Achieving Organizational Design Goals

Two Frameworks for Selecting Strategy and Design

To support and accomplish the organization’s strategic intent and keep people focused in the direction determined by organizational mission, vision, and operating goals, managers select specific strategy and design options that can help the organization achieve its purpose and goals within its competitive environment.

In this literature, we examine a couple of practical approaches to selecting strategy and design.

A strategy is a plan for interacting with the competitive environment to achieve organizational goals.

Some managers think of goals and strategies as interchangeable, but for our purposes:

  • Goals define where the organization wants to go, and
  • Strategies define how it will get there.

For example, a goal might be to achieve 15 percent annual sales growth; strategies to reach that goal might include aggressive advertising to attract new customers, motivating salespeople to increase the average size of customer purchases, and acquiring other businesses that produce similar products.

Strategies can include any number of techniques to achieve the goal. The essence of formulating strategies is choosing whether the organization will perform different activities than its competitors or will execute similar activities more efficiently than its competitors do.

Two models for formulating strategies are the Porter model of competitive strategies and the Miles and Snow strategy typology. Each provides a framework for competitive action.

After describing the two models, we discuss how the choice of strategies affects organization design.

A.   Porter’s Competitive Strategies

Michael E. PorterOpens in new window studied a number of business organization more profitable and less vulnerable by adopting either a differentiation strategy or a low-cost leadership strategy.

  • Using a low-cost leadership strategy means managers choose to compete through lower costs,
  • whereas with a differentiation strategy the organization competes through the ability to offer unique or distinctive products and services that can command a premium price.

These two basic strategies are illustrated in Figure X-1. Moreover, each strategy can vary in scope from broad to narrow.

illustration of organizational operational goals Figure X-1 Porter's Competitive Strategies | Credit — SlidePlayer Opens in new window
  1.    Differentiation

With a differentiation strategy the organization attempts to distinguish its products or services in the industry.

Managers may use advertising, distinctive product features, exceptional service, or new technology to achieve a product perceived as unique. This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable.

A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand.

However, managers must remember that successful differentiation strategies require a number of costly activities, such as product research and design and extensive advertising.

Companies that pursue a differentiation strategy need strong marketing abilities and creative employees who are given the time and resources to seek innovationsOpens in new window. One good illustration of a company that benefits from a differentiation strategy is AppleOpens in new window.

AppleOpens in new window has never tried to compete on price and likes being perceived as an “elite” brand. The company has built a loyal customer base by providing innovative, stylish products and creating a prestigious image.

Service firms can use a differentiation strategy as well. Trader Joe’sOpens in new window, started in 1967 as a typical convenience store, was quickly modified by founder Joe CoulombeOpens in new window into a novel business serving unique food and drink, and expanded to 17 stores in southern California.

Today, there are more than 480 Trader Joe’s nationwide, and people are begging for more. But managers are very, very careful about how they expand. TJ’s doesn’t carry any national brands, but instead offers innovative, high quality health-conscious food and beverage products at modest prices.

About 80 percent of products carry TJ’s private label, and the company is secretive about who makes products for them. Many TJ’s stores carry only about 2,500 items, compared to a traditional supermarket that has more than 40,000 and the selection is constantly changing.

What keeps people coming back is the novelty and sense of adventure—you never know what you’re going to find—and the friendly service you might expect at the mom-and-pop shop around the corner. Managers evaluate every decision with an eye to how it fits with the goal of maintaining a neighborhood store feel.

  1.    Low-Cost Leadership

The low-cost leadership strategy tries to increase market share by keeping costs low compared to competitors.

With a low-cost leadership strategy, the organization aggressively seeks efficient facilities, pursues cost reductions, and uses tight controls to produce products or services more efficiently than its competitors.

Low-cost doesn’t necessarily mean low price, but in many cases cost leaders provide goods and services to customers at cheaper prices. For example, Michael O’Leary, CEO of Irish airline Ryanair said of the company’s strategy:

It’s the oldest, simplest formula: Pile ‘em high and sell ‘em cheap. … Nobody will beat us on price. EVER. Michael O’Leary

RyanairOpens in new window can offer low fares because it keeps costs at rock bottom, lower than any other airline in Europe. The company’s watchword is cheap tickets, not customer care or unique services.

  • The low-cost leadership strategy is concerned primarily with stability rather than taking risks or seeking new opportunities for innovation and growth.
  • A low cost leadership position means a company can achieve higher profits than competitors because of its efficiency and lower operating costs.

Cost leaders such as RyanairOpens in new window can undercut competitors’ prices and still earn a reasonable profit. In addition, if substitute products or potential new competitors enter the picture, the low-cost producer is in a better position to prevent loss of market share.

Porter found that companies that did not consciously adopt a low-cost or differentiation strategy achieved below-average profits compared to those that used one of the strategies.

Many Internet companies have failed because managers did not develop competitive strategies that would distinguish them in the marketplace. On the other hand, GoogleOpens in new window became highly successful with a coherent differentiation strategy that distinguished it from other search engines.

Competitive Scope Can Be Broad or Narrow

With either strategy, the scope of competitive action can be either broad or narrow. That is, an organization can choose to compete in many market and customer segments or to focus on a specific market or buyer group.

For example, WalmartOpens in new window uses a low-cost leadership strategy and competes in a broad market, selling to many market segments. A good example of a narrowly focused low-cost leadership strategy is Allegiant AirOpens in new window.

IN PRACTICE — Allegiant Air
“We want to be considered the hometown airline of all the little cities around the country,” Andrew Levy, former president of Allegiant Air, once said. Allegiant flies just 85 jets and specializes in flying people from small, underserved cities such as Minot, North Dakota, and Plattsburg, New York, to warm-weather tourist destinations such as Orlando, Las Vegas, and Honolulu. Although the company has expanded to serve larger cities and other destinations—even announcing flights to Anchorage, Alaska beginning in May 2019—serving small regional airpots remains its focus.

Allegiant’s focused low-cost leadership strategy has made it one of the most profitable airlines in the industry. Managers believe in “attacking niche opportunities.” For example, Allegiant moved in when other airlines left the shrinking cities of the Rust Belt and lures Canadian fliers just across the border to fly out of small U.S. airports. The airline has now set its sights on Mexico, hoping to fly middle-class Mexicans from cities such as Zacatecas or Culiacán to tourist destinations such as Las Vegas in the United States.

Allegiant goes to extremes to meet its goals of low cost. It depends largely on word-of-mouth advertising rather than paying travel agents. It offers a no-frills base fare and charges for nearly everything else, from carry-on luggage to water. Managers also say they “only fly when we can make money,” “On Tuesdays, we look like a bankrupt airline,” the former CEO said, but “who wants to start their vacation on a Tuesday?”

An example of a narrowly focused differentiation strategy is Edward Jones InvestmentsOpens in new window, a St. Louis-based brokerage house. The company concentrates on building its business in rural and small-town America and providing clients with conservative, long-term investment advice.

Management scholar and consultant Peter Drucker once said the distinctive safety-first orientation means Edward Jones delivers a product “that no Wall Street house has ever sold before: peace of mind.”

B.   Miles and Snow’s Strategy Typology

Another strategy typology was developed from the study of business strategies by Raymond Miles and Charles Snow.

The Miles and Snow typology is based on the idea that managers seek to formulate strategies that will be congruent with the external environment.

Organizations strive for a fit among internal organization characteristics, strategy, and the external environment.

The four strategies that can be developed are

  1. the prospector,
  2. the defender,
  3. the analyzer, and
  4. the reactor.
  1.    Prospector

The prospector strategy is to innovate, take risks, seek out new opportunities, and grow.

This strategy is suited to a dynamic, growing environment, where creativity to separate the organization from competitors is more important than efficiency.

NikeOpens in new window, which innovates in both products and internal processes, exemplifies the prospector strategy. For example, the company introduced a new line of shoes based on designs that can be produced using recycled materials and limited amounts of toxic chemical-based glues. Companies such as UberOpens in new window and Facebook also use a prospector strategy.

Another company that uses a prospector strategy is the Cadillac divisionOpens in new window of General MotorsOpens in new window. Since its beginning over a century ago, CadillacOpens in new window has been a leader in technological and design breakthroughs. In the early 1900s, it put a fixed roof on the Model H and became the first company to build a car with a totally enclosed cabin.

The company also invented the electric starter, introduced the industry’s first thermostatically regulated heating, ventilation and air conditioning system, invented magnetic ride control, and was the first to integrate a global positioning satellite (GPS) system.

The managers at Cadillac have over the years continued to encourage people to pursue any technology or refinement that can enhance the brand’s status. “Innovation isn’t just what we do; it’s coded in our DNA,” states the Cadillac website.

  1.    Defender

The defender strategy is almost the opposite of the prospector. Rather than taking risks and seeking out new opportunities, the defender strategy is concerned with stability or even retrenchment. This strategy seeks to hold on to current customers, but it neither innovates nor seeks to grow.

The defender strategy is concerned primarily with internal efficiency and control to produce reliable, high-quality products of steady customers.

This strategy can be successful when the organization exists in a declining industry or a stable environment. Paramount PicturesOpens in new window has been using a defender strategy for several years.

ParamountOpens in new window turns out a steady stream of reliable hits but few blockbusters. Managers shun risk and sometimes turn down potentially high-profile films to keep a lid on costs. This has enabled the company to remain highly profitable while other studios have low returns or actually lose money.

  1.    Analyzer

The analyzer tries to maintain a stable business while innovating on the periphery. It seems to lie midway between the prospector and the defender. Some products will be targeted at stable environments in which an efficiency strategy designed to keep current customers is used. Others will be targeted at new, more dynamic environments, where growth is possible.

The analyzer attempts to balance efficient production for current product or service lines with the creative development of new product lines.

Amazon.comOpens in new window provides an example. The company’s current strategy is to defend its core business of selling books and other physical goods over the Internet, but also to build businesses in multiple other areas, including a digital book service, new book content publishing, music and video streaming, games, and consumer electronics.

AmazonOpens in new window is also exploring a limited brick-and-mortar presence with physical stores as part of its analyzer strategy.

  1.    Reactor

The reactor strategy is not really a strategy at all. Rather, reactors respond to environmental threats and opportunities in an ad hoc fashion.

With a reactor strategy, top management has not defined a long-range plan or given the organization an explicit mission or goal, so the organization takes whatever actions seems to meet immediate needs.

Although the reactor strategy can sometimes be successful, it can also lead to failed companies. Some large, once highly successful companies, such as BlockbusterOpens in new window, have all but disappeared because managers failed to adopt a strategy consistent with consumer trends. In March 2019, there was only one video rental store left for the once ubiquitous video and game rental chain. what remains of the Blockbuster organization is now owned by Dish Network.

The Miles and Snow typology has been widely used, and researchers have tested its validity in a variety of organizations, including hospitals, colleges, banking institutions, industrial products companies, and life insurance firms. In general, researchers have found strong support for the effectiveness of this typology for organization managers in real-world situations.

The ability of managers to devise and maintain a clear competitive strategy is considered one of the defining factors in an organization’s success, but many managers struggle with this crucial responsibility.

C.   How Strategies Affect Organization Design

Choice of strategy affects internal organization characteristics. Organization design characteristics need to support the firm’s competitive approach. For example, a company wanting to grow and invent new products looks and “feels” different from a company that is focused on maintaining market share for long-established products in a stable industry.

Figure X-2 summarizes organization design characteristics associated with the Porteer and Miles and Snow strategies.

summary of organization design characteristics associated with the Porteer and Miles and Snow strategies Figure X-2 Organization Design Outcomes of Strategy | Credit — SlidePlayer Opens in new window

With a low-cost leadership strategy, managers take a primarily mechanistic, efficiency approach to organization design, whereas a differentiation strategy calls for a more organic, learning approach. Recall that mechanistic organizations designed for efficiency have different characteristics from organic organizationsOpens in new window designed for learning.

A low-cost leadership strategy (efficiency) is associated with strong, centralized authority and tight control, standard operating procedures, and emphasis on efficient procurement and distribution systems. Employees generally perform routine tasks under close supervision and control and are not empowered to make decisions or take action on their own.

A differentiation strategy, on the other hand, requires that employees be constantly experimenting and learning. Structure is fluid and flexible, with strong horizontal coordinationOpens in new window. Empowered employees work directly with customers and are rewarded for creativity and risk-taking. The organization values research, creativity, and innovativeness over efficiency and standard procedures.

  • The prospector strategy requires characteristics similar to a differentiation strategy.
  • The defender strategy takes an efficiency approach similar to low-cost leadership.
  • Because the analyzer strategy attempts to balance efficiency for stable product lines with flexibility and learning for new products, it is associated with a mix of characteristics, as listed in Figure X-2.
  • With a reactor strategy, managers have left the organization with no direction and no clear approach to design.

Strategy is one important factor that affects organization designOpens in new window. Ultimately, however, organization design is a result of numerous contingencies. The emphasis given to efficiency and control (mechanistic) versus learning and flexibility (organic) is determined by the contingencies of strategy, environmentOpens in new window, size and life cycle, technology, and organizational cultureOpens in new window.

Remember This
  • Strategies may include any number of techniques to achieve the stated goals. Two models for formulating strategies are Porter’s competitive strategies and Miles and Snow’s strategy typology.
  • Using Porter’s low-cost leadership strategy means managers choose to compete through efficiency and lower costs, whereas with a differentiation strategy the organization competes through the ability to offer unique or distinctive products and services that can command a premium price.
  • Miles and Snow’s typology includes prospector strategy, which is concerned with innovation and growth; defender strategy, which is concerned with stability; analyzer strategy, which balances a stable business with innovation on the periphery; and reactor strategy, in which managers have failed to define a long-range plan and the organization respond to environmental changes in an ad hoc fashion.
  • Organization design should fit the firm’s competitive approach and the various contingency factors to contribute to organizational effectiveness.
    Research data for this work have been adapted from the manual:
  1. Managerial Accounting: Tools for Business Decision Making By Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso