Strategy and structure

Question 1

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

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

Different types of structure

Answer 3

Different categories of structure exist and will be appropriate to businesses at the
various phases of their lives.

Question 4

Entrepreneurial structure

Answer 4

 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
Subordinates

Question 5

Entrepreneurial structure
Advantages

Answer 5

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

Question 6

Entrepreneurial structure
Disadvantages

Answer 6

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

Question 7

Strategy and structure
Functional structure

Answer 7

 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
Marketing
dept.
Production
dept.
Finance
dept.
HR dept.

Question 8

Strategy and structure
Functional structure
Advantages

Answer 8

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

Question 9

Strategy and structure
Functional structure
Disadvantages

Answer 9

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

Question 10

Divisionalised structure (Product/brand/division based)

Answer 10

 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 11

Divisionalised structure (Product/brand/division based)
Advantages

Answer 11

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

Question 12

Divisionalised structure (Product/brand/division based)
Disadvantages

Answer 12

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

Question 13

Divisionalised structure (Geographically based)

Answer 13

 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.

Board of Directors
European
division
Asian
division
African
division
American
division

Question 14

Divisionalised structure (Geographically based)
Advantages

Answer 14

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

Question 15

Divisionalised structure (Geographically based)
Disadvantages

Answer 15

The same as for a divisional
structure

Question 16

Strategy and structure
Matrix structure

Answer 16

 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
Functional structure

Prod
Dept - Prod Mgr,A, B,C
Sales
Dept - Prod Mgr,A, B,C
Finance
Dept - Prod Mgr,A, B,C
R&D
Dep

Question 17

Strategy and structure
Matrix structure
Advantages

Answer 17

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

Question 18

Strategy and structure
Matrix structure
Disadvantages

Answer 18

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

Question 19

Strategy and structure
Flexible structures

Answer 19

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 20

Strategy and structure
Flexible structures
Advantages

Answer 20

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

Question 21

Strategy and structure
Flexible structures
Disadvantages

Answer 21

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

Question 22

Handy’s shamrock organisation (flexible firm)

Answer 22

 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 23

The components of the shamrock

Answer 23

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 on-line

Question 24

Mintzberg’s structural configurations description

Answer 24

Mintzberg developed a concept which identified six component parts of an
organisation.

Question 25

Mintzberg’s structural configurations The components

Answer 25

Ideology Strategic apex Middle line Operating core Sides: Technostructure Support staff

Question 26

Mintzberg’s structural configurations Operating core

Answer 26

the basic work of the organisation – e.g. the shop floor

Question 27

Mintzberg’s structural configurations Strategic apex

Answer 27

higher management – overall strategic, long-term planning and control.

Question 28

Mintzberg’s structural configurations Middle line

Answer 28

managers linking between the strategic apex and operating core (up and down communication).

Question 29

Mintzberg’s structural configurations Technostructure

Answer 29

– 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)

Question 30

Mintzberg’s structural configurations Support structure

Answer 30

provision of services to the organisation which support operations/production (catering, legal advice, press relations, etc.) – often outsourced.

Question 31

Mintzberg’s structural configurations Ideology

Answer 31

organisation’s values and beliefs (culture) – the ‘glue holding the organisation together'.

Question 32

Role of Mintzerg’s components

Answer 32

Mintzberg considered different types of structures and emphasised:  The key component (‘building block’) in developing the business  The most likely co-ordinating mechanisms in achieving business development.

Question 33

Role of Mintzerg’s components Type of structure Simple structures (e.g. entrepreneurial)

Answer 33

Key building block Strategic apex Co-ordinating mechanism Direct supervision

Question 34

Role of Mintzerg’s components Type of structure Bureaucratic structures (e.g. functional)

Answer 34

Key building block Technostructure Co-ordinating mechanism Standardisation of work

Question 35

Role of Mintzerg’s components Type of structure Divisionalised structures

Answer 35

Key building block Middle line Co-ordinating mechanism Standardisation of outputs

Question 36

Role of Mintzerg’s components Type of structure Complex structures (e.g. matrix)

Answer 36

Key building block Operating core Co-ordinating mechanism Mutual adjustment

Question 37

Mintzberg: Co-ordinating mechanisms

Answer 37

 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 38

Span of control

Answer 38

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

Question 39

Tall organisations

Answer 39

Tall organisations have many ‘layers’ of management, who oversee relatively few subordinates. 'Tall' organisation with 'narrow' spans of control If spans of control are too narrow = over-supervision, inefficient management and costly delays in passing information.

Question 40

Flat organisations

Answer 40

Flat organisations have few layers of management, who oversee a larger number of subordinates 'Flat' organisation with 'wide' spans of control If spans of control are too wide = loss of contact/control and informal subgroups appear.

Question 41

Factors influencing the span of control

Answer 41

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 42

(De)centralisation

Answer 42

refers to the degree of autonomy/decision making ability diffused through the organisation

Question 43

Pros and cons of decentralisation

Answer 43

Pros  Senior management free to concentrate on strategy  Better local decisions due to local expertise  Better motivation  Quicker responses/flexibility  Training/career path Cons  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 44

Factors affecting the degree of decentralisation

Answer 44

 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 45

Mechanistic vs. organic Contingency approach

Answer 45

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!  Burns and Stalker summarise two extremes of structure: – Mechanistic – rigid structure – suitable for stable environments – Organic – flexible structure – suitable for dynamic environment.

Question 46

Mechanistic vs. organic Contingency approach Mechanistic

Answer 46

Rigid and formalised  formal  hierarchical  authority and control based  focuses on efficiency

Question 47

Mechanistic vs. organic Contingency approach Organic

Answer 47

Fluid and flexible  informal  flat  project teams  power based on expertise

Question 48

Issues in managing a divisionalised business

Answer 48

As already seen, a business may adopt a divisionalised structure so each division can focus attention on its own markets, products and brands

Question 49

Rules for effective divisionalisation

Answer 49

**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 50

Measuring performance in a divisional business

Answer 50

 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 51

Return on investment (ROI)

Answer 51

ROI = Annual profit controllable by manager (controllable profit) / Capital employed in the division (CE) ROI is also known as ROCE or RONA.

Question 52

Advantages of ROI

Answer 52

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

Question 53

Disadvantages of ROI

Answer 53

 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 54

Residual income (RI)

Answer 54

**RI = Controllable profit – (Capital employed × target % return)**  Absolute measure  RI will also increase with the age of assets  Less likely to lead to dysfunctional decisions (see below)

Question 55

Transfer pricing

Answer 55

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 56

Transfer pricing Basic situation

Answer 56

One division performs work for another division and needs to set a transfer price.

Question 57

Transfer pricing Impact on divisional profitability

Answer 57

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

Question 58

Transfer pricing Impact on taxation

Answer 58

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 59

Transfer pricing Impact on decision making

Answer 59

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

Question 60

Transfer pricing Impact on consumer selling prices

Answer 60

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 61

Transfer pricing Setting a transfer price

Answer 61

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 62

Transfer pricing When selecting a transfer price the organisation should consider the impact on:

Answer 62

 Goal congruence  Performance measurement  Combined tax liabilities.

Question 63

Corporate governance

Answer 63

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

Question 64

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

Answer 64

**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 65

Governance for Not-for-Profit organisations

Answer 65

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**.

Question 66

the general principles of good governance.

Answer 66

**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.