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Copyright Guy Harley 2004
Organisational Structure
Week 10
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Organisational Structure
Organisational Structure is a firm’s: Role configuration Procedures Governance & control mechanisms Authority & decision making processes
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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
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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)
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Strategy & Structure Growth Pattern
SimpleStructure
Sales growth coordination & control problems
FunctionalStructure
Multi-divisionalStructure
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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
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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
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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
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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
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ProductionFinance R&D AccountingSales &
MarketingHuman
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
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Functional StructureFunctional Structure Allows specialisation of tasks, for example:
Production Finance Engineering Accounting Sales & Marketing Human Resources
This facilitates knowledge sharing Idea development
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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
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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
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Division Division Division Division
ProductionFinance Engineering AccountingSales &
MarketingHuman
Resources
Strategic Planning
Corporate Finance
Corporate R&D
Corporate Marketing
Corporate Human
Resources
CEO
Multi-Divisional Structure (M-form)Multi-Divisional Structure (M-form)
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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
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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 controlsObjective criteria that evaluate returns of business units & managerial performance
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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
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ProductionFinance R&D AccountingSales &
MarketingHuman
Resources
Centralised staff
Chief Executive Officer (CEO)
Cost Leadership
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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
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ProductionFinance
R&D
Accounting
Sales & Marketing
Human Resources
Chief Executive Officer and limited staff
Differentiation
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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
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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:
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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
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StrategicPlanning
CorporateFinance
Govt. Affairs
LegalAffairs
Corporate Marketing
CorporateHR
Chief Executive Officer
Cooperative Form
ProductDivision
CorporateR & D
ProductDivision
ProductDivision
ProductDivision
ProductDivision
ProductDivision
HQ
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Strategic Business Unit Form (SBU)
Three levels Corporate Headquarters SBU Groups Divisions
Integration within SBUs Independence between SBUs
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StrategicPlanning
CorporateFinance
Corporate Marketing
CorporateHR
Chief Executive Officer
SBU Form
Division
CorporateR & D
Division Division DivisionDivision Division
HQ
SBU SBU
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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
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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
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LegalAffairs
Finance
Chief Executive Officer
Competitive Form
Division
Auditing
Division Division DivisionDivision Division
HQ
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Cooperative M-Form
SBU M-Form
Competitive M-Form
Structural Characteristics
Degree ofCentralisation
Use ofIntegrating
Mechanisms
DivisionalPerformance
Appraisal
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
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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
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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
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Global Structures
Worldwide Geographic Area Structure Worldwide Product Divisional Structure Combination Structure
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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
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Worldwide Geographic Area Structure
Worldwide Geographic Area Structure HQ coordinates financial resources Divisions are independent Operations are decentralised
Disadvantages Unable to create global efficiency
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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 AsiaLatin
AmericaAfrica
Product A Product CProduct B Product D
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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
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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
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Corporate Office (Staff)
CEO
Evolution of Multi-Divisional Structure
Product A Product B Product C Product D
A structural evolution based on product lines usually implies a global international strategy
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Combination Structure
A trans-national international strategy Local responsiveness and Global efficiency
Uses combination structure
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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
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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
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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
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Finance
ProductionFinance Engineering AccountingSales &
MarketingHuman
Resources
Production Engineering AccountingSales &
MarketingHuman
Resources
Corporate Office (Staff)
CEO
Product A Product B
Evolution of Multi-Divisional Structure
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Corporate Office (Staff)
CEO
Evolution of Multi-Divisional Structure
Product A
North America
Europe Asia
Product B Product C Product D
ProductionFinance Engineering AccountingSales &
Marketing
Human Resources
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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
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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
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A Strategic NetworkA Strategic Network
Network firms firms
Strategic Strategic Centre Firm Firm
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Strategic Networks
Critical functions of the strategic centre firm are: Strategic Outsourcing Capability Development Technology Sharing Network Learning
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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
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A Strategic Network – Strategic OutsourcingA Strategic Network – Strategic Outsourcing
Strategic Strategic Centre Firm Firm
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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
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A Strategic Network – CapabilityA Strategic Network – Capability
Strategic Strategic Centre Firm Firm
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Technology
The Strategic Centre firm Manages the development and sharing of
technology between partners
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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
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A Strategic Network – Race to LearnA Strategic Network – Race to Learn
Strategic Strategic Centre Firm Firm
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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
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Strategic Networks – Horizontal Integration
Usually unstable due to rivalry Difficult to agree on strategic centre firm
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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
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A Distributed Strategic NetworkA Distributed Strategic Network
Distributed Strategic Centre FirmsDistributed Strategic Centre Firms
Main Main Strategic Strategic
Centre FirmCentre Firm