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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 Functional Structure Multidivisional Structure Sales growth coordination & control problems 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 Functional Structure Chief Executive Officer (CEO) Low cost business-level strategy usually employs a centralised structure and emphasises process R&D and operations Finance Production Copyright Guy Harley 2004 R&D Differentiation businesslevel strategy usually employs a decentralised structure and emphasises product R&D and sales & marketing Accounting Sales & Marketing Human Resources 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 Multi-Divisional Structure (M-form) CEO Corporate R&D Division Finance Corporate Finance Division Strategic Planning Corporate Marketing Division Production Engineering Accounting Copyright Guy Harley 2004 Corporate Human Resources Division Sales & Marketing Human Resources 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 Cost Leadership Chief Executive Officer (CEO) Centralised staff Finance Production Copyright Guy Harley 2004 R&D Accounting Sales & Marketing Human Resources 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 Differentiation Chief Executive Officer and limited staff R&D Finance Copyright Guy Harley 2004 Sales & Marketing Production Accounting Human Resources 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) Three variations of the multi-divisional structure: Strategy Type Related Constrained Related Linked Multi- Cooperative Strategic Divisional Form Business Form Unit Structure Centralisation Copyright Guy Harley 2004 Bureaucratic cost Competitive Form Unrelated/ Holding Company 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 Cooperative Form HQ Chief Executive Officer Corporate Marketing Govt. Affairs Corporate Finance Product Division Strategic Planning Product Division Copyright Guy Harley 2004 Legal Affairs Product Division Corporate HR Product Division Corporate R&D Product Division Product Division Strategic Business Unit Form (SBU) Three levels Corporate Headquarters SBU Groups Divisions Integration within SBUs Independence between SBUs Copyright Guy Harley 2004 SBU Form HQ Chief Executive Officer Corporate Finance Strategic Planning Corporate Marketing Corporate HR SBU Division Division Copyright Guy Harley 2004 Corporate R&D SBU Division Division Division Division 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 Competitive Form HQ Chief Executive Officer Legal Affairs Division Division Copyright Guy Harley 2004 Finance Division Division Auditing Division Division Attributes of Various Structural Forms Structural Characteristics Cooperative M-Form SBU M-Form Competitive M-Form Type of Strategy RelatedConstrained Mixed-Related or Unrelated Unrelated Degree of Centralised Centralised at Centralisation Corporate Office in SBUs Decentralised to Division Use of Integrating Mechanisms Extensive Synergies Moderate Synergies Nonexistent Synergies Divisional Performance Appraisal Subjective/ Strategic Criteria Strategic & Financial Criteria Financial Criteria Divisional Incentive Compensation Linked to Linked to Linked to Corporate Corporation, Divisional Performance Division & SBU Performance 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 Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) North America Europe Asia Latin America Product A Product B Product C Product D Africa Australia A structural evolution based on geographic lines usually implies a multi-domestic international strategy 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 Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Product B Product C Product 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 Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Finance Production Product B Engineering Accounting Finance Engineering Copyright GuyProduction Harley 2004 Accounting Sales & Marketing Human Resources Sales & Marketing Human Resources Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Product B North America Finance Copyright GuyProduction Harley 2004 Europe Product C Product D Asia Engineering Accounting Sales & Marketing 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 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 Copyright Guy Harley 2004 A Strategic Network Network firms Strategic Centre Firm 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 Copyright Guy Harley 2004 A Strategic Network – Strategic Outsourcing Strategic Centre Firm 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 Copyright Guy Harley 2004 A Strategic Network – Capability Strategic Centre Firm 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 Copyright Guy Harley 2004 A Strategic Network – Race to Learn Strategic Centre Firm 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 Copyright Guy Harley 2004 A Distributed Strategic Network Main Strategic Centre Firm Distributed Strategic Centre Firms