Chapter 9: Strategy and structure

Question 1

What is organisational structure?

Answer 1

Organisational structure defines how the various functions of an organisation are arranged.

A successful strategy requires the organisation of people and decision making

Question 2

What are the features of an organisational structure?

Answer 2

Organisation of people:
- Types of structure
- Mintzberg’s structural configurations

Organisation of decision making:
- Span of control
- Mechanistic vs organic
- Centralisation vs decentralisation

Question 3

What is the entrepreneurial structure?

Answer 3

 Structure is built around the owner-manager – typical of small companies (early stages of development).
 The structure is totally centralised with all key decisions being made by the strategic leader (often the owner in an owner-managed business).

Manager above subordinates

Question 4

What are the advantages and disadvantages to the entrepreneurial structure?

Answer 4

Advantages:
 Fast decision making
 More responsive to market
 Good control
 Close bond to workforce

Disadvantages:
 Lack of career structure
 May be too centralised
 Cannot cope with diversification/growth

Question 5

What is the functional structure?

Answer 5

 Common in organisations that have outgrown the entrepreneurial structure, therefore need to organise the business on a functional basis (economies of scale/specialisation).
 Most appropriate to smaller companies with few products and locations and which exist in a relatively stable environment

Board of Directors sit above:
- Marketing department
- Production department
- Finance department
- HR department

Question 6

What are the advantages and disadvantages to the functional structure?

Answer 6

Advantages:
 Economies of scale
 Standardisation/efficiency
 Specialists more comfortable

Disadvantages:
 Empire building
 Slow to adapt to market changes
 Conflicts between functions (e.g. impairs cross department communication and innovation)
 Cannot cope with diversification

Question 7

What is a divisionalized structure (Product/brand/division based)?

Answer 7

 Organisation structured in accordance with product lines/brands or divisions.
 Divisions are likely to be seen as profit centres and may be seen as strategic business units for planning and control purposes.
 Headed by general managers who enjoy responsibility for their own resources.

Question 8

What are the advantages and disadvantages of a divisionalized structure?

Answer 8

Advantages:
 Enables product growth
 Clear responsibility and accountability for products
 Training of general managers

Disadvantages:
 Potential loss of control
 Lack of goal congruence
 Duplication of effort
 Specialists may feel isolated

Question 9

What is the divisionalised structure (geographically based)?

What are the advantages and disadvantages?

Answer 9

 Divisionalised grouping of activities on the basis of location.
 Common in organisations that operate over a wide geographic area usually used in sales and production.

Advantages:
 Enables geographic growth
 Clear responsibility for areas
 Training of general managers

Disadvantages:
 The same as for a divisional structure

Question 10

What is the matrix structure?

Answer 10

 Matrix structure aims to combine the benefits of the divisional structure and the functional structure.
 Usually found in multi-product and multi-functional organisations – significant interrelationships and interdependencies.

Senior management sit above a functional structure that is controlled by a product structure (product managers)

Question 11

What are the advantages and disadvantages of a matrix structure?

Answer 11

Advantages:
 Improves cross-functional communication
 Particularly useful for projects and temporary teams
 Flexibility – helps staff adapt quickly to new situations

Disadvantages:
 Dual command – conflicts between managers and over individual’s time and commitments (stressful!)
 Dilution of functional authority
 Time-consuming meetings

Question 12

What are flexible structures?

Answer 12

 Flexible structures allow firms to adapt to changing circumstances.
 Network structures can be applied both within and between organisations.

Different forms of network structures include the following:
- Virtual organisations: Operating predominantly through electronic
communication from employees and third parties

• Hollow Organisations: Non-essential activities are outsourced, allowing the organisation to “hollow out”
• Modular Organisations:
  Production processes become separate modules and are outsourced to third parties or subsidiaries

Question 13

What are the advantages and disadvantages to flexible structures?

Answer 13

Advantages:
 Increased flexibility
 Reduced premises cost
 Access to specialist skills

Disadvantages:
 Lack of control
 Difficult to create a consistent culture within the organisation

Question 14

What is Handy’s shamrock organisation?

Answer 14

 Analyses how companies can improve efficiency and cut costs by considering staffing issues more flexibly.
 Business should focus on a core of vital ‘permanent’ staff with support from part-time and outsourced staff.

Question 15

What are the components of Hardy’s shamrock organisation?

Answer 15

• Professional core = permanently employed key staff
• Contractual fringe = outsourced staff performing non-core services/core services = cheaper/more economical than company can do itself
• Flexible labour force = temporary and part-time staff used to cover peak demand
• Customers = may perform some tasks themselves e.g., booking on-line, setting up a pc bought online

Question 16

What are the components of Mintzberg’s structural configurations?

Answer 16

 Operating core – the basic work of the organisation – e.g. the shop floor.
 Strategic apex – higher management – overall strategic, long-term planning and control.
 Middle line – managers linking between the strategic apex and operating core (up and down communication).
 Technostructure – accountants, computer specialists and engineers whose role is to design procedures and standards – expert co- ordination of processes.
Can be outsourced (e.g. R&D to universities).
 Support structure – provision of services to the organisation which support operations/production (catering, legal advice, press relations, etc.) – often outsourced.
 Ideology – organisation’s values and beliefs (culture) – the ‘glue holding the organisation together’.

Question 17

What does Mintzberg suggest the key building blocks and co-ordinating mechanisms are for each structure?

Answer 17

 The key component (‘building block’) in developing the business
 The most likely co-ordinating mechanisms in achieving business development.

• Simple structures (e.g., entrepreneurial), Strategic apex (key building block), Direct supervision (co-ordinating mechanism)
• Bureaucratic structures (e.g., functional), technostructure, standardisation of work
• Divisionalised structures, middle line, standardisation of outputs
• Complex structures (e.g. matrix), operating core, mutual adjustment

Question 18

What are the different co-ordinating mechanisms?

Answer 18

 Direct supervision – a formal hierarchy is important when control is needed.
 Standardisation of work – specified work/procedures/techniques and standards are important where efficiency is required.
 Standardisation of outputs – design and delivery of product/services to specifications is important if consistency is required.
 Mutual adjustment – co-ordination through informal contact is important when learning and flexibility is required.

Question 19

What is the span of control?

Answer 19

The span of control considers how many people report to one
superior.

Question 20

What is a tall organisation?

Answer 20

Tall organisations have many ‘layers’ of management, who oversee relatively few
subordinates.

Question 21

What happens if spans of control are too narrow?

Answer 21

If spans of control are too narrow = over-supervision, inefficient management and costly delays in passing information.

Question 22

What are flat organisations?

Answer 22

Flat organisations have few layers of management, who oversee a larger number of subordinates.

Question 23

What happens if spans of control are too wide?

Answer 23

If spans of control are too wide = loss of contact/control and informal subgroups appear.

Question 24

What are factors influencing the span of control?

Answer 24

The following factors will influence the span of control.
 Complexity of work – e.g. difficult/complex = small project teams.
 Degree of change – e.g. rapid/ongoing change = narrower spans.
 Management’s ability – very capable = wider spans.
 Assistance received by managers e.g. Head Office support.
 Amount of non-supervisory work undertaken by the supervisor.
 Level of knowledge and experience of staff – e.g. inexperienced = more supervision required = narrower spans.
 Level of cost associated with mistakes.
 Level of danger – e.g. how many people will a bomb disposal expert want to supervise?!
 Physical proximity of subordinates – e.g. widely dispersed = narrower spans.
 IT e.g. internet, remote access, e-mail, office-based technology, etc. has led to flatter structures, therefore fewer levels of management.

Question 25

What is decentralisation?

Answer 25

(De)centralisation refers to the degree of autonomy/decision making ability diffused through the organisation.

Question 26

What are the pros of decentralisation?

Answer 26

 Senior management free to concentrate on strategy
 Better local decisions due to local expertise
 Better motivation
 Quicker responses/flexibility
 Training/career path

Question 27

What are the cons of decentralisation?

Answer 27

 Loss of control by senior management
 Dysfunctional decisions due to a lack of goal congruence
 Poor decisions made by inexperienced managers
 Training costs
 Duplication of roles and resources
 Extra costs re information (e.g. multiple management accounts)

Question 28

What are factors affecting the degree of decentralisation?

Answer 28

 Management style and ability.
 Size of the organisation.
 Range of products/services/brands.
 Geographic location.
 Extent of local market knowledge required.
 Effectiveness of communication and communication systems.

Question 29

What is contingency-theory?

Answer 29

 Contingency-theory promotes the need to adopt an appropriate structure for the
needs and situation of the business – i.e. no one size fits all!

Question 30

Who are Burns and Stalker?

Answer 30

They utilise the contingency approach:

Burns and Stalker summarise two extremes of structure:
Mechanistic: rigid structure – suitable for stable environments
- Formal, hierarchical, authority and control based, focuses on efficiency

Organic – flexible structure – suitable for dynamic environment.
- informal, flat, project teams, power based on expertise

Question 31

What are the rules for effective divisionalisation?

Answer 31

 Autonomy for local level managers to effectively run the division – issues such as imposed Head Office costs and company-wide initiatives can stifle this autonomy.
 Control – Divisional managers are held accountable for factors they can control – perceived interference from senior management can damage this accountability.
 Goal congruence – is important so that divisional managers feel that they are fulfilling personal objectives as well as achieving corporate aims.

Question 32

How do you measure performance in a divisional business?

Answer 32

 Divisions tend to be set up as investment centres where the division manager is
responsible for profit and at least some investment decisions.
 Investment centres will have a lot of autonomy over the profits and the net
assets of a business.
 The specific performance indicators of Return on Investment (ROI) and Residual Income (RI) can be used to assess performance.

Question 33

How do you calculate return on investment?

Answer 33

ROI = Annual profit controllable by manager (controllable profit) / Capital employed in the division (CE)

ROI is also known as ROCE or RONA

Question 34

What are the advantages of ROI?

Answer 34

 Widely used and accepted.
 Should facilitate comparisons – especially between divisions of different sizes.

Question 35

What are the disadvantages of ROI?

Answer 35

 Relative measure.
 Different accounting policies can make comparisons difficult.
 ROI increases with the age of the assets:
– May discourage investment in assets.
– NBV may lead to assets being kept too long.
– May lead to inappropriate leasing/outsourcing in order to keep assets off
the Statement of Financial Position.
 Can lead to dysfunctional decision making.

Question 36

How do you calculate residual income?

Answer 36

RI = Controllable profit – (Capital employed × target % return)

Question 37

What are the advantages and disadvantages to residual income calculations?

Answer 37

 Absolute measure
 RI will also increase with the age of assets
 Less likely to lead to dysfunctional decisions

Question 38

What is the transfer price?

Answer 38

A transfer price is the price at which one division in a group sells its products or services to another division in the same group.

Question 39

What impact will the transfer price have? (Profitability)

Answer 39

The transfer price set will have an impact on the share of the profit that the two divisions make from the work performed.

Question 40

What impact will the transfer price have? (Taxation)

Answer 40

If Division A operated in a country with a lower tax rate than Division B then the
overall tax payable would be reduced when a higher transfer price is chosen, as this would transfer a greater share of group profits into the division with the lower tax rate.

Question 41

What impact will the transfer price have? (Decision Making)

Answer 41

If the transfer price has been set too high or too low then this may lead to decisions which are not goal congruent.

Question 42

What impact will the transfer price have? (Consumer Selling Prices)

Answer 42

Higher transfer prices set by the supplying division will increase the overall costs which need to be recovered by the receiving division and may force the final selling price to rise.

This could result in a failure to price the product competitively.

Question 43

What are the methods can you apply when setting a transfer price?

Answer 43

There are various methods that can be adopted when setting transfer prices.
 Cost plus pricing – transfer prices are set based on marginal or full-cost per unit plus a mark-up.
 Opportunity cost – transfer prices reflect the opportunity cost of any work
foregone by the supplying division in order to supply internally.
 Negotiated prices – divisional managers negotiate a transfer price until a compromise is reached.
 Two-part tariff – products or services are supplied at marginal cost but a fixed
annual fee is charged by the supplying division to recover fixed costs.
 Dual pricing – the supplying division is credited with a different price to the one
which has been debited to the receiving division.
 Market prices – products or services are supplied at the current market rate.

Question 44

What should an organisation consider when selecting a transfer price?

Answer 44

 Goal congruence
 Performance measurement
 Combined tax liabilities.

Question 45

What is corporate governance?

Answer 45

Corporate governance is the set of rules which governs the structure
and determines the objectives of an organisation and regulates the relationship between the organisation’s management, its board of directors, and its shareholders.

Put more simply, corporate governance is the system by which business corporations are directed and controlled.

Question 46

What are the general principles of good corporate governance?

Answer 46

The general principles of good corporate governance are covered by the UK
Corporate Governance Code.

These include:
 Appropriate balance of power
No one individual should be awarded too much power e.g. different people
should hold the role of Chairman and CEO.
 Independent NEDs
The board should consist of a sufficient number of independent Non-executive
directors to provide an objective opinion on key decisions.
 Established committees
NED’s should form a nominations committee, remuneration committee and audit committee.
 Effective risk management
The board should maintain sound risk management and internal control
systems. This includes cyber security risk management.

Question 47

How does governance work for not-for-profit organisations?

Answer 47

Organisations which are not required to comply with the Corporate Governance
Code, such as Not-for-Profit organisations, should consider the general principles of good governance.

Accountability
Responsible stewardship of public or donated money.

Stakeholders
Answerable to a wide range of stakeholders.

Openness and transparency
Improve public trust by avoiding making decisions ‘behind closed doors’.

Board structures
NFP boards may be elected or voluntary.

Monitoring performance
Increasingly NFPs are expected to measure their outcomes.