ACCA P3 Business Analysis - 2010 - Study text

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Chapter 9: Strategic direction and strategy development

 should be expected to provide a minimum acceptable financial return (in other

words, should have a positive net present value when its cash flows are

discounted at an appropriate cost of capital), and also

 should be consistent with the chosen strategies, and there should be a ‘strategic

fit’ between strategy and investments.

However, an investment opportunity might be identified that will provide high

financial returns, but is not a good strategic fit. Even though the investment is not

consistent with agreed strategy, it would probably be undertaken – provided that the

expected financial returns were high in relation to the investment risk. This would

possibly be an example of emergent strategy, which was described in an earlier

chapter. (Alternatively, it would be a one-off investment with the sole aim of making

money!)

In other situations, an entity may decide to undertake an investment with low

financial returns, because it is an excellent ‘strategic fit’.

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Strategy selection

 Formal evaluation

 Enforced choice

 Learning and experience

5 Strategy selection

The process of strategy evaluation provides an assessment of the suitability,

feasibility and acceptability of different strategies. Strategy proposals that are not

suitable, not feasible or not acceptable can be rejected. This might still leave several

different alternative strategies to consider. If so, the preferred strategies must be

selected from the strategy options that are available.

5.1 Formal evaluation

Where there is a free choice from several available strategies, the selection might be

based on a formal financial evaluation and strategic evaluation of the expected

returns and the risks, over the long term as well as the short term.

5.2 Enforced choice

In some cases, management might take the view that they have no real choice, and

that they are ‘forced’ to adopt a particular strategy. The reasons for having to select

an enforced strategy might be that:

 a key stakeholder, such as a major shareholder, is insisting on a particular

strategy, or

 every competitor is doing the same thing.

However, it is probably a sign of weak management that a strategy is considered

necessary or unavoidable. Strategy selection should be positive. Management

should be looking for the strategies that are most likely to achieve the corporate

objectives.

5.3 Learning and experience

A distinction can be made in strategy selection between experience and learning.

 Experience is acquired over time. With experience, an entity should develop

skills and competencies. Strategic opportunities should arise that enable the

entity to use its skills and experience to develop its businesses. Using acquired

skills to develop and grow is consistent with the logical incremental model of

strategic management.

 Learning is the acquisition of new ideas. An entity might select a strategy that

forces it to learn something new. This might require a significant change in

behaviour as well as skills. Although the learning process can be rapid,

strategies based on new learning are likely to introduce change more suddenly.

This type of strategy might therefore be fairly risky.

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Business analysis

CHAPTER

Strategic action

Contents

1 Organising for success

2 Internal and external relationships

3 The most appropriate organisation structure

4 Strategic change

5 Managing strategic change

6 Understanding strategy development

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Organising for success

 Strategy implementation

 Organisation structure

 Entrepreneurial organisation

 Functional organisation structure

 Divisional organisation structure

 Matrix organisation structure

 Project-based and team-based structures

 Span of control

 Organisational processes

1 Organising for success

1.1 Strategy implementation

After a strategic position analysis has been undertaken, available strategies have

been evaluated and the preferred strategies have been selected, the selected

strategies must be implemented. Achieving strategic objectives requires successful

strategy implementation.

Strategy implementation takes the form of day-to-day actions and relationships.

Three aspects of strategy implementation are specified in the syllabus for the

Business Analysis paper:

 organisation structure, including the organisation of processes and relationships

 managing strategic change

 implementing strategy through a combination of intended strategy and

emergent strategy.

1.2 Organisation structure

Organisation structure is an aspect of strategy implementation. Strategy is

implemented through actions, and actions are planned and controlled through the

management and decision-making structure within the entity.

Organisation structures differ between entities. The organisation structure for an

entity should be appropriate for the size of the entity, the nature of its operations,

and what it is trying to achieve. Most important, the organisation must enable the

entity to develop plans and implement them effectively.

There are several different types of organisation structure. Within a single entity,

particularly a large entity, there might be a mixture of different organisation

structures, with different structures in different parts of the entity.

Chapter 10: Strategic action

From a strategic perspective, however, the key question is: ‘What is the most

appropriate structure for a particular entity that will help it to achieve its strategic

objectives in the most efficient way?’

Organisation structures for multinational and global entities were described in an

earlier chapter. You should also be familiar with the following basic structures that

might exist within any entity or part of an entity:

 an entrepreneurial organisation structure

 a functional structure

 a divisional structure

 a matrix organisation.

1.3 Entrepreneurial organisation

An entrepreneurial organisation is an entity that is managed by its entrepreneurial

owner. The main features of an entrepreneurial organisation are usually that:

 the entrepreneur takes all the main decisions, and does not delegate decision-

making to anyone else

 the entity is therefore organised around the entrepreneur and there is no formal

management structure

 operations and processes are likely to be simple, and the entity will probably sell

just a small number of products or services.

An entrepreneurial structure is appropriate when an entity is in the early phase of

its life. As it grows larger, however, an entrepreneurial structure will become

inefficient, and a formal management structure is needed.

1.4 Functional organisation structure

A functional structure is usually the next stage in the development of the

organisation structure of a growing entity. In a functional organisation structure,

decision-making authority is delegated in a formal arrangement, and

responsibilities are divided between the managers of different activities or

functions. Typically, functions in a manufacturing entity include production (or

operations), marketing and sales, and finance and accounting. There might also be a

human relations function, an IT function, a research and development function, and

so on.

Each function has its own management structure and its own staff.

An organisation chart showing a simple functional structure is shown below.

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1.5 Divisional organisation structure

As entities grow still further, and develop their business operations into different

product-markets, a divisional structure might become appropriate. A division is an

area of operations, defined by:

 markets in different geographical areas (for example, the European and the

North American divisions).

 different products (for example the bus division and the rail division of a

transport company).

 different customers (for example, industrial products and consumer products).

A division might be a strategic business unit of the entity (group). Each division has

its own functional departments, such as marketing and sales, operations

(production), accounting and finance, and so on.

Authority is delegated from head office to the divisional management (led perhaps

by a divisional managing director), and responsibility for the implementation of

product-market strategy is mainly at divisional level.

Head office retains overall control, and there may be some head office functions

providing support services to all the divisions, such as corporate strategy, IT and

research and development.

The simple organisation chart below shows the organisation structure for a

divisionalised organisation with two divisions, where IT and research and

development are head office support functions.

Chapter 10: Strategic action

1.6 Matrix organisation structure

Some entities have developed a matrix organisation structure for some of their

activities. The matrix organisation originated in the 1950s and 1960s, in entities

where it was recognised that different functions within the entity needed to work

closely together. Horizontal relationships across different functions were as

important as the ‘traditional’ reporting relationship within functions.

Matrix organisations and project organisation structures were both first used in the

defence and aerospace industries, where companies were required to carry out

major projects for customers, such as building a quantity of aircraft for a

government customer.

The challenge was to complete projects on time and on budget. However, the

traditional functional structure within the construction companies meant that no

one was responsible for the project as a whole. A matrix organisation or project

management organisation was introduced to overcome the problem.

 Project managers were appointed with overall responsibility for individual

projects. Project managers had to organise the efforts of individuals in all the

different functions.

 At the same time, functional managers such as management of engineering,

production and sales and marketing, retained their decision-making authority.

In this way, a dual command structure was created. In a matrix organisation, the

traditional vertical command structure has an overlay of horizontal authority or

influence.

A matrix organisation has been defined as: ‘any organisation that employs a

multiple command system that includes not only a multiple command structure but

also related support mechanisms and an associated organisational culture and

behaviour pattern’ (Davis and Lawrence 1977).

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The difference between a matrix organisation structure and a project organisation is

that with a project organisation, the project management comes to an end when the

project ends. With matrix organisation, the matrix structure of authority and

command is permanent.

Functional managers Production Quality control Design

Project managers

Project A

Project B

Quality control expert

Project C

In the diagram above, the person shown is a quality control expert and is

responsible to the quality control manager for technical aspects of the job,

maintaining quality systems and so on.

The person is also responsible to the manager of Project B. That manager will be

concerned with completing the project on time, within the cost budget and to the

proper standard.

Obviously conflicts can arise: the project manager might want to skip some tests to

make up time, but the quality control department won’t want to do that. Both can

put the employee under some pressure. However the matrix structure should allow

the employee to ask the two managers to discuss the problem, as it is plain that they

are both involved.

Overall, matrix structures should:

 encourage communication

 place emphasis on ‘getting the job done’ rather then each manager defending his

or her own position.

Examples

Examples of matrix organisations are as follows.

 A large company in which there are:

− divisional managers responsible for a geographical market or a particular

product, and for the profitability of the market or the product, and in

addition

− functional managers at head office responsible for the major functions across

the entire entity – for production marketing and sales, human resources

management and so on.

 A university in which there is a traditional command structure based on heads

of faculty and heads of department, but in addition a course-based management

Responsible to Project Manager B

Responsible to quality

control manager

Chapter 10: Strategic action

structure in which individual lecturers are responsible for all aspects of

particular courses or degree programmes (for example, obtaining and managing

the teachers from different faculties or departments, finding the lecture rooms,

marking the examinations, and so on).

1.7 Project-based and team-based structures

In addition to having a formal management structure, entities might also used

project teams and other management teams to implement some activities.

Project teams are usually assembled to accomplish a specific task, such as

introducing a new system or a new process. The project team should consist of

members from different disciplines or functions, so that a wide range of skills is

assembled to implement the project.

Project teams might be used for implementing planned strategic changes.

1.8 Span of control

The span of control refers to the number of people who directly report to a manager

in a hierarchical management ‘command’ structure. There are two extreme shapes:

 Tall-narrow. In this type of structure, each manager has a small number of

subordinates reporting directly to him. As a result, in a large organisation, there

are many layers of management from the top down to supervisor level. The span

of control is narrow, and the shape of the organisation structure is tall, because

of the many layers of management.

 Wide-flat. In this type of structure each manager has a large number of

subordinates reporting directly to him. As a result, even in a large organisation,

there are only a few layers of management from the top down to supervisor

level. The span of control is wide, and the shape of the organisation structure is

flat, because of the small number o f management levels.

Tall-narrow Wide-flat

(here the span of control = 2) (here the span of control = 12)

Recent trends have

been to ‘flatten’ or

‘delayer’ the

structure.

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The tall-narrow structure often has the following characteristics.

 Formality in relationships between managers and subordinates.

 Close supervision, with managers spending much of their time monitoring the

work of subordinates and giving them directions.

 Task specialisation, with a small group of manager and subordinates

specialising in a very narrow aspect of the entity’s operations.

 A strong cultural and procedural emphasis on formal roles, job titles and job

descriptions.

 Slow vertical communication. Because of the many levels of management, it can

take a long time for information to get from top to bottom of the management

hierarchy, and from bottom to top. As a result, tall-narrow organisations can be

slow to react to change.

The wide-flat organisation structure often shows the following characteristics,

where the work is fairly complex and non-routine.

 Greater egalitarianism. ‘Bosses’ and ‘subordinates’ will often respect each other

for their skills and experience, and will treat each other as equals.

 Team-work and co-operation.

 Greater delegation of responsibility to subordinates. Managers have too many

subordinates to apply close control. Managers must therefore trust subordinates

to get on with their work, with relatively little supervision.

 Flexibility. There is less emphasis on roles and job descriptions, and individuals

are more willing to switch from doing one type of task to another, as the

demands of the work change.

 There is rapid vertical communication and decision-making. Information travels

quickly from top to bottom of the organisation structure and from bottom to top.

Wider and flatter organisation structures have replaced tall bureaucratic structures

in many organisations. The reasons why wide-flat organisations are often preferred

are as follows.

 Wide-flat structures are more suitable to rapidly-changing business

environments, where entities must respond to changes quickly and with

flexibility. An organisation in which information travels quickly and decisions

can be made quickly is more appropriate in these circumstances that a structure

that is more formal and hierarchical.

 Cost savings. It has been argued that in a tall-narrow organisation, managers

spend too much time managing each other, instead of adding value. If middle

managers do not add value, they should be eliminated from the organisation

structure.

1.9 Organisational processes

Actions are implemented within an entity through established processes. The

processes that are used within an entity vary. As explained above, they differ

between tall-narrow organisation structures and wide-flat organisations.

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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