ORGANIZATION STRATEGY

AND
DESIGN

SESSION 8
 LEARNING OBJECTIVES
1. Understand how organizations develop and use core competencies to create value and
gives it a competitive advantage.

2. Explain how an organization’s distinctive competences can create a successful functional,

business-level and corporate strategy.

3. Appreciate the importance of linking strategy to structure and culture at each level to
increase the ability to create value.

4. Understand how global expansion strategies allow an organization to seek new

opportunities to exploit its core competences to create value for stakeholders.
 CORE COMPETENCY
A harmonized combination of multiple resources and skills that distinguish a
firm in the marketplace.
Core competencies fulfil three criteria:
 Provides potential access to a wide variety of markets.
 Should make a significant contribution to the perceived customer benefits of the end product.
 Difficult to imitate by competitors.

A company’s collective knowledge about how it can coordinate diverse technical and production
skills.

Prahalad, C.K. and Hamel, G. (1990) "The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91.
 SOURCES OF CORE COMPETENCES
A. SPECIALIZED RESOURCES
1. Functional resources: the skills possessed by an organization’s functional personnel

2. Organizational resources: skills of the top-management

Team or possession of valuable and scarce resources;

3. Reputation (Nielsen Corporate Image Monitor 2014- 15 most reputed companies)

High quality and reliable ;consistently showing good financial results ; sharing a clear
company vision with stakeholders ;environment conscious .
 SOURCES OF CORE COMPETENCES

B. COORDINATION ABILITY
An organization’s ability to coordinate its functional and organizational resources to create
maximal value
 Control systems (15 % time to hatch new ideas at 3M)
 Centralization or decentralization of authority (e.g. small teams at Google)
 Development and promotion of shared cultural values
Sharing resources PepsiCo - PepsiCo Americas Foods; Frito-Lay North America ; Quaker
Foods North America ; Sabritas and Gamesa; PepsiCo Americas Beverages
THREE LEVELS OF STRATEGY
FUNCTIONAL-LEVEL STRATEGY
A plan to strengthen an organization’s functional and organizational resources, as well as its
coordination abilities, in order to create core competences.
Perform functional activities at a cost lower (e.g. Hr reducing employee turnover) than that of
its rivals, or
in a way that clearly differentiates its goods and services from those of its rivals. (e.g. hiring
the best in terms of competencies)
The skills and expertise of sales and marketing can contribute directly to a low-cost or
differentiation advantage (Customer service Nordstrom- empowerment -autonomy/ tight
ship- standards)
R&D can reduce costs by developing cheaper ways of making a product.
 FUNCTIONAL-LEVEL STRATEGY
Structure
The strength of a function’s core competence depends not only on the
function’s resources, but on its ability to coordinate the use of its resources
(Contingency theory- each function should develop a structure that suits its
human and technical resources)

Culture: a product of the property rights system, structure, ethics, and

characteristics of its top-management team.
( hire for sharing Terminal values and socialize into instrumental values:
Samsung - hard work and cooperation)
 BUSINESS-LEVEL STRATEGY
A plan to combine functional core competences to position the organization so that it has a competitive
advantage in its domain.
The business-level strategy involves:
Selecting and managing the domain the organization will compete in
Positioning the organization so that it can use its resources and abilities to manage its specific and
general environments to protect and enlarge that domain.

Strategies to lower costs or differentiate products

Low-cost business-level strategy: use of skills in low-cost value creation to produce for a customer
group that wants low-priced goods and services ( bottom of the pyramid )
Differentiation business-level strategy: use of skills to differentiate products for customer groups
that want and can afford differentiated products that command a high or premium price (Low-cost
warrior CavinKare reboots for better profits, Business Standard Nov 18th )
Focus business-level strategy: specialization in one segment of a market, and focusing all of the
organization’s resources on that segment ( Leela Ventures_ luxury hotels)
 BUSINESS LEVEL: STRUCTURE
Factors that affect an organization’s choice of a structure to create a competitive advantage:
1. Low cost: simple org structures mostly functional
2. Differentiators ( wider range of products for different groups of customers) more complex
coordinating mechanisms – product structures.
3. As an organization seeks to find new customer groups for its products, it needs a structure that
allows it to serve the needs of its customers: market or geographic structures
4. As the pace of new product development in an industry increases, an organization will need a
structure that increases coordination among its functions product team or matrix .

Culture:
Organizations pursuing low-cost strategy must develop values of economy and frugality
Differentiators must develop values of innovation, quality, excellence, and uniqueness
 CORPORATE-LEVEL STRATEGY
Involves a search for new domains in which to exploit and
defend the ability to create value from its core competences.
ITC Create multiple drivers of growth by developing a portfolio of world class businesses that best matches
organizational capability with opportunities in domestic and export markets.

Vertical integration: a strategy in which an organization takes over and owns its suppliers (backward
vertical integration e.g. Rolls Royce and sheep farms) or its distributors (forward vertical integration
Reliance Industries oil and gas production, refining, petrochemicals, synthetic garments and retail outlets.)
May be more profitable; lead to production cost savings; differentiate its products; avoid opportunistic
behavior of suppliers; lead to savings in distribution.

Related diversification: the entry into a new domain in which it can exploit one or more of its existing
competences.
Unrelated diversification: the entry into new domains that have nothing in common with its core domain.
 CORPORATE-LEVEL STRATEGY AND
STRUCTURE

For organizations operating in more than one domain, a multidivisional structure is appropriate

Conglomerate structure (unrelated diversification)

a structure in which each business is placed in a self-contained division and there is no contact
between divisions.
The Tata group comprises over 100 operating companies in seven business sectors:
communications and information technology, engineering, materials, services, energy, consumer
products and chemicals.
The group has operations in more than 100 countries across six continents, and its companies
export products and services to 150 countries.
CORPORATE-LEVEL STRATEGY AND
STRUCTURE (CONT.)
Related diversification creates value by sharing resources or transferring skills from one division
to another; requires lateral communication between divisions as well as vertical communication
between divisions and headquarters
Integrating Roles and teams of functional experts are needed to coordinate skills and resource
transfers.
 Corporate employees to coordinate

 R & D coordinates flow of info

 Telecommunication & tel conferencing networks

 Strong corporate culture of cooperation and team work.

Multidivisional structures or matrix allow for the coordination needed.

Cultural values and the common norms, rules, and goals that reflect those values can greatly
facilitate the management of a corporate strategy.
Organizations need to create cultures that reinforce and build on the strategy they pursue.
 STRATEGIC CONTROLS FINANCIAL CONTROLS
Largely SUBJECTIVE criteria intended to verify that the Largely OBJECTIVE criteria used to measure
firm is using appropriate strategies for the conditions in firm’s performance against previously
the external environment and the company’s established quantitative standards
competitive advantages. Are concerned with examining  Focus on short-term financial outcomes
the fit between:  Include accounting-based measures
 What the firm might do (opportunities in its  ROI (return on investment)
external environment)  ROA (return on assets)
 What the firm can do (competitive advantages)
 Include market-based measures
 Evaluate the degree to which the firm focuses on the  EVA (economic value added)
requirements to implement strategy
 Business-level: primary and support activities  Produce risk-averse managerial decisions
 Are essential when a firm pursues a
 Corporate-level (related): sharing of knowledge,
strategy with unrelated diversification
markets, and technologies across businesses
 ORGANIZATIONAL STRUCTURE AND
CONTROLS
• Business - differentiation strategy emphasizes strategic
controls (such as subjective measures of the effectiveness of
STRATEGIC product development teams)
CONTROLS • Corporate - related diversification strategy where sharing
among business units is critical; emphasizes strategic
controls

• Business - cost leadership strategy emphasizes financial

FINANCIAL controls (such as quantitative cost goals)
CONTROLS • Corporate - unrelated diversification strategies where
capabilities are not shared; emphasizes financial controls

Structure’s effectiveness is determined by using both strategic and financial controls.

GLOBAL EXPANSION
&
ORGANIZATION DESIGN
 GLOBAL EXPANSION AND CORE
COMPETENCES
 Transferring core competences abroad
Transfer core competence overseas to produce cheaper or improved product (Hyundai exports 20 lakh cars
in just over a decade from India to 110 countries in 2014)

 Establishing a global network

Establish value-creation activities in countries where economic, political, and cultural conditions are likely
to enhance its low-cost or differentiation advantage ( e.g. Tata Global beverages (Tetley, 2000) gains in
Europe & America )
 Gaining access to global resources and skills
Different countries have different resources and skills that give them a competitive advantage (Dell India,
skills and customers)

 Using global learning to enhance core competences

Global activities provide access to knowledge that will allow an organization to improve its core
competences ( Nissan and Renault S.A. of France, 1999, 4th largest automotive giant; Electric Zero emission
vehicles)
 IMPLEMENTING STRATEGY ACROSS
COUNTRIES
Four Principal Strategies
1. Multi-domestic strategy: oriented toward local responsiveness by decentralizing control to
subsidiaries and divisions in each country.
2. International strategy: decentralization of all value-creation functions except for R&D and
marketing.
3. Global strategy: oriented toward cost reduction, with all the principal value-creation functions
centralized at the lowest-cost global location.
4. Transnational strategy: some functions are centralized, while others are decentralized at the
global location best suited to achieving these objectives to achieve both local responsiveness
and cost savings.
 1. IMPLEMENTING A MULTIDOMESTIC
STRATEGY
Generally operates with a global geographic structure
Authority delegated to each overseas division
Managers at global headquarters use market and output controls
Main aim is maximum local responsiveness
Customize product offering, market strategy including establishing production and R&D facilities
according to national conditions.
Generally unable to realize value from experience curve effects and location economies.
Possess high cost structure due to duplication of value-creation activities in all countries
(GE India – energy , healthcare, aviation, transportation
Matrix to geographic structure –Country Head, ET Nov 18th 2012 )
Decentralization and a willingness to loosen up
2. IMPLEMENTING INTERNATIONAL
STRATEGY
Managers abroad are in the control of the international division managers.

Create value by transferring valuable core competencies to foreign markets that indigenous
competitors lack.
Centralize product development functions at home
Establish manufacturing and marketing functions in local country but head office exercises
tight control over it
Limit customization of product offering and market strategy.
Volkswagen Group
 3. IMPLEMENTING GLOBAL STRATEGY
Manufacturing and other value-chain activities placed at the global location that will allow it to
increase efficiency and quality
Focus is on achieving a low cost strategy by reaping cost reductions that come from experience
curve effects and location economies.
Production, marketing, and R&D concentrated in a few favorable locations.

Market standardized product to keep cost’s low

Effective where strong pressures for cost reductions and low demand for local responsiveness

Healthcare, Consumer Lifestyle and Lighting.

4. IMPLEMENTING TRANSNATIONAL
STRATEGY
Global Matrix Structure

To meet competition firms aim to reduce costs, transfer core competencies while paying
attention to pressures for local responsiveness.
 Global learning
 Valuable skills can develop in any of the firm’s world wide operations
 Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries
 Transnational strategy difficult task due to contradictory demands placed on the organization.
 TWO WAYS OF IMPLEMENTING IT…
Transnational strategy difficult task due to contradictory demands placed on the
organization.

Example: two dimension (Product & Region)

THREE DIMENSIONS (PRODUCT,
FUNCTION & GEOGRAPHY )