The first paragraph of this suggested answer builds upon and fills in some gaps in the text discussion with logical extensions of the chapter material. Students should be able to arrive at these conclusions with their critical thinking skills.
Many of top management's strategic choices affect organization design decisions. Strategic choices enable an organization to capitalize on its unique capabilities. Companies need to distinguish and position themselves differently from their competitors in order to build and sustain a competitive advantage. Without a competitive advantage, an organization will be unlikely to survive in the rapidly changing and highly competitive global marketplace. Organizations have attempted to build competitive advantages in various ways, but three underlying strategies appear to be essential in doing so: low-cost, differentiation, and focused. Different strategies tend to be more or less effective in different types of organizational environments, and with different types of organization design. Thus, strategic choices are a crucial variable to be assessed in making organization design decisions, so that the most appropriate match can be achieved between organizational environment, organizational design, and business strategy.
A low-cost strategy is based on an organization's ability to provide a product or service at a lower cost than its rivals. Such a strategy aims at selling a standardized product that appeals to an "average" customer in a broad market. Such organizations typically employ a functional design, such as Wal-Mart or PetSmart. A differentiation strategy is based on providing customers with something that is unique and makes the organization's product or service distinctive from its competition in such a way that customers are willing to pay a higher price for it. Superior value in the product or service is typically achieved through higher quality, technical superiority, or some special appeal. Such organizations typically adopt a product organization design whereby each product has its own manufacturing, marketing, and research and development departments. These organizations typically operate in changing environments.
Many of top management's strategic choices affect organization design decisions. Strategic choices enable an organization to capitalize on its unique capabilities. Companies need to distinguish and position themselves differently from their competitors in order to build and sustain a competitive advantage. Without a competitive advantage, an organization will be unlikely to survive in the rapidly changing and highly competitive global marketplace. Organizations have attempted to build competitive advantages in various ways, but three underlying strategies appear to be essential in doing so: low-cost, differentiation, and focused. Different strategies tend to be more or less effective in different types of organizational environments, and with different types of organization design. Thus, strategic choices are a crucial variable to be assessed in making organization design decisions, so that the most appropriate match can be achieved between organizational environment, organizational design, and business strategy.
A low-cost strategy is based on an organization's ability to provide a product or service at a lower cost than its rivals. Such a strategy aims at selling a standardized product that appeals to an "average" customer in a broad market. Such organizations typically employ a functional design, such as Wal-Mart or PetSmart. A differentiation strategy is based on providing customers with something that is unique and makes the organization's product or service distinctive from its competition in such a way that customers are willing to pay a higher price for it. Superior value in the product or service is typically achieved through higher quality, technical superiority, or some special appeal. Such organizations typically adopt a product organization design whereby each product has its own manufacturing, marketing, and research and development departments. These organizations typically operate in changing environments.
Examples include Toyota's Lexus in automobiles and Starbucks. A focused strategy is designed to help an organization target a specific niche within an industry, unlike both the low-cost and differentiation strategies, which are designed to target industry wide markets. The basic idea is to specialize in ways that other organizations can't match effectively. These organizations generally operate in either a varied-stable or uniform-unstable environment, and may utilize any of a variety of organization designs, ranging from functional to product to matrix to network, to satisfy their customers' preferences.
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