How does Strategy Affect Structure?

An organization’s structure is a means to help management achieve its objectives. Because objectives are derived from the organization’s overall strategy, it is only logical that strategy and structure should be closely linked. For example, if the organization focuses on providing certain services say, police protection in a community – its structure will be one that promotes standardized and efficient services. Similarly, if an organization is attempting to employ a growth strategy by entering into global markets, it will need a structure that is flexible, fluid, and readily adaptable to the environment. Accordingly, organization structure should follow strategy. And if management makes a significant change in its organization’s strategy, then it will need to modify structure to accommodate and support that change.

The first important research on the strategy structure relationship was Alfred Chandler’s study of nearly 100 large US companies. After tracing the development of these organizations over 50 years an compiling extensive case histories of companies such as DuPont, General Motors, Standard Oil of New Jersey and Sears, Chandler concluded that changes in corporate strategy precede and lead to changes in an organization’s structure. Specifically, he found that organizations usually begin with a single product or line. The simplicity of the strategy requires only a simple or loose form of structure to execute. Decisions can be centralized in the hands of a single senior manager, and complexity and formalization will be low. As organizations grow, their strategies become more ambitious and elaborate. Research has generally confirmed the strategy structure relationship using strategy terminology. For instance, organizations pursuing a differentiation strategy must innovate to survive. Unless they can maintain their uniqueness, they may lose their competitive advantage. An organic organization matches best with this strategy because it is flexible and maximizes adaptability. In contrast, a cost leadership strategy seeks stability and efficiency. Stability and efficiency help to produce low cost goods and services. This, then, can best be achieved with a mechanistic organization.

How does Size affect structure?

Considerable historical evidence indicates that an organization’s size significantly affects its structure. For instance, large organizations—those typically employing 2,000 or more people tend to have more work specialization, horizontal and vertical differentiation, and rules and regulations than do small organizations. However, the relationship is not linear, size has less impact as an organization expands. Why? Essentially, once an organization reaches about 2,000 employees, it is already fairly mechanistic. An additional 500 employees will not have much effect. On the other hand, adding 500 employees to an organization that has only 300 members is likely to result in a shift toward a more mechanistic structure.

How does Technology affect structure?

Every organization uses some form of technology to convert its inputs into outputs. To attain its objectives, the organization uses equipment, materials, knowledge and experienced individuals and puts them together into certain types and patterns of activities. For instance, workers at Videocon build washing machines and other home appliances on a standardized assembly line. Employees at car service centers carry out customized service and repair for individual customers. And employees at Ranbaxy work on a continuous flow production line for manufacturing its pharmaceuticals. Each of these organizations represents a different type of technology.

Over the years, several studies regarding the effect of technology have been conducted. In one study, it was found that distinct relationships exist between size of production runs and the structure of the firm. The effectiveness of organizations was related to the fit between technology and structure. Most of these studies have focused on the processes or methods that transform inputs into outputs and how they differ by their degree of routineness. Three categories, representing three distinct technologies showed increasing levels of complexity and sophistication. The first category, Unit production (Production in terms of units or small batches) described the production of items in units or small batches. The second category is mass production (production in terms of large batch manufacturing). Finally the third and most technically complex group, Process production included continuous process production. The process or methods that transform an organization’s inputs into outputs differ by their degree of routineness. In general, the more routine the technology, the more standardized and mechanistic the structure can be. Conversely, organizations with more non-routine technology are more likely to have organic structures.