Copyright Guy Harley 2004 Organisational Structure Week 10

Copyright Guy Harley 2004 Organisational Structure  Organisational Structure is a firm’s:  Role configuration  Procedures  Governance & control mechanisms  Authority & decision making processes

Copyright Guy Harley 2004 Organisational Structure  Proper use of:  organisational structure and  accompanying integrating mechanisms & controls Contribute to a firm’s competitiveness  Competitive advantage is created when there is a match between strategy and structure

Copyright Guy Harley 2004 Structure Types  All organisations require some form of organisational structure to implement and manage their strategies  Firms frequently alter their structure as they grow in size and complexity  Three basic structure types:  Simple structure  Functional structure  Multi-divisional structure (M-form)

Copyright Guy Harley 2004 Strategy & Structure Growth Pattern Simple Structure Sales growth coordination & control problems Functional Structure Multi- divisional Structure

Copyright Guy Harley 2004 Simple Structure  Owner/manager makes all major decisions directly and monitors all activities  Staff serve as an extension of the Manager’s supervisory authority  Information systems are unsophisticated  Typically offers a single product line in a single geographical market

Copyright Guy Harley 2004 Simple Structure  Often used for focused strategies  Communication is frequent & direct  New products are introduced to market quickly  Important to the nations economy  Created 92% of new jobs in Australia in early 1990’s

Copyright Guy Harley 2004 Simple Structure  Difficult to maintain this structure as the firm grows in size and complexity  Lack skills necessary to manage specialised & complex tasks of multiple organisational functions

Copyright Guy Harley 2004 Functional Structure  First stage beyond a simple structure  Appropriate for single- or dominant-business firms  Consists of  CEO  Functional line managers in dominant organisational areas

Copyright Guy Harley 2004 ProductionFinanceR&DAccounting Sales & Marketing Human Resources Differentiation business- level strategy usually employs a decentralised structure and emphasises product R&D and sales & marketing Low cost business-level strategy usually employs a centralised structure and emphasises process R&D and operations Chief Executive Officer (CEO) Functional Structure

Copyright Guy Harley 2004 Functional Structure  Allows specialisation of tasks, for example:  Production  Finance  Engineering  Accounting  Sales & Marketing  Human Resources  This facilitates  knowledge sharing  Idea development

Copyright Guy Harley 2004 Functional Structure  Overcomes information-processing limits of single owner/manager  Functional department heads report to CEO, who integrates decisions and actions from a companywide point of view  Risks conflicts between myopic function managers

Copyright Guy Harley 2004 Multi-Divisional Structure  Each division is operated as a separate business  Results from  CEO information overload  Increased diversification  Conflict between functional managers  Appropriate for related-diversified businesses

Copyright Guy Harley 2004 Division ProductionFinanceEngineeringAccounting Sales & Marketing Human Resources Strategic Planning Corporate Finance Corporate R&D Corporate Marketing Corporate Human Resources CEO Multi-Divisional Structure (M-form)

Copyright Guy Harley 2004 Multi-Divisional Structure  Enables corporate office to more accurately monitor performance of each business  Facilitates comparisons between divisions which improves resource allocation  Stimulates managers to improve poor performance

Copyright Guy Harley 2004 Multi-Divisional Structure  Key task of corporate managers is to exploit synergies among divisions  Managers use a combination of:  Strategic controls Subject long term & strategically relevant criteria  Financial controls Objective criteria that evaluate returns of business units & managerial performance

Copyright Guy Harley 2004 Structure & Business Level Strategy Cost Leadership  Strong task specialisation  Centralised decision making  Formalisation of work rules  Low cost culture  Emphasis on process engineering  Infrequent product changes

Copyright Guy Harley 2004 ProductionFinanceR&DAccounting Sales & Marketing Human Resources Centralised staff Chief Executive Officer (CEO) Cost Leadership

Copyright Guy Harley 2004 Structure & Business Level Strategy Differentiation  Teams that can coordinate & integrate with each other  Decision making  Consensus  Decentralised  Rapid changes in work processes  Emphasis on R&D and marketing  Frequent product changes

Copyright Guy Harley 2004 ProductionFinance R&D Accounting Sales & Marketing Human Resources Chief Executive Officer and limited staff Differentiation

Copyright Guy Harley 2004 Structure & Business Level Strategy Cost Leadership\Differentiation  Conflicting organisational structure requirements  Functional structure supplemented by horizontal coordination  Strong organisational structure  Moderate level of product change

Copyright Guy Harley 2004 Multi-Divisional Structure (M-form) Cooperative Form Related Constrained Multi- Divisional Form Strategy Type Strategic Business Unit Structure Related Linked Competitive Form Unrelated/ Holding Company Centralisation Bureaucratic cost Three variations of the multi-divisional structure:

Copyright Guy Harley 2004 Cooperative Form  Fosters cooperation and integration  Divisional liaisons  Temporary teams  Matrix organisation  Sharing of strategic assets  Centralisation  Reward managers on overall results as there can be an unequal flow of benefits of integration to divisions

Copyright Guy Harley 2004 Strategic Planning Corporate Finance Govt. Affairs Legal Affairs Corporate Marketing Corporate HR Chief Executive Officer Cooperative Form Product Division Corporate R & D Product Division HQ

Copyright Guy Harley 2004 Strategic Business Unit Form (SBU)  Three levels  Corporate Headquarters  SBU Groups  Divisions  Integration within SBUs  Independence between SBUs

Copyright Guy Harley 2004 Strategic Planning Corporate Finance Corporate Marketing Corporate HR Chief Executive Officer SBU Form Division Corporate R & D Division HQ SBU

Copyright Guy Harley 2004 Strategic Business Unit Form (SBU)  Corporate HQ  Conducts strategic Planning  Staff serve as consultants to SBUs  SBUs are  Profit centres  largely unrelated to each other  Divisions are grouped by relatedness  Structural flexibility is important

Copyright Guy Harley 2004 Competitive Form  Corporate HQ has small staff  Finance & Auditing are most prominent HQ functions  Legal Affairs for acquisition\divestiture of assets  Divisions  are independent  Retain strategic control  Compete for corporate resources

Copyright Guy Harley 2004 Legal Affairs Finance Chief Executive Officer Competitive Form Division Auditing Division HQ

Cooperative M-Form SBU M-Form Competitive M-Form Structural Characteristics Degree of Centralisation Use of Integrating Mechanisms Divisional Performance Appraisal Divisional Incentive Compensation Type of Strategy Related- Constrained Centralised at Corporate Office Centralised in SBUs Decentralised to Division Extensive Synergies Moderate Synergies Financial Criteria Strategic & Financial Criteria Linked to Corporate Performance Linked to Corporation, Division & SBU Linked to Divisional Performance Nonexistent Synergies Subjective/ Strategic Criteria Attributes of Various Structural Forms UnrelatedMixed-Related or Unrelated

Copyright Guy Harley 2004 Multi-Divisional Structure  Firms with a complex multi-divisional structure may be simultaneously centralised and decentralised, depending upon the various business-level strategies employed throughout the firm’s individual businesses

Copyright Guy Harley 2004 Holding Company Structure  Appropriate for widely diversified firms operating in many unrelated businesses  Each business is treated as a separate profit or investment centre competing for corporate resources  Corporate office acts as a central capital market  Corporate staff evaluates financial performance  Portfolio of business units or companies is balanced through acquisitions or divestitures  Corporate staff generally lack deep understanding of strategic issues facing individual businesses  Creates no obvious benefit to shareholders, who can diversify on their own

Copyright Guy Harley 2004 Global Structures  Worldwide Geographic Area Structure  Worldwide Product Divisional Structure  Combination Structure

Copyright Guy Harley 2004 Worldwide Geographic Area Structure  Multi-domestic strategy  Strategy & operating decisions are decentralised to business units in each country  Allows products to be tailored to local markets  Firms seek to isolate their business units from global forces

Copyright Guy Harley 2004 Worldwide Geographic Area Structure  Worldwide Geographic Area Structure  HQ coordinates financial resources  Divisions are independent  Operations are decentralised  Disadvantages  Unable to create global efficiency

Copyright Guy Harley 2004 Corporate Office (Staff) CEO Evolution of Multi-Divisional Structure A structural evolution based on geographic lines usually implies a multi-domestic international strategy North America Australia EuropeAsia Latin America Africa Product AProduct C Product B Product D

Copyright Guy Harley 2004 Worldwide Product Divisional Structure  Global Strategy  Standardised products are offered across country markets  Seeks economies of scale and scope  Firm’s organisational functions are sourced to the most effective worldwide providers

Copyright Guy Harley 2004 Worldwide Product Divisional Structure  Worldwide Product Divisional Structure  Centralised decision making  Home office dictates strategy  HQ allocates financial resources in a cooperative way  Use of integrating mechanisms  Standardised policies and procedures  Disadvantages  Coordination of decisions  Unable to respond quickly

Copyright Guy Harley 2004 Corporate Office (Staff) CEO Evolution of Multi-Divisional Structure Product AProduct BProduct CProduct D A structural evolution based on product lines usually implies a global international strategy

Copyright Guy Harley 2004 Combination Structure  A trans-national international strategy  Local responsiveness and  Global efficiency  Uses combination structure

Copyright Guy Harley 2004 Combination Structure  Structure that results in emphasis on both geographic and product structures  Must be simultaneously  centralised and decentralise  Integrated and non-integrated  Formalised and non-formalised  Encourage employees to understand cultural diversity  Shared vision and leadership

Copyright Guy Harley 2004 Multi-Divisional Structure  Managers try to strike a balance between:  Competition among divisions for scarce capital resources  Creating opportunities for cooperation to develop synergies  The goal is to maximise overall firm performance

Copyright Guy Harley 2004 Multi-Divisional Structure  The structure will evolve over time with:  Changes in strategy  Degree of diversification  Geographic scope  Nature of competition  Firms which diversify too much will change strategy to divest non-performing assets

Copyright Guy Harley 2004 Finance ProductionFinanceEngineeringAccounting Sales & Marketing Human Resources ProductionEngineeringAccounting Sales & Marketing Human Resources Corporate Office (Staff) CEO Product A Product B Evolution of Multi-Divisional Structure

Copyright Guy Harley 2004 Corporate Office (Staff) CEO Evolution of Multi-Divisional Structure Product A North America EuropeAsia Product BProduct CProduct D ProductionFinanceEngineeringAccounting Sales & Marketing Human Resources

Copyright Guy Harley 2004 Strategic Networks  A strategic network is a group of organisations that is formed to create value through participation in an array of cooperative arrangements, such as a strategic alliance  A strategic centre firm often manages the network

Copyright Guy Harley 2004 Strategic Networks  The strategic centre firm identifies actions that increase the opportunity for each firm to achieve success through participation in the network  The strategic centre firm creates incentives that reduce the probability of any single firm taking advantage of its network partners

A Strategic Network firms Network firms Strategic Firm Strategic Centre Firm

Copyright Guy Harley 2004 Strategic Networks Critical functions of the strategic centre firm are:  Strategic Outsourcing  Capability Development  Technology Sharing  Network Learning

Copyright Guy Harley 2004 Strategic Outsourcing Strategic centre firm  Outsources and partners with more firms than other firms  Coordinates outsourcing among partners,  Initiates actions and coordinates problem solving among members  Encourages partners to  Solve problems  Initiate competitive courses of action

A Strategic Network – Strategic Outsourcing Strategic Firm Strategic Centre Firm

Copyright Guy Harley 2004 Capability Development The Strategic Centre firm  Has core competencies that are not shared with all network partners  Attempts to develop each partner’s core competencies  Provides incentives for partners to share capabilities & competencies

A Strategic Network – Capability Strategic Firm Strategic Centre Firm

Copyright Guy Harley 2004 Technology The Strategic Centre firm  Manages the development and sharing of technology between partners

Copyright Guy Harley 2004 Network Learning The Strategic Centre firm  Emphasises to partners the competitive worth of a network of value chains  Seeks to develop a competitive advantage in primary or support activities  Promotes the need for each firm to be strong for the benefit of the entire network value chain  Encourages friendly rivalry  Builds links to facilitate learning  Manages the learning process among partners

A Strategic Network – Race to Learn Strategic Firm Strategic Centre Firm

Copyright Guy Harley 2004 Strategic Networks – Vertical integration  Stable  Strategic centre firm  Negotiates long term contracts  Encourages partners to modernise  Promotes communication along value chain  The strategic centre firm’s structure becomes a sustainable competitive advantage

Copyright Guy Harley 2004 Strategic Networks – Horizontal Integration  Usually unstable due to rivalry  Difficult to agree on strategic centre firm

Copyright Guy Harley 2004 Distributed Strategic Networks  International Cooperative Strategies often require the use of more complex networks due to different regulatory frameworks  Many large multinational firms form distributed strategic networks with multiple regional strategic centres to manage their array of cooperative arrangements with partner firms  Breaking large networks into multiple manageably sized networks helps manage the complexity of maintaining many relationships

A Distributed Strategic Network Distributed Strategic Centre Firms Main Strategic Centre Firm