ACCA P3 Business Analysis - 2010 - Study text

Подождите немного. Документ загружается.

Chapter 10: Strategic action

Processes affect the way that plans are made and implemented, and activities are

controlled. The nature of planning and control can differ widely between different

entities.

 At one extreme, actions are controlled through direct and close supervision of

the work of individuals by their supervisor or superior manager.

 At the other extreme, there is minimal supervision, and control is exercised

mainly by the individual himself.

Example

Some investment banks have developed very complex financial products which

they sell to customers or trade for profit.

Due to their complexity, senior management do not understand the products in any

great detail. They rely on small investment management teams to use and develop

new products that are consistent with the bank’s strategic intent.

Supervision is therefore minimal, and control is often exercised through self-control

by the individual product experts.

Paper P3: Business analysis

236 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Internal and external relationships

 Organisational relationships and implementing strategy

 Internal relationships: centralisation versus decentralisation

 External relationships

 Outsourcing

 The virtual organisation

2 Internal and external relationships

2.1 Organisational relationships and implementing strategy

Plans are put into action by the co-ordinated efforts of many individuals and groups

within the entity. The way in which plans are implemented depends on:

 the nature of internal relationships: these are relationships between different

parts of the organisation

 the nature of external relationships: in many entities a significant amount of

work is done by other entities and individuals who are external to the entity and

not a part of it.

2.2 Internal relationships: centralisation versus decentralisation

An important aspect of internal relationships is the extent to which decision-making

is centralised, so that major planning decisions are made (and implemented) by

‘head office’, or decentralised.

 In a centralised organisation, senior management retain most (or all) of the

authority to make the important decisions.

 In a decentralised organisation, the authority to take major decisions is delegated

to the management of units at lower levels in the organisation structure, such as

SBU managers, and divisional managers.

The choice between a centralised and a decentralised organisation depends to some

extent on the preference of senior management. However, the size and complexity

of the entity also influence the extent to which decision-making, planning and

control are centralised or decentralise (‘devolved’). It is difficult to control a large

and complex entity from head office, without delegating substantial amounts of

authority to divisional managers.

Advantages of centralisation

Advantages of centralisation are as follows.

 Decisions by management are more likely to be taken with regard for the

corporate objectives of the entity as a whole. There is a very strong argument in

favour of making strategic decisions centrally.

Chapter 10: Strategic action

 Decisions by management should be co-ordinated more effectively if all the key

decisions are taken centrally.

 In a crisis, it is easier to make important decisions centrally.

Advantages of decentralisation/devolution of authority

Advantages of decentralisation are as follows.

 In many situations, junior (‘local’) managers have much better knowledge than

senior management about operational conditions. Tactical and operational

decisions are probably better when taken by local management, particularly in a

large organisation.

 Giving authority to managers at divisional level and below helps to motivate the

management team.

 Decisions can be taken more quickly at a local level, because they do not have to

be referred to head office.

 In a large and complex organisation, many decisions have to be made – probably

too many for senior management at head office.

The appropriate amount of centralisation or decentralisation for an entity will

depend on the circumstances.

It has already been suggested (Greiner’s growth model) that as it gets larger, an

entity might go through periods of centralisation, decentralisation and co-ordination

between local management and head office.

2.3 External relationships

An entity might use external relationships to deliver a particular strategy. These are

relationships with other entities, or with individuals who are not a part of the entity

but are external to it. External relationships may take the form of:

 strategic alliances

 value networks

 outsourcing of functions

 virtual organisation

Strategic alliances (including joint ventures) and value networks have been

described in earlier chapters.

2.4 Outsourcing

An entity does not need to carry out operations itself. Instead, it can outsource work

to a sub-contractor.

Outsourcing is common in certain industries, such as the construction industry. It is

also common to outsource ‘non-core’ activities, such as the management of the

entity’s fleet of motor vehicles, security services, some IT work and some

accountancy work (for example, payroll operations).

Paper P3: Business analysis

238 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

The size of an entity, and its organisation structure, will depend to some extent on

how much of its operational activities it chooses to outsource.

The reasons for outsourcing

Outsourcing is consistent with the view that an entity achieves competitive

advantage by concentrating on its core competencies. It does not achieve

competitive advantage doing work that can be done just as well – if not much better

– by another entity.

 The entity should therefore focus activities within the entity on core

competencies, with the aim of gaining more competitive advantage in these core

areas.

 The entity should outsource work to entities that have core competencies in

these areas of work. They should be able to add value more effectively than the

entity would if it were to carry out the work internally instead of outsourcing it.

 The outsourced work might require specialist skills that the entity cannot

employ internally, because it cannot offer enough work or a career structure to

full-time specialists. It therefore outsources its specialist work to specialist firms.

Problems with outsourcing

The nature of the relationship with suppliers of outsourced work is critical to the

successful implementation of strategy.

A potential problem with outsourcing is the loss of control over the outsourced

activities. This can be significant when something goes wrong, and action

performance does not meet expectations.

For example a company might outsource its IT work and might commission a

software company to write some new software. The software, when written, might

not function properly. The problem is then to manage the external relationship with

the software company, to find a satisfactory solution to the problem.

2.5 The virtual organisation

The virtual company or virtual organisation does not have an identifiable physical

existence, in the sense that it does not have a head office or operational premises. It

might not have any employees.

A virtual organisation is operated by means of:

 IT systems and communications networks – normally telephone and e-mail

 business contacts for outsourcing all operations.

Many small businesses operate as virtual organisations. For example, a house

builder might operate his business from his home. When asked to build a new

house, he can hire all the labour – skilled and unskilled – that he needs to do the

work, supervise it and check it. He can employ a firm of accountants to deal with

the invoicing and payments. The builder does not need an office, or full-time

Chapter 10: Strategic action

employees. His core competence is his personal skill and experience, which he

should use to give his firm its competitive advantage over rival house builders.

In the same way, there is no reason why a larger business should not be operated as

a virtual company. For example, a company that sells branded footwear could

operate as a virtual company, using its brand name as its major core competence. It

could outsource all its value chain and support activities. Manufacture could be

outsourced to producers in developing countries, warehousing companies could be

used to hold inventories. A network of self-employed sales representatives might be

used to sell the footwear into retail organisations, and marketing activities might be

outsourced to an external agency.

One person, or a small number of individuals, can operate a virtual organisation

and indirectly control the actions of many ‘external’ entities and individuals.

A key to a successful virtual organisation is the successful management of all the

different external relationships, and successful co-ordination of their activities.

Paper P3: Business analysis

240 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

The most appropriate organisation structure

 Contingency theory of organisation structure

 Burns and Stalker: mechanistic and organic structures

 Mintzberg’s five building blocks for organisational configurations

 Mintzberg’s six organisational configurations

 Conclusion: the most appropriate organisation structure

3 The most appropriate organisation structure

3.1 Contingency theory of organisation structure

Contingency theory of organisation structure is that the most effective organisation

structure for an entity depends on the circumstances. An entity should use the

organisation structure that is best suited to its size, complexity and strategies.

Organisation structure will vary according to differences in organisational processes

and internal and external relationships.

3.2 Burns and Stalker: mechanistic and organic structures

An example of contingency theory is the management study of Burns and Stalker.

They identified two categories of organisation structure, a mechanistic structure and

an organic structure.

The differences between the two types of structure are set out in the table below.

Mechanistic organisation Organic organisation

Authority is delegated through a

hierarchical management structure.

Power over decision-making is

obtained from a person’s position in

the management hierarchy.

There is a network structure of control.

Individuals influence decisions on the

basis of their knowledge and skills,

regardless of their position in the

organisation.

A bureaucracy. Control is cultural, not bureaucratic.

Communication is vertical, up and

down the chain of command.

There is much more horizontal

communication and free-flow of

information.

Jobs are specialised, and individuals

concentrate on their specialist area.

Doing the job is the main priority.

Specialist knowledge and expertise are

shared, and contribute to the ‘common

task’ of the entity. Contributing to the

common task is the main priority.

Job descriptions are precise. Job descriptions are less precise.

Tasks and operations are governed by

instructions from a superior manager.

Communications consist of information

and advice, rather than decisions and

instructions from a manager.

Chapter 10: Strategic action

Burns and Stalker found from their research that one type of organisation is not

necessarily better than the other. However, they did find that:

 an organic structure is better-suited to an entity that needs to be responsive to

change in its products and markets, and in its environment

 a mechanistic structure is better suited to an entity in a stable environment,

where change is gradual.

Burns and Stalker also found that entities with an organisation structure better

suited to their environment perform better than entities whose structure is not well

suited to their environment. For example an entity with a mechanistic structure

performs better in a stable market than an entity with an organic structure.

Example

It is important to recognise that the most suitable organisation structure depends

partly on circumstances and partly on management preference. Organisation

structures can also be changed.

An example is Nestlé. In an article in the Financial Times newspaper (22 February

2005), the CEO of Nestlé explained that in the past he had been frustrated by the

minor role played by the marketing function in the company. He had also disliked

the matrix organisation structure used by the company, where ‘local’ managers

were responsible for the profitability of their local markets, and functions such as

marketing had responsibility for their functions, but not for markets. The marketing

management were responsible for some innovation, but not for country

performance. Marketing managers had targets for returns on investment in

advertising, rather than responsibility for returns on business investment.

This organisation structure was changed. The head of marketing was made

responsible for the company’s seven strategic business units – dairy, confectionery,

beverages, ice cream, food, pet care and food services. These units established the

global business strategy for the company’s product markets. They were responsible

for research and development, production expertise and systems control.

Regional business strategy was developed from the business strategies for each of

the SBUs. Local market strategy was developed from the regional business

strategies. In this way, the head of marketing became a key figure in strategic

management. He had to authorise every new factory opening by guaranteeing the

capacity utilisation of the factory and the return on investment.

The change in organisation structure, giving much more responsibility to the

marketing function, was the result of management preference rather than strategic

necessity. Clearly, however, the CEO believed that the new structure would be more

effective.

Paper P3: Business analysis

242 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

3.3 Mintzberg’s five building blocks for organisational configurations

Mintzberg argues that an organisation structure exists to co-ordinate the activities

of different individuals and work processes, and to implement plans into action.

The nature of the organisation structure varies with differences in processes and

internal and external relationships. He suggested that there are five elements or

‘building blocks’ in an organisation. The way in which an entity is organised most

effectively depends on which of these elements is dominant.

These five elements are shown in the diagram below.

 Strategic apex. This is the top management in the organisation.

 Operating core. This represents the basic work of the organisation, and the

individuals who carry out this work.

 Middle line. These are the managers and the management structure between the

strategic apex and the operating core.

 Support staff. These are the staff who provide support for the operating core,

such as secretarial staff, cleaning staff, repair and maintenance staff, IT staff and

so on.

 Technostructure. These are staff without direct line management

responsibilities, but who seek to standardise the way the organisation works.

They produce procedures and systems manuals that others are expected to

follow.

Mintzberg argued that the group that has the greatest influence determines the way

in which the entity is organised, and the way that its processes and its relationships

operate.

 When the strategic apex is powerful, the organisation is entrepreneurial. The

leaders give the organisation its sense of direction and take most of the

decisions.

Chapter 10: Strategic action

 When the technostructure is dominant, the organisation often has the

characteristics of a bureaucracy, with organising, planning and controlling

prominent activities. The organisation continually seeks greater efficiency.

 When the organisation is divisionalised and local managers are given extensive

authority to run their own division in the way that they consider best, the

middle line is dominant.

 Some organisations are dominated by their operating core, where the basic

‘workers’ are highly-skilled and seek to achieve proficiency in the work that they

do. Examples might be schools, universities, and hospitals, where the teachers

and doctors can have an exceptionally strong influence.

 In a professional bureaucracy, such as a firm of accountants or lawyers, the

middle line tends to be short (close contact between the partners and staff).

Unexpectedly, in view of the amount of standardised audit documentation, the

technostructure is small. This is because, although the documentation is

extensive, the use of the documentation is unique for each client. No two audits

or law cases are the same, so standardisation must be limited.

3.4 Mintzberg’s six organisational configurations

Mintzberg identified six different organisational configurations, each having a

different mix of the five building blocks. He suggested that the most suitable

organisational configuration would depend on the type and complexity of the work

done by the entity. The six configurations are:

 simple structure

 machine bureaucracy

 professional bureaucracy

 divisionalised form

 adhocracy

 missionary organisation

Simple structure

This is found in an entrepreneurial company. The strategic apex exercises direct

control over the operating core, and there is no middle line. There is also little or no

support staff or technostructure. The strategic apex might be an owner-director of

the company. This type of structure is very flexible, and can react quickly to changes

in the environment, because the strategic apex controls the operating core directly.

Machine bureaucracy

In a machine bureaucracy, the technostructure is the dominant element in the

organisation. The entity is controlled and regulated by a bureaucracy and the

emphasis is on control through regulation. It is difficult for an entity with this type

of organisation to react quickly to environmental change. This structure is therefore

more suitable for entities that operate in a stable business environment.

Paper P3: Business analysis

Professional bureaucracy

In this type of structure, the operating core is the dominant element. Mintzberg gave

the name ‘professional bureaucracy’ to this type of structure because it is often

found in entities where the operating core consists of highly-skilled professional

individuals (such as investment bankers in a bank, programmers in a software firm,

doctors in a hospital, accountants and lawyers in a professional practice, and so on).

Divisionalised form

In this type of structure, the middle line is the dominant element. There is a large

group of powerful executive managers, and the organisation structure is a

divisionalised structure, each led by a divisional manager. In some divisionalised

structures, divisional managers are very powerful, and are able to restrict the

influence of the strategic apex on decision-making.

Adhocracy

Mintzberg identified a type of organisation that he called an ‘adhocracy’. This is an

organisation with a complex and disordered structure, making extensive use of

teamwork and project-based work. This type of organisation will be found in a

complex and dynamic business environment, where innovation is essential for

success. These organisations might establish working relationships with external

consultancies and experts. The ‘support staff’ element can therefore be very

important.

Missionary organisations

In this type of organisation, all the members share a common set of beliefs and

values. There is usually an unwillingness to compromise or accept change. This type

of organisation is only appropriate for small entities that operate in simple and

fairly static business environments.

Differences between the six organisational configurations

The differences between the six organisational configurations are summarised

below. Note in particular how each configuration is likely to be suitable for different

types of business environment and different types of organisational relationships.

The main controlling and co-ordinating factor within each type of configuration also

differs.

Business

environment

Internal features

Key

organisational

element

Main co-

ordinating factor

Simple

structure

Simple and

dynamic

Small entity

Simple tasks

Strategic apex

Direct control by

strategic apex

Machine

bureaucracy

Simple and static

Large and well-

established.

Regulated

processes and

systems

Technostructure

Standardised

procedures

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

Подождите немного. Документ загружается.