STRATEGY AND STRUCTURE

438 • Chapter 13 • Strategy and Structure

Bottling Group and PepsiAmericas—which strengthened the company’s beverage business in North America and Europe and largely consolidated bottling operations within a single unit. In 2011, PepsiCo completed its largest ever transaction outside of the United States with the acquisition of Wimm Bill Dann, the largest manufacturer of dairy products in Russia. As a result of these strategic changes, Pepsi’s corporate structure is now fundamentally different and comprised of four business units organized on the basis of global geography: PepsiCo Americas Beverages (PAB), PepsiCo Americas Foods (PAF), PepsiCo Europe, and PepsiCo Asia, Middle East, & Africa (AMEA).

Changing corporate structure is costly. Pepsi pays seven-figure fees to consultants who design and implement organization change. Work flows are disrupted. Teams are split apart and reformed. Throughout the restructurings, Pepsi’s technology, product mix, and market position remain largely unchanged. Pepsi would not have engaged in so many restructurings if it did not believe that these factors alone are insufficient for explaining firm performance. Research supports this view. For example, Richard Caves and David Barton found that firms in the same industry, with similar technologies and labor forces, often have substantially different levels of productivity.1 While some of the reasons for differences in performance are idiosyncratic and do not lend themselves to general principles (e.g., the role of Steve Jobs in attracting talent to Apple Computer and spurring the development of his “digital hub” strategy), others can be generalized. We have previously discussed, for example, the importance of appropriately applying resources and capabilities to the competitive environment. In this chapter, we consider organizational structure.

Organizational structure describes the arrangements, both formal and informal, by which a firm divides up its critical tasks, specifies how its managers and employees make decisions, and establishes routines and information flows to support continuing operations. Structure also defines the nature of agency problems within the firm— who has authority for which decisions and who controls flows of information. Structure can even determine whether workers’ goals are aligned with each other, with management, and with owners.

Does it matter how a firm is organized? Are some structures better than others? We argue that the way a firm organizes matters for its success in implementing its strategic choices. These choices do not implement themselves, and the activities necessary to collect information, circulate it to the appropriate people, bring people together to make decisions, and then follow up on how decisions are carried out are costly to coordinate. The right structure will enable managers to link a firm’s resources and capabilities with the opportunities that managers perceive in their business environment more easily and effectively than alternatives. This implies that an optimal structure permits the firm to create the most value, thereby making the ability to organize in pursuit of strategic goals a critical capability for a firm.

In his classic set of case studies of the growth of such large corporations as General Motors and Sears, Strategy and Structure, Alfred Chandler made essentially the same argument. He observed that the founding top managers of large industrial and mass distribution firms structured their firms to best allow them to pursue their chosen business strategy—or, simply put, that structure follows strategy.2 We will return to this crucial idea near the end of the chapter.

The growth of the Internet, the spread of globalization, the continuing deskilling and computerization of entire occupations, changing workforce demographics, and other factors have led some observers to question whether organizational structure has the same importance for firms that it once did, such as in the high-growth period