05. Business Structure Flashcards
Outline set up of a functional organisational form (traditional structure).
Department to are defined by their function (sales, finance, production etc.).
What are some (6) implications of a functional organisational form on performance management?
- There is a need for coordination of all the departments. This function is performed by directors.
- The directors’ responsibilities would include functional oversight and high-level strategy and will therefore need detailed information from the levels below.
- Budgets and management accounts are based around this structure and so reinforce the structure. Each dept has its own budget which will usually simply show the costs as each department is a cost centre. Only directors will see the budgets and the actual reports that include profits.
- Difficult to see where profits/losses are made. Won’t necessarily see profits by products as many of the costs would be considered overheads (eg finance costs).
- Approaches such as ABC, where overheads are included in product costs may be difficult if functional info is siloed (isolated).
- It is difficult to see where value is added.
Describe the likely nature of the management accounting information in an organisation that adopts a functional form. Consider the following:
- degree of centralisation
- how information flows
- approach to budgeting
- analysis of profits
- Degree of centralisation - Information will be very centralised. Management at the top will require detailed management accounts to monitor the business.
- How does information flow? - information will flow up and down the organisation. There may be little flow of information horizontally between functions.
- Approach to budgeting - top-down
- Analysis of profitability eg info by customer or product will be difficult due to inability to allocate the expenses of different functions to each customer/product.
Outline the divisional organisation form.
Divisions are created which are run by divisional managers to run their business area as they wish.
- divisions may be based on geographical location or along business/product lines.
- typically each division is organised along functional lines.
Each division may be a separate legal entity, owned by the parent.
What are some (2) implications of the divisional form on performance management?
- Divisional managers have a lot of autonomy. Head office not involved in daily operations but rather, requires more high level info such as ROI of the division.
- Head office’s main challenge is making sure the divisional directors are operating to achieve the overall organisation’s goals..usually wealth maximisation. This requires the divisional managers to only invest in projects that maximise shareholder wealth.
What are some of the information needs of divisional organisations?
HQ does not need detailed management accounting info. It is more concerned with higher-level measures that indicate how well divisional directors are achieving the organisational objectives. E.g ROI, RI and economic value added.
These measures are supplemented by non-financial KPIs.
Divisional managers however require detailed info to manager their division. These managers will define what management info they want.
Explain how the management accounting information in a divisional organisation might differ from the management accounting information in a functional organisation.
Functional - info received by top management is very detailed as HQ manages all functions.
Divisional - each division is accountable to top management at HQ for its performance. Info provided to HQ is less detailed and includes high level details such as:
- divisional profits and cash flows
- achievement of other corporate objectives (eg market share).
Divisional managers will need detailed info to enable them to manage their divisions.
Outline the network organisational form and describe 3 types of networks.
A network organisation is a collection of autonomous business units which are coordinated centrally to behave as a single larger organisation.
Types of network:
- Internal networks - organisations that treat their units as separate profit centres and encourage them to sell to each other internally and to customers externally. Competing with market rates is thought to make them more efficient.
- A stable network is an organisation that outsources much of its work.
- Dynamic networks outsource even more dramatically. A majority of the functions of the business will be outsourced including core business activities, with the head office acting as a coordinator.
What are some of the implications of network organisations on performance management?
Outsourcing means that top management does not need detailed info on outsourced activities. The focus is more so on ensuring that network partners are providing sufficient quality at an appropriate price. Top management may also want partners to comply with ethical standards.
Challenges with outsourcing include:
- reputation damage if partners provide low quality goods/services. Especially where those partners are in charge of critical business processes.
- loss of confidentiality as business sensitive data may have to be shared.
- performance measures and targets will need to be set and agreed with the partners. These may be difficult to monitor as there’s an incentive for the partners to report only good info.
What are the information requirements of network organisations?
HQ has more of a coordinating role and the info needed would be:
- NFPIs related to partners’ performance. Eg quality of goods manufactured or no. of deliveries on time.
- info about prices charged by partners. This is usually agreed in a service level agreement.
- compliance with ethical, environmental and health and safety standards of the company by the partners.
Information about the performance of partners will often be gained through integrated IT systems. This can be supplemented by audits of the suppliers.
The objectives of management accounting information in manufacturing industries can be categorised in 5 ways. What are they?
- Cost behaviour - used for planning, controlling and costing for inventory valuation.
- Quality of production - this will be measured against the product specification.
- Time taken - manufacturing time, bottlenecks, etc to gain more efficiency.
- Innovation - required in new products and new processes.
- Valuation - even in the world of just-in-time manufacturing, there may be some inventory. Valuation may also be performed for other purposes such as pricing.
Manufacturing goods may be standardised - which makes the objectives above simpler to deal with.
What is business process re-engineering?
The fundamental rethinking and redesign of business processes to achieve dramatic improvement in critical measures of performance such as cost, quality, service and speed.
Outline the McKinsey 7s framework.
Designed to assist orgs to assess how various org elements work together to achieve corporate strategy.
Outline the 3 hard factors of the McKinsey model.
Hard elements are easily identified, defined and controlled by management.
Strategy - plan to achieve competitive advantage
Structure - org structure
Systems - orgs daily activities and procedures
Outline the 4 soft factors of the McKinsey model.
Soft factors are intangible and often influenced by corp culture and the informal organisation. Managers can take measures to influence them but can’t control them directly.
shared values - core values of the org including the culture and general work ethic
Skills - specific skills and competencies of the staff
Style - leadership style
Staff - employees
