Organisational Structure

Copyright Guy Harley 2004

Organisational Structure

Week 10


Organisational Structure Organisational Structure is a firm’s:

Role configuration Procedures Governance & control mechanisms Authority & decision making processes


Organisational Structure Proper use of:

organisational structure and accompanying integrating mechanisms &

controlsContribute to a firm’s competitiveness

Competitive advantage is created when there is a match between strategy and structure


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)


Strategy & Structure Growth Pattern

SimpleStructure

Sales growth coordination & control problems

FunctionalStructure

Multi-divisionalStructure


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


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


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


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


ProductionFinance R&D Accounting 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


Functional StructureFunctional Structure Allows specialisation of tasks, for example:

Production Finance Engineering Accounting Sales & Marketing Human Resources

This facilitates knowledge sharing Idea development


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


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


Division Division Division Division

ProductionFinance Engineering Accounting Sales & Marketing

Human Resources

Strategic Planning

Corporate Finance

Corporate R&D

Corporate Marketing

Corporate Human

Resources

CEO

Multi-Divisional Structure (M-form)Multi-Divisional Structure (M-form)


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


Multi-Divisional Structure Key task of corporate managers is to exploit

synergies among divisions Managers use a combination of:

Strategic controlsSubject long term & strategically relevant criteria

Financial controlsObjective criteria that evaluate returns of business units & managerial performance


Structure & Business Level StrategyCost Leadership Strong task specialisation Centralised decision making Formalisation of work rules Low cost culture Emphasis on process engineering Infrequent product changes


ProductionFinance R&D Accounting Sales & Marketing

Human Resources

Centralised staff

Chief Executive Officer (CEO)

Cost Leadership


Structure & Business Level StrategyDifferentiation 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


ProductionFinance

R&D

Accounting

Sales & Marketing

Human Resources

Chief Executive Officer and limited staff

Differentiation


Structure & Business Level StrategyCost Leadership\Differentiation Conflicting organisational structure requirements Functional structure supplemented by horizontal

coordination Strong organisational structure Moderate level of product change


Multi-Divisional Structure (M-form)

Cooperative Form

RelatedConstrained

Multi-Divisional

Form

StrategyType

Strategic Business

Unit Structure

RelatedLinked

CompetitiveForm

Unrelated/Holding

Company

Centralisation

Bureaucratic cost

Three variations of the multi-divisional structure:


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


StrategicPlanning

CorporateFinance

Govt. Affairs

LegalAffairs

Corporate Marketing

CorporateHR

Chief Executive Officer

Cooperative Form

ProductDivision

CorporateR & D

ProductDivision

ProductDivision

ProductDivision

ProductDivision

ProductDivision

HQ


Strategic Business Unit Form (SBU) Three levels

Corporate Headquarters SBU Groups Divisions

Integration within SBUs Independence between SBUs


StrategicPlanning

CorporateFinance

Corporate Marketing

CorporateHR


SBU Form

Division

CorporateR & D

Division Division DivisionDivision Division

HQ

SBU SBU


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


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


LegalAffairs

Finance


Competitive Form

Division

Auditing

Division Division DivisionDivision Division

HQ

Cooperative M-Form

SBU M-Form

Competitive M-Form

Structural Characteristics

Degree ofCentralisation

Use ofIntegrating

MechanismsDivisional

PerformanceAppraisal

DivisionalIncentive

Compensation

Type of Strategy

Related-Constrained

Centralised atCorporate Office

Centralisedin SBUs

Decentralisedto Division

ExtensiveSynergies

ModerateSynergies

FinancialCriteria

Strategic &FinancialCriteria

Linked to Corporate

Performance

Linked toCorporation,

Division & SBU

Linked toDivisional

Performance

NonexistentSynergies

Subjective/StrategicCriteria

Attributes of Various Structural Forms

UnrelatedMixed-Relatedor Unrelated


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


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


Global Structures Worldwide Geographic Area Structure Worldwide Product Divisional Structure Combination Structure


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


Worldwide Geographic Area Structure Worldwide Geographic Area Structure

HQ coordinates financial resources Divisions are independent Operations are decentralised

Disadvantages Unable to create global efficiency


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 AustraliaEurope Asia Latin

America Africa

Product A Product CProduct B Product D


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


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



CEO


Product A Product B Product C Product D

A structural evolution based on product lines usually implies a global international strategy


Combination Structure A trans-national international strategy

Local responsiveness and Global efficiency

Uses combination structure


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


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


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


Finance


Human Resources

Production Engineering Accounting Sales & Marketing

Human Resources


CEO

Product A Product B




CEO


Product A

North America Europe Asia

Product B Product C Product D


Human Resources


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


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 NetworkA Strategic Network

Network firms firms

Strategic Strategic Centre Firm Firm


Strategic NetworksCritical functions of the strategic centre firm are: Strategic Outsourcing Capability Development Technology Sharing Network Learning


Strategic OutsourcingStrategic 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 OutsourcingA Strategic Network – Strategic Outsourcing



Capability DevelopmentThe 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 – CapabilityA Strategic Network – Capability



TechnologyThe Strategic Centre firm Manages the development and sharing of

technology between partners


Network LearningThe 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 LearnA Strategic Network – Race to Learn



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


Strategic Networks – Horizontal Integration Usually unstable due to rivalry Difficult to agree on strategic centre firm


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 NetworkA Distributed Strategic Network

Distributed Strategic Centre FirmsDistributed Strategic Centre Firms

Main Main Strategic Strategic

Centre FirmCentre Firm

Documents

Organisational Structure