Strategy and structure Flashcards
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
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
Different types of structure
Different categories of structure exist and will be appropriate to businesses at the
various phases of their lives.
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
Subordinates
Entrepreneurial structure
Advantages
Fast decision making
More responsive to market
Good control
Close bond to workforce
Entrepreneurial structure
Disadvantages
Lack of career structure
May be too centralised
Cannot cope with diversification/
growth
Strategy and structure
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
Marketing
dept.
Production
dept.
Finance
dept.
HR dept.
Strategy and structure
Functional structure
Advantages
Economies of scale
Standardisation/efficiency
Specialists more comfortable
Strategy and structure
Functional structure
Disadvantages
Empire building
Slow to adapt to market changes
Conflicts between functions
(e.g. impairs cross department
communication and innovation)
Cannot cope with diversification
Divisionalised 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.
Divisionalised structure (Product/brand/division based)
Advantages
Enables product growth
Clear responsibility and
accountability for products
Training of general managers
Divisionalised structure (Product/brand/division based)
Disadvantages
Potential loss of control
Lack of goal congruence
Duplication of effort
Specialists may feel isolated
Divisionalised structure (Geographically based)
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
Divisionalised structure (Geographically based)
Advantages
Enables geographic growth
Clear responsibility for areas
Training of general managers
Divisionalised structure (Geographically based)
Disadvantages
The same as for a divisional
structure
Strategy and structure
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
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
Strategy and structure
Matrix structure
Advantages
Improves cross-functional
communication
Particularly useful for projects
and temporary teams
Flexibility – helps staff adapt
quickly to new situations
Strategy and structure
Matrix structure
Disadvantages
Dual command – conflicts between
managers and over individual’s time
and commitments (stressful!)
Dilution of functional authority
Time-consuming meetings
Strategy and structure
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
Strategy and structure
Flexible structures
Advantages
Increased flexibility
Reduced premises cost
Access to specialist skills
Strategy and structure
Flexible structures
Disadvantages
Lack of control
Difficult to create a consistent
culture within the organisation
Handy’s shamrock organisation (flexible firm)
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.
The components of the shamrock
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
Mintzberg’s structural configurations description
Mintzberg developed a concept which identified six component parts of an
organisation.
Mintzberg’s structural configurations
The components
Ideology
Strategic
apex
Middle line
Operating core
Sides:
Technostructure
Support staff
Mintzberg’s structural configurations
Operating core
the basic work of the organisation – e.g. the shop floor
Mintzberg’s structural configurations
Strategic apex
higher management – overall strategic, long-term planning
and control.
Mintzberg’s structural configurations
Middle line
managers linking between the strategic apex and operating core
(up and down communication).
Mintzberg’s structural configurations
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)
Mintzberg’s structural configurations
Support structure
provision of services to the organisation which support
operations/production (catering, legal advice, press relations, etc.) – often
outsourced.
Mintzberg’s structural configurations
Ideology
organisation’s values and beliefs (culture) – the ‘glue holding the
organisation together’.
Role of Mintzerg’s components
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.
Role of Mintzerg’s components
Type of structure
Simple structures
(e.g. entrepreneurial)
Key building block
Strategic apex
Co-ordinating mechanism
Direct supervision
Role of Mintzerg’s components
Type of structure
Bureaucratic structures
(e.g. functional)
Key building block
Technostructure
Co-ordinating mechanism
Standardisation of work
Role of Mintzerg’s components
Type of structure
Divisionalised
structures
Key building block
Middle line
Co-ordinating mechanism
Standardisation of outputs
Role of Mintzerg’s components
Type of structure
Complex structures
(e.g. matrix)
Key building block
Operating core
Co-ordinating mechanism
Mutual adjustment
Mintzberg: 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.
Span of control
The span of control considers how many people report to one
superior.
Tall organisations
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.
Flat organisations
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.
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.
(De)centralisation
refers to the degree of autonomy/decision making
ability diffused through the organisation
Pros and cons of decentralisation
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)
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.
Mechanistic vs. organic
Contingency approach
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.
Mechanistic vs. organic
Contingency approach
Mechanistic
Rigid and
formalised
formal
hierarchical
authority and control
based
focuses on efficiency
Mechanistic vs. organic
Contingency approach
Organic
Fluid and
flexible
informal
flat
project teams
power based on
expertise
Issues in managing a divisionalised
business
As already seen, a business may adopt a divisionalised structure so each division
can focus attention on its own markets, products and brands
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.
Measuring 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.
Return on investment (ROI)
ROI = Annual profit controllable by manager (controllable profit) / Capital employed in the division (CE)
ROI is also known as ROCE or RONA.
Advantages of ROI
Widely used and accepted.
Should facilitate comparisons – especially between divisions of different sizes.
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.
Residual income (RI)
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)
Transfer pricing
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.
Transfer pricing
Basic situation
One division performs work for another division and needs to set a transfer price.
Transfer pricing
Impact on divisional profitability
The transfer price set will have an impact on the share of the profit that the two
divisions make from the work performed.
Transfer pricing
Impact on 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
Transfer pricing
Impact on 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.
Transfer pricing
Impact on 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.
Transfer pricing
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.
Transfer pricing
When selecting a transfer price the organisation should consider the impact on:
Goal congruence
Performance measurement
Combined tax liabilities.
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.
The general principles of good corporate governance are covered by the UK
Corporate Governance Code.
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.
Governance 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.
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.
