The most important decisions managers make is finding the right balance between vertical control and horizontal coordination depending on the organization’s strategy.
Introduction
Finding the right balance between vertical control and horizontal coordination comprises an important management decision because this facilitates the accrual of the integrated strategic benefits from both options. Many of the successful business firms are those that were able to find the right fit between vertical control and horizontal coordination, suitable to the strategic needs and objectives of the company, to usher both dynamism and efficiency (Pettigrew, 2003). However, effective balancing requires alignment with the specific situation of the firm. The paper argues that managers need to find the right fit between vertical control and horizontal coordination depending on their strategy and culture. Examples from the Flight Centre will be used to support this argument.
Arguments
Finding the fit between organisational design and intended strategic outcomes supports the balancing of vertical control and horizontal integration (Williams & Rains, 2007). A vertical structure supports standardisation as a strategic outcome. Standardisation is equally important for business firms to ensure that different business units or working teams operate towards the achievement of the common business goals of the organisation. Horizontal organisational design ushers coordination as a strategic outcome. Coordination is necessary to integrate the contributions of individuals or teams comprising aggregate output of the organisation. (Davidson & Griffin, 2006)
However, the strategic outcome intended could require the combination of standardisation and coordination such as multinational corporations with different business units handling different aspects of product and service delivery. This requires coordination and at the same time uniformity of product and service standards. Organisations need to compromise vertical control and horizontal coordination to support the achievement of strategy via the appropriate structure resulting from the compromise. Compromising could be necessary for the organisation to develop a structure that supports the achievement of its strategy or achieve a structure necessary to achievement of strategy. (Robbins & Barnwell, 2006) The link between strategy and structure finds exemplification in the typologies of Miles and Snow (1978), with organizations classified according to strategic options as defenders, prospectors, analyzers, and reactors. Defenders ignore developments and thus have standardized structure. Prospectors tend to engage in innovation to enter or create new markets, and thus require a flexible structure. Analyzers follow the steps of prospectors after prospectors have proven new markets as viable. Analyzers focus on decreasing risk and loss and thus require the balancing of stability and flexibility in its structure to effectively control cost and address risk. Reactors focus solely on addressing developments leading to very flexible and unstable structures.
Flight Centre was able to identify the balance between the two structural forms that suits its strategic purpose. Based on the typology of Miles and Snow (1978), Flight Centre classifies as an analyser because its focus is on the minimisation of cost and risk so that it does not heavily invest in innovation or market development and enters markets once prospectors have already shown this to be viable. As such, the structure requires standardisation to control cost as well as a certain degree of flexibility to enable the company to capture opportunities in new markets proven viable by prospectors. It maintains standardisation by maintaining three tiers of hierarchical structures—family, tribe and country levels—and achieves coordination by keeping a flat structure at the business unit level. Direct communication constituted both a means in achieving both coordination and standardisation by creating direct links between front line employees and top managers and an outcome of balancing both vertical and horizontal control, especially by maintaining a flat structure at the business unit level with only a small number of employees running the shops. The company needed to make a compromise between vertical control and horizontal coordination to support its strategy of controlling cost and risk while at the same time maintaining flexibility to enable it to respond to opportunities verified by prospectors.
The limitation of the contingency theory in considering contingency factors as single and independent variables and the co-occurrence of these variables with varying levels of impact on firms create complexity in the compromise, which could make this theory insufficient in capturing the link between strategy and structure in actual business experience. Other contingency variables also explain the strategic achievements of Flight Centre.
Aligning organisational culture with corporate strategy could justify the balancing of vertical control and horizontal coordination. The culture of business organisations pertain to the “pattern of shared basic assumptions” (p. 9) that emerge from the learning derived from the manner that groups address, adjust and adapt to challenges emerging from within or outside of the group (Schein, 1992). Organisational culture affects strategy by comprising the best way of doing things (Drennan, 1992) for the organisation as a whole and its individual members expressed through the practices and norms of the organisation. The ability of organisational culture to support strategy depends on structure. Dalkir (2005) identified four types of organisational culture aligned with a particular structure that supports different strategies. A communal culture favours a task-driven culture. This fosters a sense of belongingness on the part of the members and the leadership of a charismatic head. This culture supports human resource development strategies via a more flexible structure. A networked culture treats employees and managers as friends or family since people have close contact with each other leading to information sharing. This supports skills development strategies by balancing flexibility and standardisation. A mercenary culture expects employees and managers to meet goals. This supports financial strategies through a more standardised structure. A fragmented culture supports individualism in task completion. This supports skills specialisation strategies via a loose structure.
Based on Dalkir’s classifications, Flight Centre appears to have a networked culture that supports information sharing and skills development. The company balances flexibility with standardisation by treating employees as co-owners giving them room for flexibility within a three-tiered structure. The firm maintains three tiers of vertical control but keeping the business units small and family-like even with its international operations. The result is small business units that are profitable and able to adjust to the changes occurring at intervals of two years with continuous increases in the number of shops in the different countries.
However, Frese (1995) discussed the view of culture as a residual factor because the lack of understanding of the differences in the perspective of managers leads to the attribution to culture. In this sense, the impact of culture on structure may not be to the extent envisioned by the contingency theory. The different levels of business and different business units also exert different culture-based perspectives.
Changing business environment could require the combination of vertical control and horizontal coordination to develop a concurrent mixed structure to support combined impact on strategy achievement. The business environment is volatile and constantly changing so that successful business firms are those able to react to change effectively. Flexibility to change enables firms to react or respond even with uncertainty. Structure affects the extent of flexibility to change of business firms by influencing the innovative strategy of companies. The extent of flexibility of the structure determines the degree of innovativeness of firms. (Tuominen, Rajala & Möller, 2004)
At Flight Centre, changing business environment led to the development of business units operating autonomously. However, the business units form part of tribes and countries, which requires the communication of uniform policies from the top for implementation at the local level. Nevertheless, the business units hold the power to decide on how to implement the policies depending on the issues emerging from the market.
However, changes in the business environment might influence strategy but not necessarily through the intermediary of structure. Flight Centre responds to changes in its business environment by expanding but change in structure comes as an aftermath.
Conclusion
Business firms no longer have to choose from the implementation of either vertical or horizontal mode of control. The contingency theory provides the selection of one or the other or the appropriate combination of both depending on its needs and objectives or internal and external context. In selecting integration, the key is finding the balance between the vertical and horizontal modes of control that fits the particular of the firm. Flight Centre adopted the integrative perspective and achieved the right balance by establishing three tiers of vertical structure and maintaining small business units.
References
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