Corporate Structure, Integration

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Once the corporate strategy is clearly defined, an appropriate corporate structure can then be determined. Execution of the corporate strategy relies on the appropriate operating structure to be put in place. Usually, this will be a case of hitting the right balance between centralization and decentralization. You want each unit to be responsive to market needs but there will be some activities and functions which should be centralized to avoid the costs of duplication. Once the correct balance is determined, coordination between the units comes through effective integration and communication.

Structure is important to the execution of strategy at both the corporate and business levels. Structural choices are often complex, difficult and flavored by political rather than practical considerations.

There are three key structural issues which will affect an organization’s ability to execute strategy:

1. What are the comparative costs and benefits of different organizational structures: and what will be the best way to structure the business? There are usually a variety of different ways the organization can be structured:

By the processes used within the company

Around specific technology or skill sets

Using a divisional, product line or geographical breakdown

Along functional lines

There will be benefits and costs associated with each of these choices:

CEO

Engineering Marketing R&D Manufacturing

Costs

Coordinating work across functions can incur some quite significant costs.

Different functions will have different goals and perceptions as sometimes functional people get wrapped up in their specialist areas. It will be diffcult for everyone to keep the big picture in mind.

An internal bureaucracy may grow, slowing down the organization’s responsiveness to market conditions.

Benefits

Focuses on expertise required to actually create a critical mass.

Economies of scale become available through standardization.

Duplication of scarce resources is avoided using this structure

It will be possible and feasiblefor employees tobuild their careers by working in the different functional areas at different stages of their careers.

CEO

Division 1 Division 2

Costs

There can be duplication of scarce resources across the organization.

There is the potential for the loss of economies of scale, since every division will want to control its own resources.

Benefits

Effectiveness increases because of a focus on customers, products, geographic markets, etc.

Fewer coordination problems leading to enhanced responsiveness.

2. Should the organization’s management be centralized or decentralized: and how should decisions be made? Flat management structures are popular, but they do have some issues that need to be addressed:

Inertia is lost because people have to figure things out.

It becomes more difficult to tap into a superior’s expertise.

People may feel unprepared to accept more responsibility.

Communication can become stifled.

In practice, most organizations use a mix of centralized and decentralized management structures. Deciding on the size and role of the corporate head office then becomes a balancing act that is difficult to get right.

3. How should our corporate strategy impact on out corporate structure? In other words, the strategy you choose will not only determine what skills and resources you’ll need to develop, but will also influence what type of organizational structure would be best. To be more specific:

If you’re going with a low-cost strategy, a centralized functional business structure will offer the greatest efficiency and economies of scale.

If you’re going to focus on the customer, a specific geographic region or product line, the decentralized divisional structure would be the most effective. Your costs may be higher due to some duplication, but that will be offset by other benefits.

If you’re going with a differentiation strategy, you should run with the divisional organizational approach. One division can focus on one part of the market while a separate second division can focus on your second market segment.

If you’re simultaneously focusing in two strategies (perhaps a high-end product and a commodity product, or a worldwide product line and a country specific product), you might use a hybrid organizational structure where some functions are centralized and others are grouped into separated divisions. If handled well, this can give the best of both worlds.