Strategy vs Structure in Strategic Management

Strategic analysis: Strategy versus Structure for International Competitiveness

Introduction

The strategy structure relationship, that was previously considered reciprocal, is now recognized as being considerably more complex, and there is some agreement that structure can and does have a profound impact on strategy through its direct effect on the strategic decision making process (Bourgeois & Astley, 1979; Burgelman, 1983; Fredrickson, 1986). In understanding the role of strategy and structure in international business, one must understand that what has essentially changed is the context within which business operations take place. The well developed and complex associations between structure and strategy in classical studies of firms are also central to research in international business, but the nature of business has changed, and so have the relationships. As such, issues have arisen over the best way for international firms, operating in global marketplaces, to best align their strategy and structure to serve numerous distinct markets, whilst maintaining a global identity. This paper looks at the development of business strategy and structure over time, highlighting how the relationships have changed, the implications for organisational behaviour, and how firms can alter their behaviour to best gain competitive advantage in international markets.

International Strategies

Business strategy refers to how firms compete in an industry or market (Varadarajan and Clark 1994; Walker and Ruekert 1987). The two historically dominant frameworks of business strategy are the Miles and Snow (1978) model, which focuses on intended rate of product-market change, and the Porter (1980) model, which focuses on customers and competitors. Miles and Snow (1978) developed a comprehensive framework that addresses the alternative ways that organisations define and approach their product-market domains and construct structures and processes to achieve competitive advantage in those domains. Miles and Snow identify four archetypes of how firms address these issues: “prospectors” continuously attempt to locate and exploit new product and market opportunities, “defenders” attempt to seal off a portion of the total market to create a stable set of products and customers, “analyzers” occupy an intermediate position by cautiously following prospectors into new product-market domains while protecting a stable set of products and customers, and “reactors” do not have a consistent response to the entrepreneurial problem.

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In contrast, Porter (1980) proposes that business strategy should be viewed as a product of how the firm creates customer value compared with its competitors, and how it defines its scope of market coverage. Walker and Ruekert (1987) observed that though each of these strategy typologies has inherent strengths, i.e., Porter’s external focus and Miles and Snow’s internal focus, each is also limited. To address this, Walker and Ruekert proposed a hybrid model that synthesizes the two foci in a typology that consists of prospectors, low-cost defenders, and differentiated defenders. However, although Walker and Ruekert’s article has been frequently cited in the marketing and management literature, the distinctions between low-cost defenders and differentiated defenders have only recently been supported in empirical analysis (Slater and Olson, 2001).

Following on from these initial developments, over the last few years researchers have quite successfully addressed and explicated the various forms of international strategy, and these forms are generally well accepted in the literature. There is now considerable agreement among international business scholars that most firms embarking upon or undertaking international business operations are cognizant of the twin pressures of global integration and local responsiveness. To this end, the integration-responsiveness framework suggested by Prahalad and Doz (1987) has provided a valuable theoretical tool to better understand international strategic behaviours of firms. More recently, we have seen many successful applications of globally integrated strategies (Parente, 2003; Parente & Kotabe, 2003). According to Yip (2003), global companies have developed more sophisticated and flexible versions of international strategies and organisational processes, which successfully embraced globalization.

Organisational Structures

Organisational structure refers to an organisation’s internal pattern of relationships (Finley, 2000). Structure has been characterized by a number of dimensions and illustrated by using a variety of types, like functional or divisional (Fredrickson 1986), however, there are three dimensions of structure: centralization, formalization, and complexity, which have received more attention than any others (Fry, 1982; Fry & Slocum, 1984). Each of these dimensions appears to have great implications for strategy and strategic decision making, and are dominant characteristics of the well known structural types (Fredrickson, 1986). Centralization refers to the degree to which the right to make decisions and evaluate activities is concentrated (Fry & Slocum, 1984; Hall, 1977). A high level of centralization is the most obvious way to control and coordinate organisation decision making, but places significant cognitive demands on those managers who retain authority (Fredrickson, 1986). Mintzberg (1979) has discussed this issue by suggesting that an individual does not have the cognitive capacity or information that is needed to understand all the decisions that face a complex organisation.

The degree of formalization specifies the extent to which an organisation uses rules and procedures to prescribe behaviour (Hage & Aiken, 1969; Hall, 1977). Therefore, formalization has significant consequences for organisational members because it specifies how, where, and by whom tasks are to be performed (Fredrickson, 1986). A high level of formalization has the benefit of eliminating role ambiguity, but it also limits members’ decision making discretion. Complexity refers to the condition of being composed of many, usually, though not necessarily, interrelated parts. Hall (1977) suggests that there are three sources of complexity: horizontal and vertical differentiation, and spatial dispersion. Therefore, an organisation that simultaneously has numerous levels, broad spans of control, and multiple geographic locations would be considered as highly complex (Fredrickson, 1986).

The Interaction Between Strategy and Structure

Whilst strategy and structure have been studied in isolation for a great many years, and are now relatively well understood, what is less understood is the international role of organisational structure and its relationship with international strategy (Finley, 2000). International strategies are the forms and types of actions firms follow to fulfil their long term business objectives. Organisations involved in international business activities usually have two major forces impinging on them. One is the need to standardise products on a global basis, and the other is to respond to local country or local market demands. International strategies may be characterized in different ways, and the integration-responsiveness framework developed by Prahalad and Doz (1987) has extended the conceptualization of industry pressures to incorporate generic strategic responses. The framework suggests that organisations develop their strategies and structures based on the emphasis they place on either one or both forces.

At the most basic level, organisational structures are established to coordinate work that has been divided into smaller tasks. Mintzberg (1981, p. 104) noted, “How that coordination is achieved–by whom and with what–dictates what the organisation will look like.” Walker and Ruekert (1987) further hypothesized that firms that follow different generic business strategies adopt different structural designs. Vorhies and Morgan (2003) studied the relationships among marketing organisation structure, business strategy, and performance in the trucking industry. Both of these studies demonstrated that different marketing organisation characteristics are more or less appropriate for different business strategies. The forms of structures typically defined by formalization, centralization, and specialization, which as Walker and Ruekert (1987 p. 27) noted “seem particularly important in shaping an organisation’s or department’s performance”, are also applicable in different ways to different strategies and geographic factors.

For example, in studying the development of America’s dominant industrial organisations, Chandler (1962) observed that major increases in unit volume, geographic dispersion, and vertical and horizontal integration were eventually followed by changes in structural form. Several studies following Chandler’s work confirmed an association between these two variables, in that structure generally followed strategy (Fouraker & Stopford, 1968; Rumelt, 1974). In spite of the wide spread acceptance of the structure follows strategy relationship, there is a significant body of literature that suggests that structure has a significant and major effect on strategy (Fredrickson, 1986). Bower, for example, characterized structure broadly as the context within which decisions are made, and observed that “structure may motivate or impede strategic activity” (1970, p. 67). This view is also supported by other researchers who contend that structure constrains, or in another set of circumstances, enables, strategic choice (Bobbitt & Ford, 1980; Duncan, 1979; Hedberg, Nystrom & Starbuck, 1976).

To understand why it is logical for strategic action to be affected by structure, one must understand the relationship between decision making and structure (Fredrickson, 1986). March and Simon (1958) addressed this critical aspect of the relationship by suggesting that an organisation’s structure imposes boundaries of rationality that accommodate members’ cognitive limitations. By delimiting responsibilities and communication channels, structure allows organisations to achieve organisationally rational outcomes despite their cognitive limitations (Simon, 1976). Structure also allows management to control the decision making environment and facilitate the processing of information (Fredrickson, 1986). The structure-strategy relationship is well explained by Bower when he states that “when management chooses a particular organisational form, it is providing not only a framework for current operations but also the channels along which strategic information will flow” (1970, p. 287). As a result, the relationships between business strategy and organisational structure become massively complex when considered in the international context, and thus require organisations to strategically examine their fundamental behaviours in order to best align their strategy and structure, without becoming lost in the complexity.

Strategic Organisational Behaviour

Organisational behaviour refers to organisational members’ work-related activities (Ouchi 1977; Robbins 2002) and, according to Snell (1992), management attempts to influence organisational behaviour through the use of control systems. Control is any process that helps align employees’ actions with the firm’s interests (Snell 1992; Tannenbaum 1968). Control theory (Snell 1992) identifies three major categories of control mechanisms: behavioural control (e.g., establishing and monitoring of sets of actions), output control (e.g., goal attainment measures), and input control (e.g., training). When applied within an organisational context, control theory posits that management attempts to direct employee behaviour to enhance the probability of desired outcomes. As Snell notes (p. 292), “Advocates of the behavioural perspective posit that different strategies require different behaviours.” Snell also notes that this view of the link between strategy and behaviour is useful because it provides a clear explanation of why behaviour should be linked to strategy and because it posits a testable set of behaviours.

As a result, strategic behaviours have the potential to create superior performance through enhancing the execution of business strategy and identifying the relevant organisational structure (Slater and Narver 1995). There are four behaviours which are all claimed to offer potential competitive advantage to firms. These are customer-oriented behaviours (Deshpandé, Farley, and Webster 1993), competitor-oriented behaviours (Armstrong and Collopy 1996), innovation-oriented behaviours (Hurley and Hult 1998), and internal/cost-oriented behaviours (Porter 1980). It is important to understand that these strategic behaviours are not mutually exclusive and that it is common for firms to engage in multiple sets of behaviours simultaneously (Slater and Narver 1995). Furthermore, different combinations of emphases will likely prove more or less beneficial for firms that adopt different business strategies.

Customer-Oriented Behaviours

Firms with a strong customer orientation pursue competitive advantage by placing the highest priority on the creation and maintenance of customer value. As such, these firms engage in the organisation wide development of and responsiveness to information about the expressed and unexpressed needs of both current and potential customers (Deshpandé, Farley, and Webster 1993). Because of the constantly refined market-sensing and customer-relating capabilities of the customer-oriented firm, it should develop strategies and a structure to anticipate customer need evolution and to respond through the development of new customer value-focused capabilities and the addition of valuable products and services (Day 1994).

Competitor-Oriented Behaviours

A different perspective on competitive advantage is simply to beat the competition (Day 1994). This orientation places a priority on the in-depth assessment of a set of targeted competitors, focusing on targeted competitors’ goals, strategies, offerings, resources, and capabilities (Porter 1980) and on the organisation wide dissemination of the information generated from this assessment. The result is that managers develop competitor-oriented objectives rather than economic or customer-oriented objectives (Armstrong and Collopy 1996). The behavioural goal of the firm is to match, if not exceed, competitors’ strengths, both in strategy and structure.

Innovation-Oriented Behaviours

Another perspective is that firms build and renew competitive advantage through radical or discontinuous innovations. An innovation orientation indicates that the firm not only is open to new ideas but also proactively pursues these ideas (Hurley and Hult 1998) in both its technical and administrative domains An innovation orientation encourages risk taking and enhances the likelihood of developing radically new products. March (1991) argues that firms must be aware of the possibility that an innovation orientation may not allow for the follow-through that is necessary to reap the benefits of earlier innovations fully, unless their strategy and structure are aligned with both the generation and utilisation of innovation.

Internal/Cost-Oriented Behaviours

Porter (1980) argues that there are two basic sources of competitive advantage. The first is the differentiation advantage that a firm derives from the customer-, competitor-, or innovation-oriented behaviours. The second is the cost advantage that a firm derives from internal orientation and structure, with internally oriented firms pursuing efficiency in all parts of their value chain (Porter 1985). They attempt to reduce costs in primary activities, such as logistics, operations, and sales and marketing, and also attempt to reduce costs in support activities, such as procurement, research and development, and administrative functions. These firms pursue operational excellence, through their strategy and structure, that they can translate into higher sales through lower prices or higher margins. Whereas experimentation is the hallmark of firms with an innovation orientation, exploitation is the hallmark of internally oriented firms (March 1991).

Conclusion

International business has produced some incredibly competitive and complicated markets, with numerous potential problems for organisations, but also numerous opportunities for firms that can best adapt to their marketplace. However, such is the level of complexity in these markets, that firms who try to engineer specific, rigid strategies and structures will likely find themselves left behind by the latest shift in the market or technology. As a result, firms competing in international markets would be best advised to focus on the organisational behaviour, or behaviours, that best match their capabilities, and let these behaviours drive their strategy and structure to provide the most sustainable competitive advantage possible. Unfortunately, there is currently a paucity of available academic evidence on the most relevant behaviours for firms to best secure competitive advantage under the myriad market conditions, and this should be a key area for future research, as it may soon become a strategic issue of significant importance.

Equally, organisational behaviour as a field of study is vastly complex, with ongoing debates between theorists around organistic versus mechanistic structures, the role of teams, and the best styles of leadership needed in an organisation. In particular, organisational behaviour tends to suggest that organistic structures will be required in uncertain, rapidly changing markets, however mechanistic structures will be required in markets where the pace of technological developments is slower (Burns and Stalker, 1961). Thus, more research is needed into the consequences of an organisation in a relatively fast moving market making strategic organisational behaviour choices which would be better facilitated by a more hierarchical, mechanistic structure.

Similar research would be recommended into the roles of leaders, and teams within organisations, in implementing and driving these behaviours forward. However, regardless of the need for further research, it is clear that firms can no longer merely define a strategy, focus strongly on it, and expect their strategic focus to guarantee success. Likewise, in the international business world, firms should no longer focus on having a well defined structure, regardless of whether it is organistic or mechanistic. Instead, a key recommendation of the strategic organisational behaviour approach is that firms should concentrate on best aligning themselves to the most appropriate behaviour for their industry. In manufacturing, this is likely to be more internal, or cost oriented, in technology it will tend to be primarily innovation oriented and in professional services a strong customer, or client, orientation would be best. However, it is vital that firms do not neglect the other behaviours: those that are not their primary focus, as these remain important, and can help maintain a balance approach to strategy and structure, offering sustained competitive advantage in international markets.

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