Strategy and organisation

6th September 2009

Writers on strategy have known this since time immemorial, and the works of past gurus such as Sun Tzu, Vegetius, Machiavelli and Clausewitz devote many pages to the relationship between strategy and organisation. Virtually every modern writer on business strategy touches on this subject too. 

But the relationship between strategy and organisation is not a simple one. For a start, there is the question of which comes first: the chicken or the egg? Do we start with the strategy and then build an organisation which supports it and is able to carry it out? Or do we start with the organisation, and carefully create a strategy which is within the organisation’s competencies to deliver? 

One of the first writers on business strategy, the late Alfred Chandler of Harvard University, believed it was the former. Chandler’s famous dictum was that ‘structure follows strategy’. His study of the histories of large American corporations in the early twentieth century convinced him that, having adopted strategies of national and multinational expansion and growth, they then created and built an organisational form – in this case the multi-divisional or M-form, which many companies still use today – which would enable them to carry out their strategies successfully. Corporations such as General Motors, Sears Roebuck, Standard Oil and the like became world-class companies by following this principle. 

Since Chandler published his ideas in his book Strategy and Structure in 1962, academics have devoted a good deal of time to picking holes in his theory. This was inevitable, as picking holes in other peoples’ theories is one of the things academics like best to do. But in fact there are flaws in Chandler’s approach. Just because the principle of ‘structure follows strategy’ worked well for big American companies in the 1920s and 1930s does not mean it will work equally well everywhere, all the time. 

For a start, to say that ‘restructuring an organisation is not an easy thing to do’ is a massive understatement. Anyone who has been part of a restructuring effort, or even been a member of an organisation that is being restructured, will know this at once. A successful change in organisational structure requires a very serious commitment of time, money and other resources, and the constant guidance and leadership of top management. Even with all the required resources and leadership, restructurings are still tricky and can go wrong. It is almost inevitable that there will be resistance from those within the organisation who fear change. In many of his writings, notably the 1971 book Management and Organizational Development, another Harvard professor, Chris Argyris, has noted how passive and even active resistance to change can disrupt plans for organisational change and transformation. Overcoming this resistance requires further time, money and leadership commitment, and that in turn can have an impact on the strategy itself. 

Even if the organisational transformation is completed successfully, there is a question mark as to whether the reward will be worth the effort. Will the strategy yield a pay-off sufficient to cover the costs? And in three years time, when the strategy has been implemented and a new one been prepared, will we have to redesign the organisation all over again? And again three years after that? One can start to feel tired just thinking about it. 

The alternative option is to let the strategy be dictated by the organisation and its structure and capabilities. This is of course what many businesses do. They recognise their own limitations and work within them, developing strategies that they know they can implement with only minimal organisational change. But there is something deeply unsatisfying about this. Such businesses may never fulfil their potential. They will tend to shy away from new markets, new products, innovations, even growth itself because these things will place too much strain on the organisation. If the shareholders and management have only modest expectations, well and good. But most people don’t go into business because they simply want to chug along; they have ambition. And the idea that ‘strategy follows structure’ will constrain that ambition. 

In 1978 two academics, Raymond Miles and Charles Snow, proposed a solution to the problem. In their book Organisational Strategy, Structure and Process, they argued that rather than seeing a dichotomous choice – create a strategy and design an organisational structure to implement it, or create an organisation and then design strategies that are within that organisation’s limits – businesses and managers needed to see strategy and organisation as linked and interdependent phenomena. One cannot really exist without the other. 

A strategy without an organisation behind it is just a set of ideas. And an organisation without a strategy is inert: it has no guiding force, no way of knowing what to do or where to go. The relationship is like that of a racing car and its driver. The latter cannot even begin to compete unless he has a car; the former will never move out of the garage unless there is a driver behind the wheel. 

The key, according to Miles and Snow, was to ensure that the strategy and the organisation were fully aligned with each other. Rather than privileging one over the other, equal attention had to be given to both. In practice this means that managers must both alter the organisational structure to make certain that the organisation is able to carry out the strategy and at the same time ensure the strategy is realistic and implementable. Miles and Snow gave this concept the rather prosaic title of ‘organisational fitness for purpose’. 

This might seem like the worst of both worlds: the costs and risks associated with restructuring, combined with the limitations and strategic constraints imposed by letting the organisation dictate the strategy. But in fact, this is quite a realistic way of looking at the world. Not all organisational change has to be of the drastic kind described by Chandler.

The changes required to support a strategy can be fairly simple ones: adding new skills and competencies through training and recruitment, redeploying staff into the new markets, setting up new innovation teams and so on. Miles and Snow argued for steady incremental change in both strategy and structure, keeping both aligned with each other in a kind of balancing act, adjusting the organisation as the strategic implementation process went on and requirements changed, altering the strategy if it became clear that the organisation lacked the competencies to carry out certain parts of it. 

To see how this works, let us take again the metaphor of the racing car and driver. The driver drives within the limits of the car; he or she must, or the car will crash. But the driver also knows what those limits are, and between races he or she works with the mechanics and support team to alter the car to make it more aerodynamic, to corner better and so on. There is a continuous process of alignment between what the driver wants to do and what the car is capable of doing, with incremental adjustments on both sides. 

Organisational fitness for purpose is not a particularly dramatic way of looking at strategy – or organisation either, come to that. But it does what it says on the tin. It is, or can be, a highly effective way of conceptualising the relationship between strategy and organisation. The critical point to remember is that the two depend on each other; neither can achieve anything without the other. As is so often the case in business, it is the relationship between things that matters more than the things themselves.