How does the Global Market Influence Organisations?
With intense competition in the current competitive environment, firms are looking for ways in which they can market their products and services globally. This has given way to globally standardised products instead of locally customised ones: a global market is now the focus of many firms. This necessitates adapting a firm’s strategy, structure, and other five elements of McKinsey 7S model in order to remain competitive and/or survive.
This article discusses how the global market influences organisations in the context of McKinsey 7S model of organisational structure. This is done in section 2.0. Section 3.0 draws conclusion from the discussion. References are provided at the end of the article for further reading.
2.0 The Global Market and McKinsey 7S Model
2.1 Features of the Global Market
A global market has globally standardized products which are advanced in functionality and reliability while sold at relatively low prices. Formally hard-to-reach areas are now accessible through new technologies, such as the internet. This has led to convergence of tastes and preferences thus enabling firms to standardise products and sell them to a global market. This has enabled firms such as Coca-Cola to establish and enjoy economies of scale as they produce their drinks for a global consumer market. This implies that ‘global firms’ are able to produce, market and sell their standardised products in a similar way worldwide. Therefore, the global market can be assumed to be homogenised. This is why successful firms are those which are able to offer “the best combinations of price, quality, reliability, and delivery for products that are globally identical with respect to design, function, and even fashion” (Levitt, 1983, p.5). Such global standardisation of products for global markets has implications for organisation structure and other McKinsey 7S elements as discussed in the next subsection.
2.2 McKinsey 7S Model of Organisational Structure
McKinsey 7S model is a strategic planning tool which is used to analyse a firm’s internal environment by considering alignment of interconnected and interdependent 7S elements: structure; strategy; systems; style; staff; skills; and shared values. These elements are shown in figure 1.
Fig.1. McKinsey 7S Model of Organisation Structure. Source: Nejad, Behbodi and Ravanfar (2015, p.45).
Structure. This shows how the firm is organised, for example, in terms of divisions and strategic business units (SBUs) which shows the flow of information, span of control and chain of ‘command’ in the firm. It shows who supervises who; who reports to whom; who is in charge of a certain group of people; who takes responsibility for a certain group’s decisions and actions; etc. This is represented by an organisational chart in the firm’s documents. A firm’s structure is determined by: its age and size; technology involved in its operations; organisational culture; complexity and dynamism of its environment; the qualifications of staff; and external control that the firm faces. For example, a firm serving a global market has high degree of specialisation in its structure since it must go through formal and complicated procedures along the value chain. This is why most firms have a divisional structure in which a division is responsible for a certain geographical area. Such areas may include: Europe, Africa, Middle East, North America, etc. However, some have a blend of divisional structure and matrix structure to effectively serve customers’ high expectations as the environment changes. This implies that the firm will try to flatten its structure or adopt a horizontal structure such that hierarchical arrangement does not be very bureaucratic and rigid. Therefore, within a divisional structure, a firm needs to have small teams of employees who can flexibly respond to the changing needs of customers in the local market. This is because a firm’s structure and systems can either be a source of competitive advantage or competitive disadvantage.
Structure alone cannot bring competitive advantage to the firm. It needs appropriate systems and strategy—the three hard elements need to be aligned together and with soft elements.
Systems. This refers to the routines/processes and procedures that a firm’s employees go through in creating value for customers. This implies that systems are what transform a firm’s inputs into outputs. This involves making daily decisions and choices to meet set goals following the firm’s strategy—it involves putting strategy into action. For a firm that serves a global market, this necessitates dividing work into several tasks/jobs: division of labour enables putting people where they perform best. Similarly, a global market forces the firm to have some level of decentralisation such that some decisions and choices are taken nearest to the customers in local markets. However, to maintain some level of control, some units, for example, strategic planning have to remain at the headquarters/centralised such that strategic direction of the firm guides decision making at all functional and operational levels. This is why global firms have formal hierarchical communication channels to ensure that the corporate centre controls standards and costs in decentralised units.
Strategy. This refers to the overall direction and plan of action of the firm aimed at achieving competitive advantage over the long-term. This is derived from the firm’s vision, mission and long-term goals as the firm attempts to compete successfully in the global market. A firm may decide to increase its sales by a certain target percentage by expanding its market for existing products using similar marketing activities. This becomes the strategy that operational units must follow to increase sales. Another firm may target increasing sales by selling existing products to a bigger market but using locally customised marketing activities. These two different strategies will depend on the structure and systems of a particular firm.
Style. This refers to the leadership style expressed by the firm’s top management. This encompasses how managers make decisions and choices (their behaviour) at the workplace. A global market may necessitate having a balance between participatory and authoritarian leadership style since there is need for both giving employees a chance to innovate and retaining control over the firm’s strategic direction. This is why global firms tend to emphasise clearly stated goals which are derived from the overall vision and mission (at a strategic level) and communicated downwards to guide implementation at functional and operational levels. This requires having clear formal instructions down the management hierarchy for consistent strategy implementation.
Staff. This refers to the number of employees a firm needs and how they will be recruited, rewarded, etc. A global firm needs staff that knows the diversity of their global market and targets it accordingly. Such diversity dictates the appropriate structure the firm should use, for example, a decentralised divisional structure. The structure adopted then determines the number of staff needed to serve the global market. For example, the number of staff at headquarters/the corporate centre can be reduced while that in divisions increased to fully serve and satisfy customers in local markets. The corporate centre may remain with strategists and customer support staff while other functions like finance and operations are decentralised.
Skills. This refers to what the firm’s employees can do well: the firm’s competences. A global market will need staff with diverse competences to suit the diverse customer needs, tastes, preferences, and cultures. Whereas there tends to be convergence of cultures, standardisation of products and procedures may not work competitively everywhere and every time. There may be a need for ‘customised standardisation’ (a little dose of customisation) depending on diversity of the global market served. Still, the required skills will be determined by the firm’s structure, systems and strategy. For example, a decentralised structure may require that certain skills be possessed by each cluster of leaders in the divisions while a centralised traditional hierarchical structure may need the skills to be concentrated at the corporate centre. The need for diverse skills in a global market justifies the need to continuously train staff to ensure that their competences enable satisfying changing customer needs, tastes and preferences.
Shared Values. These are the traditions, norms, standards, etc. which are the basis for employees’ behaviour, choices, and decisions: the agreed and sometimes unwritten way of doing things in the firm. This guides the structure to be adopted by the firm and systems to be used. For example, if a global market requires valuing participation of all members in decision making, innovative risk taking, and recognising individual input, a bureaucratic controlling structure will be considered inappropriate. This is because there will be a need for flexibility to allow room for innovation and creativity which too much control can frustrate.
A global market determines: what structure a firm should adopt; what systems the firm should use; what strategy the firm should follow; what leadership style the firm’s management should express; how many staff it should have; what skills its employees need to have; and what shared values should be cherished by the firm. Therefore, a global market influences organisations by influencing all McKinsey 7S elements of a given firm since all the elements are interconnected and interdependent in complex ways.
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