Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 1 :: March 1998
STRATEGY is a concept, an abstraction, a theory of the business, often inferred by reviewing a pattern of managerial decisions. Structure is real, an artifact, a visible determinant of the practice of business, often designed to orient, limit and motivate managerial decision making. That strategy drives structure is a long-accepted tenet deriving from Chandler's (1962) seminal, historical analysis. That structure in turn creates strategy is increasingly recognised but not as well understood. Adhocracies (Mintzberg, 1979), bureaucracies (Weber, 1947) and clusters (Mills, 1991) are instances of vastly different forms of organisation that not only reflect but effectively create very different strategies. At the extreme, the argument can be made that structure is strategy. The ABC's of the structural underpinnings of strategies are the focus of this article.
THE ADMINISTRATIVE SYSTEMS PERSPECTIVE
The well-known 7-S framework (Waterman, et al, 1980) and the more parsimonious 4-S framework (Camillus, 1986) - strategy, structure, systems, and style - recognise the inseparable, mutual influence of strategy and structure. The theory of the business (strategy) is the basis of organisation design (structure) and organisation design defines the managerial decision orientation. What is not readily evident but is of fundamental importance is that structure is tangible and can be manipulated, while strategy is conceptual and realised strategies are often different from those that were intended.
The administrative systems perspective identifies (organisational) structure and (planning and control) systems as the two levers that managers can utilise to create the desired form of (competitive) strategy and (management) style. Structure and systems are, in practice, the means by which strategies and style can be manipulated. A ``machine bureaucracy'' -- where work processes and procedures are standardised--focuses on efficiency, is challenged by complexity, is unresponsive to change and creates an inflexible strategy wholly unsuited to a dynamic contact. A ``professional bureaucracy'' that standardises skills and knowledge rigidly defines the core competence of the organisation and supports strategic viability only if the organisation finds itself in an environment where this competence can generate value. An ``adhocracy'' as defined by Mintzberg (1979), where situationally relevant project teams can be created (e.g., building a turnkey chemical plant) in matrix fashion from core groups that possess differentiated skills and knowledge (e.g., mechanical, civil, electrical and chemical engineering departments) adds a degree of flexibility in strategy that ``professional bureaucracies'' cannot provide.
In discontinuous environments, characterised by rapid and unpredictable change, the ``cluster'' (Mills, 1991) form of organisation fashions venture teams that develop, manage and ultimately disengage from a business opportunity to return to a central core to learn new skills and capabilities that can be employed in another emerging business context. This form of organisation would promote strategies that envision, for instance, global reach, an evolving array of competencies and rapid response capability.
From an administrative systems perspective the intimate dance of strategy and structure is best choreographed by managing the organisational structure.
ORGANISATIONAL EVOLUTION PERSPECTIVE
The various forms that an organisation adopts is inextricably linked to its strategy. The simplest form of organisation, the functional structure, creates a strategy that derives from the design of each of the functional areas. A production function that is designed for outstanding and uniformly high quality; a marketing function that employs carefully selected, elite distribution outlets, charges a premium price and fits the product to the customer needs; a human resources function that focuses on recruiting, training, and developing the very best personnel all combine to create a product-market-technology strategy that seeks to capture an up-scale, price-insensitive, quality-conscious market segment. The choice of structural orientation or functional stances determines the organisation's strategic posture.
Moving to a divisional structure the choice of the dimension along which divisions are formed is both driven by and motivates strategy. In a multi-product, multi-territory operation a matrix organisation inevitably exists. If product-line managers are given primacy in decisions regarding strategy and are held directly responsible for profits, the resultant strategy will reflect the competence and orientation of these managers and will probably be driven by competitiveness based on technological characteristics. On the other hand if territory managers are given primacy, emerging strategies are more likely to be driven by the characteristics of the market.
In conglomerate structures the choice of what the Corporate H.Q. should maintain as its decision prerogatives, and what it delegates to the various groups that contain sets of related businesses/divisions, creates vastly different strategic postures. Conglomerates that give total autonomy to the groups essentially opt for a portfolio strategy where businesses are acquired and divested based on their financial characteristics such as profitability, cash flow and risk profile. If other decisions such as personnel appointments or the design of the control system are made at the Corporate H.Q., the basis of the resulting strategy goes beyond financial parameters. Competitive superiority is sought to be achieved through the distinctive competencies that the corporate H.Q. believes that it possess and manages.
The scope and orientation of managerial decision making are determined by such basic structural design choices resulting in different patterns of decision-making -- in effect different strategies.
STRUCTURE AND SYSTEMS
The administrative systems perspective described earlier identifies two indirect ways in which structure impacts strategy. One of these is the impact that the choice of structure has on the planning and control systems in the organisation. Most visibly and directly, organisational structure, almost by definition, determines the design of the control system. The parameters, for example sales revenue or profits, that define the performance of an organisational unit have to reflect the scope of decision authority that the unit possesses. Within a division, if a unit that markets certain products decides the selling price of these products, then the appropriate performance measure is profit -- the unit manager makes the decisions that combine price and volume to maximise profits. If the unit has no say in deciding the selling price then it can reasonably only be evaluated on the basis of sales volume or sales revenue, not profits.
To extend this argument, structure broadly defines the limits of responsibility and authority of the unit managers and the control system has to map directly on these limits. Indeed, in the view of some sociologists, structure is control.
A maxim in the management control discipline is that ``what you measure is what you get.'' If you measure revenue, profits or market share, then the manager being measured will focus, respectively, on improving revenue, profits or market share. Control systems have a fundamental influence on decision-making and structure defines the control system.
Similarly structure has a fundamental influence on the planning system that supports the creation of strategy. for instance, the definition of what are the ``strategic business units'' within a multi-business organisation greatly influences the design of the planning system and process, which in turn inevitably guide strategic analysis and thinking.
STRUCTURE AND STYLE
The second strong though indirect link between structure and strategy is through the impact of structure on the management style in the organisation. For instance, hierarchical structures are thought to limit creativity and ideation at lower levels in the organisation with obvious implications for strategic flexibility and innovation. Alternatively, flat organisations are preferred where knowledge and idea-generation are widely distributed in the organisation and high-involvement (Lawler, 1986) mode of strategy creation is desired.
Companies such as 3M, where innovation is a fundament of strategy, design structures and systems that support and engender widespread involvement in creating new products, markets and technologies. Professional organisations where knowledge is widely dispersed again seek structures that promote extensive involvement in strategy creation.
THE INTEGRATED PERSPECTIVE
The design of the organisational structure and the desired strategic posture necessarily have to be in harmony. Strategy itself is expected to define a harmonious relationship between the organisation and its environment. As the business environment changes, so also should strategy. The more dynamic the environment, the more flexible strategy needs to be. Changes in strategy require and are created by changes in structure. Structure can be viewed as the brush that paints the strategic posture of the organisation, the managerial wand that transforms the concept of strategy into reality.
A recent benchmarking study on strategic planning (Camillus, 1996) highlighted the approach now adopted by companies at the leading edge of managerial practice. In Royal Dutch Shell, for instance, the driver of performance is the amalgam of strategy and structure. Rapid and quantum changes in performance are much more readily attained through modifying structure than through visualisation and communications of a desired new strategic posture.
In short, the concept of strategy may have its roots in visionary aspirations and intellectual analysis, but the realisation of strategy requires the manipulation of structure. At an abecedarian level, adhocracies, bureaucracies and clusters support and create entirely different and essentially contradictory strategic orientations. Indeed, it is axiomatic that structure is strategy.