscale services. The company stretched beyond itscompetitive advantage and ended up in stuck in the middle position.The strategy of adding new routes and offering upscale services did the following things.First it blurred the public image of Laker, second it allowed the competition to makesignificant inroads and third it led to Laker's declaration of bankruptcy in 1982.(Refer Slide Time: 13:03)
Now, let us look at Porter’s competitive strategies and structure. What are the structuralimplications from these four strategies that we had talked about earlier? First nopredictions are made for the stuck in the middle strategy. Like the reactor strategydescribed by Miles and Snow it is not recommended as a desirable route to success.Second predictions have generally excluded the focus strategy. The structure for focusedlow cost and focused differentiation would be same as low cost leadership anddifferentiation respectively; because, it is merely a derivative from these two strategiesbut for a smaller market segments.(Refer Slide Time: 13:51)
So, the goal of cost leadership is to achieve efficiencies through tight controls,minimization of overheads and economies of scale. The best structure for achieving thisend would be one that is high in complexity, high in formalization and centralized. Incontrast a differentiation strategy relies essentially on the development of uniqueproducts. This demands a high degree of flexibility which can best be achieved throughlow complexity, low formalization and decentralized decision making.
(Refer Slide Time: 14:30)
Another thing that we will talk about today is Miller's integrative framework; DannyMiller at the University of Montreal and McGill University developed the four strategydimensions which were introduced in the previous module. The first is innovation,followed by marketing differentiation, breadth and cost control.These four strategies do an excellent job of tapping the concepts that Chandler, Milesand Snow and porter addressed. For example, breadth encompasses Chandler’s conceptof product diversification.(Refer Slide Time: 15:18)
Market differentiation is consistent with Miles and Snow’s prospective strategy and costcontrol aligns with porter’s cost leadership. So the table 13.1 summarizes Miller'sframework and predicted structural characteristics.(Refer Slide Time: 15:27)
This is the Miller's integrative framework. To start with, on the left column we have astrategic direction, in the middle we have challenges and in the extreme right we havepredicted structural characteristics. So let us start with the first one that is innovation. Sothe challenge in this strategic dimension that is innovation is to understand and managemore products, customer types, technologies and markets.Now, the predicted structural characteristics in this category are scanning of markets todiscern customer requirements, low formalization, decentralization, extensive use ofcoordinated committees and task force.In market differentiation, the challenge is to understand and cater to consumerpreferences. The predicted structural characteristics include moderate to highcomplexity, extensive scanning and analysis of consumer’s reaction and competitor’sstrategies, moderate to high formalization and moderate decentralization.In breadth innovation the challenge is to select the right range of products, services,customers and territory while the predicted structural characteristics include highcomplexity, low formalization and decentralization. In breadth stability, the challenge is
the same but the structural characteristics include high complexity, high formalizationand high centralization. Here it was decentralization while here it is high centralization.And in cost control the challenge is to produce standardized products efficiently. Andthis requires structural characteristics like high formalization and high centralization. So,this categorization scheme dissects Porter’s differentiation into two dimensions.(Refer Slide Time: 17:18)
The first is marketing differentiation and innovation which deals with productdifferentiation. Further Miller assumes that breadth can be achieved in two ways movinginto a market segment by doing more innovation or moving into more stable and placidsettings.
(Refer Slide Time: 17:38)
So, Miller’s research for the most part confirms the predicted structural characteristicsthat are given in table 13.1. The exceptions are those predictions made for the breadthstability dimension. Miller has no compelling explanation for this finding. However, inspite of this one inconsistency table 13.1 offers a generally valid guide for summarizingthe strategy-structure relationship.Moreover, it is interesting how closely Miller's results are aligned with Miles and Snow’srecommendations. What is this innovation and breadth innovation? It generally requiresthe same flexible structures as described by Miles and Snow for their prospector.Cost control requires stability and structural characteristics consistent with Miles andSnow’s defenders. Finally marketing differentiation, blends the need for flexiblemarketing and stable production which suggests its structural characteristics that Milesand Snow’s attributed to their analyzers.
(Refer Slide Time: 18:42)
(Refer Slide Time: 18:47)
Now, let us look at the limitations to the strategy imperative. So far we have presentedthe positive case for strategy determining structure. Attacks on the strategy imperative liebasically in questioning the degree of discretionary latitude that managers actually have.For instance, it seems logical that the impact of strategy would be greater in the earlydevelopment period of an organization. Once personnel are hired, equipments purchasedand procedures and policies established, they are a whole lot tougher to change.
(Refer Slide Time: 19:26)
When the organization is in its infancy, vested interest have yet to be solidified, but oncethe die is cast managers may be severely restricted in their discretion. Similarly, it islogical that the capital to labor ratio in an organization will affect the impact of a strategyon structure. If the ratio is low that is labor intensive, then managers have much moreflexibility and hence discretion to exercise changes and influence structure.(Refer Slide Time: 20:06)
Another challenge to the strategy imperative deals with the lag factor. Whenmanagement implements a new strategy there is often no immediate change in structure.
Does this suggest that structure does not follow strategy? Advocates of a strong strategicand structural relationships say no.They point out that there is often a lag, structure responds to changes in the strategy butslowly. At the extreme this lag argument can be considered a cop out. If researchers failto find a strategy-structure relationship in the study of an organization, they can alwaysclaim that there is a lag and the structure just has not caught up yet.(Refer Slide Time: 20:57)
More realistically however we find that this lag is not purely a random phenomenon.Some organizations are slower to adapt their structure to changes in their strategy thanthe others. The major factor affecting response is the degree of competitive pressure.
(Refer Slide Time: 21:25)
The less competition and organization face the less rapid its structural response. Withoutcompetitors the concern for efficiency is reduced. We would conclude that where anorganization face minimal competition there is likely to be a significant lag betweenchanges in a strategy and modification in structure.(Refer Slide Time: 21:36)
Now, could strategy follow a structure? That is the other way around. Is it possible that astrategy and structure are positively related, but that the causal relationship is such thatthe structure determines strategy? One author acknowledged at least the logical
possibility as when a multidivisional structure is installed because everyone else is doingit and then an acquisition strategy is developed to make the structure viable. A littlethought would certainly suggest that a structure can influence the strategy.(Refer Slide Time: 22:10)
Structure can motivate or impede strategic activity as well as simply constrain strategicchoices. For instance, strategic decisions made in a centralized structure are typicallygoing to have less diversity of ideas and are more likely to be consistent over time. Incomparison, in a decentralized organization input is likely to be diverse and the peopleproviding that input will change depending on the situation.
(Refer Slide Time: 22:48)
The notion that strategy determines structure has some preliminary support. A study of110 large manufacturing firms found that strategy followed structure. Another study of54 firms listed among the top half of the Fortune’s 500 found that a structure influencesand constraints strategy rather than the other way around. If further research were tosupport these conclusions, we would state that as a structural determinant, strategy is oflimited importance.(Refer Slide Time: 23:19)
Now, we are looking at the industry-structure relationship. Closely related to the issue ofstrategy’s impact on its structure is the role of industry as a determinant of structure.There are distinguishing characteristics of industries that affect the strategy they willchoose. So, therefore as shown in figure 13.1, strategy may merely be an intermediatestep.It links the unique characteristics of the industry in which the organization operates andthe structure it implements to achieve alignment. So this is the strategy structurerelationship, industry determines strategy and it determines the structure. So this is figure13.1.(Refer Slide Time: 24:09)
Industries differ in terms of growth possibilities, regulatory constraints, barrier to entryand mobility and numerous other factors. Simply knowing the industry in which anorganization operates allows one to know something about product life cycle, requiredcapital investments, long term prospects, types of production technologies, regulatoryrequirement and so forth.Public utilities, for example, face little competition and can have more tightly controlledstructure. In some industries strategic options are relatively few. The major homeappliance industry is rapidly becoming the exclusive area of companies that competeonly on a high volume low cost basis.
(Refer Slide Time: 25:07)
On the other hand, the tobacco industry supports a much broader range of strategicoptions competing on manufacturing, marketing or product innovation basis.(Refer Slide Time: 25:14)
.
To illustrate how industry can affect a structure, let us take two variables that tend todiffer by industry category-capital requirements for entry and product innovation rates.figure 13.2 shows four industry categories with examples for each. Type A industriesrate high on both variables while type C industries are high on capital requirements and
low on product innovation. The high capital requirements tend to result in largeorganization and a limited number of competitors.(Refer Slide Time: 25:52)
This is figure 13.2. So on the y axis we have product innovation rates and on the x axiswe have capital requirement. So both of them have two categories high low and highlow. So, now you see that in A when product innovation rate is high and the capitalrequirement is also high, examples include aerospace, large mainframe computermanufacturers.While in B where the product innovation rates are high but capital requirements are low,so, this includes computer software manufacturers and magazine publishers. In C wherethe capital requirement is high but the product innovation rates are low, examplesinclude metals and mining and appliances manufacturers. And in D where both thesedimensions are low, it includes retail building material sales bicycle manufacturers.
(Refer Slide Time: 26:51)
So the firms in type A and C industries will be highly structured and standardized. Thetype C will be more decentralized to facilitate rapid response to innovations introducedby competitors.(Refer Slide Time: 27:08)
Type B and D industries because of low capital requirements tend to be made up of alarge number of small firms and type D however will likely have more division of laborand more formalization than type Bs because low product innovation allows for greaterstandardization.
(Refer Slide Time: 27:30)
In the same way that capital requirements influence organizational size and number ofcompetitors we would expect high product innovation rates to result in less formalizationand more decentralization of decision making. The preceding analysis argues thatindustry categories do influence structure. Although there are certainly intra industrydifferences there is a high degree of similarities with in industry categories.(Refer Slide Time: 28:01)
For instance Revlon, Mary Kay, Shahnaz Hussain and Lakme are all in personal careproducts but use very different marketing channels. These similarities lead to strategies
that tend to have largely common elements which results in structural characteristics thatare very similar.(Refer Slide Time: 28:20)
So, in order to conclude this module, in this module we understood the real worldimplications of Miles and Snow’s Framework, then we have talked about and discussedPorter’s competitive strategies that an organization can pursue and these are the threestrategies, the cost leadership, differentiation focus and this is the fourth one that is whena company is nowhere so which is called as stuck in the middle.Specific structural predictions could be made for the first two strategies. Millerintroduced a framework made of four dimensions, innovation, marketing differentiation,breadth and cost control.
(Refer Slide Time: 29:08)
Attacks on the strategy imperative have generally focused on three points; managerialdiscretion over changes in a strategy may be considerably less than suggested. Whencompetition is low, the lag may make the interaction between strategy and structureappear almost unrelated and the structure may determine strategy rather than vice versa.The industry in which organization operates was introduced as an important factorinfluencing strategy and hence, structure.(Refer Slide Time: 29:40)
And these are the four books from which the material for this module was taken.
Thank you.