Matching Controls to Strategy and Structure - Principles of Management

Although organizations typically use most of the control methods discussed here, the precise mix of controls tends to vary with the size, strategy, and organization structure of the enterprise. As organizations grow they tend to rely less on personal controls and more another methods. Beyond this generalization, we need to consider how controls vary with the strategy and structure of an enterprise. Here we look at different controls first in single business enterprises and then in multi business enterprises.

CONTROLS IN THE SINGLE BUSINESS

In the last chapter we noted that the organization structure of a single business depends on the strategy it is pursuing and the environment in which it is based. Specifically, firms in stable environments with little product innovation tend to operate with functional structures and use simple integrating mechanisms, such as direct contact and liaison roles, to achieve coordination between functions.

In contrast, firms in dynamic and uncertain environments, such as those characterized by rapid technological change, tend to operate with functional structures and achieve tight coordination with more complex integrating mechanisms such as temporary or permanent cross-functional teams or matrix structures. How might the controls that managers use vary across such enterprises?

Matching Structure and Control to Strategy

Functional Structure with Low Integration Consider first a firm with a functional structure and no integrating mechanisms between functions beyond direct contact and simple liaison roles. The environment facing the firm is stable, so the need for integration is minimal.

Within such a firm, bureaucratic controls in the form of budgets are used to allocate financial resources to each function and to control spending. Output controls assess how well each function is performing. Different functions are assigned different output targets, depending on their specific tasks.

The procurement function might be assigned an output target based on procurement costs as a percentage of sales; the manufacturing function might be given productivity and product quality targets such as output per employee and defects per thousand products; the logistics function might have an inventory turnover target; the marketing and sales function might be given sales growth and market share goals; and the success of the service function might be measured by the time it takes to resolve a customer problem.

To the extent that each function hits these targets, the overall performance of the firm will improve and its profitability will increase. Output controls might also be pushed further down within functions. Thus the manufacturing process might be subdivided into discrete tasks, each of which has a measurable output. Employee teams might be formed and empowered to take ownership of each discrete task. Each team will be assigned an output target.

To the extent that functions can be vided into teams and output controls applied to those teams, this will facilitate decentralization within the organization, wider spans of control ( because it is relatively easy to control team by monitoring its outputs), and a flatter organization structure. Within such a structure, the CEO will control the heads of the functions. They inturn will exercise control over units or teams within their functions.

There may also be some degree of personal control within the structure, with the CEO using personal supervision to influence the behavior of functional heads, who in turn will do the same for their direct reports. Incentives will be tied to output targets. Thus the incentive pay of the head of manufacturing might be linked to the attainment of predetermined productivity and quality targets for the manufacturing function; the incentive pay of the head of logistics might be linked to increases in inventory turnover; and so on.

Incentives might also be pushed further down within the organization, with members of teams within functions being rewarded on the basis of the ability of their teams to reach or exceed targets. A portion of the incentive pay for managers (and perhaps all employees)might also be tied to the overall performance of the enterprise to encourage cooperation and knowledge sharing within the organization.

Finally, such an enterprise can have strong cultural controls, which may reduce the need for personal controls and bureaucratic rules. Individuals might be trusted to behave in the desired manner because they accept the prevailing culture. Thus cultural controls might allow the firm to operate with a flatter organization structure and wider spans of control and generally increase the effectiveness of output controls andincentives.

Matching Structure and Control to Strategy

Functional Structure with High Integration A functional structure with high integration presents managers with a more complex control problem. The problem is particularly severe if the firm adopts a matrix structure. As noted in the last chapter, such a structure might be adopted by a firm based in a dynamic environment where competition centers on product development. Within such an enterprise bureaucratic controls will again be used for financial budgets, and output controls will be applied both to the different functions and to cross-functional product development teams.

Thus a team might be assigned output targets covering development time, production costs of the new product, and the features the product should incorporate. For functional managers, incentive controls might be linked to output targets for their functions, whereas for the members of a product development team, incentives will be tied to teamperformance.

The problem with such an arrangement is that the performance of the product development team depends on support from the various functions, including people and information from manufacturing, marketing, and R&D. Consequently, significant performance ambiguity might complicate the process of using output controls to assess the performance of product development team.

The failure of a product development team to achieve output targets might be due to the poor performance of team members, but it could just as well be due to the failure of functional personnel to support the team. Identifying the cause of performance variations requires senior managers to collect more information (much of it subjective), which increases the time and energy they must devote to the control process, diverts their attention from other issues, and increases the costs of monitoring and controlling the organization.

Other things being equal, this reduces the span of control senior managers can handle, suggesting the need for a taller hierarchy—which as we saw in the last chapter creates additional problems. Performance ambiguity raises the question of whether there is a better solution to the control problem. One step is to make sure the incentives of all key personnel are aligned.

The classic way of doing this is to tie incentives to a higher level of organization performance.Thus, in addition to being rewarded for the performance of their functions, functionalheads might also be rewarded for the overall performance of the firm.

In so far as thesuccess of product development teams increases firm performance, this gives functional heads an incentive to make sure the product development teams receive adequate support.In addition, strong cultural controls can help establish companywide norms and values emphasizing the importance of cooperation between functions and teams for their mutual benefit.

CONTROLS IN DIVERSIFIED FIRMS

In a classic multidivisional structure, each business is placed into its own division with its own functions as a self-contained entity. The role of the head office is to control divisions, determine the overall strategic direction of the enterprise, and allocate capital resources between the different divisions to maximize the economic performance of the enterprise.

We saw three ways in which diversified firms might try to improve the performance of their constituent units: leveraging core competencies across divisions, sharing resources across divisions to realize economies of scope, and superior internal governance.

Controls in the Diversified Firm with Low Integration In firms that focus primarily on boosting performance through superior internal governance, the need for integration between visions is low. These firms are not trying to share resources or leverage core competencies across divisions, so there is no need for complex integrating mechanisms, such as cross divisional teams, to coordinate the activities of different divisions. In these enterprises the head office typically controls the divisions in four main ways.

First, bureaucratic controls regulate the financial budgets and capital spending of the divisions. Typically each division must have its financial budgets approved for the coming year by the head office. In addition, any capital expenditures in excess of a certain amount have to be approved by the head office. Thus, for example, any item of spending by a division in excess of $50,000 might have to be approved by the head office.

Second, the head office will use output controls, assigning each division output targets that are normally based on measurable financial criteria such as the profitability, profit growth, and cash flow of each division. Typically targets for the coming year are set by negotiation between divisional heads and senior managers at the head office. So long as the divisions hit their targets, they are left alone to run their operations.

If performance falls short of targets, however, top managers will normally audit the affairs of a division to discover why this occurred, taking corrective action if necessary by changing strategy or personnel. Third, incentive controls will be used, with the incentives for divisional managers tied to the financial performance of their divisions. Thus to earn pay bonuses, divisional managers will have to achieve or exceed the performance targets previously negotiated between the head office and the divisions.

To make sure divisional managers do not try to “talk down “their performance targets for the year, making it easy for them to earn bonuses, the head office will normally benchmark a product division against its competitors, take a close look at industry conditions, and use this information to establish performance targets that are challenging but attainable. Fourth, the head office will use market controls to allocate capital resources between different divisions.

As noted earlier, in multidivisional enterprises the cash generated by product divisions is normally viewed as belonging to the head office, which functions as an internal investment bank, reallocating cash flows between the competing claims of different divisions based on an assessment of likely future performance.

The competition between divisions for access to capital creates further incentives for divisional managers Torun their operations efficiently and effectively. In addition, as at Matsushita, the head office might use market controls to allocate rights to develop and commercialize new products between divisions.

Within divisions, the control systems used will be those found within single-business enterprises. Head office managers might also use personal controls to influence the behavior of divisional heads. In particular, the CEO might exercise control over divisional heads by meeting with them and probing for richer feedback about operations.

Controls in the Diversified Firm with High Integration The control problem are more complex in diversified firms that are trying not only to improve performance through superior internal governance but also to leverage core competencies across product divisions and realize economies of scope. 3M is an example of such an enterprise. 3M is a diversified enterprise with multiple product divisions.

The company devotes a lot of effort to leveraging core technology across divisions (and as we saw in Chapter , one way in which the company does this is by establishing internal knowledge networks). In addition, the company tries to realize economies of scope, particularly in the areas of marketing, sales, and distribution withal marketing and sales group that sells the products of several 3M divisions.

In this sense 3Mhas an organization structure that is similar in some respects to PDN Inc.More generally, when a multidivisional enterprise tries to improve performance through economies of scope and via the leveraging of core competencies across divisions, the need for integration between divisions is high. In such organizations top managers use the standard repertoire of control mechanisms discussed in the last section. However, they also have to address two control problems that are not found in multidivisional firms with no cooperation and integration between divisions.

First, they have to find a control mechanism that induces divisions to cooperate with each other for mutual gain. Second, they need to handle the performance ambiguities that arise when divisions are tightly coupled, sharing resources and performance results. The solution to both problems is in essence the same as that for single-business firms with high integration between functions.

Specifically, the firm needs to adopt incentive controls for divisional managers that are linked to higher-level performance—in this case the performance of the entire enterprise. Improving the performance of the entire firm requires cooperation between divisions; such incentive controls should facilitate that cooperation. In addition, strong cultural controls can create values and norms that emphasize the importance of cooperation between divisions for mutual gain.

At 3M, for example, there is a long-established cultural norm that while products belong to the divisions, the technology underlying those products belong to the entire company. Thus the surgical tape business might use adhesive technology developed by the office supplies business.

Despite such solutions to control problems, top managers in firms with tightly integrated divisions have to cope with greater performance ambiguities than top managers in less complex multidivisional organizations. Integration between various product divisions means that it is hard for top managers to judge the performance of each division merely by monitoring objective output criteria.

To get a true picture of performance and achieve adequate controls, they probably have to spend more time auditing the operating divisions and talking to divisional managers to get a more qualitative picture of performance. Other things being equal, this might limit the span of control they can effectively handle—and thus the scope of the enterprise.


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