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Strategy and structure Flashcards

1
Q

Organisational structure

A

Organisational structure defines how the various functions of an
organisation are arranged.
A successful strategy requires the organisation of people and decision making

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2
Q

The features of an organisational structure

A

Organisation of people
Types of structure
Mintzberg’s structural configurations

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

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3
Q

Different types of structure

A

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

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4
Q

Entrepreneurial structure

A

 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

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5
Q

Entrepreneurial structure
Advantages

A

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

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6
Q

Entrepreneurial structure
Disadvantages

A

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

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7
Q

Strategy and structure
Functional structure

A

 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.

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8
Q

Strategy and structure
Functional structure
Advantages

A

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

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9
Q

Strategy and structure
Functional structure
Disadvantages

A

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

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10
Q

Divisionalised structure (Product/brand/division based)

A

 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.

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11
Q

Divisionalised structure (Product/brand/division based)
Advantages

A

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

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12
Q

Divisionalised structure (Product/brand/division based)
Disadvantages

A

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

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13
Q

Divisionalised structure (Geographically based)

A

 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

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14
Q

Divisionalised structure (Geographically based)
Advantages

A

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

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15
Q

Divisionalised structure (Geographically based)
Disadvantages

A

The same as for a divisional
structure

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16
Q

Strategy and structure
Matrix structure

A

 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

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17
Q

Strategy and structure
Matrix structure
Advantages

A

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

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18
Q

Strategy and structure
Matrix structure
Disadvantages

A

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

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19
Q

Strategy and structure
Flexible structures

A

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

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20
Q

Strategy and structure
Flexible structures
Advantages

A

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

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21
Q

Strategy and structure
Flexible structures
Disadvantages

A

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

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22
Q

Handy’s shamrock organisation (flexible firm)

A

 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.

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23
Q

The components of the shamrock

A

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

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24
Q

Mintzberg’s structural configurations description

A

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

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25
Q

Mintzberg’s structural configurations

The components

A

Ideology
Strategic
apex
Middle line
Operating core

Sides:
Technostructure
Support staff

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26
Q

Mintzberg’s structural configurations

Operating core

A

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

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27
Q

Mintzberg’s structural configurations

Strategic apex

A

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

28
Q

Mintzberg’s structural configurations

Middle line

A

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

29
Q

Mintzberg’s structural configurations

Technostructure

A

– 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)

30
Q

Mintzberg’s structural configurations

Support structure

A

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

31
Q

Mintzberg’s structural configurations

Ideology

A

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

32
Q

Role of Mintzerg’s components

A

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.

33
Q

Role of Mintzerg’s components
Type of structure

Simple structures
(e.g. entrepreneurial)

A

Key building block
Strategic apex

Co-ordinating mechanism
Direct supervision

34
Q

Role of Mintzerg’s components
Type of structure

Bureaucratic structures
(e.g. functional)

A

Key building block
Technostructure

Co-ordinating mechanism
Standardisation of work

35
Q

Role of Mintzerg’s components
Type of structure

Divisionalised
structures

A

Key building block
Middle line

Co-ordinating mechanism
Standardisation of outputs

36
Q

Role of Mintzerg’s components
Type of structure

Complex structures
(e.g. matrix)

A

Key building block
Operating core

Co-ordinating mechanism
Mutual adjustment

37
Q

Mintzberg: Co-ordinating mechanisms

A

 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.

38
Q

Span of control

A

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

39
Q

Tall organisations

A

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.

40
Q

Flat organisations

A

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.

41
Q

Factors influencing the span of control

A

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.

42
Q

(De)centralisation

A

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

43
Q

Pros and cons of decentralisation

A

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)

44
Q

Factors affecting the degree of decentralisation

A

 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.

45
Q

Mechanistic vs. organic
Contingency approach

A

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.

46
Q

Mechanistic vs. organic
Contingency approach
Mechanistic

A

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

47
Q

Mechanistic vs. organic
Contingency approach
Organic

A

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

48
Q

Issues in managing a divisionalised
business

A

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

49
Q

Rules for effective divisionalisation

A

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.

50
Q

Measuring performance in a divisional business

A

 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.

51
Q

Return on investment (ROI)

A

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

ROI is also known as ROCE or RONA.

52
Q

Advantages of ROI

A

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

53
Q

Disadvantages of ROI

A

 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.

54
Q

Residual income (RI)

A

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)

55
Q

Transfer pricing

A

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.

56
Q

Transfer pricing
Basic situation

A

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

57
Q

Transfer pricing
Impact on divisional profitability

A

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

58
Q

Transfer pricing
Impact on taxation

A

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

59
Q

Transfer pricing
Impact on decision making

A

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

60
Q

Transfer pricing
Impact on consumer selling prices

A

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.

61
Q

Transfer pricing
Setting a transfer price

A

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.

62
Q

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

A

 Goal congruence
 Performance measurement
 Combined tax liabilities.

63
Q

Corporate governance

A

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.

64
Q

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

A

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.

65
Q

Governance for Not-for-Profit organisations

A

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.

66
Q

the general principles of
good governance.

A

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.

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