Assignment
Sabrinzy
grant2e_ch061.pptxChapter 10 Organisational Structure and Strategic Control
Prepared by Rajeev Sharma
Charles Darwin University
Learning objectives
Distinguish between the basic principles that determine the structural characteristics of complex human organisations
Discuss the role and importance of structural building blocks for structural arrangements
Examine the differences between mechanistic and organic structural features
Distinguish between specialisation, coordination and cooperation
Learning objectives
Apply principles of hierarchy in organisational design to specific tasks and business environments
Illustrate and discuss types of organisational structure and their strengths and weaknesses
Apply principles of organisational design
understand the role of information systems for coordination and how these can be applied
Introduction
The design of organisational structure and management control system is the key component of strategy implementation
The formulation of strategy should not be separated from its implementation
It is widely accepted now that ‘organisation structure should follow strategy’
Refer to page 317
The design of organisational structure and management control system is the key component of strategy implementation.
Hence, the view of strategy formulation and strategy implementation as a sequential process is summed up in the adage ‘structure follows strategy’.
Having established that how companies organise themselves is fundamental to their strategy and their performance, the goal of this chapter is to introduce the key concepts and ideas necessary to understand and design companies’ structures and systems, as well as possible changes to them
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Principles of organisational design
The modern organisational design should incorporate key design principles or building blocks
It is widely acknowledged that modern organisation has evolved from a purely functional to a highly adaptable design
Modern organisations have emerged from two key influences:
Line and staff structure
Multidivisional corporations
Refer to page 317
Before considering organisational design issues, it is important to discuss the key principles including the notion of line and staff
It is important to acknowledge the history of organisational design development. Work of Alfred Candler is worth consideration here
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line and staff structure
Historically, most organisations were small and operated from a single plant or office.
With advancement in transportation and communication, organisations commenced operating over a wider area
These geographically dispersed units were managed by an administrative headquarter.
This organisational form was known as line and staff structure
Refer to page 318
Discuss the evolution of geographically dispersed organisation and how they led to the creation of line and staff structure. Also highlight the features of this structure including the fact that employees were either line, allocated to operational tasks within the operating units, or staff, administrators and functional specialists located at head office
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Companies and markets
The business corporation is one of the greatest innovation of modern civilisation
Most of the modern world’s production of goods and services is undertaken by corporations — enterprises with a legal identity that is distinct from the individuals that own the enterprise
In the capitalist economy, production is organised in two ways: in markets — by the price mechanism — and in companies — by managerial hierarchical direction
Refer to page 318
Most of the modern world’s production of goods and services is undertaken by corporations — enterprises with a legal identity that is distinct from the individuals that own the enterprise.
The main exceptions include agriculture and crafts in the developing world, where family-based production predominates, and services such as defence, policing and education that are usually provided by government organisations.
In the capitalist economy, production is organised in two ways: in markets — by the price mechanism — and in companies — by managerial hierarchical direction. The relative roles of companies and markets are determined by efficiency and transactions will tend to be organised within companies rather than across markets
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Building blocks of structure
Fig. 10.1
Refer to page 319
Discuss the role of flexibility and responsiveness to modern organisations and how coordination is essential.
Use examples from the text and from other sources
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Mechanistic and organic forms
Table 10.1
Refer to page 319
Explain and contrasts key characteristics of the two forms by considering various features of the two forms listed above
During the 1950s and 1960s, the human relations school recognised that cooperation and coordination within organisations was about social relationships as well as bureaucratic principles. Refer to study of Scottish engineering companies by Burns and Stalker that identified two organisational forms: mechanistic forms, characterised by bureaucracy, and organic forms that were less formal, in which coordination relied on mutual adjustment and interaction was more flexible. The discussion should extend to table 10.2 to include the notion of communities of practice and other organisational forms
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Specialisation and the division of labour
The fundamental source of efficiency in production is specialisation, especially the division of labour into separate tasks
The more a production process is divided between different specialists, the greater are the costs of coordination.
The more volatile and unstable the external environment, the greater the number of decisions that need to be made and the higher are these coordination costs
Refer to page 324
Henry Ford experienced huge productivity gains by installing moving assembly lines and assigning individuals to highly specific production tasks. Between the end of 1912 and early 1914, the time taken to assemble a Model T fell from 106 hours to just over 6 hours.
However specialisation comes at a cost.
The more a production process is divided between different specialists, the greater are the costs of coordination.
The more volatile and unstable the external environment, the greater the number of decisions that need to be made and the higher are these coordination costs
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The coordination problem
No matter how great the specialist skills possessed by individuals, unless these individuals can coordinate their efforts, production can not occur
Four different coordination mechanisms are common:
Price
Rules and directives
Mutual adjustment
Routines
Refer to page 325
No matter how great the specialist skills possessed by individuals, unless these individuals can coordinate their efforts, production can not occur.
Consider the operation of four different coordination mechanisms:
• Price. In the market, coordination is achieved through the price mechanism. Price mechanisms also exist within companies.
• Rules and directives. Unlike self-employed workers, who negotiate market contracts for individual tasks, employees enter general employment contracts where they agree to perform a range of duties as required by their employer. Authority is exercised by means of general rules and specific directives.
• Mutual adjustment. The simplest form of coordination involves the mutual adjustment of individuals engaged in related tasks. Such mutual adjustment occurs in all teams and work groups where there is no formal leader.
• Routines. Where activities are performed recurrently, coordination based on mutual adjustment and rules becomes institutionalised within organisational routines. These regular and predictable sequences of coordinated actions by individual workers are the foundation of organisational capability
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The cooperation problem
Cooperation problem refers to the problem of different organisational members having conflicting goals
Several mechanisms exist for achieving goal alignment within organisations:
Control mechanisms
Financial incentives
Shared values
Refer to page 325
The existence of different organisational members having conflicting goals creates cooperation problem
This can be addressed through different mechanisms including:
Control mechanisms typically operate on the basis of managers supervising groups of subordinates using both positive and negative incentives. Positive incentives are typically the reward of promotion up the hierarchy in return for compliance; negative incentives are dismissal and demotion for failing to acquiesce to rules and directives.
• Financial incentives are designed to reward performance. Such incentives extend from piece-rates for production workers to share options and profit bonuses for executives.
• Shared values are the commonality of goals between organisational members. Examples are Wal-Mart, Coles Group, Amway, and the Shell Group, which all show the presence of shared values and principles that encourages the alignment of individual and corporate goals without necessarily undermining the individuality of organisational members.
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Hierarchy in organisational design
The traditional approach to large-scale organisation has been to create hierarchy
Hierarchical structures are essential for creating efficient and flexible coordination in complex organisations
The critical issue is not whether to organise by hierarchy — but how the hierarchy should be structured and how the different parts of it should relate to one another
Refer to page 327
The traditional approach to large-scale organisation has been to create hierarchy.
Despite the negative associations that currently attach to hierarchy, it is possible to argue that hierarchical structures are essential for creating efficient and flexible coordination in complex organisations.
The critical issue is not whether to organise by hierarchy — there are very few, if any, alternatives — but how the hierarchy should be structured and how the different parts of it should relate to one another.
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Hierarchy as coordination: modularity
A hierarchy is defined as a system composed of interrelated subsystems
There are two key advantages to hierarchical structures:
Economising on coordination
Adaptability
Refer to page 327
A hierarchy is defined as a system composed of interrelated subsystems.
Examples of hierarchy include:
• the human body, which is composed of a hierarchy of cells, organs and subsystems.
• physical systems, which are composed at the macro level of planets, stars and galaxies, and at the micro level of subatomic particles, atoms and molecules.
• social systems, which consist of individuals, families, communities, tribes or socioeconomic groups and nations.
• a book, which consists of letters, words, sentences, paragraphs and chapters
It is useful to also discuss the advantages of hierarchy including:
Economising on coordination. As noted earlier, the gains from specialisation come at the cost of coordination. As an organisation increases in size and complexity, so the communication-economising benefits of hierarchically arranged modules increase.
Adaptability. Hierarchical, modular systems are able to evolve more rapidly than unitary systems that are not organised into subsystems. Such adaptability requires some degree of decomposability: the ability of each component subsystem to operate with some measure of independence from the other subsystems
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Hierarchy as a control: bureaucracy
It has been shown that hierarchy is an efficient solution to the problem of coordination in organising complex tasks.
To the extent that hierarchy is also a device for exercising control, it is also one solution to the problem of cooperation in organisations.
Administrative hierarchies operate as bureaucracies
Refer to page 328
It is important to discuss how hierarchy and bureaucracy are linked
Also to discuss the underlying principles proposed by Weber
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Rethinking hierarchy
Hierarchical organisations generally add layers as they get bigger
If the hierarchy is run as a bureaucracy with centralised power, growth implies an increasing ratio of managers to operatives, slower decision making and increased loss of control
In a fast-paced business environment, the slow movement of information up the hierarchy and decisions down the hierarchy can be fatal
Refer to page 329
It is helpful to consider some of the recent research on hierarchy including:
Hierarchical organisations add layers as they get bigger.
If the hierarchy is run as a bureaucracy with centralised power, growth implies an increasing ratio of managers to operatives, slower decision making and increased loss of control.
In a fast-paced business environment, the slow movement of information up the hierarchy and decisions down the hierarchy can be fatal.
So long as there are benefits from the division of labour, hierarchy is inevitable.
The critical issue is to reorganise hierarchies in order to increase responsiveness to external change.
The trend towards decentralisation has not been one way. Some companies engage in decentralisation followed by a phase of centralisation
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Types of structure in focus
Four common organisational forms include:
The simple structure
The functional structure
The multidivisional structure
The matrix structure
Refer to page 331
Provide an overview of the four organisational forms
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The simple structure
It is a structure with a minimum level of division of labour
Decision making is largely centralised in the hands of a single person, usually the founder, with very little formalisation
The major advantage of a simple structure is its flexibility and adaptability
A major weakness of the simple structure is the lack of consistency and sustainability
Refer to page 331 and figure 10.4 and table 10.3
It is a structure with a minimum level of division of labour.
Decision making is largely centralised in the hands of a single person, usually the founder, with very little formalisation.
The major advantage of a simple structure is its flexibility and adaptability.
The simple structure’s major weakness is a possible lack of consistency and sustainability.
The organisation’s entire operations may be over-dependent on a single person, usually the founder
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The functional structure
Single-business organisations often tend to be organised along functional lines
Grouping together functionally similar tasks is conducive to exploiting scale economies, promoting learning and capability building, and deploying standardised control systems
Different functional departments however develop their own goals, values, vocabularies and behavioural norms, which make cross-functional integration difficult
Refer to page 332 and figure 10.5 and table 10.4
Grouping together functionally similar tasks is conducive to exploiting scale economies, promoting learning and capability building, and deploying standardised control systems.
Since cross-functional integration occurs at the top of the organisation, functional structures are conducive to a high degree of centralised control by the CEO and top management team.
Different functional departments develop their own goals, values, vocabularies and behavioural norms, which make cross-functional integration difficult.
As the size of the company increases, the pressure on top management to achieve effective integration increases. Because the different functions of the company tend to be tightly coupled rather than loosely coupled, there is limited scope for decentralisation.
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The multidivisional structure
It is a structure that permits decentralised decision making where business-level strategies and operating decisions are made at the divisional level
The multidivisional structure is an example of a loose-coupled, modular organisation where business-level strategies and operating decisions can be made at the divisional level, while the corporate headquarters concentrates on corporate planning, budgeting and providing common services
Refer to page 334, figure 10.7 and table 10.5
Discuss the features of this form including:
The key advantage of divisionalised structures is the potential for decentralised decision making.
The multidivisional structure is the classic example of a loose-coupled, modular organisation where business-level strategies and operating decisions can be made at the divisional level, while the corporate headquarters concentrates on corporate planning, budgeting and providing common services.
The large, divisionalised corporation is typically organised into three levels: the corporate centre, the divisions and individual business units, each representing a distinct business for which financial accounts can be drawn up and strategies formulated
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Matrix structures
Organisational structures that formalise coordination and control across multiple dimensions are called matrix structures
Organisations that require a high level of innovation are more likely to benefit by adopting a matrix structure
The problem of the matrix organisation is over-formalised and excessive corporate staffs and over-complex systems that tend to slow decision making and dull entrepreneurial initiative
Refer to page 336 figure 10.8 and table 10.6
Organisational structures that formalise coordination and control across multiple dimensions are called matrix structures.
It is thought that perhaps organisations that require a high level of innovation will benefit most by adopting a matrix structure.
The current trend is that the matrix structure is used carefully and discretionally.
The problem of the matrix organisation is not that it attempts to coordinate across multiple dimensions - in complex organisations such coordination is essential - but that this multiple coordination is over-formalised, resulting in excessive corporate staffs and over-complex systems that slow decision making and dull entrepreneurial initiative
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Applying the principles of organisational design
A fundamental problem of organisational design is reconciling specialisation with coordination and cooperation
Two key issues are:
On what basis should specialised units be defined?
How should decision-making authority be allocated?
Refer to page 338
Introduce the problem of reconciliation driven by two competing forces of specialisation and coordination
Use relevant examples
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Defining organisational units
Some of the principal bases for grouping employees are:
Tasks
Products
Geography
Process
Refer to page 338
Discuss the four commonly used bases of grouping employees in organisations including:
Tasks. Organisational units can be created around common tasks. This usually means grouping together employees who do the same job.
Products. Where a company offers multiple products, these can provide a basis for structure. In a department store, departments are defined by products: kitchen goods, bedding, lingerie and so on.
Geography. Where a company serves multiple local markets, organisational units can be defined around these localities.
Process. A process is a sequence of interlinked activities. An organisation may be viewed as a set of processes: the product development process, the manufacturing process, the sales and distribution process and so on. A process may correspond closely with an individual product, or a process may be dominated by a single task
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Organising on the basis of coordination intensity
How do organisations decide whether to use task, product, geography or process to define organisational units?
The fundamental issue is achieving the coordination necessary to integrate the efforts of different individuals
This implies grouping individuals according to the intensity of their coordination needs
Those individuals whose tasks require the most intensive coordination should work within the same organisational unit
Refer to page 338
The fundamental issue is achieving the coordination necessary to integrate the efforts of different individuals.
This implies grouping individuals according to the intensity of their coordination needs.
Those individuals whose tasks require the most intensive coordination should work within the same organisational unit
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Other factors influencing the definition of organisational units
Factors, other than employees and activities that influence the definition of organisational units are:
Economies of scale
Economies of utilisation
Learning
Standardisation of control systems
Refer to page 339
Consider and explain other factors that may influence the definition of an organisational unit including:
Economies of scale. It may be desirable to group together activities even if there is little coordination among different projects, simply to exploit scale economies in specialised facilities and technical personnel.
Economies of utilisation. It may also be possible to exploit efficiencies from grouping together similar activities that result from fuller utilisation of employees.
Learning. If establishing competitive advantage requires building distinctive capabilities, companies must be structured to maximise learning. Typically, it was assumed that learning was best achieved by grouping together individuals doing similar jobs. More recently, it has been observed that the specialised functional and discipline-based knowledge may be less important than architectural knowledge — knowing how to link together specialised knowledge from different fields.
Standardisation of control systems. Tasks may be grouped together to achieve economies in standardised control mechanisms
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Contemporary organisational structures
There have been major changes in the way organisational hierarchies are now organised. Some of the new structures include:
Adhocracies
Team-based and project-based organisations
Networks
Refer to page 340 and strategy capsule 10.2
Adhocracies. These organisations feature flexible, spontaneous coordination and collaboration around problem solving and other non-routine activities. Team-based and project-based organisations. Flexibility and adaptability can also be achieved in project-based organisations — common in sectors such as construction, consulting, oil exploration and engineering services — where business takes the form of projects of limited duration. Networks. Highly specialised companies that coordinate to design and produce complex products. Often these networks feature a central firm that acts as a ‘systems integrator’. In the developing world, such networks can be a viable alternative to industrial development where large enterprises are lacking
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Management systems for coordination and control
Management systems provide the mechanisms of communication, decision making and control that allow companies to solve the problems of achieving both coordination and cooperation. Three key areas addressed are:
Performance
Culture
Strategic planning and finance
Refer to page 342 and figure 10.9
It is important to explain the relationship between management systems and organisational structure.
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Strategic planning systems
Fig. 10.10
Refer to page 345 and provide details of the strategic planning system
Most large companies have a regular (normally annual) strategic planning process.
For a multi-business company, the strategic planning process creates business plans for the individual divisions that are then integrated into a corporate plan.
Whether formal or informal, systematic or ad hoc, documented or not, the strategy formulation process is an important vehicle for achieving coordination within a company.
The system through which strategy is formulated varies considerably from company to company but the figure here shows a typical strategic planning cycle
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Financial planning and control systems
Finance is a critical resources for all organisations
Financial systems are a key mechanism to exercise control
At the centre of financial planning is the budgetary process
Two types of budgets should be well understood:
Capital expenditure budget
Operational budget
Refer to page 347
Describe the importance of financial details to organisational planning and control inlcluding two types of budgets:
Capital expenditure and operational
The capital expenditure budget
Is established through both top–down and bottom–up processes.
Companies have standardised processes for evaluating and approving projects.
Requests for funding are prepared according to a standardised methodology, typically based on a forecast of cash flows discounted at the relevant cost of capital (adjusted for project risk).
The operating budget
The operating budget is a pro forma profit and loss statement for the company as a whole and for individual divisions and business units for the upcoming year.
It is usually divided into quarters and months to permit continual monitoring and the early identification of variances.
Each business typically prepares an operating budget for the following year that is then discussed with the top management committee and, if acceptable, approved.
At the end of the financial year, business-level divisional managers are called upon to account for the performance over the past year
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Organisational restructuring
Changes are often painful to many employees as they can involve job losses, pay cuts and more work
Organisations should restructure to align with the changes
The restructuring plan should identify appropriate staff to achieve the objectives of restructuring
Organisational restructure should involve new organisational culture that is well communicated to all employees
Refer to page 349
Organisational restructure is becoming a key component of strategic adjustment
One should understand how this is implemented with least resistance
Instructors should use strategy capsule 10.4 to provide an illustration of what mangers can learn from the change management of an organisation
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Summary
This session has dealt with various aspects of organisational structure and control
Some of the key issues to recall are that:
strategy implementation is inseparable from strategy formulation
organisational structure and systems are central to the fundamental issues of competitive advantage and strategy choice
effective management systems for coordination and control are important
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