Organizational Structure and Competitive Advantage
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Published: Mon, 03 Jul 2017
In our fast-paced, ever-changing world, organizations are constantly seeking ways to gain and sustain effectiveness. Though there is no single thing that makes an organization successful – no secret ingredient – some concepts do universally apply. One fundamental is to create a right organizational structure for success by ensuring alignment in organization dynamic relative to core purposes, strategy, and culture.
Organisational structure refers to the way tasks are divided up, how the work flows, how this flow is coordinated and the forces and mechanisms that allow this coordination to occur. It creates the framework within which organizations operate. It is the skeleton and later on becomes the engine of the business. Therefore an organization with a structure which does not fit into economic and business environment, differentiated from its core purposes cannot exist for a long time.
The aim of this paper is to review an organizational structure as a competitive advantage. The objectives will be the guiding tour to achieve the goal:
- Review existing organizational structures and their respective
- Analyse relationship between organizational structure and strategy
- Define which organizational structure is relatively better for exporting companies
As a case study, organizational structure of Hansa Flex was researched, and subject in question was applied to it to compare organizational theory in real business life.
The paper starts formulating a unified theoretical framework by explaining what the organization is, and describing relationship within an organization. Then it defines common types of organizational structure, talks about their function principles, afterwards investigates organizational effectiveness and relationship between organizational structure and strategy. To describe how a company can gain a competitive advantage relying on this relationship, and to compare theoretical framework with real business life, at the end, organizational structure of Hansa Flex was studied and conclusion about comparison is described.
Some have described organizational structure as a formal configuration of roles and procedures, the prescribed framework of the organization. Others have described structure as the patterned regularities and processes of interaction. Structure is important in organizations because it reduces ambiguity and clarifies tasks, expectations and goal. Bartol, Martin, Tein and Matthews (2001, p. 267) define organizational structure as “the formal pattern of interactions and coordination that managers design to link the tasks of individuals and groups to achieve organizational goals”.
Different sources give different contingencies which define organizational structure. These contingencies change through the time due to economic and business environment, technology, innovation as well as designs of organizational structures. The elements that were main criteria for selecting organizational structure 20 years ago are not reliable nowadays. Contingencies like size of organization, role clarity, specialization and control, for example, have been replaced by speed, flexibility, integration and innovation (Ashkenas et al., 1995, p. 7).
Before carrying out the research, it is reasonable to analyse particular method for a given study. There are two main points that the research process of the paper goes through, as the research is done to enlighten development of organizational structures and review organizational structures as a competitive advantage:
Defining the resource for analysis of theoretical framework
Applying the theory on particular case study (Hansa-Flex)
Starting a new research paper is like starting a new project – you have an idea of what you want to do, but are not sure how to start. Many writers, like many project planners and managers, find that outlining is frequently the most effective way to start writing (Keene, 1987, p. 2). So having this idea in mind, we started to draw a step-by-step methodology of the research. Following are the stages that paper went through.
Formulating the research aim (Initiation). This is the first stage of our research process, and the purpose of this stage is for us to decide what we are writing about, therefore after this stage it is possible to know which are the other stages that are needed for the fulfilment of the paper. As it was mentioned, the aim of the paper is to review organizational structure as a competitive advantage. We want to analyse perspectives of modern organizational structures and see whether there is one best structure that exporting companies can use.
Developing the objectives. Once the research aim is determined, the next stage of our research is to develop the objectives:
- Review existing organizational structures and their respective
- Analyse relationship between organizational structure and strategy
- Define which organizational structure is relatively better for exporting companies
These objectives will keep the research study going on towards the aim of the paper.
Resource selection. Having followed all the previous stages then is the next stage; determine how and where to collect the data that is crucial to draw inferences and conclusions for the study.
Primary Data Secondary data
Collection Purpose For the problem at hand For other problems
Collection process Very involved Rapid & easy
Collection cost High Relatively low
Collection Time Long Short
Table 1. A Comparison of Primary and Secondary data
Source. Malhotra (1996, p. 117)
According to a source comparison table of Malhotra (1996, p. 117), due to absence of research budget and short time, secondary data was chosen to be relative as source. It was decided to use, for this area of study, the following sources:
Published censuses or other statistical data
Company Hansa-Flex (interviews with representatives)
Unfortunately, there were some difficulties using all the sources above. Since the research took place in Bremen, small town in North Germany, it was not easy to find physical books, journals or newspapers in English. Therefore, to help this situation, electronic versions of some of the books were downloaded from the Hochschule Bremen’s internet network. Also, not being able to have an interview with Hansa-Flex’s representative had negative impact on the case study part of the research.
Literature Review. After collecting necessary data, this stage is an integral part of the research methodology, because it makes important contribution to all the next stages of the methodology. This stage helps to understand the subject area as well as the research aim precisely and clearly. Although the secondary sources created a framework for the study, censuses and annual reports published by Hansa-Flex did not help a lot to analyse the organizational structure of the company and evaluate it as a competitive advantage. The company presentation of Hansa-Flex given at the Hochschule Bremen by the company’s Development Manager was used to fill this lack.
Interpretation. After collecting and analyzing the data, and also subsequent to the clarifying of the questionable points, the next stage for the study will be interpretation in which the raw data, clean of “mistakes”, will be applied to the research aim. In this case it will be related to the case study, which is organizational structure of Hansa-Flex.
Results and formal write of conclusions reached. The last stage is writing the report, in which all the previous stages come together as one research study and with the principle of enlighten the reader what all the research is about and all the results achieved drawn from what all the previous stages have done. It will also help to finally come with the result, whether the research aim was achieved or not.
Organization and organizational structure. Definitions
As it was mentioned before, the purpose of this paper is to clarify the relationship between organizational structure and strategy, and describe organizational structure as a competitive advantage. However, the goal of this chapter, as a starting point, is to introduce some common view about an organization and organizational structure.
What is an Organization?
Organizations all over the world share the same characteristics; they are social entities that are goal-directed, are designed as deliberately structured and coordinated activity systems and are linked to the external environment. Not all organizations are the same, some are large, multinational corporations, others are small, family owned business, some manufacture products, others provide services. One key element of an organization is that indeed the organization will exist when people interact with one another to perform essential functions that will help the achievement of goals. One organization cannot exist without the interaction with customers, suppliers, competitors, and some other elements of the external environment like the government etc (Daft, 2007, p.10-11).
Definitions of organizational structure
Having defined the organization, it is next sensible to define organizational structure. The Morris describes organizational structure as “â€¦the framework around, and the systems that support, the work being done in an organization”. Walton (1986) notes structure as the basis for organizing, to include hierarchical levels and spans of responsibility, roles and positions, and mechanisms for integration and problem solving. The similar definition is given in the Dictionary-Organizational Behavior (2003) as: “the established pattern of relationships among the components of parts of a company; the way that a company is set-up; the formally defined framework of an organization’s task and authority relationship.” (p.2)
The organizational structure is reflected in the organization chart (Daft, 2007, p. 190). It is the visual representation of the whole organization and its processes. The organization chart enables to see employees going about their duties, performing different tasks, and working in different locations. The organization chart is very useful in the understanding how a company works.
In general, it refers to the way that an organization arranges people and their jobs so that the work can be done and its goals can be achieved. If the size of a work organization is not big and communication can be made face to face, formal structure may be not necessary, but in a large-scale organization the messengers have to be passed about the delegation of various tasks. Then, structure is established that distribute responsibilities for various functions. It is these decisions that determine the organizational structure.
Organizational structure and effectiveness
Having a common view about what an organization is, and saying that organizational structure refers to the way that an organization arranges people and their jobs, it is time to think about the impact of the structure on organizational effectiveness.
Organizational structure and organizational effectiveness are interrelated, because organizational structure impacts organizational effectiveness based on organization creativity. Woodman explains that: “â€¦in general, adaptive organizational forms (e.g. matrix, networks, collateral or parallel structures) increase the odds for creativity. Bureaucratic, mechanistic, or rigid structures decrease the probability of organizational creativity.” (Morris, 1995, p.64)
Peguin (2003) comments that “organizational effectiveness and its relation to structure are determined by a fit between information processing requirements so people have either too little or too much irrelevant information” (para. 3). Andrews (1995) supports his idea and notes “without clearly defined roles and responsibilities of getting information, any organization structure becomes dysfunctional.” (p. 1)
In analyzing the difficulties of realizing the organizational effectiveness, on the one hand, Bedeian (1986) says, “Although effectiveness is a central theme in the study of organizations, it remains one of the most frequently cited yet least understood concepts in organization theory.” (p. 186). He continues to argue that “failing to consider organizations goals, characteristics, and constituents lead to fault assumptions of performance.” (p. 190). He also believes that the relationship and consequences between organizational design and structure choice. “Organizations are incredibly complex. They are molded by increasingly fluid and disorderly environmental forces that constantly threaten their rationally ordered structures and stated goals.” (p. 198)
On the other hand, he emphasizes the possible result of wrong structure choice. “Declining organizations face many problems. One of the most serious of these is the lack of flexibility at time when adaptiveness and agility are especially needed. Among the attributes most commonly affected are an organization leadership, innovative processes, work-force composition, and relationships with interest groups.” (p. 197).
Relation between organizational structure and strategy
This chapter is divided in two parts, while first part describes how organizational structure and strategy are related via environmental conditions; second part explains how to build proper organizational structure that supports strategy and defines the authority for each manager.
Nearly always, development of corporate strategy begins by analyzing the industry in which it operates and environmental conditions. Then having industry and competitive analyses, through research and benchmarking the strengths and weaknesses of competitors, executives set out to carve a distinctive strategic position where they can outperform their rivals by building a competitive advantage. To obtain such advantage, a company chooses a structure, which is supposed to group people due to their duties, tasks and responsibilities as well as hierarchy of decision making (Mouborgne, et al., 2009). Developing an organizational structure that supports the strategy is not easy, because of uncertainty in the global economy’s rapidly changing and dynamic competitive environments. When a structure’s elements, such as reporting relationships, procedures, etc., are properly aligned with one another the structure facilitates effective use of the strategy (Hitt, et al., 2009, p. 309).
Choosing the most appropriate organizational structure that supports the strategy does not ensure an organization from future mismatches. As previous chapters describes organizations has to change and adopt to innovation and changing environment, and just as organization’s strategy needs to change with changing external environment, so must a structure change for proper strategy implementation.
In other hand company’s strategic options are bounded by the environment. In other words, structure shapes strategy (Mouborgne, et al., 2009). So organizational structure and strategy are like two different sides of the same coin.
In structure strategy relationship, organizations must be wide awake in their efforts to verify that the structure calls for work to be completed remains consistent with implementation requirement of chosen strategy. There is no perfect or ideal organizational structure that lasts forever. The strategy must be supported by the structure that provides the stability needed to use current competitive advantage as well as flexibility required to develop future advantages. Therefore, properly matching organizational structure and strategy can create competitive advantage (Hitt, et al., 2009).
Characteristics of organizational structures
After the impact of organizational structure on organizational effectiveness and strategy was described, based on the literature review of the definition and characteristics of organizational structure above, this part explores the types of organizational structure. There are different approaches to design the organization’s activity. In the other word, that is different types of organizational structure.
Common types of organizational structure
Numerous international scholars are working on identifying the types of organizational structure. Thus, various literatures identify several dominant organizational structure types from different perspective. According to traditional organizational type of bureaucratic and other new forms, dominant organizational structure types include functional structure, divisional structure and matrix structure. The descriptions below are summarized and supported by reference to current literature.
Functional structure. It refers to “a set of people who work together and perform the same types of tasks or hold similar positions in an organization” (Ledbetter, 2003, p.13). Organizations that grow too complex to be administered through a simple structure usually adopt the functional structure as a means of coping with the increased demands of differentiation (Hatch, 1997, p.183). As Raymond mentions also “a functional organization is best suited as a producer of standardized goods and services at large volume and low cost. Coordination and specialization of tasks are centralized in a functional structure, which makes producing a limited amount of products or services efficient and predictable. Moreover, efficiencies can further be realized as functional organizations integrate their activities vertically so that products are sold and distributed quickly and at low cost.”
Divisional structure. It refers to “an organizational structure that is divided along some criteria, and most commonly it is geographic location, but there can also be product, functional, or strategic divisions.” (Ledbetter, 2003, p.13)
Matrix structure. It refers to “simultaneously groups people in two ways: by the function of which they are a member and by the product team on which they are currently working.” (Ledbetter, 2003, p.13) According to Hatch’s organization theory, the matrix structure was developed with the intention of providing the best of both the functional and multi-divisional alternatives.
The sad truth is all these structures have their disadvantages parallel to their advantages. If one of the structures did not have any disadvantage, it would be automatically accepted without any need to consider the pros.
Pros and Cons of each structure
Which structure effects efficiency most and works best for an organization can be quite complicated because of the nature of different organizations themselves. Every way of designing an organization has pros and cons. However, this section describes some general advantages and disadvantages of each organizational structure. This will help us to analyze the case study in the next chapter and see whether a company can use its structure as an advantage.
Functional structure. In the functional structure, as it was recently described, the employees are allocated in departments based on their skills and what they do. Common functional departments are purchasing, accounting, manufacturing, sales and marketing, human resources. Each department acts as its own entity and they are focused on activity performance rather than final result. It leads to centralization of specialized personnel, equipment and facilities, and results high development of skills, however, this major benefit can be a major pain for the communication with other departments. In manufacturing companies, for example, weak communication within departments may affect the quality of final product. It also does not allow for flexibility because of the centralization.
Divisional structure. As Rao (2003) mentions, the main benefit this structure provides arise from, appositely from functional structure, from the fact that this type of structure tends to be more result oriented than activity oriented. Each division in this structure contains all the necessary resources and functions within it. The employees of each division know about the specific needs of the division, and are involved actively to achieve the goal. This structure creates an atmosphere of individual commitment and motivation.
Divisional structure has its own disadvantages. As it is decentralized, it results duplication of facilities, equipment, and personnel usually leads to more costly processing. Although the employees are aware of specific needs of the division, they might not know organization’s overall needs. As functional structure divisional structure also may lead to a weak communication between divisions. The lack of cooperation reduces improvement of techniques.
Matrix structure. This type of structure tries to get the benefits of functional structure and of divisional structure, reducing their disadvantages. One of the benefits is resources can be used from all over the organization. Another benefit, as Rainey (2009) underlines, is “â€¦ the advantage of the ability to share or shift personnel or other resources rapidly across product lines”. However, it is not easy to implement this structure because of the dual authority. Having two bosses may sometimes confuse the employees. But this fact can also have a positive impact, as two managers share responsibilities. Matrix structure requires heavy investment in coordination. Because such structure often produce high level of stress and conflict that must be resolved.
It is important to remember that each managerial decision has its pros and cons. When designing an organizational structure management should take necessary actions to decrease the disadvantages of the chosen structure. Nowadays, many companies are based on mix of these structures. Whatever structure is chosen, management has to make sure that it supports organization’s strategy and can be used as competitive advantage.
Case study. Hansa-Flex
As previous chapters suggest, when establishing an organizational structure a company has to make sure the structure supports company’s strategy and fits into its culture. Having done this, a company can create sustainable resource for a competitive advantage.
This chapter describes how Hansa-Flex, supplier of hydraulic hose, applies the theory of organizational structure to its business to achieve a competitive advantage over its rivals.
Hansa-Flex. Company overview
Since it was initiated in 1962 in the garage of the company’s founder Joachim Armerding, Hansa-Flex Hydraulics has been Europe’s leading privately owned supplier of hydraulic hose, couplings, fittings, adapters and hydraulic accessories.
Hansa-Flex offers replacement of spare parts due to customers require even at short notice. This can be done very efficiently as Hansa-Flex holds over 82,000 different parts permanently in its stock. With the expertise of committed workforce and focus on service Hansa-Flex provides fast, qualified help in any situation.
Hansa-Flex equips more than 300,000 customers in various industries with hydraulic and metal hoses and components. Until now, it has more than 350 branch offices in 33 countries worldwide operations, has an annual turnover of 165 million â‚¬ in year 2009 (Hansa-Flex Annual Report 2009).
Furthermore, Hansa-Flex has a customer service fleet of 225 vehicles worldwide, of which 100 are in Germany on the road (Hansa-Flex Annual report 2009). The staff and training service in the fleet take FLEXXPRESS Services throughout the world around the clock repairs and install replacement parts. For instants, defective hydraulic hoses to forklifts and related fittings are replaced in the automobile production. In a word, the motto of Hansa-Flex is ‘thinking globally – acting locally’, which means being positioned in Bremen with a worldwide network of branch offices.
All of these branch offices guarantee great availability of their products throughout of world. For instants, by May 2010, the facility in Geisenfeld keeps about 150 branches in southern Germany (Hydraulikpresse 2010). In October 2010, Hansa-Flex opened their Operation Centre for the Asian market in Shanghai, China. This Operation Centre provides training program in training center and central warehouse as well as manufacturing and administrative space. Therefore, Hansa-Flex is well standing in Asian Market to take advantage of future developments. This is one of the last but not least successes for Hansa-Flex.
Strategy of Hansa-Flex
Hansa-Flex is also very well founded through all over world. Generally, in the process of globalization the competition between the companies is more disastrous. More customer attraction and more market share are the main targets of companies. In other words, the company needs the appropriate strategy for the organizational structure in different environment conditions, especially an international company. Well-designed structure provides effective outcome. This is the reason why Hansa-Flex has developed very fast in its founding in Germany and in Europe.
Hansa-Flex believes that ‘The whole is greater than the sum of its parts’ (Aristotle). It considers that it is more than just the number of its branches; more than the sum of its products and services. To be considered as a whole, Hansa-Flex has to include the totality of the experience and skills of every employee.
Based on this point view Hansa-Flex sets a very important and interesting Strategy for the Company. It has opened the training center for their employees and potential employees early in 2001 when Hansa-Flex merely focused on local.
Besides that, as a glocal  company, Hansa-Flex sees customer proximity as part of its responsibility for ensuring smooth processes in hydraulics. To sustain the proximity the company has chosen strategy of growth through diversification – acquisition, subsidiary, partnership. This strategy makes sure Hansa-Flex is maintaining international growth while at the same time enlarging their product range.
Figure 1. Number of branches
Source. Hansa-Flex Annual Report 2003
According to the researches which are made by the majority of international scholars we find this growth strategy highly appropriate reflexed the following theory. The strategy must be supported by the structure that provides the stability to current competitive advantage as well as flexibility required to develop future advantages (Hitt, et al., 2009).
In briefly, Hansa-Flex has a deeply understanding about how could organizational structure and strategy be related via environmental conditions and how to build proper organizational structure that supports their strategy to grow the market share and enter a new market. Hansa-Flex never stops changing and always thinks forward such as their catchword ‘Think globally – act locally’.
Organizational structure of Hansa-Flex
Interesting point here is how the company controls such a large network of branches. How is the company organized to provide a strong communication between departments, and basically between warehouses to keep customers satisfied? This section answers this question by analyzing organizational structure of Hansa-Flex, and finds out whether or not the company uses it as a competitive advantage in the market.
Obviously, as many other starter companies, Hansa-Flex was founded based on simple structure. Later on, as we see on figure 1, it starts opening branches in different regions of Germany, and so created functional structure. Starting from 1992, Hansa-Flex goes international. Being international and offering products in different countries is always a big deal and requires a lot of research. Nowadays, Hansa-Flex has established a mix of functional and divisional structures and customized it by its strategy and culture. The structured is divisioned by geographic location to push the company toward being bounderless organization. Basically it has centralized functional areas, such as purchasing, quality management, warehousing, human resources, marketing; and decentralized sales and local marketing.
Most significant advantage of centralized purchasing is that it speeds up the purchasing cycle. Thanks to centralized purchasing Hansa-Flex can complete this process very fast, sometimes even within one day. It is because purchasing data is stored and accessible via the internet. The company can access the necessary order information and place an order much more quickly.
It also saves a lot of time on conducting the correlation between supplier and Hansa-Flex. This way the company can easily forecast how it could ‘suffer’ if the supplier goes bankrupt unexpectedly. This is easier to be done, because the company does not need to collect all the purchasing data from different branches.
Another advantage is centralized purchasing makes it easy for everyone who needs to track the information even across multiple branches and corporate divisions. For Hansa-Flex this means insurance of customer proximity, and results on less time waste between branches and subsidiaries on tracking down the data. Thus, centralized warehouse again gives an advantage to Hansa-Flex to satisfy its customers faster than competitors.
Having centralized HR, first of all Hansa-Flex ensures to have most qualified applicants for work. Because centralized HR decision making promotes a more equitable treatment of employees, and is political abuse. Therefore, HR experts review and rank job candidates very carefully and transparent.
Using the advantage of purchasing power centralized marketing continue to create even better brand image among customers. The company also needs a local marketing on destination point. Because local employee knows local market better than foreigners employees. Therefore, central marketing transfer knowledge to local marketing to continue the whole process of marketing.
Following the same logic Hansa-Flex has divisional sale force that is in charge of sales in specific regions. This gives the company flexibility to react and adapt to local environment changes.
Due to the globalization the concept of competitive advantage of a product or service has recently changed. It is not easy to sustain this sort of advantage, because of high competition and growing number of follower companies. Therefore, companies like Hansa-Flex use their organizational structure as a competitive advantage.
As most of economic writers and managers say, there is no one ideal organizational structure. Each structure has its own advantages and disadvantages. It is also true that, due to its mission, organizational culture, and history, two companies in the same market can apply the same one structure, but still get totally different outcome. In our fast changing world, sticking into one classic structure is not enough. Establishing a structure needs a lot of creativity, knowledge, experience, and customization of the structure to the company’s ‘indicators’.
Following this logic Hansa-Flex designed a customized mix structure of functional and divisional structures. It efficiently uses advantages of both structures, reduces disadvantages. Therefore, having structure that supports strategy, Hansa-Flex can easily achieve its goals towards its mission. The model which Hansa-Flex constructs may not be applied in other companies; however, it provides a practical experience concerning the organizational structure, which is considered as the crucial factor for organizational effectiveness.
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