Aligning organization structure to strategy is crucial for strategy execution success. The organization structure needs to support the strategy and its execution. When possible, management must ensure that the organization structure is clear, decentralized and formalized. When the existing structure does not meet these requirements, it is a hindrance to strategy implementation and needs to be changed. An organization structure is a system that arranges the hierarchy in an organization. It refers to the way in which tasks and responsibilities are assigned, coordinated and controlled in an organization. It involves who reports to whom and how information flows between the different levels of management.
DESIGNING A DECENTRALIZED STRUCTURE
A proper alignment between strategy and organization structure is a necessary requirement to successful strategy implementation. Therefore, strategy execution often requires a revised organization structure. My research found that a clear, relatively decentralized and relatively formalized organization structure has a positive influence on implementation performance. A decentralized organization structure results in more effective strategy execution. In a decentralized organization is decision-making authority delegated to lower-levels in the organization. In highly decentralized organizations are organizational members at all hierarchical levels empowered with decision influence. The main advantage of a decentralized structure is that it increases the commitment of organizational members to decision-making, decisions can be made more quickly, and improves the quality of decisions as it makes more use of specialized knowledge of employees at lower levels in the organization.
Decentralization increases quality of decisions. It is a well-established organizational precept that decisions should be taken as close to the action areas as possible. People in organizations with a decentralized structure tend to participate more in decision-making related to the strategy and its execution. This increases the quality of decisions as specialized and operational knowledge of lower-level employees is tapped into to.
Decentralized structures are more tolerant of change. settings are more tolerant of change because organizational members are more aware of the rationales that lie behind the strategy. When organizational members are more involved in strategy development and execution decision-making this increases their understanding of the strategy. This in turn increases their commitment to the strategy. Furthermore, participation increases the speed of decision-making as decisions do not need to be referred up the hierarchy.
increases commitment and performance of employees. Furthermore, delegation gives organizational members a greater scope for action and opportunities to develop their skills and abilities, and increase their commitment to the organization and strategy. Decentralized organization structures help organizational members feel that they are contributing to the operations of the organization, increasing the sense of having impact and motivation of organizational members. This increases the strategy execution performance of organizational members.
CONSEQUENCES OF CENTRALIZED ORGANIZATIONS
When organizations have a high degree of centralization and thus low decision participation, strategy execution prospects fail. Centralized decision-making, one-way top-down communication and lack of input from lower levels of the organization are barriers to strategy formulation and implementation. A high level of centralization has the following eight consequences for strategy implementation.
Employes are not committed to the strategy. centralized organizational structure with rigid organizational policies combined with a perceived lack of control results in passive maladaptive behavior in organizations (Martinko & Garnder, 1982). A result is that people are not committed to their work and organization. When organizational members are not involved in the strategy formation process, they are not likely to be committed to the strategy. A failure to involve organizational members in strategy formulation and implementation is a very common source of implementation failure. Unforeseen circumstances are ignored or slowly acted upon. When implementation tasks are new, complex and contain matters not foreseeable by management, a top-down implementation tactic is problematic. During an implementation effort, unforeseen circumstances may arise, which may require organizational member initiative to deal with the situation. Implementing a strategy with a low level of involvement of organizational members is only effective when the implementation tasks are routine, simple and can be foreseen by management.
Centralization requires micromanagement. When employees only do what they are told and are not allowed to take initiative, management has to specify everything to get things done. This requires a great deal of close supervision from management taking up a lot of time and energy. Such micromanagement also reduces the motivation and thus work performance of employees.
Valuable expert knowledge is not tapped into. Managers and executives are not always knowledgeable about issues at a lower level in the organization. When lower-level organizational members are not involved in the formulation and implementation of a strategy their potentially valuable expertise is not tapped into. Lower-level employees have more knowledge about day-to-day operations activities and are more familiar with the issues at hand. Valuable information is often filtered as it travels up the chain of command. When information finally reaches top management it is often distorted by middle management.
Centralization slows decision-making. When only a few individuals make decisions, too few decisions tend to be made and decision-making tends to take too long. This is because organizational members relay many decisions to someone higher in the organization, which may take considerable time, which may not always be available. Furthermore, as top management tend to have very busy agenda’s many decisions are only taken during periodic board meetings. Often decisions have to wait for such meetings resulting in a loss of valuable time. Current turbulent business environments requires quick decision-making.
Centralization reduces motivation and competence of employees. A highly centralized organization can negatively influence the level of competence, feeling of competence and job motivation of employees. Individuals working in centralized organizations, tend to feel that management does not trust their knowledge, skills and abilities resulting in a sense of incompetence. Centralized control reduces self-determination, which in turn reduces the intrinsic motivation of organizational members. Individuals have a desire for personal control. An authoritarian management style removes control and discretion from employees increasing their sense of powerlessness. When organizational members are not used to making decisions, taking responsibility or initiative, and have little to say about the way in which they perform their work, they will not come to view themselves as competent and independent organizational members, having a negative influence on their level of self-efficacy and job motivation.
Competent organizational members leave the organization. Competent organizational members who want more responsibility may become frustrated and leave the organization, having a negative influence on an implementation effort and the organization as a whole. Once competent and ambitious employees start leaving an organizations is in great trouble. As we discuss later on, the availability of competent employees and especially managers is the most important success factor for successful strategy execution.
Centralization creates a false appearance of compliance. A centralized organization structure can be problematic because employees tend to agree with everything a manager says even if they do not agree. Many organizational members are afraid to say ‘no’ to someone higher up in the hierarchy. This is especially the case in more collectivistic cultures with a high power distance such as in Asia, Africa and the Middle East. Therefore, it is not always clear if subordinates are really going to follow the instruction. In addition, employees will not dare to go in against the imposed implementation but they will not be very motivated or committed either, so the implementation tends to progress slowly.
THE STRATEGY EXECUTION SERIES
This article is based on my PhD research at Rotterdam School of Management, Erasmus University – one of the top business schools in Europe. Research has shown that most strategies fail in the execution phase. The aim of my research was to understand why strategies succeed or fail. This series of articles gives a comprehensive overview of the best practices that contribute to strategy execution success or failure. Collectively, the best practices allow executives and managers to successfully executie their strategy and achieve the goals of their organization.