Chapter 9: Strategy and structure Flashcards
What is organisational structure?
Organisational structure defines how the various functions of an organisation are arranged.
A successful strategy requires the organisation of people and decision making
What are the features of an organisational structure?
Organisation of people:
- Types of structure
- Mintzberg’s structural configurations
Organisation of decision making:
- Span of control
- Mechanistic vs organic
- Centralisation vs decentralisation
What is the entrepreneurial structure?
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
What are the advantages and disadvantages to the entrepreneurial structure?
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
What is the functional structure?
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
What are the advantages and disadvantages to the functional structure?
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
What is a divisionalized structure (Product/brand/division based)?
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.
What are the advantages and disadvantages of a divisionalized structure?
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
What is the divisionalised structure (geographically based)?
What are the advantages and disadvantages?
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
What is the matrix structure?
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)
What are the advantages and disadvantages of a matrix structure?
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
What are flexible structures?
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
What are the advantages and disadvantages to flexible structures?
Advantages:
Increased flexibility
Reduced premises cost
Access to specialist skills
Disadvantages:
Lack of control
Difficult to create a consistent culture within the organisation
What is Handy’s shamrock organisation?
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.
What are the components of Hardy’s shamrock organisation?
- 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
What are the components of Mintzberg’s structural configurations?
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’.
What does Mintzberg suggest the key building blocks and co-ordinating mechanisms are for each structure?
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
What are the different co-ordinating mechanisms?
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.
What is the span of control?
The span of control considers how many people report to one
superior.
What is a tall organisation?
Tall organisations have many ‘layers’ of management, who oversee relatively few
subordinates.
What happens if spans of control are too narrow?
If spans of control are too narrow = over-supervision, inefficient management and costly delays in passing information.
What are flat organisations?
Flat organisations have few layers of management, who oversee a larger number of subordinates.
What happens if spans of control are too wide?
If spans of control are too wide = loss of contact/control and informal subgroups appear.
What are factors influencing the span of control?
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.
What is decentralisation?
(De)centralisation refers to the degree of autonomy/decision making ability diffused through the organisation.
What are the pros of decentralisation?
Senior management free to concentrate on strategy
Better local decisions due to local expertise
Better motivation
Quicker responses/flexibility
Training/career path
What are the cons of decentralisation?
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)
What are factors affecting the degree of decentralisation?
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.
What is contingency-theory?
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!
Who are Burns and Stalker?
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
What are the rules for effective divisionalisation?
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.
How do you measure performance in a divisional business?
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.
How do you calculate return on investment?
ROI = Annual profit controllable by manager (controllable profit) / Capital employed in the division (CE)
ROI is also known as ROCE or RONA
What are the advantages of ROI?
Widely used and accepted.
Should facilitate comparisons – especially between divisions of different sizes.
What are the disadvantages of ROI?
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.
How do you calculate residual income?
RI = Controllable profit – (Capital employed × target % return)
What are the advantages and disadvantages to residual income calculations?
Absolute measure
RI will also increase with the age of assets
Less likely to lead to dysfunctional decisions
What is the transfer price?
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.
What impact will the transfer price have? (Profitability)
The transfer price set will have an impact on the share of the profit that the two divisions make from the work performed.
What impact will the transfer price have? (Taxation)
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.
What impact will the transfer price have? (Decision Making)
If the transfer price has been set too high or too low then this may lead to decisions which are not goal congruent.
What impact will the transfer price have? (Consumer Selling Prices)
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.
What are the methods can you apply when setting a transfer price?
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.
What should an organisation consider when selecting a transfer price?
Goal congruence
Performance measurement
Combined tax liabilities.
What is corporate governance?
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.
What are the general principles of good corporate governance?
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.
How does governance work for not-for-profit organisations?
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.
