USA: +1 415 256 4347 
Sign in
Question
In order instruction attachment. There will be 5 questions and assignment is to answers those.Read the instruction carefully as focus is on – <br /> 1) peer reviewed articles only in last 2-4 years <br /> 2) deep analysis on past research and findings (both theoretical and empirical).<br /> <br /> Attached some other helpful materials/attachments. It is not mandatory to use these references. These are for reference purpose and if you find it helpful, then can be cited.<br /> <br /> Any number of sources can be cited but must be peer-reviewed.
Answer
Name of Student:
Institutional Affiliation:
Contents
Question One: The impact of Strategic Planning on Organizational Performance. 2
Question Two: Considerations for Firms Seeking to Grow by Increasing their International Presence. 7
Question One: The impact of Strategic Planning on Organizational Performance
Academics and managers have for a long time highlighted the importance of strategic management for organizational performance and success. The aim of this literature review is to examine trends in this area of research during the last three years. In this regard, one crucial observation is that the new evidence on the important role of strategic management in organizational performance is still being presented. This evidence is of utmost benefit to researchers who want to understand how strategic management relates to organizational effectiveness. Another crucial area to be highlighted in this literature review is the extent to which strategic planning impacts organizational performance. Lastly, an assessment will be provided on how these findings relate to my professional experience.
Many researchers support the view that strategic planning affects organizational performance in a positive manner (Aldehayyat & Al Khattab, 2013; Pierce & Aguinis, 2013; Mohammadzadeh, Aarabi & Salamzadeh, 2013). There is also widespread support for the crucial role that board of directors and top management play in the strategic planning. A common assumption is that without the support of top management, strategic management efforts may not succeed. In this debate, there is an acknowledgment of the changing environment in which contemporary organizations operate. For this reason, a commonly held opinion is that organizations may derive greater benefits by planning over shorter time horizons, for example, five years, in order to maximize organizational effectiveness under the prevailing business environment (Aldehayyat & Al Khattab, 2013).
The role of internal strategic factors has also been highlighted in literature on strategic planning. In this regard, a requirement is for managers to use various tools of strategy analysis to define organizational culture as well as to construct scenarios for the future. These tools can be of great importance in helping organizations adapt their internal strategic factors to the high-uncertainty environment in which they operate. Again, the crucial role of top management comes into focus because of the need to address the needs of all functional areas within the organization, including technological advancements as well as research and development.
Recent literature on strategic planning and organizational performance also embodies an assessment of various components of the strategic planning process itself. Two of these are financial strategic alignment and marketing strategy (Mohammadzadeh, Aarabi & Salamzadeh, 2013). In this regard, the underlying argument is that there are many functional strategies that together constitute strategic functional-level planning. For organizational performance to increase, there is a need to align these functional strategies with business-level strategies within a company. One area that requires prioritization is the alignment between financial strategy and marketing strategy. In other words, it is wrong for managers to assess decisions relating to a company’s marketing strategy independently of its financial strategy (Mohammadzadeh, Aarabi & Salamzadeh, 2013).
Although most researchers support the view that strategic planning is good for organizational performance, some dissenting views have started to emerge. The dissenters do not deny the importance of strategic planning for organizational performance; rather, they indicate that there is a limit to the level of effectiveness, profitability, growth, and overall success to be achieved within a specific organizational environment (Pierce & Aguinis, 2013; Aldehayyat & Al Khattab, 2013). Aspects of management that are widely accepted as bringing about positive consequences end up leading to negative outcomes. similarly, organizations that operate in highly volatile, high-risk business environments such as tourism face constraints on the time horizons they can target, since long-range planning may not readily lead to desirable outcomes. In such industries, it becomes difficult to draw long-term plans due to the overarching impact of short- and medium-term changes in the business environment.
One way to highlight the limits of strategic planning is to use the “too-much-of-a-good-thing” (TMGT) concept (Pierce & Aguinis, 2013). The idea is that antecedents that most researchers consider desirable such as diversification, empowerment, and a high growth rate end up leading to negative outcomes. The main counterargument to this view is that cases of companies that have collapsed because they grew too much too fast constitute the exception rather than the norm. Nevertheless, there is ample empirical evidence suggesting that these paradoxical organizational outcomes occur with greater regularity than previously thought (Pierce & Aguinis, 2013).
One area of strategic management that has been highlighted in recent research is diversification. Firms pursue strategies of diversification through operational expansion in new industrial activities as well as geographic markets. To do this they enter into mergers as well as partnerships. These efforts have greatly contributed to the success of many multinational corporations, which exploit market power as well as the efficiencies that come with economies of scale. Due to these efficiencies, the overall risk of these organizations is significantly reduced (Capar, Chinta & Sussan, 2015). In fact, many organizations pursue international diversification primarily as a strategy for managing and controlling firm performance risk (Capar, Chinta & Sussan, 2015). By gaining a multinational presence, firms are able to direct more of their resources to the goal of reducing the risk of a decrease in performance. This debate has triggered critical question as to whether the relationship between international diversification and firm performance is linear or curvilinear.
Despite these benefits of diversification, research evidence suggests that there is a certain point beyond which diversification can lead to negative outcomes in terms of firm performance. For example, too much conglomeration can reduce the value of business units in a firm by as much as 13 percent (Pierce & Aguinis, 2013). Similarly, too much diversification into new geographic markets may offset changes in the existing organizational performance (Chen et al., 2014). Thus, the argument being made is that the relationship between diversification and performance is best explained using a curvilinear model (Pierce & Aguinis, 2013). In other words, there are many situations where too much geographical diversification affects firm performance negatively.
A major point that dominates recent literature on diversification is that each firm must define its unique resources in terms of organizational processes, capabilities, and experience. Currently, a lot of emphasis is on aspects of marketing assets, financial strategy, and level of innovation (Capar, Chinta & Sussan, 2015). Rather than focus on geographical expansion alone as a platform for reducing performance risk, firms are encouraged to look closely at firm-level resources such as marketing assets and innovation assets and their role in reducing that risk. In other words, firm resources must always be brought to bear on the relationship between international diversification and organizational performance (Capar, Chinta & Sussan, 2015).
Another aspect of strategic planning that is being highlighted in current literature on strategic management and organizational performance is organizational slack. The term “organizational slack” is used to refer to unallocated resources. It is conventionally viewed as a good thing for organizations since it easily leads to positive outcomes in terms of overall organizational effectiveness and performance. Indeed, researchers, particularly those who use the resource-based theory, have found organizational slack to be positively related to organizational performance (Capar, Chinta & Sussan, 2015). On the contrary, the agency theory has been used to develop an argument indicating that too much slack is bad for organizational performance because it creates a situation where resources are allocated inefficiently. An even more compelling argument is that it encourages managers to engage in value-destroying behavior such as luxurious spending and extravagant living, all of which have a negative impact on firm performance. Thus, one may argue that slack is positively correlated with organizational success up to a certain point, beyond which the correlation with becomes negative.
In my professional experience, there are numerous situations where I found out that strategic planning was positively correlated with firm performance. When I company I work for, which is The Coca Cola Company, for decided to diversity into international markets, it succeed in reducing performance risk. Poor performance in one subsidiary was easily being offset by excellent performance in other subsidiaries. Similarly, our company made tremendous successes through mergers and acquisitions. Not only did sales and overall profitability increase, the company succeeded in enhancing its overall competitive advantages.
These observations may not confirm with the ongoing debate on the curvilinear relationship between strategic planning and organizational performance. However, this does not provide sufficient grounds for me to discredit the validity of the debate. In any case, I have also observed some situations relating to the overuse of organizational slack where strategic planning efforts turning out not as successful in terms of firm performance as Coca Cola’s top management had expected. I think that in such situations, our company had erred by using unallocated resources inefficiently. I observed that whenever managers thought that the company had too many idle resources at its disposal, they started to use those resources in self-serving activities that do not contribute in any way to overall organizational performance.
Question Two: Considerations for Firms Seeking to Grow by Increasing their International Presence
There are three major issues that have been widely discussed in literature on efforts by firms to increase their international presence, and they include cultural context, institutional context, and transaction costs (Shaver, 2013; Brouthers, 2013). The first issue, cultural context, is a major issue because cultural boundaries tend to trigger communication difficulties, time-consuming processes of problem solving, reduced opportunities for the sharing of knowledge, and unsuccessful negotiations. Moreover, a lot of debate has been on how national culture influences organizational culture (Shaver, 2013; Brouthers, 2013; Holtbrügge & Baron, 2013; Clarke, Tamaschke & Liesch, 2013; Lu et al., 2014; Larimo & Arslan, 2013). The implication is that companies from culturally distant backgrounds encounter serious challenges in the efforts to form a merger, acquisition, or strategic partnership due to cultural incompatibility. In other words, the greater the cultural distance between firms, the more difficult it becomes for them to engage in knowledge exchange.
Recent literature indicates that significant cultural differences are a major source of antagonisms and tensions within top management as well as among members of an organization. This creates a hostile environment during efforts by companies to expand their operations abroad. The resulting hostile environment tends to have a negative effect on communication and transfer of information at different levels within the organization.
International business research continues to make major inroads in terms of explaining how cultural distance influences the success of efforts by firms to increase their international presence. In most cases, comparisons are made between the national culture of the home country and that of the foreign country. Although a lot of criticism of the idea of “dimensions of national culture”, has been presented, international business researchers are yet to come up with an alternative, reliable theoretical framework for measuring cultural distance. Meanwhile, one observation that has been made in recent research is that in situations where there is a large cultural distance between the home country and the destination country of the business expansion, most firms prefer to adopt a greenfield investment strategy instead of an acquisition strategy (Holtbrügge & Baron, 2013). The most plausible explanation for this phenomenon is that in culturally-distant situations, firms expect a greater level of incompatibility to exist between the firm that is expanding its operations and the one that being acquired.
One suggested way of dealing with cultural bottlenecks is by ensuring that top management teams are internationally oriented (Hoskisson et al., 2013). This view is based on the assumption that internationally oriented teams can achieve greater excellence in coping with various cultural contexts compared to domestically oriented teams. Moreover, international orientation enables top management teams to make strategic decisions that can easily lead to superior firm performance. Recent research has established a link between international experience and firm international involvement (Clarke, Tamaschke & Liesch, 2013). However, not much has been done to highlight the potential value of cultural heterogeneity in terms of the nationalities and cultural orientations of top management teams. One may argue that promoting such heterogeneity can also go a long way in helping to reduce cultural barriers for firms that want to expand their operations abroad.
The second consideration is institutional context, which has been identified as a major consideration for firms that want to expand abroad (Lu et al., 2014). Before firms expand their operations in a host country, they tend to carry out an in-depth assessment of host-country institutions. In situations where those institutions are not well-established, the firms may be reluctant to move ahead with the expansion strategy. Similarly, government support has been identified in recent literature as a major source of motivation for firms to increase their international presence through strategic investments (Lu et al., 2014). For example, the support of numerous foreign direct investment initiatives by the Chinese government has greatly contributed to an increase in the number of Chinese firms entering the international market (Lu et al., 2014). Thus, it seems that support by home-country government, coupled with a well-established institutional framework in a host country, can enhance the organizational capabilities of firms to take the risks that are normally associated with foreign direct investment.
The current discussion on institutional context is unfolding in the context of institutional theory. One aspect of this discussion focuses on the efforts being made by firms from emerging economies to enter other emerging economies as well as the markets of developed economies. Regarding the first instance, the expectation is for firms to take advantage of similar institutional characteristics in both home and host countries to exploit various assets. A major advantage for firms operating under such circumstances is that their transaction costs tend to be lower than those of firms from developed economies.
A different area of focus in recent literature on institutional factors is how institutional differences affect firms’ understanding of rules and how this in turn influences how they choose to enter the new market (Hoskisson et al., 2013). Institutional theory posits that today’s companies are making their strategic choices on the basis of interaction between the organization itself and institutions. Each company endeavors to gain institutional legitimacy by ensuring that it is seen to be obeying the rules and regulations of the host country. During my experience as a Coca Cola employee, I have noted numerous situations where the company publishes voluminous documents outlining its ongoing efforts to promote ethical conduct, sustainability, employee welfare, equal-opportunity employment, and corporate social responsibility. These publications constitute an attempt to gain institutional legitimacy in the host country.
Among the most widely discussed institutional factors is political risk in the host country. Political risk constitutes one of the elements of the external environment that affects the operations of a company. For example, a government may decide to nationalize an investment. Similarly, a firm’s operations may be affected by drastic changes in the socio-political situation in the host country. Research evidence suggests that political risk tends to be higher in entry modes that involve full ownership or greenfield investment strategy (Lu et al., 2014). This may explain why, faced with circumstances of political uncertainty and instability, many foreign firms are unwilling to commit massive resources through foreign direct investments. Another viable solution to this problem is for firms to seek flexible solutions in times of heightened political risk that allow them to modify their decisions in response to changes in environment conditions, including a decision to exit the country without incurring huge losses (Larimo & Arslan, 2013). Coca Cola has had to pull out of several countries to avoid incurring huge losses due to deterioration of socio-political conditions and the accompanying increase in political risk.
The third consideration is transaction costs. A number of factors lead to an increase in transaction costs of expanding to a new country, one of them being cultural differences at both national and organizational levels (Brouthers, 2013). One example is that of firms from developed economies incurring huge transaction costs in their efforts to expand their operations into emerging economies. Research suggests that to reduce these costs, firms are increasingly resorting to hierarchical modes of entry, for example wholly-owned subsidiaries (Matarazzo & Resciniti, 2014). Another commonly used strategy for reducing the growing transaction costs associated with inexperience about local national culture is to employ top management teams are internationally oriented, preferably those with in-depth knowledge of local culture.
Question Three: Analysis of Marketing, Entrepreneurial, and Customer Orientations and Their Influence on Organizational Performance
There are various elements of the internal environment that crucial to the achievement of a competitive advantage. These orientations are being discussed in corporate culture in both academic literature and the popular process. This literature review examines three major orientations (marketing, entrepreneurial, and customer) and the extent to which they influence organizational performance. In marketing orientation, a business starts with targeting specific customers, finding out what they need, and then producing it for them. This business model also involves monitoring the actions of competitors and their influence on customer preferences. To succeed in the use of marketing orientation, companies are increasingly mobilizing firm’s resources in the pursuit of common goals.
Recent literature indicates that marketing orientation has a profound influence on organizational performance, although this influence is contingent upon two major moderating factors, which include service quality and internal marketing (Keelson, 2014). These factors are important given that marketing orientation entails the delivery of products that have been designed in accordance with the needs, desires, and preferences of customers. Service quality has been found to have a mediating effect on the relationship between marketing orientation and the performance of a company. Companies that are able to provide the best service quality tend to gain some competitive advantage. On the other hand, good practices relating to marketing orientation also contribute to improvement in service quality, meaning that the mediating relationship is bidirectional. For example, when market orientation is service-driven, it tends to be positively correlated with service quality.
Nevertheless, a lot of emphasis in research is on the role of service quality as a great differentiator as far as marketing orientation is concerned (Al-Hawary et al., 2013; Shehu & Mahmood, 2014). In this regard, it plays a critical role in promoting competitive advantage, and by extension organizational performance. This point of view continues to be promoted based on the argument that service quality involves comparing the expectations of consumers with actual performance. Current literature promotes the view that to measure service quality, both internal and external approaches, which involve measuring the internal process and the quality of products respectively, can be used.
Since a major determinant of performance is customer satisfaction, companies are being compelled to focus a lot on improving the quality of products (Shehu & Mahmood, 2014). At the same time, a measure of the internal process is also crucial since it acts as the main source of preliminary feedback on the process of quality improvement in a company. Moreover, measuring the internal process gives managers and employees a platform on which to compare their perceptions of quality with the actual progress being made in individual work units. In terms of current research trends, improvements in the understanding of the construct of service are being sought, particularly in terms of its role as one of the mediating factors for both marketing orientation and organizational performance. The most significant finding in these research efforts is that marketing orientation can better enhance organizational performance in situations where the organization has succeeded in providing better service quality.
Internal marketing, on the other hand, is based on the view that employees are internal customers, meaning that the jobs that are available in the organization are essentially internal products designed to satisfy employee needs while at the same time addressing organizational objectives (Boukis et al., 2015). How exactly internal marketing mediates the relationship between the two constructs (marketing orientation and firm performance) continues to be a subject of debate today (Boukis et al., 2015). Meanwhile, most people may agree that internal marketing, if properly undertaken, can have a positive impact on employees, organizations, as well as external customer satisfaction. Moreover, the internal marketing can help companies overcome resistance to change and alignment with new ideas among employees, thereby enhancing performance within cross-functional units. Moreover, the approach enables organizations to integrate and coordinate its employees towards the implementation of various corporate strategies with a view to improve customer satisfaction. Thus, by removing functional barriers to effective implementation of functional and corporate strategies, internal marketing contributes positively to organizational effectiveness and performance.
The second type of orientation is entrepreneurial orientation. In this case, organizations adopt a multi-dimensional approach encompassing risk-taking, innovation and competitive aggressiveness (Rodríguez-Gutiérrez, Moreno & Tejada, 2015; Rtanam, 2015). Research indicates that although entrepreneurial orientation is positively correlated with organizational performance, the most appropriate organizational outcomes can only be realized if various dimensions of entrepreneurial orientation are applied properly. For example, organizations may seek to enrich specific dimensions such as competitive aggressiveness and innovation in order to achieve the intended outcomes. Meanwhile, indications are innovation ranks highly among the various dimensions of entrepreneurial orientation in terms of contribution to overall organizational performance (Rtanam, 2015).
Other factors have a significant influence on business performance within the realm of entrepreneurial orientation include entrepreneurial characteristics, managerial attributes, and firm features (Rodríguez-Gutiérrez, Moreno & Tejada, 2015). One may also single out the crucial role social and macroeconomic factors in influencing entrepreneurial orientation, and by extension, the performance of the organization at both national and international levels. Meanwhile, a lot of focus is being directed towards entrepreneurial orientation in SMEs (small- and medium-sized enterprises). In this regard, the tendency is to identify various key success associated with the remarkable contribution of these enterprises to the performance of entire economies. In this area, it seems that further research is required to provide clarification on specific variables that explain the continued survival and success of SMEs in economic atmospheres that are dominated by large, powerful multinational corporations.
One dominant viewpoint in current literature is that e-commerce plays an important mediating role between entrepreneurial orientation and the success of SMEs. This viewpoint is mostly being promoted through the resource-based view of the organization. This growing preoccupation with the concept at a time when scholars are yet to agree on success factors is an indication that entrepreneurial orientation is an essential element in the SME sector. There are other ways in which the importance of EO for SMEs manifests itself. First, research has shown that EO influences organizational performance positively through the avoidance of failure and maintenance of survival (Al-Hawary et al., 2013). Secondly, organizational performance is the primary dependent variable that researchers have used to explore the effects of entrepreneurial orientation (Al-Hawary et al., 2013).. Third, contemporary theorizing has suggested that companies whose organizational behavior depicts entrepreneurial orientation are highly likely to lead to improvement in firm performance.
Nevertheless, some degree of inconsistency has also been observed, particularly through findings showing that EO has positive impact, negative impact, or no impact at all on organizational performance (Jebna & Baharudin, 2015). Fourth, consistent with findings on innovation, technology adoption has been identified as one of the major determinants of organizational performance within companies adopting entrepreneurial orientation. However, further research in this area is required since most previous studies have focused too much on technology adoption in advanced countries while failing to highlight the experiences of emerging economies where SMEs play a more critical role in the overall performance of the national economies (Herath & Mahmood, 2014).
Another major finding is that a gap between demands and requirements exists as far as the adoption of entrepreneurial orientation in contemporary organizations is concerned (Herath & Mahmood, 2014). For this reason, a lot of pressure is being heaped on managers to utilizing existing resources more efficiently with a view to seize more potential markets. This objective can possibly be achieve easily through careful selection of specific management tools that render support to entrepreneurial orientation. The potential for success in this regard is underscored by the view that competition for certain attributes of the entrepreneurial orientation such as innovation is not very high, meaning that managers can still use it to capture high outcomes in terms of profitability and long-term success (Jebna & Baharudin, 2015).
Moreover, the relationship between entrepreneurial orientation and performance may not just be looked at from the perspective of organizational internal factors such as risk-taking, innovation and competitive aggressiveness, but also from the view of external factors (Herath & Mahmood, 2014). Managerial control is crucial at this point because managers are responsible for handling aspects of both the external and internal environment. In light of this observation, other crucial factors to be considered for success in entrepreneurial orientation to be achieved include investment in training, engagement with network and communication capabilities, and adoption of new management tactics. Companies also need to embrace new ideas relating to flexibility of intern control systems as well as the management of the supply chain and value chain (Rodríguez-Gutiérrez, Moreno & Tejada, 2015).
The third type of orientation is customer orientation, which is characterized by efforts by employees and management to align their individual, group, and team objectives around efforts to satisfy and retain customers. For this reason, they must focus on and help in addressing the long-term needs of customers. Recent scholarly debate has focused on the various efforts that organizations should undertake to promote customer orientation and by extension improve overall firm performance (Jebna & Baharudin, 2015). Some of the widely suggested activities include strong training for front-office workforce, quick resolution of product defects, customer service enhancement, and workforce empowerment (Jebna & Baharudin, 2015). As far as the customer orientation is concerned, overall organizational success depends on a company’s ability to focus on the ever-changing needs and wants of customers and even to try and anticipate them in future.
One crucial observation that has been made in recent research is that varying degrees of customer orientation can be discerned in the way organizations operate (Maurya, et al., 2015). Another observation is that a major condition under which customer orientation can bring about superior organizational performance is the ability by employees and managers to understand the entire value chain of the buyer, not just in its present state, but also in terms of how it may change over time (Haghshena, Mohammad & Ahmadi, 2015). The best thing about buyer value is that it can be cared at different points within the value chain. On the downside, global competition is increasingly being viewed as a major source of increased market turbulence. More than ever before, customers and competitors possess a more diverse and richer body of knowledge about products. Under these conditions, companies are under greater pressure to offer more support to their customer service and sales staff to enable them to address more of their clients’ needs with a view to enhance satisfaction levels.
The idea of market intelligence has also been identified as one of the elements of customer orientation that must be present for organizational performance to be improved (Haghshena, Mohammad & Ahmadi, 2015). Embracing the values of market intelligence essentially means promoting an organizational culture that places the customer at the focal point of all strategic planning as well as execution efforts. Ideally, this concept needs to pervade the entire company for employees to exhibit customer-oriented behavior consistently. Such an approach also creates a situation whereby consumers become accustomed to the organization’s customer service philosophy (Maurya, et al., 2015). With these requirements firmly in place, the ability by a firm to introduce new, customer-focused products with regularity in a manner that contributes to overall organizational performance and success should not be a mirage.
From my experience as a Coca Cola employees, I have encountered numerous situations whereby marketing, entrepreneurial, and customer orientations were at play in contributing to organizational performance. I have specifically observed numerous situations where the company’s managers would go out of their way to oversee extensive market research projects aimed at assessing the needs, wants, and preferences of various customer segments. This is an excellent case of marketing orientation at work. Similarly, the company has continued to adopt an aggressive, innovative, risk-taking, and forward-looking approach to foreign direct investments as well as its domestic investments within the United States. This business approach is a demonstration of the entrepreneurial orientation. Moreover, customer orientation is evident at Coca Cola, whereby employees and managers are united by the common objective of customer satisfaction by addressing their current needs, wants, and preferences as well as anticipating possible future changes in those needs, wants, and preferences. In my view all the three orientations have contributed to organizational performance at my workplace in one way or the other. However, I think customer orientation has made the greatest contribution to the company’s performance and success. Marketing orientation has also been a vital factor in Coca Cola’s dominance of the global beverages market, though its contribution has been slightly less significant than that of customer orientation. Lastly, entrepreneurial orientation, in my view, has not contributed greatly to organizational performance at the company.
Question Four: Explaining Four Corporate-Level Growth Strategies: Vertical, Horizontal, Concentric (Related), and Conglomerate (Diversified)
Vertical growth strategy involves efforts by a company to control its inputs and output by integrating with suppliers and distributors respectively. The objective of this corporate-level strategy is normally to address inefficient operations as well as reduce costs relating to resource acquisition. It is considered a crucial growth strategy because it enables a company to expand its operations beyond its primary business. The vertical growth strategy may involve backward or forward movement. In the backward strategy, a firm acquires firms whose business is to supply the products that are needed in the production process. In the forward strategy, a firm seeks to begin distributing its own products instead of leaving this task in the hands of other firms.
As to whether this strategy hurts or helps performance, mixed empirical results have been generated (Carvalho & Marques, 2013). Meanwhile, vertical integration has several benefits, which include reduced purchasing costs and selling costs, protected proprietary technology, and improvement in the coordination of a firm’s functions and capabilities. The strategy adds value to the firm through production cost savings, better quality control, and avoidance of huge market costs. On the other hand, the strategy has its costs too. One of costs emanates from reduced flexibility since firms are locked into specific products and technologies. This means that the firm gets exposure to cost disadvantages, demand uncertainty, and the vagaries of technological change. Another disadvantage is that it creates an exit barrier because it generates many assets that cannot easily be sold. Other costs include the financial costs of start-up acquisition and difficulties in the integration of operations.
Horizontal growth strategies, on the other hand, require firms to expand their operations by partnering with competitors that operate within the same industry and do the same things. In this growth strategy, a firm acquires one or more firms that are similar and that operate at the same level in terms of the production chain. It is a crucial corporate-level growth strategy for any firm as long as it creates opportunities for the firm to meet all its long-term growth objectives. Moreover, its usefulness can be enhanced by strategically managing it with a view to attain competitive advantage while at the same satisfying all existing legal and regulatory requirements.
The strategy has several advantages, which include elimination of competitors, access to new markets, economies of scale, efficiency in the use of capital, and risk reduction. The strategy reduces risk because a firm is able to merge only with those competitors with proven abilities in terms of organizational performance. However, there may be a downside to this approach because it creates a situation where a company becomes increasingly committed to only one business line.
Concentric (related) diversification is another common corporate-level growth strategy. Under this strategy, a firm departs from its existing line of operation by acquiring separate businesses whose synergetic possibilities counterbalance the strengths and weaknesses of both businesses. Synergies happen simply because the interrelatedness of various operations of the new and existing firms lead to distinctive competencies as well as shared resources and capabilities. For this strategy to succeed, a firm should expand into businesses whose activities lie within its area of specialization in terms of products and services offered, distribution challenges, experience in technology, and customer base. This corporate-level growth strategy differs from horizontal integration in the sense that the latter targets competitors.
Moreover, concentric diversification builds shareholder value due to the establishment of the so-called “strategic fits” within the cross-business realm. Consequently, skills and capabilities are transferred from one business to the other, facilities and resources are shared to reduce operational costs, the newly formed business outfit leverages on the use of a common brand name, and resources are combined to build new competitive strengths. Under these circumstances, a firm can easily achieve rapid growth through economies of scale and expansion into new service offerings. The main disadvantage of concentric diversification is that it leads to complexity in the coordination of businesses that are completely different but somewhat related.
In conglomerate diversification, a firm adopts a growth strategy that requires taking up of activities that are not related to the existing businesses. Thus, the new venture differs from the original business entity in terms of customer functions, customer groups, supply chain, and alternative technologies. An example of a conglomerate diversification is when a hotel company diversifies into a cigarette company. In other words, growth pattern is anchored on the most promising business opportunity out there, and managers put little attention on synergies between products and markets as far as the operations of the businesses is concerned. This approach is often preferred because it leads to balance in portfolio. It can also play a critical role in enhancing access to capital for the firm. There are three major types of conglomerates: pure, product, and geographical conglomerates.
Recent literature suggests that vertical integration is most appropriate in situations where intangible inputs need to be transferred at the intra-firm level (Carvalho & Marques, 2013; Hauton & Héam, 2015). In other words, it seems that many companies that enter into vertical integration are not preoccupied with facilitating the movement of physical goods along the firm’s production chain as is the common presumption. Similarly, the shares of output that are being shipped by upstream units to their downstream establishments are surprisingly low. This is an indication that a lot of emphasis is being put on the intra-firm transfer of a firm’s intangible inputs as part of efforts to promote business growth. Another crucial observation is that when firms are spatially agglomerated within the same industry, fewer cases of vertical integration are reported (Carvalho & Marques, 2013). This is because geographical concentration leads to inter-firm synergies throughout the production process, thereby making vertical integration unnecessary. An example of a company that has succeeded in vertical integration is Shell Oil. The company owns the entire supply chain in which it operates, including oil wells, oil refineries, and gasoline service stations.
Regarding horizontal integration, research evidence suggests that the strategy is most appropriate for firms that are ready to enter into strategic alliances with their competitors in order to achieve compatible goals (Hauton & Héam, 2015). As long as these compatible goals exist, companies are less interested in the length of their business relationship and more with how the relationship will be managed. Moreover, focus is on either collaborative or cooperative strategic alliances, with the difference being the duration of the relationship. The former tends to be of short-term nature while the latter is of long-term nature. However, in both cases, focus is on long-term outcomes since this is the core objective of formulating strategy anyway. Horizontal integration is most appropriate for firms which for some reason are concerned about their respective prospects in terms of value, long-term survival, and growth. This calls for a proclamation of purpose and values for the firms involved. Such a move creates a phenomenon where the internal groups of both firms can work together to achieve a common end. An example of horizontal integration is the move by AT$T, a telecommunications company, to acquire another telecommunications company called T Mobile.
Horizontal integration is also evident in the shipping industry. Many competing maritime companies, logistics providers, inland carriers, and terminal operators are resorting to this growth strategy to achieve compatible goals. The same case applies to the rail markets, where rail companies that offer parallel routes are merging to enhance productivity, efficiency, and market penetration (Satta, 2013). The same case applies to the shipping industry, where logistics companies and shipping lines are responding to the needs of large shippers who demand more global services by entering into horizontal mergers involving both route sharing and route extension.
The shift towards horizontal integration also fits in with the natural trend of growth of hierarchies as part of business expansion. As an organization begins to sprawl, the need for more active leadership becomes inevitable, and so does the pressure from stakeholders for that leadership to look for opportunities through which to dominate the market. One way in which attentive managers seek to dominate the market is through horizontal integration. In other words, managerial roles act as integrators by encouraging collaborative behavior. Horizontal integration requires a higher level of engagement with people within an organization, hence the need for active, attentive, focused, and effective leadership. Organizations that lean towards horizontal integration must be led by people who are ready to learn through failure. Unfortunately, most companies are not willing to go through new, high-risk experiences such as horizontal acquisitions. They associate such moves with fuzziness, ambiguity, fragmentation, and sheer disorders. Moreover, horizontal acquisitions require a high degree of internal efficiency, which many companies are yet to master. The few firms that choose this path increase their chances of delivering memorable brand experiences.
In contrast, concentric diversification is often preferred in situations where a firm is facing challenges relating to inefficient production process, high cost of production, and stiff competition from firms that use low-cost production methods (Wilfred Bernard & George, 2014). Such firms resort to concentric diversification to reduce and spread risk by avoiding reliance on a single product line. For example, Coca Cola acquired several companies, including Vitamin Water, Fuze Beverage, and Honest Tea in its concentric diversification move aimed at expanding its brand power and avoiding over-reliance on only the soft drinks industry. Similarly, a trend towards diminishing market opportunities tends to be counterbalanced by growing opportunities to penetrate the market with the new product. In concentric diversification, a closely related business must be selected. For instance, a firm may venture into the business of generating power and supply water in order to cut down on its own production costs.
Recent literature on conglomerate diversification indicates that the diversification strategy is becoming increasingly popular in banking, insurance, and healthcare industries. Banks and other financial institutions are resorting to conglomerate diversification in order to reduce exposure to sovereign risk (Hauton & Héam, 2015) while healthcare providers and insurers prefer this diversification method because it contributes positively to their financial performance (Chang, 2013). An example of a company that has growth through conglomerate diversification is Samsung, which achieved success in television manufacturing before diversifying to a new product portfolios: smartphones and tablet computers.
Question Five: Explaining Alfred Chandler’s Dictum: ‘Structure Follows Strategy’ and the Impact of Corporate Structure on Organizational Performance
The idea that “structure follows strategy” was developed by Alfred Chandler, a renowned management historian (Rowlinson, Hassard & Decker, 2014). By this statement, Chandler meant to say that all components of a firm’s structure should be made while putting into consideration the strategic intent of the organization. Chandler argued that strategy draws up markets and arenas in which a firm will compete, and should thus be the most important factor in the creation of departments and divisions as well as the designation of all reporting relationships within the company. Alfred Chandler even gave numerous examples of how structure follows strategy, such as the case of General Motors. General Motors achieved tremendous success due to its strategy of reaching out to different customer segments. The company actualized this strategy by setting up a corporate structure made up of different divisions, including Chevrolet, Cadillac, and Pontiac.
Chandler also argued that the need for organizations to undergo restructuring arises from a strategic shift that is driven by changes in the market or advent of new technologies. In essence, Chandler used the term “structure follows strategy” to mean that managers should always build organizational structures in a way that optimizes the pursuit of their companies’ strategic objectives. Some of the elements of organizational design that should be informed by strategy include recruitment, employee development practices, reward and recognition structures, decision-making systems. All these should be aligned around a well-defined organizational structure. By extension, the structure that a company chooses should enable it to achieve its stated strategic objectives.
From his analysis of past management practices of major corporations, Chandler was able to highlight four main examples of how structure follows strategy. First, he noted that he needed to understand the administrative history of corporations in order to succeed in his analysis of the establishment of new administrative structures by those corporations. Second, Chandler observed that there manner in which firms expanded was being influenced by the structural changes that they instituted. Third, growth patterns that were recorded by firms reflected changes that were unfolding within the economy. Fourth, the state of the art in administrative science had a significant influence on corporate reorganizations. All these observations served to support Albert Chandler’s view that structure follows strategy.
To explain his dictum “structure follows strategy” Albert Chandler argued that complex structures tend to emerge whenever several basic strategies are converged while particular structures emerge when firms expand their operations either through geographical distribution or expansion of volume (Rowlinson, Hassard & Decker, 2014). Based on this argument, Chandler encouraged researchers to examine the theoretical question of why a delay tends to exist in efforts aimed at ensuring that new organizations are capable of meeting new strategies. He pointed out that strategic growth occurs once firms become aware of new opportunities created by change and promptly employ existing resources more profitably. This response gives birth to a new strategy, which in turn necessitates a new structure. Companies that fail to reorient their structures end up becoming inefficient in their execution of the new strategy.
Chandler also used this same line of thought to explain the various changes that major U.S. corporations underwent during their progress towards prosperity and success. To begin with, these firms started pursuing accumulation of resources and initial expansion. With time, they shifted their attention to the task of rationalizing the use of their resources. Later on, they expanded into new markets and product lines. This was followed by the creation of new structures to facilitate efficient mobilization of resources in order to adapt to market changes and the emergence of new technologies.
In literature, findings indicate that organizational structure can influence organizational efficiency positively or negatively depending on the prevailing environmental factors that define the operating environment of the organization (Hilman & Siam, 2014; Emmanuel, 2014). As a corollary to this, one important view that can be derived from the current discourse is that organizational structure can have a positive impact on organizational performance through the mediating effect of strategy communication. Another important view is that in some cases, organizational structure can be a barrier to the implementation of a strategy, thereby impacting negatively on performance. There must be a link between different organizational systems and people within an organization, and this significantly affects the effectiveness with which a strategy is executed (Emmanuel, 2014).
Moreover, structure influences both the formulation and execution of strategy. There is a dearth of literature on execution of strategy in relation to the role of structure. Today, most of research focus is on the link between structure and strategy execution (Hilman & Siam, 2014). In determining the effects of structure, attention is mostly on how specific dimensions such as formalization and decentralization influence performance. Moreover, a lot of emphasis is on the need to align structure with strategy in order to achieve optimal organizational performance. The expectation is that firms that fail to realign end up experience poor performance, thereby falling into competitive disadvantage.
When the structure is aligned to strategy, people within the organization tend to understand the strategy direction being taken by the company. They also understand their roles and responsibilities and how they contribute to strategy. Moreover, a sense of clarity in the responsibility for decision-making tends to prevail as far as different issues affecting the operations of the organization are concerned. Other characteristics of a properly aligned structure include clear lines of accountability, shared responsibility for outcomes, and unrestricted flow of information to everyone who relies on it for decision-making.
Another important observation in current literature is that the extent to which organizational structure affects performance may vary from one sector to the other (Hauton & Héam, 2015). Nevertheless, further research in this area is required because it is yet to be widely explored. Towards this end, the question should not be about whether good structures lead to improved performance, but rather the significance of the resulting changes in performance. This observation is crucial since it may be wrong to rule out situations where firms can succeed in realigning their strategies to adapt to market and technological changes without altering their existing organizational structures.
From personal experience as an employee of Coca Cola, I have observed that structure follows strategy. This is because the organizational structure that Coca Cola has adopted seems to be an outcome of its strategic move to dominate the soft drinks industry at the global level. With time, the company has grown to the extent where it has felt the need to diversify into the beverages industry. This growth imperative has necessitated the move by Coca Cola to develop new organizational structure that facilitate its quest for strategic expansion into the beverage industry.
References
Aldehayyat, J. & Al Khattab, A. (2013). Strategic Planning and Organizational Effectiveness in Jordanian Hotels. International Journal of Business and Management, 8(1), 11-25.
Al-Hawary, S., Al-hawajreh, K., Al-Zeaud, H. & Mohammad, A. (2013). The impact of market orientation strategy on performance of commercial banks in Jordan. International Journal of Business Information Systems, 14(3), 261-279.
Boukis, A., Kaminakis, K., Siampos, A. & Kostopoulos, L (2015). Linking internal marketing with customer outcomes. Marketing Intelligence & Planning, 33(3), 394 – 413.
Brouthers, K. (2013). A retrospective on: Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies 44, 14-22.
Capar, N., Chinta, R. & Sussan, F. (2015). Effects of International Diversification and Firm Resources on Firm Performance Risk. Journal of Management and Strategy, 6(1), 10-20.
Carvalho, P. & Marques, R. (2013). Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods. European Journal of Operational Research, 234, 292–307.
Chang, H., Fernando, G., Srinivasan, D. Tripathy, A. (2013). A Re-Examination of Diversification and Firm Productivity. Journal of Management Accounting Research, 25(1), 99-118.
Chen, Y. Jiang, Y., Wang, C. & Hsu, W. (2014). How do resources and diversification strategy explain the performance consequences of internationalization? Management Decision, 52(5), 897 – 915.
Clarke, J., Tamaschke, R. & Liesch, P. (2013). International Experience in International Business Research: A Conceptualization and Exploration of Key Themes. International Journal of Management Reviews, 15(3), 265–279.
Emmanuel, O. (2014). Organizational Structure, Function and Performance of Agribusiness Enterprises in Nigeria. SCSR Journal of Development, 1(3), 28‐41.
Haghshena, M., Mohammad, S. & Ahmadi, R. (2015). The effects of customer relationship management dimensions on organizational performance (Case study: Shipping organization of Iran). WALIA journal 31(4), 134-141.
Hauton, G. & Héam, J. (2015). Interconnectedness of Financial Conglomerates. Risks, 3, 139-163.
Herath, H. & Mahmood, R. (2014). Strategic Orientations and SME Performance: Moderating Effect of Absorptive Capacity of the Firm. Asian Social Science, 10(13), 96-107.
Hilman, H. & Siam, M. (2014). The Influence of Organizational Structure and Organization Culture on the Organizational Performance of Higher Educational Institutions: The Moderating Role of Strategy Communication. Asian Social Science, 10(13), 142-154.
Holtbrügge, D. & Baron, A. (2013). Market Entry Strategies in Emerging Markets: An Institutional Study in the BRIC Countries. Thunderbird International Business Review, 55(3), 237–252.
Hoskisson, R., Wright, M., Filatotchev, I. & Peng, M. (2013) Emerging Multinationals from Mid-Range Economies: The Influence of Institutions and Factor Markets. Journal of Management Studies, 50(7), 1295–1321.
Jebna, A. & Baharudin, A. (2015). The Impact of Entrepreneurial Orientation on Manufacturing SME Performance with the Contingent Effect of E-Commerce in Malaysia. Advances in Environmental Biology, 9(5), 24-27.
Keelson, S. (2014). The Moderating Role of Organizational Capabilities and Internal Marketing in Market Orientation and Business Success. Review of Business and Finance Studies, 5(1), 1-17.
Larimo, J. & Arslan, A. (2013). Determinants of foreign direct investment ownership mode choice: Evidence from Nordic investments in Central and Eastern Europe. Journal for East European Management Studies, 18(2), 232-263.
Lee, J. & Sridhar, S. & Henderson, C. & Palmatier, R. (2014). Effect of Customer-Centric Structure on Long-Term Financial Performance. Management Science, 34(2), 250-268.
Lu, J., Liu, X., Wright, M. & Filatotchev, I. (2014). International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions. Journal of International Business Studies, 45, 428–449.
Matarazzo, M. & Resciniti, R. (2014). New Trends in Foreign Market Entry Mode Choices: The Case of Italian Mid-Sized Companies. Journal of International Business and Economics, 2(4), 57-70.
Maurya, U., Mishrab, P., Anandc, S. & Kumard, N. (2015). Corporate identity, customer orientation and performance of SMEs: Exploring the linkages. IIMB Management Review, 27(3), 159–174.
Mohammadzadeh, M., Aarabi, S. & Salamzadeh, J. (2013). Organizational performance, Marketing strategy, and Financial strategic alignment: An empirical study on Iranian pharmaceutical firms. DARU Journal of Pharmaceutical Sciences, 21(65), 313-338.
Pierce, J. & Aguinis, H. (2013). The Too-Much-of-a-Good-Thing Effect in Management. Journal of Management, 39(2), 313-338.
Rodríguez-Gutiérrez, M., Moreno, P. & Tejada, P. (2015). Entrepreneurial orientation and performance of SMEs in the services industry. Journal of Organizational Change Management, 28(2), 194 – 212.
Rtanam, E. (2015). Entrepreneurial Orientation and Organizational Performances (With Special Reference to Tourist Hotel and Hospitality Industry in Jaffna District). Journal of Economics and Sustainable Development, 6(1), 126-130.
Satta, G., Parola, F., Ferrari, C. & Persico, L. (2013). Linking growth to performance: Insights from shipping line groups. Maritime Economics & Logistics, 15, 349-373.
Shaver, J. (2013). Do we really need more entry mode studies? Journal of International Business Studies, 44, 23–27.
Shehu, A. & Mahmood, R. (2014). The Relationship between Market Orientation and Business Performance of Nigerian SMEs: The Role of Organizational Culture. International Journal of Business and Social Science, 5(1), 159-168.
Wilfred, M., Bernard, O. & George, G. (2014). An analysis of concentric diversification strategy on Organization competitiveness: Case of sugar firms in Kenya. European Journal of Business and Management, 6(19), 175-180.
