Business Level Strategy: Co-Alignment between Strategy and Structure

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Quinn (Quinn, 1980) defines strategy as a pattern or plan that integrates an organization's goals, policies and action sequences into a cohesive whole.

Burns and Stalker (Relating strategy) view structure as a process in itself - a means of holding together an organization so that it is able to determine its own destiny. Organizations that operate in dynamically changing and uncertain environments tend to need organic/flexible structures while more stable environments lend themselves to more familiar mechanistic bureaucratic structures.

If strategy is about realizing a plan, then in implementing it, a suitable means of structuring resources and activities must be found and maintained. Olsen (Relating strategy) uses the term "co-alignment" to describe the "best-fit" relationship between strategy and organizational structure.

Thus, an effective strategic leadership is characterized by the ability to select an appropriate strategy and match it with the appropriate structure.

A Business-level strategy is a plan to combine the core competencies in order to position the organization so that it has a competitive advantage in its domain (OB Book). Michael Porter has argued that a firm's strengths ultimately fall into one of the two headings: cost advantage and differentiation (Porter, 1980) .

Target Scope

Advantage

Low Cost

Broad Market Scope

Cost Leadership Strategy

Narrow Market Segment

Focus Cost Leadership

Table : Porter's Business-level strategies

Business Level Strategies and Matching Structures

This ability is a product of the way the organization designs its structure. Strategy and structure have a reciprocal relationship (Yin & Zajac, 2004). Research however suggests, that strategy has a much more important influence on structure than reverse (Keats & O'Neill).

Product, Market or Geographic structure

Product team structure

Matching structure for Cost Leadership Strategy

To closely control the cost of product development, low-cost companies generally adopt the simplest structure. Simple reporting relationships, few layers in decision-making and authority structure, a centralized corporate staff, and a strong focus on process improvements is what is needed.

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WalMart successfully implemented a Cost-leadership strategy by streamlining its supply chain operations. Its other functions like Marketing, Personnel aligned themselves according to the supply chain

TATA Steel heavily invested in its Manufacturing division because it derives its competitive advantage from primarily this function

Figure : Functional, Centralised structure for Cost Leadership Strategy

Matching structure for Differentiation Strategy

To have the ability to introduce new products in the market, a firm following differentiation strategy will have to be dynamic, with decentralized decision-making structures to quickly respond to market conditions. A product structure, with each product as separate divisions, served by the same group of support functions like personnel, R&D etc. is best suited for these types of firms.

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Apple has always tried to differentiate its products, be it the Mac, the IPod or the IPad. This has created a large size of Apple loyalists who are willing to high prices for Apple products.

Figure : Divisional, Decentralised structure for Differentiated Strategy

IKEA's Globalization story

History

IKEA is a Swedish home furnishings retailer, founded in 1943, with its headquarters in Denmark. It is the world's largest furniture retailer, specializing in stylish but inexpensive ready-to-assemble furniture.

Founding values

The founder, Ingvar Kamprad, believes that "Most things still remain to be done - a glorious future! Time is your most important asset." The corporate culture at Ikea is based on this philosophy all the way from the furniture design teams right down to the customer support team.

The IKEA Concept, like its founder, was born in Småland. This is a part of southern Sweden where the soil is thin and poor. The people are famous for working hard, living on small means and using their heads to make the best possible use of the limited resources they have. This way of doing things is at the heart of the IKEA approach to keeping prices low. 

But quality is not compromised for the sake of cost. Sweden has an international reputation for safety and quality you can rely on, and IKEA retailers take pride in offering the right quality in all situations. 

Facts and figures

IKEA Group

First store opened in Sweden in 1958

267 countries in 25 countries (2009)

Biggest marketing tool is the IKEA Catalogue

Published in 36 countries, 27 languages

Figure : 2004-2009 Sales figures

Corporate culture

A persistent strife to improve in all areas of the value chain is an effective way to shape the industry to better fit Ikea's future strategies. Due to the uniqueness of Ikea's strategic positioning, being the largest competitor in its field, the firm has the advantage of setting the phase of the industry.

Bureaucracy is fought at all levels in the organization. Kamprad believes that "simplicity and common sense should characterize planning and strategic direction" (Bartlett et Al, 1993: 78).

In addition, the culture emphasizes efficiency and low cost which is not to be achieved on the expense of quality or service.

Symbolic policies such as, flying economy class and stay at economical hotels, employing young executives and sponsoring university programs have made cost part of corporate culture and

has further inspired the influx of entrepreneurship into the organization.

Because of the high level of innovation required to churn out new designs at lower costs the designers are given complete autonomy in their design process.

Ikea's Internalization

Ikea applies a conservative approach towards Internalization. As a general rule, the firm never make a direct entry into a potential market, by opening a retail outlet. Instead a supplier relationship model is created. This reduces the risk where the local sellers can provide valuable inputs on the political, legal, cultural and financial issues which provide for opportunities and/or threats to the Ikea Concept.

Expansion by fully owned subsidiaries

In stable markets, Ikea establishes fully owned subsidiaries. These are setup by an expansion team from the central expansion team. The purpose of this process is to ensure standardization of the store look, training of the operators, operational control etc. This shows a high need for global integration.

This is important because Ikea wants to ensure similar customer experiences in its stores throughout the world.

Expansion by franchising

To approach, relatively unknown, dynamic markets, Ikea goes though franchisees. The franchises have the decision making power to design the product mix to fit the local market needs. But the franchisee operators undergo pre-opening activities and training to learn the frugal Ikea way. All product catalogues and promotional activities are still kept within the headquarters.

This approach takes into consideration the local market tastes. Increasingly, franchising is becoming the favoured method of entry for Ikea. This signifies a planned move by the firm to move towards a transnational strategy. But as the product decisions still remain with the headquarters in Sweden, it is can be classified as Global Product Organization.

Supporting Organizational Structure

The present organisational structure can be defined as highly functional, with a global market strategy. It is able to maintain centralized control over functional activities and at the same time take the advantage of low cost and enhanced quality of overseas suppliers,

Balance between Structural Autonomy and Strategic Direction

As Ikea continues to expand overseas, the significance of centralized strategic direction will increase. Naturally, rapid internationalization will trigger a range of challenges imposed on the headquarters in Sweden: Such challenges include:

The complexity of the logistics system will increase.

It will be more difficult to respond to national needs and cultural sensitivity issues. 

Franchisees may demand more control over operations.

Emerging demographic trends will force the organization to broaden its focus strategy to respond to varying nation-level consumer groups.

With all these challenges emerging, it will be very difficult to maintain a global organizational structure. The best approach to meet these challenges is to find the proper balance between country level autonomy and centralized intervention. Likewise, intensifying and responding to local rivalry requires increased subsidiary/franchisee autonomy. 

What next?

As the reach increases, Ikea will be under pressure to move from a global to a transnational one. The global strategy has been successful till now by achieving economies of scale. But the transnational approach will combine the scale with the local responsiveness. Hence more independence has to be given to the franchisees/subsidiaries. They can get more say in the product design phase. Thus a store in China can get low-cost furniture according to national tastes instead of being force-fed Swedish furniture.

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