CORPORATE STRATEGIC BOUNDARIES
 

 

 

 

 

 

 

 

 

 

 

 

The creation of such units demands that planners determine, as precisely as possible, in what form and to what degree resources must be integrated to ensure the level of market responsiveness dictated by their business strategy. This process can be successful only when it is undertaken in the context of a rigorous analytical framework that links strategy to organization. Procedure for To create a market-responsive organization, management can use a three-phase Creating a Market- process: (a) determine corporate strategic boundaries, (b) balance the demands of Responsive scale and market responsiveness, and (c) organize for strategic effectiveness. Organization Determine Corporate Strategic Boundaries. How successfully a corporation aligns its structure with its strategic objectives depends on its success in making a number of key decisions: determining the stage of the value-added process at which it will compete, identifying those activities in which it has a competitive edge, selecting the functions it should execute internally, and developing a plan of action for integrating those functions most productively. These decisions determine how resources should be allocated and how external and internal boundaries should be drawn. They define the company’s business—its products, services, customers, and markets—and determine both long- and short-term strategic potential. How well the company exploits its assets and the degree to which each division’s performance supports strategic objectives determine how close it will come to achieving that potential.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How strategic boundary setting reflects the trade-offs between scale and inte- gration becomes clearer when one considers the case of an assembler facing a typ- ical make-or-buy decision for components. As long as the components manufacturer is able to produce common components for several customers, the assembler among them, the components manufacturer enjoys scale advantage. As the products ordered by the assembler become more specialized in response to market demands or increased competitive pressures, however, the benefits the components manufacturer gains from scale begin to decline. At the same time, the cost of integrating operations with those of the assembler increases as technical specifications become more complex and as manufacturing operations become more interdependent. To continue their relationship and sustain their respective advantages, the components manufacturer and the assembler are required to make additional investments: the components manufacturer in capital equipment outlays and product design; the assembler in negotiating terms, research and development planning, quality control, and related areas. As a result, a substan- tial “disruption cost” is incurred if the components manufacturer and the assem- bler decide to end their business relationship. Both parties attempt to guard against this potential loss through longer-term contracts, whether explicit or implicit. As interdependence increases, prices and contract negotiations become cumbersome and unresponsive. At some point, the economies of scale may decline enough and the integration costs climb high enough that the assembler finds it more cost effective to produce components internally—to bring that particular function inside the assembler ’s corporate boundaries.