STAGES MODEL OF STRUCTURE

Explain the Stages Model of structure. Is it necessary for an organization to pass through all successive stages of growth?

 

The experiences of many firms indicate that organization structure evolves through different stages. What structure an enterprise will have would depend upon its growth stage, apart from size and the key success factors inherent in its business. For example, the type of organization structure that suits a small speciality steel tubes manufacturing firm relying upon ‘focus’ strategy in a regional market may not be suitable for a large, vertically integrated steel producing firm with businesses in diverse geographical areas. To extend our example further, the structural form suitable for a multi-product, multi-technology, multi-business enterprise pursuing unrelated diversification is likely to be still different. Recognition of this characteristic pattern has prompted several attempts to formulate a model linking changes in organizational structure to stages in an organization’s strategic development. 

The basic idea behind the stages concept is that enterprises can be arranged along a continuum running from simple to very complex organizational forms; and that there is a tendency for an organization to move along this continuum towards more complex forms as it grows in size, market coverage, product line scope and as the strategic aspects of its customer—technology—business portfolio become more intricate. The stages model proposes four distinct stages of strategy-related organization structure.

 

Stage I : Organizations in this stage are essentially small, single business and managed by one person. The owner entrepreneur has close daily contact with employees. He personally knows all phases of operations. Most employees report directly to him and he makes all pertinent strategic and operating decisions. As a consequence, the organization’s strengths, vulnerabilities and resources are closely linked with the entrepreneur’s personality, managerial ability, style and financial position. In a way, a Stage I enterprise is an extension of the interests, abilities and limitations of the personality of its owner. The activities of such a business typically are concentrated in just one line of business. 

Stage II : Compared to a Stage I enterprise, a Stage II enterprise has an increased scale and scope of operations which necessitate management specialization and transition from individual management to group management. A State II enterprise is fundamentally a single business enterprise which divides its strategic responsibility along classical functional lines: personnel, finance, engineering, public relations, manufacturing, marketing and so on. In an enterprise which is vertically integrated such as an oil company, the main organizational units are sequentially organised from one stage to another e.g., exploration, drilling, pipe lines, refining, wholesale distribution, retail sales, etc. 

Stage III : A Stage III enterprise, though in a single field or product line has operations which extend to several geographic areas. Within a broad policy framework, these units have considerable flexibility in formulating their own strategic plans to meet the specific needs of their geographic areas. Based on the principle of geographic decentralization, each unit, operating as a semi-autonomous entity, is structured along financial lines. The main difference between a Stage II and a Stage III enterprise is that while the functional units of a Stage II enterprise stand or fall together (since they are built around one business at single location), the operating units of a Stage III enterprise can stand alone in the sense that the operations in different geographic units are not inextricably linked or dependent upon the units of other areas. The firms that represent this category may include firms in the cement, brewery, heavy machinery, fertiliser industries. The chain stores of a footwear company like Bata may also fall in this category. IFFCO, SAIL, NTC, HMT, are some examples of Stage III enterprises. 

Stage IV : Stage IV represents the ultimate in the evolutionary growth of an enterprise. The firms in this category are typically large multi-product, multi-unit, multi-technology enterprises whose units operate on decentralized lines. Enterprises in this category reach this stage because their corporate managements generally lay considerable stress on the strategy of diversification—related or unrelated. As with the Stage III firms, the semi-autonomous units of Stage IV firms may have substantial flexibility in formulating their strategies and policies relating to their own lines of business. All the units however report to corporate headquarters in accordance with the performance parameters decided upon. They conform to the broad guidelines laid down by the corporate office. The general manager of each unit has overall responsibility for the total business as his authority extends to all the functional areas. However, some functions and staff services may be centralized at the corporate level. The prominent example of firms in this category are: ITC, Shaw Wallace, Grasim Industries, ICI, JK Industries, etc. 

Comments on the Stages Model : The stages model provides useful insights into why structural configuration tends to change in accordance with the change in size, geographic spread, technology and strategies. As firms progress from small, entrepreneurial enterprises following a basic ‘concentration’ strategy to more complex phases of volume expansion, vertical integration, geographic extension and line of business diversification, their organization structures evolve from unifunctional to functionally centralized to multi-divisional decentralized organization forms. While at one end of the spectrum come single line businesses which invariably have centralized functional structures, at the other end come highly diversified enterprises which again invariably have decentralised divisional form. In between come firms which have limited diversification. Such firms may have hybrid structures partaking the characteristics of functional and product divisional forms. 

Some comments of clarificatory nature at this point are in order. It is not necessary that a firm must begin at Stage I and reach ultimately to Stage IV. Most of the large enterprises today right away begin with Stage II or even Stage III. A firm in the evolutionary process may skip one or more of the stages in the journey. For example, it is not necessary for a firm in Stage II to pass through Stage III to reach Stage IV. Some firms may exhibit characteristics of two or more stages at the same time i.e., some operations of these firms may be decentralized geographically (for example, warehouses or transport facilities of a large steel mill like TISCO or a company like Coal India Limited) and some other operations (for example procurement of raw material, plant and machinery, manufacturing facilities) may be centralized. 

No organizational form is perfect. A kind of subtle experimentation always goes on. Some firms, after a stint with decentralization may revert to centralised form. For example, the five separate decentralized, fully integrated units of Dupont of USA— Rayon, Acetate, Nylon, Orlon, and Dacron—were consolidated into a Textile Fibre Unit with a single multifibre field force (earlier each unit had its own sales force which vied with each other for business from the same set of customers and thus competing with each other) organized around four market segments namely: men wear, Women wear, home furnishing, and industrial products. Whenever management changes its strategy it must review its organization structure. It must answer this question : is the organizational structure still alright or does it need modification? The answer to this question could lead the management in recognising whether there is or not a mismatch between the strategy and the organization structure.