Week 2 Flashcards
What is organisational structure?
The way in which an organisation groups its employees together to co-ordinate, manage and control the elements of an organisation and focus attention towards particular objectives and activities that support organisational strategy.
the elements of an organisation
Resources
People
Activities
Types of work units 8/3
“I’m still a believer but I don’t know why / I’ve never been a natural / All I do is try, try, try”
Work units are:
Groups of individuals who perform specific tasks or functions
Can be small (a team) or large (a business)
Are supervised by a manager
Functional work units
Focus of work unit is on a specific function
Business (Market-based) work units
Focus of work unit is a specific market
Defined by either geography, customer or product
Matrix Structures (complex market-based work units) 8/3
“But she wears short skirts / I wear T-shirts / She’s cheer captain / And I’m on the bleachers”
Hybrid example: Front-End/Back-End
8/3
“They told me all of my cages were mental / So I got wasted like all my potential”
When are functional structures appropriate?
Common technologies for all products
Standardised products
Managers are functionally skilled
When efficiency in undertaking value chain functions is a KSF
When are market-based structures appropriate?
Diversity of product lines Diversity in product technologies Dissimilar markets Capable managers When market responsiveness to customers is a KSF
Business strategy and organisational structure
Each type of work unit has its own benefits and limitations. These benefits/limitations allow different means of competitive advantage to be matched to different work unit types. When interdependencies between work units are important, horizontal information flows are important A well designed structure should provide incentives to share information with other divisions or work units. Fosters collaboration and avoids silo mentality.
Benefits of market-based responsibility centres
Co-ordination of value chain activities is easier. Most/all activities are within one work unit
Managers tend to become more widely trained
Breadth of skills
Employees are dedicated to one product/line/service
Understand customer needs
Therefore responsiveness to customers is enhanced
Limitations of market-based work units
Duplication of non-production staff
Each business unit has marketing/production function etc.
Functional economies of scale are limited
Management of work unit becomes more complex
If managers don’t have a breadth of knowledge/skills -
Information asymmetry may occur between work unit manager and employees (within the same work unit)
Can encourage competition between work units
Each are a “Mini Business” effecting a “Silo mentality”
Benefits of functional work units
Limits attention to one function
focused performance objectives
All employees specialise in one function
Allows employees develop expertise
Manager is able to supervise/teach all employees
All have similar skills
Economies of scale
Therefore efficiency of the function is enhanced
Limitations of functional work units
Functions of the value chain are separated
Co-ordination/integration of independent functions can be difficult for organisation s to achieve
Information flows/communication (vertically) are often restricted
Focus is often on efficiencies of operations at the expense of
creativity and learning,
customer value,
customer responsiveness
Performance measurement is problematic
How do you measure the contribution of a “marketing” function?
Not as suitable for firms with diversified products/services
A Decentralised Organisational Structure
Decentralisation refers to the way decision-making is delegated to responsibility centre managers and employees. The distinction between centralised and decentralised organisations depends on the degree of decision-making power/delegation within responsibility centres
Centralised v decentralised
Centralised firms
Little delegation of decision-making to lower management.
Small organisations may not necessarily have sub-units.
Decentralised firms
Work units are generally necessary.
Work unit managers have decision making power.
Why do firms decentralise?
Essentially, organisations become too large. Information flows become too complex. Co-ordination of people, resources, activities becomes more complex. Specialist knowledge/skills become critical to quality decision making and therefore organisational success. Therefore effective and timely decisions cannot be made centrally.
Potential benefits of delegating decisions to lower management (decentralising)
Improves decision-making timeliness
Improves access to relevant decision information
Provides opportunities to gain experiences and skills
Empowers employees
Tends to improve managerial motivation
Decision making and decentralisation
In a centralised organisation, decision making authority and responsibility resides with top management. In a decentralised organisation, decision making authority and responsibility is given to lower levels of management. Usually, top management has general knowledge about the operations of business segments. However, decision making often requires specific knowledge which is more likely to reside with business segment managers
Decentralisation Potential problems
Communication of strategic objectives may be difficult
Control over decision-making may be problematic
Information asymmetry
Lack of goal congruence
Performance measurement and evaluation difficult
The role of an MAS is to provide information to minimise these problems
Requirements for successful decentralisation
Clear identification and communication of boundaries of responsibility between work units and managers.
Ability to measure accurately the performance of individual work units.
Limitations on the interference of central management in local decision making
The MAS supports the establishment of these requirements through:
Development of Responsibility Centres
Use of Responsibility Accounting
Responsibility centres
Responsibility centres are decentralised sub-units or work units in which managers are accountable for specific types of operating activities. They are important part of management control. Activities and performance should be clearly defined. Activities and performance should be limited. Managers should have decision-making power over activities and performance for which he/she is responsible.
Responsibility accounting
Responsibility accounting assigns authority and responsibility to managers of sub-units and then measuring and evaluating their performance
Performance measurement in decentralised units 8/3
“You held your pride like you should have held me”
Types of Responsibility Centres
Cost centre
Two types
Engineered or
Discretionary
Revenue centre
Profit centre
Investment centre
Cost centres
Manager is responsible for costs associated with work unit responsibility centre. Cost centres tend to be functional work units. Two types of cost centres
Engineered
Discretionary
Engineered cost centres Examples
Manufacturing units, some data entry and administration units
Engineered cost centres characteristics
Input /output relationships are well understood
optimal amount of input required to produce one unit of output can be determined
Once desired output is known, inputs can be determined
Performance measurement is relatively easy
Use of standards, flexible budgets, variance analysis
Discretionary costs centres examples
R & D, Marketing, Staff Training
Discretionary costs centres characteristics
Difficult to measure output – it’s often qualitative
Even if outputs can be measured, the input-output relationship is difficult to observe
Sometimes a lag between inputs and outputs
Costs incurred are often caused by management discretion
Performance measurement and control in discretionary cost centres is difficult
No standards can be determined
Input-output relationships cannot be identified
No “optimal” level of expenditure can be determined
Performance evaluation requires judgement
Qualitative measures
Profit centres
Managers given control of both inputs (costs) and outputs (revenue). Manager evaluated in terms of effectiveness in controlling costs and revenues. Often used in business work units. Performance measures tend to be quantitative
Investment centres
Managers of investment centres are held responsible for the revenues, costs and investments under their control. Because investment centres include revenues, costs and investment, performance measures need to address all of these factors. Objectives emphasise generation of profit, for a given level of assets– i.e. profitability, not just profit is important.
Most common performance measures for investment centres
ROI or ROA
Residual income
Economic Value Added (EVA)
Choice of types of responsibility centres depends on:
size of organisation
nature of organisation
organisational structure.
Functional work units tend to be?
Cost or revenue centres
Production department
Sales department
Business (market-based) work units tend to be?
Profit or investment centres
“mini businesses”
Responsibility centre and management control
Ideally, responsibility centres should reduce agency costs by holding managers accountable for their decisions. However, responsibility centre accounting may lead to suboptimal decision making because managers act in their own best interests rather than for the entity as a whole. To address agency problems, appropriate performance measures and reward systems must be implemented
Influencing behaviour
Organisational structure directly provides a form of management control as it determines a manager’s Span of control, Span of accountability and Span of attention. These “spans” define a manager’s role and behaviours These “spans” influence individual behaviour by providing direction for behaviour and decision-making
Controlling management actions
8/3
“Time won’t fly, it’s like I’m paralyzed by it / I’d like to be my old self again, but I’m still trying to find it / After plaid shirt days and nights when you made me your own / Now you mail back my things and I walk home alone”
