Business Organization and Strategy Notes
Chapter 6: Business Organization Structure and Strategy
Informal Organization
A network of relationships within the organization.
Arises from common interests or friendships.
Four Manifestations:
Informal communication (grapevine).
Informal groups.
Informal work methods.
Informal power/leadership.
Exists alongside the formal organization.
Emphasizes people and their relationships.
Allows connections across divisions.
Supplement the formal organization by providing motivation, emotional commitment, responsiveness, and flexibility, while the formal organization provides alignment, scale, and consistency.
Disadvantages:
Often conveys inaccurate information.
May cause health and safety problems.
Relationship with Formal Organization
All organizations have a mix of formal and informal structures.
Formal Organization: Designed by management to meet goals.
Informal Organization: Connects people in ways not possible in the formal setup; satisfies social and psychological needs.
Formal Organization
Formal organization follows the principle of scalar chain.
Basic Organization Structure Concepts
Separation of Ownership and Control (Divorce of Ownership and Control)
Shareholders (owners) are different from the board of directors (those who control the company).
Span of Control
Number of employees directly reporting to a manager.
Decreases if employees are geographically dispersed.
Scalar Chain
Line of authority from top to bottom of the organization.
Long in tall organizations.
Factors Influencing Span of Control
Manager’s capabilities.
Nature of manager’s workload (supervisory vs. non-supervisory).
Geographical dispersion of subordinates (similar vs. different work).
Organizational Chart
Provides a summary of the business structure.
Improves internal communications.
Enhances employees’ understanding of their roles.
Only indicates line authority (not functional authority).
Tall vs. Flat Organization
Tall Organization
Many managerial levels (hierarchies).
Narrow span of control.
Tight supervision control.
Long scalar chain → poor vertical communication.
Flat Organization
Few managerial levels.
Wide span of control.
Greater delegation/decentralization of authority.
Short scalar chain → faster vertical communication.
Delayering
Reduction in the number of management levels.
Restructuring the business.
Removes middle managers.
Departmentation / Organizational Structure
Organizations may be departmentalized or divisionalized in a number of different ways:
Entrepreneurial Structure
Functional – (by specialism) grouping by function
Geographic – by region or country
Product / Brand / Division (divisionalization) – activities are grouped based on product lines
Matrix – (task based) structure
Shamrock Organization
Divisionalization refers to the structuring of an organization on the basis of divisions.
Entrepreneurial Structure
Simple structure, usually for start-ups.
Built around the owner/manager.
Fluid structure with little formality.
Direct control by the owner.
Fast decision-making.
Better goal congruence (alignment of individual goals with the overall goals of the organization).
Disadvantages: Reliance on one person, difficult to grow beyond a certain size (50 employees).
Functional Organization (Departmentalization / Departmental structure)
Most appropriate for small to medium-sized organizations.
Departments for people with similar jobs or tasks.
Enables standardization and specialization.
Avoids duplication of functions.
Enables economies of scale.
Disadvantages: Slow, conflicts between departments, vertical barrier, poor coordination.
Divisional / Product Structure
Organization split into several divisions.
Each division oversees a product, geographic section, or customer type.
Each division has a functional structure.
Divisions run as profit centers (strategic business units - SBU).
Advantages: Enables growth, clear responsibility, training of general managers, easily adapted for diversification, top management focus on strategic matters.
Disadvantages: Potential loss of control, lack of goal congruence, duplication, specialists may feel isolated, allocation of central costs can be a problem.
Geographical Divisionalization
Divisions in different geographic regions or countries.
Functions are the same across locations.
Geographic divisions become administrative units.
Other functions may be based at the head office, but day-to-day operations are handled locally.
Disadvantages: Duplication of effort, inconsistency in methods/standards.
Matrix Structure
Flattest structure, associated with “networking”.
Combination of functional and product/project structures (hybrid).
Dual reporting.
Optimal for project-based organizations with fluctuating workloads.
Violates the principle of Unity of Command (every employee should only have one boss).
Better coordination in complex situations.
Functional flexibility achieved by training staff to be multi-skilled.
Handy’s Shamrock Organization
Flexible structure.
Core workers: permanent/professional core (salaries are given based on employee’s performance).
Insourced workers: temporary/contingent workers (short-term contracts).
Outsourced workers: self-employed professionals.
New Organization Structures
Boundaryless Organization
Removes internal barriers between hierarchy levels and functions and external barriers between the organization and its suppliers, customers, and competitors.
Communication via email, phone, virtual methods.
Managers may use virtual, hollow, or modular structures.
Virtual Organization
Operates without a main physical office.
Conducts business mostly through telecommunications media.
May outsource most of their business operations.
Hollow Organization
Splits people and activities into core (strategically important) and non-core.
Outsources all non-core processes and activities.
Retains core activities (e.g., product design) in-house.
Modular Organization
Different elements or components of the product/service are outsourced to different suppliers.
Organization assembles the final product.
Jobless Structure
The employee becomes not a job holder but a seller of skills (influencer).
Shared Service Center
Created within the organization.
Provides support across the organization.
Views the rest of the organization as their customers.
Disadvantage: Less tailored and more generic.
Horizontal Structures
Multi-functional project teams and multi-skilling.
Emphasizes an employee-centered approach with emphasis on teamwork and collaboration.
Chunked or Unglued Structures
Creating smaller and more flexible units within the overall structure team working and decentralization and empowerment.
Output-Focused Structures
Focus on results and on the customers, instead of internal processes and functions for their own sake.
Offshoring vs. Outsourcing
Outsourcing: Contracting out aspects of the work of the organization, previously done in-house, to specialist providers.
Off-shoring: Process of outsourcing or relocating some of an organization’s functions form one country to another, usually in an effort to reduce cost.
Types of Outsourcing
Ad-hoc: Only for that purpose, for particular tasks or short-term.
Levels of Strategy in the Organization
Corporate: Overall goals, general direction of the whole organization (S-Level).
Business: How organization or SBUs tackle particular markets (5 forces) (T-Level).
Strategy to address:
Cost leadership
Cost focus
Product differentiation
Operational/functional: Specific strategies for different departments of the business (O-Level).
Porter’s Generic Strategies
Cost leadership: low-cost (set lower price than competitors), broad-based market strategy → cheapest in the whole market.
Cost-focus/niche: low-cost, narrowly focused market strategy (concentrates on a select few target markets). → cheapest price in a narrow market.
Product Differentiation: marketing a unique product (brand image, features etc.) to a broad-based market. → sell unique and brand.
Porter's Model of Generic Strategies for Competitive Advantage:
*Cost Leadership: Broad+Low costs. With this strategy, the objective is to become the lowest-cost producer in the industry.
*Cost Focus: Narrow+Low costs. Here a business seeks a lower-cost advantage in just one or a small number of market segments.
*Differentiation Leadership: Broad+High costs. The business targets much larger markets and aims to achieve competitive advantage through differentiation across the whole of an industry.
*Differentiation Focus: Narrow+High costs. In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments.
Levels of Planning
Strategic planning: 3-5 years (major planning, long-term decisions).
Decision: Unstructured, non-routine.
By Senior Management.
Tactical planning / Functional planning: 1 year.
Decision: Semi-structured, routine, and analyzing.
By Middle Management.
Operational planning: short term, daily.
Decision: Structured, detailed, and practical.
By employees, Junior management.
Anthony's Hierarchy of Managerial Activity
*Strategic planning: undertaken by senior managers, involves making long-term decisions for entire organization.
*Tactical planning: undertaken by middle management, looks at the plans for specific divisions or departments, specifies how to use resources.
*Operational planning: undertaken by junior managers and supervisors, short-term, detailed and practical.
Centralization vs Decentralization
Centralization: Authority for decision-making is retained at the top. People must refer decisions upward.
Decentralization: Authority for decision-making is delegated to a lower level. There is empowerment and autonomy at lower level.
Chapter 7: Organizational Culture and Committees
Main Departments in a Business Organization
Research and development
Purchasing
Production
Direct service provision / service operations
Marketing
Administration
Finance
Human resources
Research and Development
*Improving existing products
*Developing new products
*Generating new ideas
*Testing
Purchasing
*Acquiring the goods and services necessary for the business
*Price and payment terms
*Quality
*Stock levels/delivery schedules
Production
*Converting raw materials into finished goods
*Quality (of materials and finished good)
*Costs
*Wastage/efficiency
*Stock levels/production schedules
Direct Service Provision
*Providing services to clients
*Quality
*Time sheets/scheduling
Marketing
*Identifying customer needs
*Market research
*Product design strategy
*Pricing strategy
*Promotion
*Distribution
Administration
*Administrative support
*Efficiency
*Information processing
*Processing transactions
Finance
*The raising money/capital
*Recording and controlling what happens to the money
*Providing information to managers
*Reporting to shareholders and others
*Treasury Management
*Cash budgeting
Arranging a bank overdraft facility
Repaying loans
Comparing actual cash flow
***Note: Accuracy and completeness of record keeping
Monthly management reporting
Annual financial reporting against budget
Cashier's duties - making payments to suppliers, paying wages and banking receipts
Types of research
*Basic research: also called fundamental research or pure research, is a systematic study directed toward greater knowledge or understanding of the fundamental aspects of phenomena. It is exploratory and often driven by the researcher’s curiosity and interest.
*Applied research: research for solutions with existing problems
*Development research: use of existing scientific or technical knowledge to produce new product or system by follow commercial production with technical knowledge
*Product research: new product development
*Process research: make process efficient or enhance quality
Marketing
Manage an organization’s relationship with its customers.
Levels of Products (Kotler)
Level 1: Core Product
Most basic, lists what people set out to buy and what benefits the producer would like their product to offer buyers.
Level 2: Actual Product
Translates core product benefits into a product people will buy.
Involves deciding on the quality level, product and service features, styling, branding and packaging.
Level 3: Augmented Product
Additional non-tangible benefits that a product can offer (after-sales service, warranties, delivery).
Nature of Services
Intangibility: services are performances or actions. They cannot be seen, felt, tasted, or touched. Services cannot be inventoried.
Inseparability: In most cases a service cannot be separated from the person or firm providing it. Services are typically produced and consumed at the same time.
Heterogeneity: Since services are performances, frequently produced by human beings, no two services will be precisely alike. The heterogeneity connected with services is largely the result of human interaction (between and among employees and customers).
Perishability: services cannot be saved, stored, resold, or returned; they tend to perish in the absence of consumption.
No transfer of ownership: In the case of a service, we may pay for its use, but we never own it.
Promotion
AIDA: attention (Awareness of the product), interest, desire to buy the product, and action through actually buying the product (used to measure the promotion strategy).
Price
Penetration Pricing: start with low price to secure market share
Price Skimming: High price to recover production cost and lowering the price to compete with new model
Psychological Pricing: $99 is psychologically "less" in the minds of consumers than $100
Cost-Plus Pricing: Selling price = Cost + Mark-up price
Going-Rate Pricing: Adopt the same price as the competitors
Marketing plan and Strategic plan
*Strategic plan: formulated to achieve long-term objectives (3 - 5 years → Strategic Level)
*Marketing objectives must be consistent with strategic objectives (Tactical Level)
*Market research is done in Marketing
Marketing Audit
Addresses 3 questions:
Where are we now
Where do we want to be
How do we get there
Marketing Orientation
*Production orientation: Making as many products as possible.
*Product orientation: a variant of production orientation, add additional features to the products without conducting market research
*Sales orientation: Focusing on persuasion of people to buy the products instead of understanding the customer needs
*Marketing orientation: Determine the needs, wants and values of a target market
Culture
The way we do things around here.
Key Elements
Shared values or dominant beliefs.
Norms- standard behaviors, guide people’s behavior, suggesting what is or is not appropriate
Symbols and symbolic action- e.g. rituals such as buying the office a cake on your birthday
What shapes Organizational Culture
Founder
History
Leadership and management style
Organization’s environment culture of the country where your organization branch is located
NOTE: Socialization: the term for the act of getting individuals to behave in ways that are acceptable to a group. Organizational socialization: the ways people learn when first join the organization and will be corrected over time
Manifestations of Culture(Indicators)
Beliefs and values – what it does; its mission
Behavior – reporting lines; how widely spread is power; the way the work flows through the business
Artefacts- works of art, stories and myths build up about people and events; dress codes
Rituals- meetings, reports, more habitual than necessary
Symbols – logos; extended symbols of power (parking space and executive washrooms
Assumptions- “unspoken rules” that are no longer consciously recognized or questioned by the culture
Explicit and Implicit Aspects of Culture
Explicit aspects of a culture are those that are easily observable
Implicit aspects of culture are those that are not easily observable. Proper behavior and etiquette are usually implicit
Schein’s 3 Levels of Culture
*Artifacts: the way people dress, the way they behave, the structure of the company as set out in the organization chart (behavior, artifacts, attitudes)
*Values and beliefs:(Espoused values) the stated goals, strategies, and philosophies (slogans)
*Basic assumptions: most fundamental level; very important but are often the most difficult to identify and to understand (unseen and often unconscious); unspoken rules
Harrison / Handy Culture Classifications
Power Culture (Zeus)
Concentrates power in a few hands; shaped by one individual (ex. Small entrepreneurial org./owner-managed).
Leader Focused
Role Culture (Apollo)
Clearly delegated authority within a highly defined structure (bureaucracy); shaped by rationality, rules, and procedures.
Mechanistic Culture
Task Culture (Athena)
Teams form to solve particular problems; shaped by focus on output and results.
Project Focused
Person Culture (Dionysus)
*Depend on the talent of the individual; satisfy the requirements of the particular individuals; found in a small, highly participatory organization, Person focused
Individual and his talent, status symbol, Existential culture: organization exists for the employees; culture based on self-interest
The Hofstede Model
Cultural Dimensions by Hofstede
Power/Distance (PD)
This relates to the degree of inequality that exists – and is accepted – among people with and without power
Individualism (vs. Collectivism)
Refers to the strength of the ties people have to others within the community
Masculinity (MAS
This refers to how much a society sticks with, and values, traditional male and female roles
Uncertainty/Avoidance (UA)
This relates to the degree of anxiety society members feel when in uncertain or unknown situations
Long- Versus Short-Term Orientation
Description Focus on future rewards, with focus on saving and ability to adapt to changing situation
Indulgence Versus Restraint (IVR)
indulgent societies allow relatively free gratification of basic and natural human drives related to enjoying life and having fun. More restrained societies suppress gratification of needs and regulate it by means of strict social norms.
Handy's Classification
Handy matched his cultural types with Anthony’s classification of managerial activity: (S, T, O) strategic Management, Tactical Management, Operational Management
Types of Committees
Executive committees
Standing committees
Ad hoc committees
Sub-committees
Joint committees
Management committees
Purposes of Committees
Creating new ideas, brainstorm.
Excellent means of communication.
Democratic.
Combining abilities.
Co-ordination.
Representation.
Making recommendations.
Committee Chair and Secretary
Qualities of Good Committee Chair
Give immediate rulings- can vote when there is a tied
Maintaining order at meetings
Impartial- treat opponents with equal fairness → make all members contribute fully to discussion
Punctual and regular in attendance
Duties of Secretary
Before committee meeting: (fix date, time, venue, documents); find out whether specific matters fall within the terms of reference of the committee → not determining the terms of reference During: Assist Chair, making notes After: preparing of minutes of the meeting
NOTE: Participants who attended the meetings are the one who agree the minutes of meetings whether it is true and accurate recorded. The meeting must has a quorum (Quorum = ½ +1)
Advantages of Committees
Consolidation of power- plural executive
Delegation of power and authority
Blurring responsibility- it is committee decision, can’t blame the individual in the committee
Creating new ideas
Communication
Encourage participation
Advisory capacity
Delay- have time to study more about the problems as the committee will be formed to study the problems and the one who responsible for the committee has the final say
Disadvantages of Committees
Too large for constructive action
Time consuming and expensive (delay the work
Delays may occur
Distracts executives from more important duties- operations may be jeopardized
Poor decisions – incorrect or ineffective decisions
Compromise- instead of clear cut decisions
Chapter 8: Corporate Governance and Social Responsibility
Key Term
*Fiduciary- relationship of trust between two or more parties Going concern- the idea that a company will continue to operate indefinitely Integrity- dealing honestly with employees, customers and all business contacts Accountability- being answerable for its actions Independence- there must be independent people within the organization checking that the business is complying with its code of governance. (NED, internal audit, External auditor) Good management- setting best practice guidelines Proactive- positive; planning ahead and anticipating problems (look forward ahead of future) Reactive - waiting for problems to appear before addressing them. Quoted company- a company whose shares can be bought or sold on the Stock Exchange. Stewardship-to manage someone else's property. Executive Director (ED) –directors who are involved in the day-to-day running of the company Non-Executive Director (NED)- directors who are not employees of the company and have no managerial responsibilities; do not participate in the day-to-day running of the organization
Agency relationship
Agency relationship is an agreement where one group (the principals) hires another person (the agent) to perform a job that involves giving decision-
making power to the agent
Agent (BOD) is accountable to principal (shareholders) for their actions
Stewardship, agency and stakeholders theories
*Stewardship theory is managers will act as responsible stewards of the assets they control.
*Agency Theory- managers are assumed to act in their own self interests at the expense of shareholders
*Stakeholders theory- managers have a duty of care to all stakeholders not only to the owners/shareholders.
Corporate Governance deals with
Management and reduction of risk – System of Control → can only reduce the risks but cannot eliminate the risks
Supervision (NED) and management (ED)- to reduce agency problem
Framework to pursue strategy in ethical and effective way
Willingness to apply the spirit and letter of the law- act accordingly to the intention of the laws
Accountability to stakeholders- to align the interests of executives with those stakeholders (Accountability mean answerability
Price of the share related to the company reputation
Governance principles minimize risk – financial, legal and reputation risk; Ensure Adherence etc
Approaches to corporate governance: Principles vs. Rules
Principles UK- more flexible – Can be applied across countries
Rules US
Audit Committee
*UK Smith report recommends that the audit committee should consists entirely of INED (excluding the chairman) Sarbox– independent non-executive directors (100%)
*reporting to the shareholders, making recommendations to the board, for them to put to the shareholders, relating to the appointment and removal of the external auditors as well as their remuneration and terms of engagement
Sometimes the committee may carry out investigations and may deal with matters reported by whistleblowers ***Note:
Whistle-blowing is the name of the process in which an employee informs another responsible employee in the company about potentially unethical behaviour
Key Board Committees
Nomination committee: Majority NED : Lawyers, accountants, consultants Listed companies should consider directors of private companiesPublic sector or charitable experience, but strong commercial awareness
Remuneration committee: 100 % INED : Pay scales for directors; Administer any share option scheme If pay is good than employees will always be good; Period for which performance is payable
Board of directors: should be more NED than ED (Non-executive directors VS the executive directors.
Audit committee: 100% INED Smiths included in Higgs report: 100% Expert - Oversee external audit
how ever sometimes can be executive directors that have a good audit skills. Features of poor corporate governance -
Domination of the board by a single individual; lack of Supervision etc
Reporting Requirements
Sustainability Reporting
Corporate Social Responsibility (CSR
Employees: What are company policies in terms of; customers, Shareholders,Suppliers
Corporate Social Responsibility (CSR): Reactive Strategy : not ethical; unacceptable Strategies just to make them look good . The defence: accept social responsibility in response to pressure from the government Proactive Strategy: ethical they really do care . A company which discovers a fault in a product and recalls the product.