Ch1 business organisation and structure

Study guide(+P48-49)

Identify the different types of organisationDescribe the different ways that an organisation can be structuredExplain the characteristics of the strategic, tactical and operational levels in the organisationDescribe the roles and functions of main departments in a business organisationExplain centralisation and decentralisation Understand committees in an org.Explain the role of marketing in an org.Explain the accounting function in an org.Explain basic organizational structure concepts

1 Types of OrganizationsAn organization is a social arrangement which pursues collective goals , which controls its own performances and which has a boundary separating it from its environment.

car manufacturersaccountancy firms trade unions charities local authorities the army, navy and air force schoolsExamples:

1.1Common features of organizationsThey pursue a variety of objectives and goals.Preoccupied with performance,and meeting or improving their standardsmade up of individuals, specialising in certain activities, doing different things Obtain inputs and process them into outputsContain formal systems and procedures which enable them to control what whey do

The organization processes

1.2 Why do organisations exist?Enable people to be more productive:Overcome peoples individual limitationsEnable people to specialiseIndividual worker concentrates on a limited type of activity, more efficientlySave timea group can accomplish a task more quickly than one individualsAccumulate and share knowledgeEnable synergythe whole is greater than the sum of the parts

Synergy (1+1>2)Separate entities are combined together so that it has a great effect than the sum of the activities of each entity working alone.Synergy operates, not just by reducing the time taken to carry out the task in proportion to the number of people working on it, but has the effect of improving the quality of the work of the participants by better organization and a more fertile flow of ideas.*synergy can be positive or negative.

1.3 How organisations differDifferent ownership(public vs. private)Different control(by owners vs. by agents)Different activity (industry) Profit or non-profit orientationDifferent legal status(limited company vs. partnership)Different size(small vs. large)Different sources of finance(borrowing, government funding vs. share issues)Different technology(high tech. vs. low tech.)

1.4 What the organisation doesAgricultureManufacturingExtractiveEnergy Retailing Intellectual productionService industries

1.5 Profit vs. non-profit orientation

Profit orientatedNon-profit orientatedPrimary goalMaximise profitProvision of goods/servicesSecondary goalOutput of goods/servicesMinimise cost

1.6 Private vs. public sectorPrivate sector: organisations not owned or run by central or local government, or government agencies.Public sector: organisations owned or run by central or local government, or government agencies.

1.7 Private sector businessA business organisation exists to make a profit.Legal statusSole trader: go into business alonePartnership: go into business with one or more partners to share the profit and riskLimited company: has a separate legal personality from its owners

Degree of regulationFormation & dissolutionOwnership liabilityOwnership and management relationshipAccountability of policy makersRaising capitalProfit distributionTaxation of profitsSole trader-No formalitiesUnlimitedFrequently but not necessarily the same personAccountable to self onlyLimited to the resources available to the single ownerAll profits go to the ownerPersonal taxation of owners incomePartnership-By agreement amongst partnersUnlimitedCustomarily the same personsAll accountable to each otherCurrent and additional partners may provide capitalProfits distributed according to partnership agreementPersonal taxation of each partners income Limited companyConsiderable, especially for quoted companiesDetailed onerous compliance with company legislationLimitedOften the same in small private companies. In larger companies different peopleAccountable to the shareholdersFor large quoted companies it may be easy to make a new share issueDirectors decide about dividends paid to shareholdersCorporation tax on the companys profits

Characteristics of limited companiesOwnership and control are legally separate. Shareholders are the owners:have limited liabilityHave limited rights over the daily running of the companyProvide capital and receive a returnDirectors are appointed by shareholders to run the companyExecutive directorsNon-executive directorsOperational management operates the business and is accountable to the board of directors

Types of limited company

Private limited company(Ltd)Public limited company(plc)Number of shareholderssmallerlargerTransferability of sharesRarely transferableShares offered to publicDirectors as shareholdersDirectors more likely to hold sharesDirectors less likely to hold sharesSource of capitalFounders, business associates, venture capitalists+ Public , institutional investors

Adv. and disadv. of limited companyAdvantages:More money available for investmentReduces risk (limited liability)Separate legal personalitySeparation of ownership and controlNo restriction on sizeFlexibility Disadvantages:Compliance costs are highShareholders have little power

Co-operative and mutual associationsCo-operatives are businesses owned by their workers or customers, who share the profits.E.g. Co-operative Retail Store network; Co-operative Wholesale Society; Co-operative BankMutual association are owned by their members rather than outside investorsE.g. some financial companies and some insurance companies

1.8 the public sectorPublic sector comprises all organisations owned and run by the government and local government.Examples: some hospitals some publicly funded agencies armed forces most schools and universities government departments

Characteristics of public sectorAccountability (to parliament)Funding from:Raising taxesMaking chargesBorrowingLimitless demand for servicesLimited resources

Adv. and disadv. of public sectorAdvantages:FairnessProviding public goods Satisfying public interestCheaper financeSometimes economies of scale and efficiency can be achievedDisadvantages:Accountability InterferenceCost

Classification by Ownership (private vs. public)

sectorowned and financed bymain aimexamplePrivateindividualof a commercial nature (e.g. profit)most businessPublicgovernmentTo provide goods and services which address the well-being of the communitymost schools and universities, state-owned banks, hospitals,CCTV, etc.

Non-governmental organisationsNGO is an independent voluntary association of people acting together for some common purpose.Organisational features of NGO:Staffing by some volunteersFinance from grants or contractsSkills in advertising and media relationsSome kind of national headquartersPlanning and budgeting expertiseNGO also need to possess an efficient level of organisation structure.

2. Organisational structure

Mintzbergs 5 components of the organization

The importance and relative size of these blocks will vary across organizations.Strategic apexrefers to the higher levels of management, ensures the organization follows its mission, managers the organizations relationship with the environment.Middle linethe intermediate levels of management, converts the desires of the strategic apex into the work done by the operating core.Operating core represents the basic productive work of the organization, i.e. people directly involved in the process of obtaining inputs, and converting them into outputs.

Technostructurerefers to staff who provide a technical input without being directly engaged in core activities, but involves standardisation of work processes or outputs. Analyzers determine the best way of doing a job Planners determine outputs Personnel analysts standardize skillsSupport staff provide services ancillary to the core operations of the organization. They do not plan of standardize production.Independent of the operating core. Q: Where is the accounting function located in the organisational structure?*(R-163:2; P561:2)

Departmentation Grouping tasks and people together in some rational wayDifferent patterns of departmentation can be selected depending on the individual circumstances of the organisationFunctional departmentationGeographic departmentationProduct/brand departmentationCustomer departmentation

Functional departmentationSetting up departments for people who do similar jobs, primarily production, sales, finance and general admin.

Advantages: SpecialisationExpertise is pooled and employees work can be coordinated Avoiding duplication enables economies of scale facilitates the recruitment, management and development of functional specialists Suits centralised business

Disadvantages: Lack of customer orientation: focuses on internal processes and inputs, rather than customer and outputs Communication problems between different functions poor co-ordination: decisions by on function involving another might have to be dealt with at a higher level Create vertical barriers to information and work flow

Geographic departmentationDivides the enterprise into regions or countries according to geographic area.

Advantages:

Local decision-making: respond quickly to local needs Cheaper sometimes to establish area offices

Disadvantages:

Duplication of some functional department and possible loss of economies of scale. Inconsistency in standards or methods

Product/Brand departmentationSpecialists and activities are grouped on the basis of product or product line.

AdvantageProduct-oriented Focus on the product performance and profitability Specialisation on specific product achieved different functional activities required to make and sell each product can be co-ordinated and integratedDisadvantages: Increases overhead costs and managerial complexity Different products may fail to share resources and customers

Brand-oriented structureBrand is the name or design which identifies the products or services of a manufacturer or provider and distinguishes them from those of competitors.Creates brand recognition, differentiation and loyalty.Brand departmentation has similar adv. And disadv. to product departmentation. Customer-oriented structureActivities are grouped on the basis of types of customers, or market segment. (usually between business and household)

DivisionalisationThe division of a business into autonomous regions or product businesses, each with its own profit and loss responsibility.Division of the organisation might be:Subsidiary companyProfit centre or investment centreStrategic business unit(SBU)*R-30:8

Advantages:

Focuses the attentions of divisional management on business performance. Encourages a greater attention to efficiency, lower costs and higher profits. Reduce the likelihood of unprofitable products and activities being continued.Gives more authority to junior managers.Reduces the number of levels of management.

Disadvantages:

In some business, it is impossible to set up separate divisions. Only possible at a fairly senior management level.Divisions may compete each other in getting resources from head office.

Key conditions for successful divisionalisation:

Each division must have properly delegated authorityEach division must be large enough to support the management, not rely on head office Each division must have a potential for growth.There should be scope and challenge in the job for the management of each division.The deal between divisions should be arms length transaction.

Crosses functional and product/project/customer organisation.Matrix structure(p63)

Advantages: Greater flexibility Mix strength of functional and project teams improved communication, coordination and co-operation of people Team members become customer oriented or product focused. Motivational in that it requires greater employee participation and control.Bureaucratic obstacles are removed, and horizontal workflow is available.PeopleWorkflow & decision makingTasks and structure

Disadvantages: conflicts between functional managers and product/project/area managers. Too many bosses, conflicting demands and roles More complex, more costly Slower decision making

Hybrid structuresInvolve a mix of functional departmentation with elements of : Product organisationCustomer organisationTerritorial organisation*R-71:1(note the difference between matrix structure and hybrid structure)

Organization structureDefinitionOrganization structure is the grouping of people into departments or sections and the allocation of responsibility and authority.Organization Structure defines how tasks are to be allocated, who reports to whom, and the formal coordination mechanisms and interaction patterns that will be followed.To achieve the organizational goal, the interaction patterns of organization members need formal coordination.

Fundamentals of structuringThe combination of span of control and scalar chain determines the overall pyramid shape of the organization and whether the hierarchical structure is flat or tall.

Span of controlSpan of control refers to the number of subordinates responsible to a superior.Too wide a span of control means too much of the managers time will be taken up with routine problems and supervision, leaving less time for planning.Too narrow a span of control means the manager may fail to delegate, keeping too much routine work to himself and depriving subordinates of decision-making authority and responsibility . *pilot paper #1

Managers workSolitary workEntrepreneurial activitiesInteraction with superiors and colleaguesSupervisionNon-supervisory work

Span of controlNarrowWideAdvantageClose supervision and control DelegateDisadvantageFail to delegate, keeping too much routine work and depriving subordinates decision-making authority.High costs due to numerous levels and undue delays of information.Subordinates dissatisfied, having little challenge and responsibilityToo much time taken up with routine problems and supervision, leaving less time for planning.Possible loss of control Managers workload so high that bottlenecks may occur.

Factors to influence the span of controlManagers capabilitiesNature of mangers workloadThe more non-supervisory work, the greater the delegation,the narrower the span of controlSubordinates workNature of the problemsInteraction between subordinatesGeographical dispersionSupport that supervisors receive from other parts of the organisation

Tall and flat organisationsScalar chain: the chain of command from the most senior to the most junior.Tall organisation has a large number of levels of management hierarchy and implies a narrow span of control.Flat organisation has a small number of levels of management hierarchy and implies a wide span of control.

OrganizationAdvantageDisadvantageTallNarrow control spansSmall groups

Assists management trainingInhibits delegationRigid supervision blocking initiativeSame work passes too many layersincreases administration and overhead costs Communication problemsFlatMore opportunities for delegationLow administration costSpeed up communicationManagers may only get a superficial idea Sacrifice controlMore pressure on the middle manager layer

Tall and narrow span of control:Close control and supervisionHigh administration costs; low delegation (low motivation); communication problem; rigidFlat and wide span of controlDelegation; fast communication (vertical); cheap; flexibleLoss of control; too much workload in supervision

Delayering There is a trend of delayer: reducing the number of management levels from the bottom to top.Possiblities:Information technologyEmpowerment to front-line workersAdvantages:Economy: reduce managerial/supervisory costsFashion

5. Centralisation vs. Decentralisation(P89)

Centralisationthe practice of minimal delegation of authority outside senior managementCentralisted organisation one in which authority is concentrated in one place.Decentralisationincreased delegation, empowerment and autonomy at lower levels of the organisation.

CentralisaitonDecentralisationPlanning: management can balance the interests of different functionsPlanning: greater awareness of local problemsDecision-making: higher quality due to senior managerss abilitiesDecision-making: quick response to changing events

Greater and easier ControlSeparate spheres of responsibility identified: Performance measurement and accountability are betterStandardizationLocalisationGreater CoordinationLowering workload of top managersWider view of senior managementMotivation of junior managersLower ohead cost by reducing number of managersGreater flexibility

simple structure (entrepreneurial structure)(P63)Strategic apex (a single entrepreneur or management team)retains control over decision-making and exercises a pull to centralise. Wide span of control; direct supervision; no middle line; minimal hierarchy; no technostructure; little standardisation.Suitable for small and young organisations, to handle an environment that is relatively simple but fast moving.Risky as it depends on the expertise of one or few persons, prone to succession crises.

The new organisation(p64)Focuses on flexibility as a key organisational value. Flat structures: shorten lines of communication and decision-making; more responsive.Horizontal structures: functional versatility.Chunked and unglued structures: teamwork and decentralisationOutput-focused structures: focus on results and customersJobless structures: employees become seller of skills

The shamrock organisation (flexible firm)(p65)Core of essential executives and workers supported by outside contractors and part-time help. Professional coreSelf-employed professionals or technicians or specialised organisationsContingent work forceConsumersFlexibility:Personnel costsPersonnel numbersSkills *pilot paper #42

3.Levels of strategy in the organisationThe strategic management process is multi-layered.Levels of strategy:CorporateGeneral direction of the whole organisationDecide what types of business the organisation is inBusinessDetermines how an organisation approaches a particular product market area.Because of development of divisionalised organisation with SBUs.Operational/functionalDeal with specialised areas of activity

Anthony hierarchyStrategic managementCarried out by senior managementDirection setting, policy making, crisis handlingTactical managementCarried out by middle managementEstablish ways to achieve corporate strategiesOperational managementCarried out by supervisors or operativesRoutine activities to carry out tactical plans

Exam focus pointOne of the basic opganisational structure concepts is that the separation between direction-setting for the business, and day-to-day management processes.

4. Organisational departments and functionsResearch and development (R&D)PurchasingProductionService operationsMarketingAdministrationFinance Human resources

4.1 R&DPure research: research with no obvious commercial endApplied research: research with specific practical aimDevelopment: use of knowledge to produce new products or systems

R&DProduct research:Create new products and develop existing products.Process research:Improve the way or efficiency in which the products or services are made or deliveredR&D should support the organistions strategy and be closely co-ordinated with marketing.

4.2 PurchasingThe acquisition of material resources and business services for the use of organisation.Purchasing mix:Quantity quality price deliveryLink with the rest of organisationR&DProductionFinance Meeting quality targets, minimising inventory holding cost and getting the best value for money

4.3 ProductionPlan, organise, direct and control the activities to provide products and services.Production manager:How to add value during the process of production (converting inputs to outputs)Long-term and short-term decisionsIntegrated with other functions:R&DHuman resourcesSalesFinance

4.4 Service operationsAny activity of benefit that one party can offer to another that is essentially intangible and does not result in the ownership transfer.Nature of servicesIntangibilityInseparabilityVariabilityDo not result in the transfer of ownershipDimensions of service operations

4.5 MarketingThe management process which identifies, anticipates and satisfies customer needs profitably.4 roles Sales support: essentially reactiveMarketing communications: more proactiveOperational marketing: broad range of marketing activitiesStrategic marketing: creation of competitive strategy

*Pilot paper #2

Marketing strategy and corporate strategyMarketing planning is subordinate to corporate planning but makes a significant contribution to it.Specific marketing strategies will be determined within the overall corporate strategy, and these will be interdependent with those for other functions of the organisation.

Marketing orientation Marketing Sales/production/product orientation orientation

*The key task of marketing orientation is to determine the needs of the customers and profit via customer satisfaction.

Marketing mixThe set of controllable variables and their levels that an organisation uses to influence the target market.4Ps:

*Pilot paper #46

4PsproductWhat is being sold (could be a service).Implication of the marketing orientation:Not a thing with featuresA package of benefits, which meets a need or provides a solution for the customerMarketing managers distinguish:Product classProduct formBrand or makeA different marketing approach is appropriate to each stage of the product life cycle.

4PsplaceOutlets: where products are soldDirect distributionThrough one or more intermediariesLogistics: the management of how to warehouse, storage and transportation.

4PspromotionIncludes all marketing communications, by which the public knows about the product or service.Types of promotion:AdvertisingSales promotionDirect sellingPublic relations4 behavioural stages of customer:Awareness, interest, desire, action

4PspriceIncludes basic price, discounts, credit terms and interest free credit.Influenced by demand and products stage in its life cycle.Penetration: low price is charged in early stages of the product.Skimming: high price is charged to cream off the highest level of profits.Price is also part of image of the product.Price is a weapon against competitors.

Service marketingPeopleProcessesPhysical evidence

The ideal marketing mixHolds a proper balance between the elementsProper attention should be given to all the activitiesShould not place too much emphasis on one aspect of the marketing mix

4.6 AdministrationCentralised administration is to carry out administrative functions at head office as much as possible.AdvantagesconsistencyBetter security/controlHead office knows better whats going onEconomies of scaleStaffs in a single locationDisadvantagesTime-consumingReliance on head officeSystem fault easy to spread across the organisation

4.7 Finance functionRolesRaising moneyRecording and controllingProviding information to managersReporting to stakeholdersFinance functionFinancial managementTreasury managementWorking capital managementFinancial accountingManagement accounting

Financial managementInvestment decisionsFinancing decisionsRetained earningsCapital marketsMoney marketsBank borrowingsGovernment sourcesVenture capitalInternational money and capital marketsDividend decisionsOperating decisions

Treasury managementPlan and control the sources and uses of funds by the organisations.Cash budgetingArrange bank overdraft raise funds in money market and capital marketrepay loans when they matureCarry out cashiers dutiesManage foreign currency dealings

Working capital managementReceivables management: credit controlPoor credit control will lead to irrecoverable debts and overdraft finance.Payables managementInventory managementPayroll management

Financial & management accountingFinancial accountingRecording financial transactionsReporting to shareholdersManagement accounting provides information to management and assist in:PlanningDecision makingcontrolling

Coordination with other functionsAs information providers to other managers in other departments, accountants cannot be fully effective unless they work in co-operation with other managers.Purchasing departmentSales departmentCredit control and debt collectionFinancial accountingManagement accountingcashier

Strategic contributions Ensure that resources of finance are availableIntegrate the strategy into budgetsEstablish the necessary performance measuresEstablish prioritiesAssist in the modeling process

4.8 Human resource managementHRM is concerned with the most effective use of human resources.ObjectivesDevelop an effective human component for the organisationObtain and develop the human resources, and use and motivate them effectivelyCreate and maintain a co-operative climate of relationshipsMeet the organisations social and legal responsibilities relating to HR

Human resource cycle

Effective HRM can:Increase productivityEnhance group learningEncourage initiativeReduce staff turnover

HR planningConcerns the acquisition, utilisation, improvement and return of human resources.Should be based on:Strategic analysisEnvironmentSWOTUse of employeesOrganisations objectivesForecastInternal demand and supplyExternal supplyshould be regularly controlled.

6. committeesConsist entirely of executives or be instruments for joint consultation between employers and employees.Committee chair(6.1.1)Committee secretary(6.1.2)Purposes:Creating new ideasMeans of communicationAllow for greater participation in the decision-making and problem-solving processCombining abilitiesCo-ordinatingRepresentationrecommendations *P561:4

Types of committeeExecutive committeesStanding committees: permanent basisAd hoc committees: ad hoc basisSub-committeesJoint committeesManagement committees

Adv. and disadv. of committeeAdvantages:Consolidation of power and authorityDelegation of power and authorityBlurring responsibilityGain timeDisadvantages:Too large for constructive actionTime-consuming and expensiveDelays may occurOperations may be jeopardisedIncorrect or ineffective decisions may be madeMay invite compromise in the decision-making

Using committees successfullyWell defined authority, timescale and purposesGood chairGood secretaryMembers with necessary skillsNot too large to manageCost kept low Allowed enough time to reach decisions