Organization Structure and Strategy PDF

BM2105 ORGANIZATION STRUCTURE AND STRATEGY Types of Organizational Activities (Jenkins & Williamson, 2016) An organization is a collection of resources that are linked together to transform inputs into outputs. On the other hand, an organization structure is a framewo...

BM2105 ORGANIZATION STRUCTURE AND STRATEGY Types of Organizational Activities (Jenkins & Williamson, 2016) An organization is a collection of resources that are linked together to transform inputs into outputs. On the other hand, an organization structure is a framework that evolves (or is designed) to facilitate communication and coordination between organization members so that this transformation can occur. The dimensions of an organization's structure are how it arranges its resources, including its people, and the mechanisms that link these resources and make them cohesive. If the organizations’ environments were unchanging, an ideal organization structure would optimize inputs to outputs. It is difficult to imagine such a scenario because organizations operate in environments where consumers’ choices can be inconsistent, raw materials become scarce, governments change laws, and shareholders' expectations change. This suggests that organizational members invariably undertake routine and non-routine tasks. The following are the four (4) different types of organizational activities: 1. Steady-state activities. These activities are routines that account for most of the organization's work and are typical in routine manufacturing, sales, and accounting. 2. Innovation activities. These activities are concerned with changing the processes of the organization or the way it implements these methods. They are exemplified in marketing, product research and development, process development, and innovative training. 3. Crisis activities. These are activities associated with dealing with the unexpected and are likely to be encountered by those departments and people within the organization's environment. 4. Policy-making activities. These activities are concerned with the overall guidance of the organization. Chandler’s Model of Strategy Development (Jenkins & Williamson, 2016) Chandler defined an industrial enterprise as “a large private profit-orientated business firm involved in the handling of goods in some or all of the successive processes from the procurement of raw materials to the sale to the ultimate customer.” He observed that, as companies grew in turnover, employee numbers, geographical areas served, number of products sold or manufactured, etc., there was the possibility of an administration crisis before appropriate structures were developed. Chandler concluded that new strategies created new administrative needs but that executives could administer “both old and new activities with the same personnel, using the same channels of communication and authority. Such administration must, however, become increasingly inefficient.” Chandler's research indicated that the solution to complex growth on several dimensions (expansion by volume, geographical dispersion, vertical integration) was through a multi-divisional structure. The generic multi-divisional structure described by Chandler has a general office, each division’s central office, headquarters for the divisional departments, and the field units. This is shown in Figure 1. General office or headquarters (HQ’s). Responsible for planning, coordinating, and appraising the activities of the quasi-autonomous divisions. Division's central office. Administers several functional departments. Divisional departmental HQ’s. Responsible for the administration of the field offices. Field units. Executes the functions of sales offices, plants, and other administrative tasks necessary for the day-to-day operation of a firm. 04 Handout 1 *Property of STI  [email protected] Page 1 of 9  BM2105 Figure 1. The multi-divisional structure Source: Strategic management and business analysis, 2016, p. 51. Chandler distinguished between administrative and functional work. Administrative work is the domain of the company executives and is concerned with two (2) kinds of tasks: 1. Tasks that are concerned with the overall coordination and efficient operation of the enterprise. 2. Tasks that are concerned with ensuring the long-term health of the organization. Functional work involves the actual buying, selling, processing, or transporting of goods. In Chandler's model, strategy development is largely the responsibility of the general office. Chandler noted that as a strategy developed, successful organizations developed structures that supported its implementation. It was also recognized that strategy development could be hindered by managers' perceptions, as their history can constrain them in implementing structural changes. This was because either they were “too involved with day to day tactical activities to appreciate longer-range organizational needs or because they felt structural reorganization threatened their position.” Chandler concluded that structural change served to make strategy implementation more efficient and created an environment in which strategy would be made differently. The suggestion is that strategy influences structure and how strategy is formed, which influences its content. Greiner’s Model of Organization Growth (Jenkins & Williamson, 2016) Greiner's ideas were developed in the early 1970s before information technology (IT) increased cross- and inter-organizational communication possibilities. Nonetheless, the propositions that are implicit in his work are an important contribution to the frameworks for understanding organization structures: Organizations can and do fail if there is an improper fit between structure, strategy, and environment. Strategy structure misalignments occur when an organization structure is rooted in its history rather than its present situation. Successful organizations overcome problems by going through periods of evolution and revolution. A period of evolution is when the organization experiences a long period of growth where no major disturbances occur in organization practice. A period of revolution occurs when there is substantial 04 Handout 1 *Property of STI  [email protected] Page 2 of 9  BM2105 turmoil in organizational life. The model says that organizations require different structures as they grow and that organizations that survive change their structures. This is best exemplified by profiling the life stages of a company as explained below: Phase 1: Foundation and early growth. In the beginning, the organization is staffed by its founders, who subsequently recruit employees as the company grows. It has a simple structure, with power resting with the founders, and where control and decision-making are achieved through informal communication. As the organization grows, the ability of the owners to maintain control is reduced until there is a crisis of leadership. The informal manner in which the organization is managed is no longer adequate because it cannot: o Cope with higher production volumes; o Coordinate increased employee numbers; o Motivate employees who no longer identify with founding ideals; and o Manage both support and primary activities. The organization can survive this crisis by developing an organizational structure that facilitates control and communication and allows specialist managers to run the company. Phase 2: Direction. As a result of its growth, the organization develops a functional structure (see Figure 2) to support increased turnover in established and new product areas. The senior management team now becomes responsible for the direction of the company. At the same time, those below it assume responsibility for controlling the functional tasks of production, distribution, and marketing. As the organization continues to increase in complexity through the growth in the number of inputs, processes, and outputs, there comes a stage when senior managers cannot cope with all the demands being made on them. As a consequence, junior managers are torn between following procedures or taking their initiative. The emerging crisis requires greater autonomy for junior managers, with failure occurring when senior managers remain reluctant to delegate and when junior managers are unable to adjust to making non-routine decisions. Figure 2. Functional organizational structure Source: Strategic management and business analysis, 2016, p. 53. Phase 3: Delegation. At this stage, the organization can survive by developing an organizational structure that pushes some elements of strategic decision-making down the organization. This gives rise to a structure that retains functional elements while allowing the formation of autonomous units. As Figure 3 shows, responsibility for profit and cost control can be delegated down the organization by forming profit/cost centers. In the illustration, the Sales Manager of Product Group A could be responsible for the profit targets of Product Group A and influence manufacturing and research and development (R&D) by creating an incentive bonus scheme. The structure would also allow R&D and Manufacturing to be profit centers to charge other Product Groups for work undertaken. Decentralized structures like these seek to give greater responsibility to local managers, with overall control being managed through output targets. The decentralization of responsibility and power also encourages the development of relationships between middle managers, making senior executives 04 Handout 1 *Property of STI  [email protected] Page 3 of 9  BM2105 uncomfortable if they feel that the growing influence of functional and line managers reduces their overall level of control within the diversified organizational structure. If managers become parochial and run their units as quasi-independent businesses, then coordination and integration with the rest of the organization can be inhibited. Figure 3. Autonomous profit-cost center Source: Strategic management and business analysis, 2016, p. 54. Phase 4: Coordination. The solution to these problems, according to Greiner, is to move to divisional structures that are coordinated by formal planning procedures within and across central, divisional, and functional areas (see Figure 4). These structures can have activities with a functional role within divisions and be centrally coordinated: accounting and finance, for example, can have central and divisional arms. The danger with these structures is that they can become over bureaucratic and induce a crisis of red tape (excessive conformity to formal rules or standards). In these circumstances, organizations will likely have to progress to some form of collaborative structure. Figure 4. Coordination through formal planning Source: Strategic management and business analysis, 2016, p. 54. Phase 5: Collaboration. In this phase, the emphasis is on the association between divisional groups and between the center and these groups, which can be made possible by moving to a more matrix- 04 Handout 1 *Property of STI  [email protected] Page 4 of 9  BM2105 style structure like the one (1) shown in Figure 5. Greiner was optimistic that using matrix structures and developing managers with appropriate behavioral skills would overcome “red tape crises” in larger organizations. In this matrix structure, the divisional manager of Product Group A in Asia reports to both the Product Director and the Regional Director. It is designed to increase collaboration, although the multiple intersections within the matrix structure can be a source of potential conflict and confusion. Figure 5. Matrix organization structure Source: Strategic management and business analysis, 2016, p. 55. Mintzberg’s Control and Coordination Model (Jenkins & Williamson, 2016) Mintzberg recognized that an organization's structure is not only dependent upon its age or size but is affected by other situational features, such as: the nature of the technology used in its transformation processes; the nature of the environment; and the distribution of power inside and outside of the organization. All organizations have units whose task is to provide the service or produce the goods that define the organization's purpose. This is the operating core. The overall control of the organization is in the hands of the strategic apex. In small organizations, the organization can consist of just the operating core and the strategic apex. However, a hierarchical middle line is created between the strategic apex and the operating core as the operation grows. As the organization becomes more complex two (2) additional groups of people may be required: 1. Those people who Mintzberg describes as analysts, who are responsible for designing the way others do work; this is the technostructure and it exists outside the hierarchy of line authority. 2. Those people who supply support services to the organization, such as legal advice and canteen facilities. Mintzberg also suggests that every “active” organization has an ideology. Each of these six (6) components (operating core, strategic apex, middle line, technostructure, support services, and ideology) plays a role in producing an organization's outputs. For outputs to be produced, organizations must also have mechanisms of coordination. Organizational coordination, according to Mintzberg, is facilitated through mutual adjustment, direct supervision, and standardization of work processes, outputs, skills, and norms. 04 Handout 1 *Property of STI  [email protected] Page 5 of 9  BM2105 By using Mintzberg's model, it is possible to discuss the ways that communication and coordination can occur in different organizational structures: Simple structures. In simple structures, the prime coordinating mechanism is direct supervision by the strategic apex. The structure of a general store is shown in Figure 6. In this structure, coordination is through direct supervision, although mutual adjustment and formal/informal work standardization are also present. The process is informal, with the key driver being the owner-manager. Figure 6. Communication and coordination in a general store Source: Strategic management and business analysis, 2016, p. 57. Machine organizations (traditional manufacturing firms). The biggest part of the organization is likely to be the operating core. The prime coordinating mechanism in the operating core is work standardization, which means that the technostructure is important (although other mechanisms are also likely to be present). Many traditional manufacturing firms have functional structures, which means there is a requirement for control and coordination within and across functions. The coordination within functions will be significantly affected by the nature of the work done. Coordination in professionally staffed functions and involve the production of variable and complex outputs, such as research laboratories or design offices, will differ from coordination in functions that conduct routine, repetitive tasks. Innovative organizations. In this kind of organization, coordination will be characterized by mutual adjustment - but since many participants will have been through professional training, there will also be skills standardization. This suggests that there will be some supervision, perhaps similar to that shown in Figure 7, which depicts the relationships of one (1) person with four (4) others (group size is five ). Figure 7. Communication and coordination in innovative organizations Source: Strategic management and business analysis, 2016, p. 58. In a group of five (5), there will be 10 relationships. When the group size is 10 there are 45 relationships. This means that for a group size of 𝑛 there are (𝑛 − 1)𝑛/2 relationships. If a group of 04 Handout 1 *Property of STI  [email protected] Page 6 of 9  BM2105 size 𝑛, increases in size by one (1), the number of relationships in the group increases by 𝑛. Groups will therefore require a different coordination mechanism if they grow beyond a certain size because simple mutual adjustment will not be possible. However, large-scale mutual adjustment could be possible if groups have leaders or representatives who liaise with other groups. Mutual adjustment is then sustained by having a hierarchy of groups. Missionary organizations. Mintzberg describes an organization that is dominated by its ideology as a missionary one. The outputs of this type of organization and the activities of its members are largely controlled by the values that the organization member shares with his or her colleagues. Missionary organizations have strong cultures perpetuated by effective indoctrination of new members followed by reinforcement rituals, routines, and symbols. Divisional structures. Mintzberg observed that the center's role in divisional structures is to develop corporate strategy; arrange the movement of funds between units; devise and operate a performance control system, and appoint and replace divisional managers. Divisional structures were designed to allow the center to focus on decision-making in specific business areas. The objective is not to free the units from central control but to maximize the centers’ ability to control units and to be able to communicate more effectively with them. Goold and Campbell’s Management Styles (Jenkins & Williamson, 2016) When companies acquire other firms, the result of the union does not always produce more shareholder value than when the companies operate independently. The suggestion is that the center can either reduce or enhance the performance of a subsidiary business unit. A key issue is the relationship between each business in a corporate portfolio and the center's role in creating value for each business. This value can be achieved by directly injecting value-generating resources or competencies into the business or by facilitating synergistic links between businesses where such synergistic value would not be created by the businesses acting alone. Simply injecting capital into a business is therefore unlikely to increase shareholder value. If the corporate center does not contribute to the business, there is no rationale for the link to be maintained. There are three (3) ways in which the center can add value: By acting as a portfolio manager, in this scenario, the center acts as an informed banker and adds value by ensuring sound financial divisional control. The center is an expert in developing and implementing control systems; By facilitating the transfer of skills between business units; and By facilitating the sharing of activities. Campbell and Goold suggested three (3) styles on how corporate centers can add value to their respective business units: 1. Strategic Planning Style. It is characterized by strong central leadership, an emphasis on coordination and cooperation, mechanisms for thorough review and analysis, the setting of long-term strategic objectives, the willingness to change strategies to meet changing circumstances. Organization structures in strategic planning companies are often of a matrix nature because it allows the center to facilitate cooperation across various businesses. This approach seeks to create strategic options for business units that draw upon and utilize the expertise of the whole corporate entity. It would also provide an appropriate mechanism for the identification of synergies, through cooperation, across units. 2. Financial Control Style. It is characterized by the autonomy of divisions and local leadership, an emphasis on control through budgets, strategy direction, the setting of financial objectives, and 04 Handout 1 *Property of STI  [email protected] Page 7 of 9  BM2105 allocation of resources (based on the historical ability to deliver set objectives), and tight financial control by the center. Organization structures in financial control companies stress independence, with divisions reporting directly to the center with little cross-division liaison. There is no obvious added value from links between divisions. 3. Strategic Control Style. Strategic control companies try to position themselves between financial control companies and strategic planning companies. Businesses are grouped into divisions, but the center maintains a closer interest in strategy than financial control companies. The intermediate position intends to gain advantages that accrue to both financial control and strategic planning companies. Strategic control companies eradicate overlapping of center and subsidiary management functions, facilitate business unit collaboration, and provide access to resources so that subsidiaries can finance long-term or risky projects that would be difficult to finance through capital markets. Management Styles Strengths Weaknesses The center can challenge ideas and Business managers have fewer attitudes more competently than responsibilities and lesser autonomy, outside bankers and investors. which can lead to de-motivation. By interaction and leadership, effective The decision-making processes can be central management can lead the slowed down. In the worst cases, the business unit to develop more creative whole system can become unwieldy and ambitious strategies that would and bureaucratic. come out of a single business. There is a risk that the center can be The center can buffer the business unit seen to be autocratic and ill-informed, from short-term financial pressures resulting in perception, and sometimes Strategic that stock markets and other investors a reality, that good opportunity is Planning Style may place on single businesses. missed through a lack of fit with the Therefore, the business unit can adjust overall corporate plan. strategies to gain long-term benefits An obsession with the long term can rather than be forced to concentrate on lead to the neglect of important short-term financial targets. operational issues and the need to generate profits in the short term. The business environment can be over- protected from harsh competitive realities, inducing complacency in business units. Financial control organizations are Some critics claim that the focus on more demanding of the business units short-term financial measures than banks or stock markets. They encourages revenue maximization at impose tight controls, which are tightly the expense of investment needs. monitored, with under-achievement Evidence suggests that financial control being quickly addressed. This can companies can miss out on long-term motivate divisional managers to think and more speculative investments due about their strategies so that they can to the desire to operate in financially Financial deliver above-average performance. predictable environments. Control Style The simplicity of accountability also provides managers with clear guidelines of the center’s expectations of them. The center reinforces the focus on performance by allocating investment based on performance. Similarly, under-performing units will be divested. Financial control 04 Handout 1 *Property of STI  [email protected] Page 8 of 9  BM2105 Management Styles Strengths Weaknesses organizations search for acquisition candidates performing poorly concerning return on assets to turn them around by applying financial control disciplines. It allows the individual businesses to It can become bureaucratic, and there take a long-term view on investment is confusion between strategic control decisions and implementation and financial control. Strategic performance. The whole corporation may be unable Control Style There is an awareness of the need to to raise funds in situations where the balance long-term goals and short-term individual businesses could. performance. Business can be over-protected from the disciplines of the markets. Table 1. Pros and cons of different management styles Reference: Jenkins, W. & Williamson, D. (2016). Strategic management and business analysis (2nd ed.). Routledge. 04 Handout 1 *Property of STI  [email protected] Page 9 of 9