Chap - 8 Strategy and Structure

chapter 8
Strategy and structure

Contents
Introduction
Examination context
Topic List
1
Strategy and structure
Divisionalisation approaches
Mintzberg's organisational forms
Divisionalised organisations
Organisational structures for international

business
Governance
Decision making in organisations
Summary and Self-test

Answers to Self-test
Answers to Interactive questions
The Institute of Chartered Accountants in England and Wales, March 2009
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Business strategy
Introduction
Learning objectives
Describe, in a given scenario, the advantages and disadvantages of alternative business

structures
Evaluate the different types of organisational structure and recommend an appropriate

structure for a given strategy
Analyse the governance and management structures of businesses and identify weaknesses
Tick off
Specific syllabus references for this chapter are: 1f, g, 3d, e.
Practical significance
In the traditional approach strategy is decided first, then the organisation structure (allocation of work to
the functions such as production, marketing etc, divisions, matrices etc). Structure deals with the
implementation of the strategy and has no influence on strategy choice.
In the emergent approach, the relationship between strategy and structure is much more complex. The
existing structure may aid or hamper strategic choice. Thus in this view structure needs to be considered
alongside strategy choice.
Structure looks at how the various functions (e.g. production, marketing, finance etc) might be formally
arranged.
Stop and think

In the organisation you work for, does everything run smoothly? Or are there inadequate staff, or a division
of staff into departments that often means the work doesn't get done as it should. In other words, is your
organisation's structure functional or dysfunctional?
Working context
The job you do and to whom you report is the most obvious context in which to understand this chapter.
If auditing a client, the organisational structure and its corporate governance arrangements are matters
which your audit work should consider.
Syllabus links
The rudiments of organisational structure were covered in section 1 of the syllabus for Business and
Finance. This chapter reviews them and introduces the new concepts of structural configurations, network
organisations and divisional control.
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Examination context
Exam requirements
The key element in this chapter is how structure links with strategy. Knowledge of organisational structures
in isolation from strategy would not normally be examined. The idea that there is no one ideal structure is
important, as it means that issues of structure will need to interact with the strategy according to the
particular circumstances of the scenario.
This chapter contains references to a number of named studies. It is necessary to attribute the source of
these studies in describing them. However, for examination purposes it is not the intention that the names
should be quoted or reproduced without application. Rather, it is intended that the implications and results
of these studies can be applied appropriately to practical scenarios to inform applied strategy and
organisational structure recommendations.
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1 Strategy and structure

Section overview
1.1
The management team and staff of a firm must be organised to carry out the operations and strategy
of the business.
There is a debate about the direction of influence between strategy and structure. Does management
build a structure once it has decided strategy or does the structure determine the strategy through
its influence on the flows of information and managements assessment of what is possible?
Structure needed to implement strategy

A strategy without effective organisation of the people required to carry it out is doomed. Strategies can
only be implemented by, and through, people. Therefore the manner in which human resources are coordinated through hierarchical and lateral assignments of responsibility and authority becomes a central
management challenge.
In overview (and discussed at length later) organisational structure consists of:
The roles carried out by individual staff members
The primary grouping of staff into work teams, gangs, shifts, crews etc.
The arrangement of primary groupings into departments and divisions
The supervisory and management teams in charge of each grouping, department, division etc.
The systems used to control performance such as standard operating procedures, attendance
monitoring, corporate codes of conduct, bonus payment systems, budgetary control procedures and
disciplinary processes
The make-up of the senior management team, e.g. the corporate board, and the methods they use to
govern the organisation. This includes the processes used to monitor financial results, to arrive at
strategic decisions and to manage risk.
The term corporate governance is often reserved to refer to the last of these (but would also include
external stakeholders). However, corporate governance requires that all are properly carried out and
ultimately the corporate board can be held to account for not doing so.
1.2
Impact of strategic choices on structure and vice versa

The relationship between strategy and structure is a complex one.
Structure follows strategy
This top-down approach says that management decide the strategy then build or revise organisational
structure to implement it.
The argument for structure following strategy was put forward by Chandler. He argues that the structure
of the organisation must be adapted to fit the strategy adopted by management:
In his analysis any changes to organisation structure were a response to the organisation's stage of growth.
Geographic expansion called for departmental offices to be set up to administer the new field units.
Vertical integration required a central office and multi-departmental structure.
Diversification required a general office to administer divisions operating in different industries.
Strategy follows structure

An alternative bottom-up view is that the strategy a firm follows emerges from, or depends on, its
structure or that the structure limits the choice of strategy.
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For example:
Organisational structure and the interests of people within it shapes the flow of information to those
responsible for strategic management. For example government ministers can only respond to issues
they are told about and can select only from the options they are presented with.
What actually gets done depends on power. The informal organisation may feature quite different
power relations than suggested by the formal structure.
Highly centralised structures tend to stifle innovative strategic solutions
Divisionalised structures restrict collaboration and 'joined up' strategies
Bureaucratic structures focus on maintaining the status quo.
Both the top-down and bottom-up views are extreme expressions. Managers recognise both forces will be
at work.
Management will restructure to implement new strategies

Management strategies will be partially unrealised because the structure worked against them
Structures will develop organically as teams and managers adapt to new challenges and initiatives
Restructuring will create new initiatives and possibilities at the same time as suppressing others
Worked example the NHS

Discussion of organisational structure can become very abstract. The following worked example illustrates
many of the concepts used.
The UK National Health Service (NHS) is reputed to be the largest employer in Europe with nearly 500,000
full-time equivalent employees. Its annual expenditure exceeds 90bn (about 8.5% of UK GDP). Its mission
is to provide quality healthcare free at the point of need to the entire UK population.
The NHS is structured as follows:
Corporate governance: The government department responsible for the NHS is the Department of
Health (DOH) which is accountable to the UK Parliament through the Secretary of State for Health, a
political appointee who will be assisted by several other politically appointed Health Ministers. Each Primary
Care Trust (PCT) is required to appoint a Board of Trustees with representation from the professions,
public and DOH. The National Institute for Clinical Excellence (NICE) is a DOH body that lays down
standards for performance, including the balanced scorecard and will carry out audits of clinical
performance and procedures. Financial and administrative affairs are subject to a detailed system of internal
audits in Trusts and each Trust receives periodic audits from a public watchdog the Audit Commission that
result in recommendations to the Trusts.
Divisionalisation: A person's primary point of contact with the NHS may be with a self-employed dentist,
General Practitioner, optician, nurse or so on. The point of contact receives payment from the NHS on the
basis of number of registered patients with additional fees paid for specified procedures. These payments
are administered by 152 Primary Care Trusts (PCTs) organised regionally. The PCTs will have established
some direct services such as Community Nurses and Midwifery and increasingly employs their own GPs in
Health Centres. PCTs may also operate as Hospitals, Paramedic units etc. PCTs can contract with other
NHS divisions (e.g. hospitals belonging to another Trust) or with other organisations to buy-in additional
procedures. The Trusts are grouped regionally under the control of 10 Strategic Health Authorities (SHAs)
that have the role of co-ordinating staff development, patient care, financial control etc.
Job roles: These are divided into clinical staff and administrative staff. Within the clinical staff (sometimes
referred to as front-line staff ) there are differences of role between doctors, nurses, and consultants.
Each of these features further subdivisions such as, for doctors, between General Practitioners (GPs often
called family doctors), with junior doctors graded as senior housemen and registrars. Nurses have similar
differentiation of role. Medical staff may also have specialist areas such as obstetrics, oncology, paediatrics
etc. Administrative staff have administrative grades, including accountants, and ancillary staff have roles such
as porter, cleaner, cook etc. The job roles are assumed to reflect levels and breadth of training and
experience and exceeding one's role is regarded as a dangerous act of misconduct.
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Business strategy
Teams: The NHS operates 24/7 and so most staff will find themselves organised into shifts. Therefore they
will work with different people according to the shift. Teams exist in areas such as running local surgery
practices, community nursing, paramedic care, physiotherapy, midwifery, intensive care, and in the operating
theatre.
Departments: The signage in a hospital shows divisionalisation on the basis of specialism (e.g. Ear, Nose
and Throat), customer (e.g. geriatrics, children's ward, women's ward), or geographical position (e.g. North
wing). A large local health centre will also have departments such as appointments, practise nurses,
community nurses etc.
Control systems: The main control systems are employment contracts specifying hours of work and
other terms and conditions, the network of payments between Trusts that encourage them to use their
capacity, complex balanced scorecards of performance involving the monitoring of a multitude of Key
Performance Indicators against government targets relayed by the SHAs, and budgetary control systems.
Many controls come from outside the NHS such as the training, CPD and membership requirements of
professional bodies such as the British Medical Association, Royal Colleges of Nurses, Surgeons etc. and
their professional disciplinary systems.
An influential government body has likened the NHS's organisational structure to the film set of a Wild
West movie by saying 'it's thrown up quickly, there's nothing behind it, and it will last a few weeks until its
torn down and replaced with another one'. This refers to the constant organisational restructuring of the
NHS to try to improve its effectiveness and its efficiency. In past five years these initiatives have included:
Encouraging Trusts to fund infrastructure improvements by entering into long-term leases with private
sector building firms (the Private Finance Initiative, later called Public Private Partnerships)
Encouraging Trusts to combine and set up Shared Services in areas such as transactions processing, and
ordering to reduce the costs of administration and to gain economies of scale in purchasing
Encouraging Trusts to go it alone and apply for independence from the SHAs as Foundation Hospitals
able to govern themselves, set own standards and to borrow finance privately.
Creation of an internal market via the patient choice initiative in which patients carry with them a credit
(i.e. money) and can choose the hospital they want to go to based on data on waiting lists and
effectiveness. This credit could also be put towards an operation bought from the private sector in the
UK or overseas
Creation by DOH of a Leadership Centre to develop a cadre of managers able to innovate and change
the NHS beyond the alleged incrementalist improvements achieved by the established Trust and SHA
managers.
Simplification and renaming of regional controllers from Regional Health Authorities to Strategic
Health Authorities.
2 Divisionalisation approaches
Section overview
332
Dividing the people of an organisation into units is called divisionalisation.
The bases for this include functional, geographic, customer or product.
Matrix structures attempt to co-ordinate separate departments to serve joint goals such as particular
customers or projects.
2.1
Functional structure
Functional structure leads to departments that are defined by their functions, that is, the work that they do.
Advantages
It is based on work specialism and staff and managers can be technical experts.
The firm can benefit from economies of scale and division of labour.
It offers a career structure within the specialism.
Specialised resources and equipment are used efficiently.
It can enhance quality by deploying expertise.
It can promote the acquisition of technical skills.
Disadvantages
2.2
It does not reflect the actual business processes by which value is created. This means that a
mechanism for co-ordinating the departments will be needed, such as a corporate board.
It is hard to identify where profits and losses are made on individual products.
It can lead to mutual suspicion and conflict between specialisms which may be dysfunctional (e.g.
between production and sales)
It hampers cross-functional innovation and creativity.
Geographic structure
Some authority is retained at Head Office (organised, perhaps, on a functional basis) but day-to-day service
operations are handled on a territorial basis. Within many sales departments, the sales staff are organised
on this basis.
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Business strategy
Advantages of geographic divisionalisation
Better and quicker local decision making at the point of contact between the organisation (e.g. a
sales executive) and its customers.
It may be less costly to establish area factories/offices than to run everything centrally (e.g. costs of
transportation and travelling may be reduced).
It might be essential for overseas operations to cope with different environments.
Disadvantages of geographic divisionalisation
2.3
Duplication of management effort, (e.g. a national organisation divided into ten regions might have a
customer liaison department in each regional office).
It struggles to cope with large clients who span the divisions.
Product/brand divisionalisation
Product divisionalisation: The elements of an organisation are grouped by products or product lines.
Some functional divisionalisation remains (e.g. manufacturing, distribution, marketing and sales) but a
divisional manager is given responsibility for the product or product line, with authority over personnel of
different functions.
Advantages
Individual managers can be held accountable for the profitability of individual products.
Specialisation can be developed. For example, some salesmen will be trained to sell a specific product
in which they may develop technical expertise and thereby offer a better sales service to customers.
Service engineers who specialise in a single product should also provide a better after sales service.
The different functional activities and efforts required to make and sell each product can be
co-ordinated and integrated by the divisional/product manager.
It should be focused on how a business makes its profits.
The disadvantage of product divisionalisation is that it increases the overhead costs and managerial
complexity of the organisation.
Brand: A brand is the name or design which identifies the products or services of a manufacturer or
provider and distinguishes them from those of competitors. Brands may denote different products or,
often, similar products made by the same firm.
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2.4
2.5
Branding implies a unique marketing position. It becomes necessary to have brand divisionalisation. As
with product divisionalisation, some functional divisionalisation remains (especially on the
manufacturing side) but brand managers have responsibility for the brand's marketing and this can
affect every function.
Brand divisionalisation has similar advantages and disadvantages to product divisionalisation. In

particular, overhead costs and complexity of the management structure are increased, the
relationships of a number of different brand departments with the manufacturing department, if there
is only one, being particularly difficult.
Customer or market segment divisionalisation
Divisionalisation by customer is commonly associated with sales departments and selling effort, but it
might also be used by a jobbing or contracting firm where a team of managers may be given the
responsibility of liaising with major customers.
Another example is where firms distinguish between domestic consumers and business customers,
with different marketing and supply efforts for each.
Hybrid structures
Very few organisations divisionalise on one basis alone. This was clear in the NHS example above.
Many organisation hierarchies in practice combine elements of a number of these approaches. In the
example below, research and development is centrally organised, but the operating activities of the firm are
geographically arranged. This is an example of a hybrid structure.
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Business strategy
Interactive question 1: Erewhon Bank
[Difficulty level: Intermediate]
The Erewhon Bank Ltd has branches in Bangladesh, India, Nepal, Thailand and Burma. It grew from the
merger of a number of small local banks in these countries. These local banks were not large enough to
compete single-handedly in their home markets. The Erewhon Bank hopes to attract both retail and
corporate customers, through its use of home banking services and its heavily advertised Direct Bank
service, which is a branchless bank to which customers telephone, fax or post their instructions. The bank
also specialises in providing foreign currency accounts, and has set up a revolutionary service whereby
participating customers can settle their own business transactions in US dollars.
What sort of organisation structure do you think would be appropriate?
See Answer at the end of this chapter.
2.6
Matrix organisation
Matrix organisation is a structure which provides for the formalisation of management control between
different functions, whilst at the same time maintaining functional divisionalisation. It can be a mixture of a
functional, product and territorial organisation.
Worked example: Matrix management

Matrix management first developed in the 1950s in the USA in the aerospace industry. Lockheed-California,
the aircraft manufacturers, were organised in a functional hierarchy. Customers were unable to find a
manager in Lockheed to whom they could take their problems and queries about their particular orders,
and Lockheed found it necessary to employ 'project expediters' as customer liaison officials. From this
developed project co-ordinators, responsible for co-ordinating line managers into solving a customer's
problems. Up to this point, these new officials had no functional responsibilities.
Owing to increasingly heavy customer demands, Lockheed eventually created 'programme managers', with
authority for project budgets and programme design and scheduling. These managers therefore had
functional authority and responsibilities, thus a matrix management organisation was created.
The matrix organisation imposes the multi-disciplinary approach on a permanent basis.
The product managers may each have their own marketing team; in which case the marketing department
itself would be small or non-existent.
In some cases the matrix structure involves the appointment of a special manager responsible for a project
or customer. They are charged with ensuring that the necessary departments pull together to achieve what
is needed.
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Advantages of a matrix structure
It offers greater flexibility. This applies both to people, as employees adapt more quickly to a new
challenge or new task, and to task and structure, as the matrix may be short-term (as with project
teams) or readily amended.
It should improve communication within the organisation.
Dual authority gives the organisation multiple orientation so that functional specialists do not get
wrapped up in their own concerns.
It provides a structure for allocating responsibility to managers for end-results. A product

manager is responsible for product profitability, and a project leader is responsible for ensuring that
the task is completed.
It provides for inter-disciplinary co-operation and a mixing of skills and expertise.
There are many geographic areas with distinct needs, but the firm wishes to exploit economies of
scale.
Disadvantages of matrix organisation
Dual authority threatens a conflict between managers. Where matrix structure exists it is important
that the authority of superiors should not overlap and areas of authority must be clearly defined. A
subordinate must know to which superior he is responsible for each aspect of his duties.
One individual with two or more bosses is more likely to suffer role stress at work.
It is sometimes more costly e.g. product managers are additional jobs which would not be required
in a simple structure of functional divisionalisation.
It may be difficult for the management to accept a matrix structure. It is possible that a manager
may feel threatened that another manager will usurp his authority.
It requires consensus and agreement which may slow down decision-making.
Interactive question 2 : Boxer Ltd
Boxer Ltd is a company which manufactures dried pasta, produces ready-to-eat meals and is about to start
making specialist pasta sauces for distribution to independent delicatessen shops.
The dried pasta revenue and profits have been substantial and stable in the last few years, with sales of the
Boxer brand to all large supermarket chains as well as to wholesalers.
The ready-to-eat meals are produced only for two large chains of supermarkets. Products are badged by
the retailers under their own name.
Boxer has recently recruited Jake La Motta from Sauce Specialists Ltd. He has considerable knowledge of
and contacts within the small delicatessen market. Boxer wishes to pursue a cautious approach to this new
area, incurring only limited investment.
Requirement
Design an appropriate structure for Boxer Ltd.
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Business strategy
2.7
Centralisation v decentralisation
Centralisation/decentralisation refers to how much authority/decision-making ability is diffused throughout
the organisation.
Centralised structures: Upper levels retain authority to make decisions.
Decentralised structures: Ability to make decisions (i.e. commit people, money and resources) is
passed down to lower levels of the hierarchy.
Factors affecting amount of decentralisation
2.7.1
Management style: Authoritarian = centralised.
Size of organisation: As size increases, decentralisation tends to increase.
Extent of activity diversification: The more diversified, the more decentralised.
Effectiveness of communication: Decentralisation will not work if information is not

communicated downwards.
Ability of management: The more able, the more decentralisation.
Speed of technological advancement: Lower managers likely to be more familiar with changing
technology, therefore decentralise.
Geography of locations: If spread, decentralise.
Extent of local knowledge needed: If required, decentralise.
Advantages/disadvantages of decentralisation
Advantages
Senior management is free to concentrate on strategy: day to day decisions are delegated to lower
levels of management.
Motivation for lower managers from increased delegation/responsibility.
Local expertise of managers improves decisions based on local knowledge.
Quicker and more effective responses to local conditions.
Career paths for managers/employees.
Disadvantages
2.7.2
More difficult to co-ordinate organisation as lots of people are making the decisions rather then just a
few.
Incongruent decisions, i.e. different levels of management may pursue different objectives.
Loss of control by senior management.
Complicated structures.
Problems with transfer prices.
Evaluating divisional performance becomes difficult.
Duplication of some roles (e.g. administration).
Span of Control
Introduction
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The 'span of control' refers to the number of people reporting to one person.
This influences the shape of the organisation:
TALL
FLAT
Tall and flat organisational structures
A determinant of whether the organisation is tall or flat is the use of delegation 'the transfer of
legitimate authority without passing on ultimate responsibility'.
Factors influencing span of control
Location of subordinates: The more widely spread, the fewer that can be managed effectively.
Complexity/nature of the work: As complexity increases (and the need for greater teamwork), so
the span decreases.
Management personality and ability: The better they are, the more people they can manage.
Subordinate ability: The better they are, the more that can be delegated and therefore managed by
the manager.
Level of organisational support: Personnel departments can remove the routine personnel tasks
from a manager, enabling him to manage more people.
Level of 'danger' involved if delegation takes place: The more dangerous, the less people that
can be managed.
Effects of setting span of control incorrectly

Too wide
Loss of contact between superior and subordinates demoralised subordinates.

Loss of control over subordinates.
Subgroups form with unofficial leaders.
Too narrow
Too many management levels and too much cost.

Delays in decision-making (because of the length of the chain of command).
Over-supervision and demoralised staff.
Span and IT
IT can have significant effects on organisational structure in terms of:
New patterns of work

Form and structure of groups
Supervisory/management roles
Changes in lines of authority
Job design/descriptions
Centralisation/decentralisation of decision making and control
New technology (e.g. the Internet) has often resulted in flatter structures (i.e. wider spans) with fewer
levels of management. Office-based technology can facilitate a greater range of functions and self-checking
for staff.
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Business strategy
Contingency approach to organisation structure
Modern contingency approach 'takes the view that there is no one best, universal structure. There are a
large number of variables, or situational factors, which influence organisational design and performance. The
contingency approach emphasises the need for flexibility' (Mullins, 2002).
The most appropriate structure for an organisation depends on its situation. It is an 'if then' approach, i.e. if
certain situational factors are present, then certain aspects of structure are most appropriate.
Typical situational factors include:
Type and size of organisation and purpose

Culture
Preferences of top management/power/control
History
Abilities, skills, needs, motivation of employees
Technology (e.g. production systems, see Woodward below)
Environment (see below).
Burns and Stalker identified two (extreme) types of structure (and management style).
Mechanistic rigid structure, bureaucratic management structure/style, applicable in stable

environments.
Organic more fluid appropriate to changing circumstances (i.e. dynamic environments).
This links with the traditional/emergent approaches to strategy and structure. Both mechanistic and organic
elements may exist side by side in any one organisation, e.g. in a hotel 'production' departments like the
kitchens may be suited to a mechanistic structure but 'service' departments like marketing/reception may
work better with organic structures.
3 Mintzberg's organisational forms

Section overview
3.1
Mintzberg uses topological diagrams called organograms to represent the structures and coordinating mechanisms of an organisation.
The 'structure of sixes' identifies six potential co-ordinating mechanisms each of which, if dominant,
pulls the firm into a particular structural configuration.
The most appropriate configuration depends on the stage of development of the organisation and the
nature of its competitive environment.
Components of organisations
Formal organisation charts show merely the divisionalisation and scalar chain of the formal organisation.
They do not show:
The methods by which co-ordination takes place

Where power lies
Mintzberg's theory of organisational configuration (sometimes called the structure of sixes) details the
main features by which both formal structure and power relationships are expressed in organisations. All
organisations can be described by five distinct components that operate within the sixth, the ideology of the
organisation.
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The members of the organisation (individuals) are distributed to these five parts as demonstrated in the
diagram below.
The operating core encompasses those members who perform work directly related to the
production of goods and services.
The strategic apex has to ensure that the organisation serves its mission. The apex is responsible to
the organisation's owners (e.g. the board of directors).
The middle line is joined to the operating core by middle managers in formal authority.
The technostructure contains analysts (e.g. accountants, IT, work planners) who aim to effect
'certain forms of standardisation in the organisation'.
Support staff provide support outside the normal workflow (e.g. mail room, legal counsel). These
are not the technostructure in that they have no standardised function or control over the work of
the operating core.
The organisation has a sixth essential component that Mintzberg calls ideology. This is exactly equivalent
to culture.
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Business strategy
3.2
Configurations of organisations
Mintzberg suggests that each component of the organisation has its own dynamic. The precise shape
(configuration) of the organisation will be determined by the degree of 'pull' each exerts.
The strategic apex wishes to retain control over decision-making through a 'pull to centralise'. An
example is a manager's refusal to delegate. A more direct example is the decision-making structure in
a dictatorship, where power is closely controlled at the centre. It achieves this when the co-ordinating
mechanism is direct supervision. The force this most relates to is the force for direction (in other
words for the need for people to be told what to do).
The technostructure's reason for existence is the design of procedures and standards. For
example, the preparation of accounts is highly regulated. This acts as a force for efficiency.
The members of the operating core seek to minimise the control of administrators over what they
do. They prefer to work autonomously, achieving what other co-ordination is necessary by mutual
adjustment. As professionals, they rely on outside training to standardise skills. This corresponds to
the force for proficiency.
The managers of the middle line seek to increase their autonomy from the strategic apex, and to
increase their control over the operating core, so that they can concentrate on their own segment of
the market or with their own products. This corresponds to the force for concentration (on
individual product areas).
Support staff only gain influence when their expertise is vital. Mutual adjustment is the coordinating mechanism. This corresponds to the force for learning.
The forces for co-operation and competition largely determine how these elements relate to each
other.
Mintzberg discusses five configurations, covering the environment, the type of work and the complexity of
tasks facing the organisation. These are outlined below.
Simple structure: Corresponding to the
entrepreneurial organisation. The strategic apex
possibly consisting of a single owner-manager in a
small business - exercises direct control over the
operating core, and other functions are pared down
to a minimum. There is little or no middle line, and
the technostructure and support staff are also absent.
The fact that co-ordination is achieved by direct
supervision means that this structure is flexible, and
suited to cope with dynamic environments.
Machine bureaucracy: Just as the simple structure
is based on predominance of the strategic apex, so
the machine bureaucracy arises from the power of the
technostructure. The emphasis is on regulation:
bureaucratic processes govern all activities within the
organisation. This means that speedy reaction to
change is impracticable, and this arrangement is best
suited to simple, static environments.
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Professional bureaucracy: This organisational

structure arises from the predominance of the
operating core. The name is appropriate, because this
type of structure commonly arises in organisations
where many members of staff have a high degree of
professional qualification (for example the medical
staff in a hospital or the analysts and programmers in
a software developer).
Divisionalised form: This is characterised by a

powerful middle line in which a large class of middle
managers each takes charge of a more or less
autonomous division. Depending on the extent of
their autonomy, managers will be able to restrict
interference from the strategic apex to a minimum.
'Adhocracy': This refers to a complex and disorderly

structure in which procedures and processes are not
formalised and core activities are carried out by
project teams. This structure is suited to a complex
and dynamic environment.
Configuration
Environment
Internal factors
Key building
block
Key
co-ordinating
mechanism
Simple structure
Simple Dynamic
Small Young
Simple tasks
Strategic apex
Direct supervision
Machine
bureaucracy
Simple Static
Large Old
Regulated
Techno-structure
Standardisation of
work
Professional
bureaucracy
Complex Static
Professional
Simple systems
Operating core
Standardisation of
skills
Divisionalised
Simple Static
Diverse
Very large Old

Divisible tasks
Middle line
Standardisation of
outputs
Adhocracy/
Innovative
Complex Dynamic
Young Complex
tasks
Operating core
Mutual adjustment
Missionary
Simple Static
Middle-aged
Simple systems
Support staff
Ideology
Standardisation of
norms
Mintzberg mentions one other co-ordinating factor: mission. A missionary organisation is one welded
together by ideology or culture. There is job rotation, standardisation of values (norms) and little
external control (e.g. like a religious sect).
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Business strategy
Interactive question 3: Organisational configurations

Identify the organisation configurations suggested in the following cases.
(a)
Creation Ltd provides public relations services to clients. It is run by five partners, with a staff of copy
editors, designers, party-throwers and people with contacts in the press. Clients contact one of the
partners who assembles a team to solve a client's problem, though the partner does not direct the
solution.
(b) Smithers Ltd is a small family company. The chief executive and founder is a strong leader and tends to
dominate decision making. He does not believe in discussing his decisions with staff. According to
Mintzberg what would be the key building block and the main co-ordinating mechanism in Smithers
Ltd?
3.3
Network organisations
Network organisations were introduced in Chapter 5. The idea of a network structure is applied both
within and between organisations.
Within the organisation, the term is used to mean something that resembles both the organic organisation
discussed later in this chapter and the structure of informal relationships that exists in most organisations
alongside the formal structure. Such a lose, fluid approach is often used to achieve innovative response to
changing circumstances.
The network approach is also visible in the growing field of outsourcing as a strategic method. Complex
relationships can be developed between firms, who may both buy from and sell to each other, as well as the
simpler, more traditional practice of buying in services such as cleaning. These were discussed extensively in
Chapter 5.
Writers such as Ghoshal and Bartlett, mentioned in Chapter 1, point to the likelihood of such networks
becoming the corporations of the future, replacing formal organisation structures with innovations such as
virtual teams. Virtual teams are interconnected groups of people who may not be in the same office (or
even the same organisation) but who:
Share information and tasks

Make joint decisions
Fulfil the collaborative function of a team
Organisations are now able to structure their activities very differently:
344
Staffing: Certain areas of organisational activity can be undertaken by freelance or contract workers.
Charles Handy's shamrock organisation (see below) is gaining ground as a workable model for a leaner
and more flexible workforce, within a controlled framework. (The question is: how can this control be
achieved?)
Leasing of facilities such as machinery, IT and accommodation (not just capital assets) is becoming
more common.
Production itself might be outsourced, even to offshore countries where labour is cheaper. (This,
and the preceding point, of course beg the question: which assets and activities do companies retain,
and which ones do they 'buy-in'?)
Interdependence of organisations is emphasised by the sharing of functions and services. Databases

and communication create genuine interactive sharing of, and access to, common data.
Network structures are also discerned between competitors, where co-operation on non-core
competence matters can lead to several benefits:
Cost reduction
Increased market penetration
Experience curve effects
Typical areas for co-operation between competitors include R&D and distribution chains. The spread of
the Toyota system of manufacturing, with its emphasis on JIT, quality and the elimination of waste has led
to a high degree of integration between the operations of industrial customers and their suppliers.
3.4
The shamrock organisation

Largely driven by pressure to reduce personnel costs and to adapt to new market imperatives, there has
been an increase in the use of part-time and temporary contracts of employment. These allow rapid downsizing in times of recession or slow growth and can save on the costs of benefits such as pensions, holiday
pay and health insurance. The growth in the proportion of the workforce employed on such less-favourable
contracts has attracted political attention but continues. It has produced the phenomenon of the flexible
firm or, as Handy calls it, the shamrock organisation.
Handy defines the shamrock organisation as a 'core of essential executives and workers supported by
outside contractors and part-time help'. This structure permits the buying-in of services as needed, with
consequent reductions in overhead costs. It is also known as the flexible firm.
The professional core are

permanently employed staff who
provide the core competencies
and distinctive knowledge base
of the organisation.
The flexible labour force are
temporary and part-time
workers who can be deployed,
when required by peaks in
demand (e.g. seasonal tasks or
projects).
Professional
core
Flexible
labour
fource
Contractual
fringe
Customers
Representation of Handy's
shamrock organisation
The contractual fringe are

external providers (consultants,
sub-contractors and freelancers)
who can undertake non-core
activities and/or provide
specialist services more
economically than the
organisation could arrange
internally. Many organisations
now outsource activities such
as IT, logistics, maintenance,
call-centre management and so
on.
Customers are a fourth cluster, to whom the organisation may be able to 'sub-contract' some tasks.
Information and communication technology (such as the Internet) has allowed sales, service and supply to
be conducted on a 'self-service' basis: booking tickets, downloading music/books, getting on-line help and so
on. (Even low-tech equivalents, such as home-assembly furniture, enable the organisation to devolve
activities to customers and save costs.)
Organisations are increasingly seeking to be lean at the core where activities are important to their
competitive strategy while maintaining access to a full range of flexibly deployed services at the periphery.
Worked example: TLG

TLG, a lighting equipment maker based in UK, has abandoned 'its country-by-country managerial structure
and adopted a pan-European system of managing its business by product categories' (Financial Times,
21 February 1997). This comes at the end of a period of evolutionary change and development in the
market.
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Business strategy
(a)
'Five years ago it was very difficult to develop a product for five different countries in Europe. But
now, in our business, the characteristics of our products and the installation habits are converging.'
TLG which started with vertically-integrated operations in each geographical market - has gradually
recognised the need to develop a common approach across Europe.
(b) In 1991 the group introduced a 'matrix' system of management, by which regional executives took on
pan-European responsibilities.
(c)
Early last year the group decided this system did not go far enough towards Europe-wide integration.
Many of its customers wholesalers and retailers were themselves becoming pan-European and
telling their suppliers they wanted to deal with one company throughout Europe.
The company decided to review its operations, and asked Ernst & Young for advice.
(a)
Functional structure (i.e. with a separate manufacturing director, technical director etc) was rejected
because production methods differed so greatly across the product range.
(b) Instead, the firm rationalised its product range and adopted product divisionalisation.
'The group set up three 'centres of excellence' in Europe, based around its core lighting products: indoor
commercial, indoor architectural and outdoor lighting. Each division is headed by a managing director with
Europe-wide responsibilities. The group has also appointed a European commercial director to manage and
develop the existing salesforces. 'The selling operations are still country-based because we want the point
of contact with our customers to remain on the same basis as it was previously.'
Divisional managers are beginning to see the benefits of the new organisation. Terry Smith, director of the
indoor commercial division, says the new system makes its easier for the group to transfer its best
manufacturing and design practices across Europe and between divisions.
4 Divisionalised organisations
Section overview
4.1
Divisionalised organisations are ones which feature separate businesses within businesses, often as a
result of the development of diverse products or markets.
The control of the corporate centre over its divisions is termed corporate parenting and involves
the development of control systems.
The styles of parenting identified by Goold and Campbell range from the use of complex strategic
planning techniques through the use of a balanced scorecard of financial and non-financial
performance measures to a third approach that relies solely on financial controls.
Using financial controls necessitates the development of responsibility centres and the use of
investment based control measures such as ROCE and residual income (RI).
Divisional inter-trading requires the setting of appropriate transfer prices.
Origins of divisionalised form

According to Chandler divisionalised forms arise from the diversification of the business. This is broader
than Ansoff's formulation of diversification and in addition to vertical integration it includes developing the
business in new locations.
Divisionalised structures (sometimes called multi-divisional or M-form structures) are a response to the
problems management have in running a more diverse or geographically dispersed business. Top
management lack the time or direct day-to-day knowledge to run the businesses and so delegate this to the
'local' management of the divisions.
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The multi-divisional structure might be implemented in one of two forms.
This enables concentration on particular product-market areas, overcoming problems of functional

specialisation at a large scale. Problems arise with the power of the head office, and control of the
resources. Responsibility is devolved, and some central functions might be duplicated.
The holding company (group) structure can be a step on the way to divisionalisation or a radical form of it,
depending how it arises. Subsidiaries are separate legal entities. The holding company can be a firm
with a permanent investment or one that buys and sells businesses.
If a holding company organisation is to create more value than its constituents would if they acted
independently, the holding company itself must make some significant contribution, such as providing
financial, marketing or technological expertise to the operating companies.
Advantages of divisionalised structure:
4.2
It focuses the attention of subordinate management on business performance and results.
It enables greater flexibility in business units to enable them to respond to local competitive
challenges.
It enables financial evaluation and comparison of performance of divisions, e.g. by measures such as
return on capital employed.
It provides an organisation structure which reduces the number of levels of management. The top
executives in each division should be able to report direct to the chief executive of the holding
company.
Rules for successful divisionalisation

Three key considerations in successful divisionalisation:
Autonomy: Divisional management should be able to run their businesses otherwise there is little to
be gained from having separate divisions.
Controllability: The factors against which divisional managers are evaluated should be within their
control.
Corporate optimality: Divisions should follow courses of action that bring the best result for the
corporation as a whole.
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Business strategy
In practice there can be a tension between these three considerations: For example:
Corporate centre wishes to implement group-wide initiatives on quality, risk management, human
resource development or corporate branding which is irrelevant to, or conflicts with, the immediate
business needs of a division.
Inter-trading between divisions is important but there are disputes on the appropriate transfer price
because each division want to maximise its own profits.
Allocation of head office costs between divisions for central services such as IT, HRM, marketing,
corporate treasury mean that many of the divisional costs are uncontrollable.
Local competitive conditions seem to require different products and prices from those laid down
by head office, e.g. in a national marketing campaign.
Worked example: Leisure clubs

The following shows some of the problems that can occur where divisionalisation is operating
inappropriately.
A major operator of health and leisure clubs has over 40 centres in a country. The centre manager has
profit centre responsibility and is also evaluated on ROCE each year for the purposes of granting a bonus
pool to the centre which is shared between the manager and staff. The clubs are ranked into grades
according to their size and the range of activities offered. All exercise equipment and facilities are
determined by the grade of club and the replacement of equipment is on a strict 5 year basis. Members join
a particular centre and pay fees to it. The fees they pay are based on the grade of club they join. However
membership of one club entitles them to use other clubs in the chain.
A number of problems have arisen:
4.3
Managers of lower grade clubs situated near higher grade clubs have canvassed members by
emphasising that their fees are lower but that members can still use the higher grade club if they
choose.
Some clubs face competition from smaller independent fitness clubs which are able to undercut the
national pricing structure.
Managers of older clubs are complaining that they are being forced to replace equipment that is still
perfectly serviceable, and preferred by customers over newer versions which have slick but pointless
features, and so are losing out on bonuses because the book value of assets leaps.
Managers of established clubs are complaining that they get little benefit from the central re-charge for
marketing because most marketing activity is being used to launch new clubs.
Managers of new clubs complain that they are not getting bonuses because they have new equipment
and membership numbers are still growing and this is causing staff to leave or become despondent.
Performance management of divisions

Responsibility centres
Control requires that managers are appointed with clear domains of responsibility such as range of
activities, geographical scope and resources. As covered above, these are the basis of divisionalisation.
From a financial control perspective responsibility centres are:
348
Revenue centres: Responsible for revenues only such as a sales department
Costs centres: Responsible for keeping expenditure within limits such as a hospital ward or IT
function
Profit centre: Responsibility for revenues and costs (and therefore profit) but not balance sheet
Investment centre: A business within a business responsible for balance sheet and profit
Multi-divisional firms generally assign Investment Centre responsibility to divisions.

Return on capital employed (ROCE)
ROCE is also called Return on Investment ROI or Return on Net Assets (RONA). This divisional
performance target is calculated as:
Profit for the period 100%

Average capital employed during the period
The economic principle behind this measure, developed by Du Pont in the early 1900s, is that the return
derived should be in excess of the cost of capital of the firm in order to provide a suitable return to
investors.
In practice this measure has achieved popularity because:
It can lead to a desired group ROCE i.e. if all divisions return a 15% ROCE then, assuming all
central costs and assets are charged back to divisions, the group as a whole will make 15%.
Improvements in group ROCE can also feed into the EPS of the group and so into the share price.
It enables comparisons to be made between divisions of different sizes for the purposes of
identifying where group value is being created or destroyed and also for the identification of high and
low performing divisional managers.
It is readily understood by management due to its similarity to an interest rate or other yield on
assets.
It is cheap to calculate given that the financial reporting system will be calculating profits and asset
values already.
Residual Income (RI)

This measure was developed in 1950s by GE to avoid a dysfunctional consequence of ROCE/ROI:
Managers who are evaluated and rewarded against ROCE improvements may choose to forego investments
which are in the investor's interest.
Worked example: XYZ Corporation 1

XYZ Corporation has a cost of capital of 10% which is the hurdle rate for new investments and the
minimum benchmark for divisional performance.
Division A presently has profits of CU158m on assets of CU610m.
A proposed capital investment of CU60m will yield net cash flows of CU13m pa for the next 10 years after
which the asset will be worthless.
Will management of Division A undertake the project?
According to the NPV approach to project appraisal they should
i.e. CU12m for 10 years at 10% = CU12 6.145 = CU73.74m
NPV = (CU73.47m - CU60m) CU13.47m
But the division's present ROI is CU158/CU610 = 26% whilst the project has an ROI of only CU13/CU60 =
22%
It will drag the divisional ROI down to (CU158 + CU13)/(CU610 + CU60) = 25.5%
The board of XYZ Corporation would not know this valuable project had been foregone. The decision is
dysfunctional and so potentially is the use of ROI as a divisional performance measure.
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Business strategy
Definition
Residual Income is calculated as
Divisional profit (Net assets of division required rate)
Worked example: XYZ Corporation 2

Returning to the example of XYZ Corporation above:
Present divisional residual income is:
Profit
Cost of assets (CU610 @ 10%)
Residual income
Divisional residual income with new project
Profit (CU158 + CU12)
Cost of assets (CU610 + CU60) 10%
New residual income
CUm
158
(61)
97
170
(67)
103
Residual income is theoretically superior to ROI for the reasons shown above. However it is not widely
used because:
It is conceptually more complex than a simple percentage yield.
It doesn't allow easy comparison of divisions of different sizes.
It requires that a required rate be assessed and this may be different between divisions according to
risk.
It lacks the clear link to the ROCE of the group. Although in financial theory the market
capitalisation of the firm will be the NPV of all its business units rather than being influenced by one
year's ROCE and EPS, the fact remains that, for all its shortcomings, ROCE is still closely monitored by
the investment analysts who determine share prices with their buy/sell recommendations.
Problems of both ROCE/ROI and RI in the evaluation and control of business divisions are:
350
Short-termist: Being based on annual profit figures both disregard the future earnings of the division.
Using BCG terminology from Chapter 5, a cash cow might present a high ROI and a star a low one
which would be a misleading guide their true financial value if assessed as the NPV of future earnings.
Discourage investment in assets: To boost ROI or RI assets with low book values will be used in
preference to new assets. This could reduce the prestige of the organisation (e.g. shabby fittings) or
lead to risk (e.g. leaking vessels). It may also lead to inappropriate outsourcing to avoid having the
assets required to provide the service on the division's balance sheet.
Lack of strategic control: Unless the corporation is acting merely as a super financial controller
(e.g. as defined by Goold and Campbell) it will wish to co-ordinate and integrate operations of its
divisions to gain group synergies. Financial control measures alone cannot do this.
Interactive question 4: ROI
[Difficulty level: Easy]
An asset costs CU100,000, has a life of four years, and no scrap value. It generates annual cash flows of
CU34,000. Depreciation is calculated on the straight-line basis.
Requirements
(i)
Calculate annual ROI using opening carrying amount.
(ii)
Calculate annual ROI using historic cost.
(iii) Comment on any problems identified by these calculations.

Interactive question 5: Asset disposal
A manager has the following data.

Profit
Historic cost
ROI
Year 1
20
100
20%
Year 2
15
100
15%
Year 3
10
100
10%
Year 4
5
100
5%
Manager's target ROI = 12% per annum.

Requirement
When would the manager dispose of the asset and what problem might this cause?
Interactive question 6: ROI or RI?
A division manager has the following data.

Target ROI
20%
Divisional profit
CU300,000
Capital employed
CUlm
Requirements
Would the division manager accept a project requiring capital of CU100,000 and generating profits of
CU25,000, if the manager were paid a bonus based on ROI?
Would the decision change if the manager's pay were based on RI?
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Business strategy
Interactive question 7: Comparing divisions
A company has two divisions.

Target ROI = 20%
Capital
Profits
Year I
Year 2
Division I
Division 2
CUlm
CU100k
CU200k
CU220k
CU20k
CU40k
Requirements
Which division is performing better
(a)
Using RI?
(b) Using ROI?

4.4
Transfer pricing between divisions

Definition
Transfer price: The price at which one division in a group sells its products or services to another
division in the same group.
Divisions buying and selling with each-other leads to transfer prices. Several situations may give rise to this:
Transfer of finished goods between divisions, e.g. a car manufacturer selling cars to its sales division
Transfer of components between divisions, e.g. engine manufacturing plant selling engines to the car
assembly plant
Transfer of staff or customers between divisions, e.g. a professional practice seconding staff from one
office to work on a project run by another office
Provision of central services, e.g. the group IT function selling hardware, training and user support
services to divisions.
Consider the following example:

Division A
Car Manufacturing
Costs = CU12,000
per unit
Division B
Car Sales
Costs = CU5,000 per
unit
Final Market
10,000 units at
CU20,000
Transfer prices have several implications:
352
They determine the profits of divisions: If the upstream (supplying) Division A charges a high
price of CU15,000 for its cars then all of the final profit from the product (CU30m) will be enjoyed by
it and none by the downstream Division B.
They affect performance evaluation: If Division A takes all the profit its manager will look better.
They determine the tax to be paid: If Division A is in a different country does take all the profit
for itself then it will be taxed according to the tax rates in its country.
They determine the currency in which profits are made: Suppose Division B is in a country
where dividends are subject to punitive withholding taxes. By charging a high price Division A is taking
the money out of Division B's country as a payment for the cars and not as a dividend and so avoiding
the withholding tax on dividends.
They may determine the price and final sales of the product: Suppose Division B decides to
set its market price as a 15% mark-up on costs. If the cars are transferred by Division A at cost, the
final price would be CU19,550 i.e. (CU12,000 + CU5,000) 1.15. If the transfer price were CU15,000
then the final price would be CU23,000. This would clearly have a significant effect on volumes sold
and therefore profits. Another situation is where the receiving division must pay an import tariff on
its receipts of the components. Here charging a low transfer price will reduce the amount of the tariff
and so avoid the final good being priced out of the market.
They can lead to dysfunctional decisions: If either division believes it can get a better deal from
the market it may take it. For example, if division B could obtain supplies of cars elsewhere, say from
other dealers supplied by A, it might leave A with unsold stock. Conversely A might supply to
alternative channels and leave B with empty showrooms and unabsorbed overheads.
Cost based methods of setting transfer prices

This leads to the inevitable problem of deciding which cost to use:
Full cost: The variable costs plus an amount to cover overheads. This leaves the supplying division in
a break-even situation.
Variable cost (or marginal cost): This leaves the supplying division making nil contribution and so
enduring losses equal to its fixed costs.
Opportunity cost: The revenue foregone by not selling the item to highest bidder.
Optimal transfer pricing requires that divisions sell components at the higher of variable cost and
opportunity cost.
Other methods of setting transfer prices
Managers of divisions will want to record a profit. For this reason the following transfer price setting
methods have been identified:
Negotiated prices: The transfer price is established by discussions between the divisional managers
in a bargaining process.
Two-part transfer prices: The transfer price is set at variable cost to ensure corporate optimality
but in addition to this price the supplying division records an extra amount in its sales ledger to arrive
at a profit figure for evaluation purposes.
Central subsidy: The transfer price is set at variable cost but in addition to the revenue from this the
division receives a central subsidy, a share of the profits from the final good in effect, in order to cover
its fixed costs and to make a profit.
Considerations in transfer pricing
Impact on group profitability
Impact on product positioning: Where the internal transfer price is also the price on external markets
it will influence the positioning of the product.
Costs of the system: Month ends determining and recording inter-company charges ('chasing wooden
dollars') is a non-value adding activity.
Motivational impacts of the system: Transfer prices affect evaluation of managers, bonuses for divisions
and the purchasing decisions of the divisions.
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Business strategy
Interactive question 8: External offer

Unit costs
Variable
Transfer price
Fixed costs
Profit
Selling price

Division A
CU
10
5
5
20
Division B
CU
15
20
10
25
70
Division A can sell outside at CU20 per unit or transfer internally to Division B at CU20 per unit.
B receives an offer from a customer of CU30 per unit for its final product.
Requirements
(a)
Would B accept the offer of CU30 per unit given the existing transfer price?
(b) Is this the right decision from the company's point of view if
A has surplus capacity?
A is at full capacity?
Interactive question 9: Full cost transfer price
A multi-product company has two divisions.

Unit costs for a particular product
Variable
Fixed (apportionment of costs incurred for all products)
Manufacturing division
CU
20.00
11.00
31.00
Transfers are at full cost.

Ultimate selling price = CU40.00
Requirements
Are the transfers recommended from the point of view
(a)
Of the company?
(b) Of the selling division?

354
Selling division
CU
15.00
15.00
Interactive question 10: Full or variable cost?
A corporate power plant serving divisions A and B:

Power plant
Budgeted fixed cost per month
Standard variable cost
Actual total cost in January
CU10,000
CU1/kwh
CU18,000
Usage of power plant in January

A
4,000
4,000
Budgeted usage (kwh)

Actual usage (kwh)
B
6,000
2,000
Requirements
How much are A and B charged if
(a)
The charge is based on full actual cost?
(b) The charge is based on standard variable cost plus a share of budgeted fixed costs?
5 Organisational structures for international business

Section overview
5.1
International business needs structures based on divisionalised structures but varied to reflect the
national cultures of the countries where they are to be based. The research of Hofstede provides
guidance to this.
The steps in becoming an international (or transnational) organisation are outlined.
Organisation structure and overseas operations

With overseas operations the divisionalisation and operations of the home organisation are likely to be
made complex by distance (geographical and cultural), and so there may be a variety of functional and
regional structures.
5.2
Becoming a transnational organisation

Definition
Transnational corporation (TNC): A firm that is able to co-ordinate and control operations in more
than one country, even if it does not have full ownership.
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Business strategy
Whereas traditional foreign direct investment (FDI) is based on ownership of assets created or bought,
this is a very partial view of the role of the TNC.
The TNC co-ordinates various stages of the production chain between different countries.
The TNC can take advantage of differences in geographical distribution in factors of production (e.g.
raw materials, skilled labour, access to capital) and government policies (e.g. taxes, subsidies).
The TNC has geographical flexibility; it can switch resources and operations at an international and
global scale.
A TNC is not just a company that exports. It might develop in the following ways, as the level of
involvement in overseas activities increases:
Traditional model
Step 1
Produce for the home market; overseas orders are incidental to the business.
Step 2
Formally target export markets through intermediaries, such as agents, who will have differing
degrees of responsibility for pricing and distribution.
Step 3
Begin to build an institutional base in the target market by opening a sales office, building or
acquiring distribution outlets.
Step 4
Produce in the overseas markets.
For many firms this sequence is a good historical description of the chain of events, e.g. Japanese and
European motor manufacturers, selling to, and then building factories in the US. For certain kinds of service
industry, it is inevitable.
However, the model above concentrates on market opportunities, not the supply chain itself. We could
have a situation in which alternative models are explored.
Alternative 1
Step 1
A company supplies domestic market from a factory within that market.
Step 2
To cope with fluctuations in supply, the company subcontracts some components to overseas
firms.
Step 3
The company decides to retain design and marketing in home market, but to source its entire
production overseas to a network of subcontractors or to acquire overseas facilities.
Or even further:
Alternative 2
Step 1
The company identifies a market opportunity in the home market.
Step 2
The company realises it cannot possibly afford to produce in home market.
Step 3
The company exists only to research and design in home market.
The key difference is who controls the supply chain the producer as in the traditional model or the
marketing unit the firm doing the subcontracting as in both alternatives.
There may be other variants for example a TNC may buy a firm in an overseas market, but choose to
centralise its R&D in one place.
356
6 Governance
Section overview
6.1
At its broadest corporate governance would cover all aspect controlling the organisation including its
structure and systems. Here it is restricted to a discussion of the role of the Corporate Board.
Governance should take the overview of the direction of the business and consider the proper
policies to deal with risk and the transparency of the appointment of directors etc.
The governance of not-for-profit organisations requires greater transparency than the governance of
businesses.
Introduction
Over the last decade, in the wake of a series of major corporate scandals of which the likes of Enron and
WorldCom are only two of the latest, there has been a growing concern to make board stewardship of
public companies more effective.
It is important when deciding on an appropriate structure that practical matters of corporate governance
are not forgotten. Areas to consider include:
6.2
The split between executive and non-executive directors
The possible establishment of an audit committee
The possible creation of an internal audit function
Building responsibility for risk management into job descriptions
Creating a framework for communication with external and internal stakeholders.
Strategy and governance

Definition
Corporate governance: The set of rules which governs the structure and determines objectives of a
company and regulates the relationship between the company's management, its board of directors and its
shareholders.
Corporate governance is not primarily concerned with day-to-day management of operations by

business executives. The powers of executive managers to direct business operations are one aspect
of governance, but management skills are not.
Similarly, corporate governance is not concerned with formulating business strategy, although the
responsibility of the board of directors and executive managers is for strategic decisions taken.
Corporate governance and

strategic management
Accountability
Supervision
Corporate
governance
Direction
Executive action
Rest of strategic
management
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Business strategy
The diagram shows the distinction between governance and the rest of strategic management, with
governance mainly concerned with accountability and supervision.
The two-tier board form of governance practised in Germany and Holland recognises this split. The
upper, supervisory board is responsible for monitoring and overseeing the work of the executive board
which runs the business, and has the power to hire and fire its members. The management body is
responsible for direction and executive action. Thus the supervisory board is responsible for governance.
6.3
Structure of governance
The London Stock Exchange issues Principles of Good Governance and Code of Best Practice (known as the
Combined Code). The Combined Code does not require compliance but recommends best practice and
adopts a 'comply or disclose' policy. Broadly the Combined Code covers:
6.4
Membership of the board to achieve a suitable balance of power. The chairman and chief executive
officer should not be the same individual. There should be a sufficient number of non-executive
directors on the board, and most of these should be independent.
Non-executives on the board should prevent the board from being dominated by the executive
directors. The role of the non-executives is seen as critical in preventing a listed company from being
run for the personal benefit of its senior executive directors. Amendments to the Combined Code in
2003 included measures to increase the influence of the non-executives on the board.
A remuneration committee to be established to decide on the remuneration of executive directors.

Service contracts for directors should not normally exceed one year. Efforts to give shareholders
greater influence over directors' remuneration have since resulted in the Directors' Remuneration
Report Regulations.
The role of the audit committee of the board: This should consist of non-executive directors, and
should work with the external auditors.
Role of the board and non-executives

Boards of directors in Bangladesh have four principal roles:
Accountability the liability to render account to someone else. A director is accountable to the
shareholders, at common law or by statute, and the company's annual report and accounts, for
example, should be presented to the shareholders for approval
Supervision monitoring and overseeing management performance
Direction formulating the strategic direction in the long term
Executive action involvement in implementing strategy
The 'tone at the top' sets the pattern for the way in which a company conducts itself, and board members
should give ethical leadership. A board of directors should have the necessary skills, experience and
integrity, both individually and collectively, to govern the company effectively. A lack of collective
experience among the board members will affect the quality of decision-making by the board.
The board of directors should exercise full control and monitor executive management.
There should be a clearly accepted division of responsibility to ensure a balance of power. Where the
chairman is also the chief executive there must be a strong and independent element of the board.
The board should recruit non-executive directors of sufficient calibre and number.
The board should have a formal schedule of matters for decision to ensure that direction is firmly in
its hands.
All directors should take independent professional advice where necessary at the company's expense.
Non-executive directors (NEDs) should bring an independent viewpoint to the issues of strategy,
performance, resources and standards of conduct. They should be independent of management and free of
any responsibility that could materially interfere with the exercise of independent judgement apart from
their fees and shareholding. Fees should be time related.
358
They should be appointed by a formal selection process and appointment approved by the board for a
specific term and their re-appointment should not be automatic.
Worked example: Volkswagen

In January 2007 a German court handed Peter Hartz a two-year suspended sentence and a $750,000 fine
for paying off labour leaders while he was a director at Volkswagen. Hartz acknowledged that he had
authorised millions of euros in payments to members of the carmaker's influential works council to ensure
close ties to management. The money financed luxury trips, including visits to prostitutes in Brazil, with
individual tabs as high as $36,000.
The case threw a spotlight on corporate governance and the tight ties between executives and labour in
Germany, especially at Volkswagen, the biggest carmaker in Europe, where workers have traditionally
helped shape management strategy.
Hartz had faced up to 10 years in prison for plying senior worker representatives with company money, but
he avoided jail in return for confessing and because he did not enrich himself. Hartz was charged with
breach of trust and for providing improper favours to a works council, the body that represents employees.
At the centre of the case were charges that he paid Klaus Volkert, the one-time boss of Volkswagen's
works council, a total of 1.9 million, or $2.47 million, in special bonuses between 1994 and 2005. Another
400,000 was paid to Volkert's former lover.
The payments were not linked to specific management decisions or personnel matters, he said, but instead
meant to 'stabilise relations' between the two. 'The point was to keep Volkert happy.'
Volkswagen's scandal exposes a deeper problem for Corporate Germany than alleged fraud. It highlights an
underlying cause of the country's economic stagnation Germany's co-determination law, which gives
workers' representatives 50% of the seats on the supervisory boards of all large companies. What started
out conceptually as a law to ensure a balance between the interests of management and labour in many
large companies has morphed into an insidious alliance aimed at not rocking the boat. CEOs and top
managers depend on votes from the labour reps to be reappointed. Instead of making tough decisions on
restructuring or job cuts, German managers are inclined to delay or avoid change and instead curry favour
with union bosses sitting on their boards, often to the detriment of their companies. According to Theodor
Baums, a corporate governance expert and professor of finance at Frankfurt's Goethe University, the
implicit dialogue is: 'If you are nice to me [the labour representative], I prolong your [CEO] contract'.
The ties between management and labour are more intense at VW than at other German companies
because the carmaker is controlled by the traditionally left-leaning state of Lower Saxony. The state owns a
controlling 18% of VW's shares (Schrder once served on the VW board), and a special law prevents
hostile takeovers by limiting the voting rights of any single shareholder to 20%. State control has seemingly
ensured that maintaining jobs in the region is a goal at VW that supersedes growth or profits. 'Volkswagen
is the last enclave of communism' in Europe, says one German CEO.
6.5
Reward structures
The remuneration committee exists in public companies for the purpose of demonstrating to shareholders
and any other interested parties that there is an objective process for determining the financial rewards of
directors and any senior staff who are remunerated on a performance related system. The committee is
composed of non-executive directors; members of the firm of external auditors have also sat on the
remuneration committee. The committee advises and comments on the proposed reward structure; the
board of directors implements the necessary recommendations. Issues considered by the committee would
be the following:
Remuneration levels for non-executives

Length of service contracts for executive directors
Performance related systems of reward
Compensation for loss of office
Share option schemes.
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Business strategy
It is important to remember that the corporate governance issues on rewards extend to the entire reward
package of individual directors, as well as to the reward policy generally. The package may consist of:
Annual compensation (basic salary, pension contributions by the company for the individual, payments
by the company into a personal pension scheme arrangement for the individual, a bonus (often a cash
bonus) tied perhaps to the annual financial performance of the company and various perks, such as
membership of the company's health insurance scheme, private use of company aircraft or boats, and
so on).
Long-term compensation, consisting of share option schemes or company shares or the award of
additional options depending on long-term performance indicators.
A severance payment arrangement, whereby the company is committed to giving the individual a
minimum severance payment if he or she is forced to leave the company.
It is often useful to think of a reward package as a combination of fixed and variable elements:
6.6
The fixed elements are the remuneration received by the director regardless of performance, such as
fixed salary and salary-related pension.
The variable elements are the performance-related elements (cash bonuses, awards of share options
or shares depending on performance, etc).
Risk profiles
An issue in corporate governance is that the directors of companies might take decisions intended to
increase profits without giving due regard to the risks. In some cases, companies may continue to operate
without regard to the changing risk profile of their existing businesses.
The moral hazard to shareholders from the increasing risk profile of a firm is greater than to its
directors.
Shareholders stand to lose some or all of the value of their investment in the business. To shareholders,
investment risk is important, as well as high returns.
Directors, on the other hand, are rewarded on the basis of the returns the company achieves, linked to
profits or dividend growth, and their remuneration is not linked in any direct way to the risk aspects of
their business. Risk management is now recognised, particularly in the UK, as an ingredient of sound
corporate governance.
The duties of the board of directors must include ensuring that there is an operative and effective system of
risk management. Shareholders should feel confident that the board is aware of the risks faced by the
company, and that a system for monitoring and controlling them is in place.
The risk management cycle is an interactive process of identifying risks, assessing their impact, and
prioritising actions to control and reduce risks.
(Adapted from Managing the Risk of Fraud A Guide for Managers, HM Treasury, 1997)
360
Once the risks have been identified and assessed, and the organisation's risk appetite has been set,
strategies can be developed by the risk management group to deal with each risk that has been identified.
Strategies could include:
Ignoring small risks (but ensuring that they remain under cyclical review)
Contractual transfer of risk
Risk avoidance
Risk reduction via controls and procedures
Transferring risks to insurers.
Risk management is covered in more detail in Chapter 9.
Interactive question 11: Good governance
Define corporate governance and the key aspects of good governance.

6.7
Governance of government, public and non-profit organisations

This section applies to the following:
Government areas like defence and the law, which are the responsibility of the nation state.
Public the provision of health, transport, energy and other services which may be the responsibility
of the state or may have been privatised, depending on the political views of the government.
Not-for-profit institutions that work for the common public good but are independent of the state
for example, charities, trusts and similar institutions.
In profit-oriented organisations, the board's minimum responsibilities are established by statute, regulation
and case law. Many corporate boards also assume broader responsibilities in other key areas, such as health
and safety or environmental practices. No similar set of legal minimum responsibilities exists for non-profit
organisations' boards. Many of the issues are the same but there are some that are of specific importance to
these sectors:
Accountability: This is fundamental to the corporate governance of public bodies, and in recent
years, the voluntary sector with regard to both the proper stewardship of public and donated funds
and the increasing demand for service users to be involved in decision-making.
Stakeholders: Whilst commercial companies are primarily accountable to the shareholders,

organisations in the public and voluntary sectors are accountable to a wide range of stakeholders,
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Business strategy
including service users, the general public, funders and national government. Issues of accountability
are not clear-cut and conflicts can arise, e.g. charity trustees have a legal duty to act in the interests of
their beneficiaries, but if the charity is a membership body this may conflict with the wishes of
members.
Openness and transparency: There is a demand for open government and a distrust of decisions
taken 'behind closed doors'. Voluntary organisations also face calls for transparency.
Governance/board structures: The unitary board is not common in these sectors. Boards, or their
equivalent, may be directly elected or appointed, and are often volunteer-based.
Monitoring performance: In recent years a major emphasis in the public sector has been on
performance measurement and evaluation. Increasingly voluntary organisations are beginning to look
at ways of measuring outcomes.
Each group involved in a not-for-profit organisation its board, management, staff, volunteers, donors and
others plays a part in its governance system. The board's role and activities can be examined in terms of
five distinct areas:
1
Responsibilities and mandate: In profit-oriented organisations, the board's minimum

responsibilities are established by statute, regulation and case law. No similar set of legal minimum
responsibilities exists for NFP boards. The board bears the ultimate responsibility, though it usually
delegates the authority to run the organisation to a CEO and a management team. The board's
primary role is to oversee management and ensure that the NFP's affairs are being conducted in a way
which achieves the organisation's objectives. NFP boards should have responsibility for:
Strategic planning for the organisation

Risk identification and management
Management effectiveness and succession
Communications with stakeholders, and
Internal control and management information systems.
Structure and organisation: The structure and mandates of the board and each of its committees
should be documented, to help ensure that board members, management and the NFP's stakeholders
clearly understand the board's role. The board should also consider the qualifications it requires of
individual board members in order for them to help carry out the board's responsibilities
Processes and information: Processes of decision-making and consultation should be open and will
need to conform to procedures laid down in statute law (e.g. planning applications) or in accordance
with procedures laid down by the organisation itself. Information must be provided to interested
parties and may be subject to various legal duties of disclosure.
Performance assessment and accountability: Boards of directors are accountable for their
actions, and board members of all organisations are exposed to a growing personal liability resulting
from the actions of the board and the organisation as a whole. Even though NFP board members are
volunteers, their liability is the same as that of remunerated members of corporate boards. The
responsibilities of board members include:
Acting in good faith, in the best interests of the NFP

Avoiding conflicts of interest
Being diligent with regard to board meetings and obtaining information, and
Obtaining a degree of confidence regarding the CEO's integrity and ability.
Organisational culture
A key development for the corporate governance of the UK public sector was the Nolan Committee
on Standards in Public Life.
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The Nolan Seven Principles of Public Life include:
Selflessness: Holders of public office should take decisions solely in terms of the public interest.
They should not do so to gain financial or other material benefits for themselves, their family or
their friends.
Integrity: Holders of public office should not place themselves under any financial or other
obligation to outside individuals or organisations that might influence them in the performance of
their duties.
Objectivity: In carrying out public business, including making public appointments, awarding
contracts or recommending individuals for rewards and benefits, holders of public office should
make choices on merit.
Accountability: Holders of public office are accountable for their decisions and actions to the
public and must submit themselves to whatever scrutiny is appropriate to their office.
Openness: Holders of public office should be as open as possible about the decisions and
actions that they take. They should give reasons for their decisions and restrict information only
when the wider public interest clearly demands.
Honesty: Holders of public office have a duty to declare any private interests relating to their
public duties and to take steps to resolve any conflicts arising in a way that protects the public
interest.
Leadership: Holders of public office should promote and support these principles by leadership
and example.
7 Decision making in organisations

Section overview
7.1
The making of decisions in an organisation has been the subject of research that can be divided into
rational and behavioural explanations.
The rational approach, familiar from techniques in management accounting such as NPV or make or
buy decisions, describes decision-making as a series of steps.
Behavioural explanations provide a richer, and probably more realistic, interpretation in which the
ways decisions are taken combine rational approaches and techniques with trial and error-based
heuristic approaches.
The rational decision-making model

The rational decision making model is a process that follows the orderly path from problem identification
through to solution. The main stages in the process include:
Identify an opportunity to exploit (proactive) or identify a way to solve a problem (reactive).

Conduct a search to establish alternative courses of action.
Gather information about each alternative.
Undertake an analysis of advantages and disadvantages of each alternative.
Rank alternatives in order of preference.
Initiate action to implement decision.
Monitor feedback to ensure response is as expected.
Review outcome and add new knowledge to mental store.
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Business strategy
7.2
Behavioural theories of decision-making

Simon's model
There is no universally accepted model of the decision making process, but Simon's model provides an
acceptable basis. The model includes three key elements:
Intelligence awareness of an opportunity or problem.
Design formulation of problem and analysis of alternatives of potential applicability.
Choice the choice of solutions to the problem identified in the intelligence phase, from one of the
solutions identified in the design phase.
Variables affecting how we make decisions include the following:

The conditions under which decisions are made a decision can be made under the following three
different conditions.
Certainty operational managers make decisions based on certainty

Uncertainty strategic managers make risk decisions
Total uncertainty use past experience
The style of decision-making there are two different decision making styles.
Analytic the use of set rules. The decision maker would use graphs, probability models, mathematical
techniques etc.
Heuristic the exploration of possibilities. The decision maker would use rule of thumb, gut feeling
and experience.
The type of decision may be categorised into three different types.
364
A structured decision: This is where all or most of the variables are known and can be totally
programmed. These decisions are routine and require little human judgement (e.g. setting a credit
rating for a new customer).
An unstructured decision: These types of decisions are resistant to computerisation and depend
mainly on intuition (e.g. fixing the price of a new product).
A semi-structured decision: This type of decision falls between a structured decision and an
unstructured decision, in that it is partially programmable but still requires some human judgement
(e.g. adjusting the credit rating of an existing customer).
Summary and Self-test
Summary
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Business strategy
366
Self-test
Answer the following questions.
1
Greenleaf Ltd has grown from a small entrepreneurial company of five staff to a larger organisation of
thirty-five. The growth, though welcome, has thrown Greenleaf into chaos. No-one is sure what they
should be doing and mistakes are beginning to be made.
Recommend, with reasons, a suitable organisation structure and suggest the mechanism required to
co-ordinate the various parts of the organisation.
Suggest two ways in which a company can ensure corporate governance processes are incorporated
into the organisation structure.
What is a professional bureaucracy? Give two examples of organisations that would suit this form of
structure.
What is meant by a matrix organisation structure?
Compare and contrast centralisation and decentralisation.
How do 'the location and complexity of the work' and 'the degree of delegation possible' influence the
span of control?
Travel Fast Ltd is an established bus company. Its organisation chart shows a three-tier structure of
directors, managers and drivers.
What factors will influence the span of control of the managers?
A substantial architectural practice designing and managing the construction of various buildings is
likely to be best suited to a matrix organisational structure.
Why?
Within a manufacturing business an excerpt from the organisation chart is as follows.
The chief accountant is collating budget information for the coming year and the production managers
(after reference to the chart) are unwilling to supply figures, saying they report to the production
director.
Explain why the problem has arisen and how it can be solved.
10
North East Electricity Board

The North East Electricity Board (NEEB) provides electricity distribution in a major province in the
North East.
The function of NEEB is to take electricity from electricity generators in the country and to distribute
this electricity to homes and to commercial and industrial users in the region.
This involves NEEB in the following areas.
Cabling and laying of power lines from the National Grid.

Building and management of electricity sub-stations.
Provision of electricity cables and power lines into homes and offices.
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Business strategy
Provision of metering facilities in homes and offices.
In addition, the company also owns and operates 52 shops around the region. These shops vary in size
from small village locations to large inner city shops up to 20,000 square feet. These retail outlets have
a dual role.
(1) To provide a point where customers can pay their bills on a quarterly basis. They can also buy
stamps or make monthly payments towards their bills.
(2) To retail a large range of white goods (i.e. consumer durables such as refrigerators, washing
machines, dishwashers, etc) which are marketed under their 'own label' brand name Tricit. The
goods are manufactured for NEEB under licence by famous name manufacturers. The stores also
sell a wide range of other electrical goods such as hi-fi, radios, toasters, etc. All of these tend to
be good brand names aimed at mass market consumption and are not the high end expensive
items.
NEEB structure
The company is best described as being organised along functional lines as follows.
The structure is broadly functional. The company has approximately 8,500 employees.
The main board meets once a month.
The objective of the company is 'to provide a secure, safe, reliable and efficient electricity supply to
residents and commercial users in the NEEB region insofar as is practicable ...'
The company, about to be privatised, has an obligation to be run as a public service, i.e. 'in the public
interest'. The phrase 'public interest' is extremely difficult to define and translate into practical policies.
The major financial requirement for the company is that over the medium term (i.e. three years plus)
it achieves an average return on capital of 5% year on year.
As part of a public enterprise the funding of the company differs from that of a quoted company. A
proportion of its capital expenditure budget is provided by central government. This will clearly
change once the company is privatised.
The planning process
The planning process in the company is as follows.
(1) The corporate planning department forecasts electricity demand on a five year rolling basis. The
variables in the forecast are numerous and include
Net population movements in the region
Penetration of consumer durables into homes (more durables mean increased demand for
electricity).
This plan is completed by the start of the last quarter in each year.
368
(2) The forecast electricity demand is then used to generate budgets for various categories (i.e.
functional budgets, etc). Importantly, the capital expenditure budget is generated at the same
time. Given the timescale of some of the capital investments (i.e. taking two or three years to
termination), some projects are completed three years after the initial demand forecast which led
to the preparation of the capital expenditure budget. Consequently any major error in the
demand forecast can lead to a significant waste of capital expenditure or a shortfall of capacity.
The structure of the planning process is shown below.
The retail side of the business has its own structure but reports directly to the operations director.
Overall the retail side performs reasonably well. It is seen primarily as being a service which the
company has to provide and as a source of contribution to the overall business.
The sales per square foot of the retailing operation are on average 30% lower than those of
comparable electrical retailers. This is thought to reflect the reduced emphasis placed on retailing at
the expense of electricity provision. However, some goods do sell well and achieve a respectable
share of the regional market.
The future
The company is to be privatised in the next two years along with the rest of the industry. The
structure of the industry will then be as follows.
235
Generation will be carried out by two quoted companies, National Power and PowerGen.
Distribution will be handled nationally by the National Grid company.
There will be twelve regional distribution/operating companies including NEEB.
Each regional electricity company will be able to 'buy' its electricity from either of the two generators. The
regional companies own the National Grid Company (NGC) through a joint holding company.
The objective of privatisation is to enable full competition to take place in two years' time. This includes
competition on the domestic and commercial front.
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Business strategy
Industry
Demand for electricity is forecast to grow nationally at 3% by volume per annum over the next decade. On
a regional basis there are substantial variations.
In terms of competitors the industry will split into two to represent the two distinct market segments of
residential and industrial/commercial. Possible new entrants may emerge from power equipment companies
supplying small scale generators to large commercial/industrial users which will generate their own
electricity. Electricity suppliers will also emerge from overseas and particularly Scotland and France.
Commercial and industrial organisations which use over 100,000 kilowatts are considered at risk to
competitive threat. These are considered to be large users and represent a potentially lucrative market for
potential entrants. This market will number approximately 40,000 50,000 users. In addition to external or
new competition any of the other 11 regional electricity companies can seek to supply a major user in any
other region.
The industry overall is to be controlled by a regulator. The agency, called OFFER, has a remit to govern the
rate of increase of electricity prices. It also exists to intervene and prevent abuse of dominant position and
unfair competition.
Privatisation will be total, i.e. all shares in NEEB will be sold at the time of privatisation. An initial restriction
will be placed on shareholdings in the form of an upper limit which any individual or group may hold.
However, once a specific (not yet published) timescale has elapsed, this restriction will be removed.
Requirement
Prepare a report to the board of NEEB which should cover the following areas, bearing in mind the
proposed privatisation.
(i)
A more appropriate organisation structure.
(4 marks)
(ii)
An assessment of NEEB's current approach to planning together with a suggested alternative planning
process in outline form.
(7 marks)
(iii) A discussion of the way in which the new planning process may be applied to NEEB, including a
comparison with its current approach and an analysis of possible constraints in implementing the new
system.
(10 marks)
(21 marks)
11
Byron Tuffin
Byron Tuffin is the owner of four hotels. Three of these have been recently acquired; one is in
Rajshahi, one close to Chittagong and the third in Pabna. The original hotel is the Imperial, outside
Coxs Bazar. The Imperial has been in the Tuffin family for fifty years and was bequeathed to Byron by
his father.
The Imperial has forty rooms. Five of these are de-luxe suites with lounge/ante-room, bedroom and
bathroom. Twenty are double bedrooms and the remainder are single rooms. The hotel has a
beautiful location in ten acres of landscaped gardens and, being on a small hill, the rooms at the top
command impressive views over the shore. The hotel makes good returns and has good all-year-round
occupancy rates. Much more comes from special events like weddings and as a stopover for
honeymooning couples before departure elsewhere the next day.
The Regent in Rajshahi and The Orangery in Pabna are similar to The Imperial. The former has 30
rooms while the latter has only 20 double rooms. The Serpentine hotel near Chittagong has 55 rooms,
i.e. 30 double, 5 de-luxe suites and 20 single rooms.
Byron bought the hotels from an old family friend. Each of the hotels needs some refurbishment.
Byron has ten years' experience in managing The Imperial but realises that a four-hotel group is a
different matter. As a consultant brought in by his bankers (who helped in the acquisitions) you have
been called in to assist Byron in developing the company. During the course of your investigations you
conduct many interviews: details from some of these are given below.
370
Carolyn Reeder (Finance manager, The Imperial)

'I'm a bit overqualified for this job. I'm a CA with four years' post-qualification experience. I've been
here for two years and, although the job is fairly easy, the people here are great to work with. Byron
is absolutely superb with customers: he checks their file (if they have one) before they arrive and he
makes them feel really special. They love him. On the other hand he does not want to be concerned
with detail. He forgets about decisions and he has trouble taking decisions without consulting
everyone else first. He thinks about 'direction of the hotel' etc, so I suppose he's more strategic. He
does interfere sometimes though, by ordering my staff about or bypassing me to get information from
them.'
Rick Fowler (Facilities manager)
'There's a fair amount to do here with the hotel being a grade II listed building. This is a 'special'
occasion hotel and I love the 'pre-war' feel to it. I've an excellent team of tradesmen under me who
are all qualified. They take pride in their work but there isn't always enough to keep them occupied.
Byron is a good enough man but on occasion he's difficult to pin down. He does occasionally annoy
me. He gives his opinion on how one of my staff should carry out a repair. He orders them about too,
overriding my authority. One instance will suffice. Last month he ordered Angus (a joiner) to repair
his office door when I'd told Angus to refit a bathroom door in Room 22. This door would not close.
We had a particularly difficult customer who wanted a room change. When I remonstrated with
Byron his response was '...why didn't you tell me you'd scheduled Angus for elsewhere ...'. That's not
the principle. Byron should only take decisions like that following consultation with me. I go to Peter
(Unwaring) for decisions on most things.'
Peter Unwaring (Operations manager)
'I look after the day-to-day operations of the hotel bookings, staffing, etc. I only involve Byron if
there is a problem. We have our weekly manager meetings which are fairly easy going. Byron is a good
man to work for he does think 'big' though. He's always coming up with ideas for the hotel. He's also
astonishing to watch with our regular customers. They adore him.'
Alexandra Thorpe-Watson (Manager, The Regent)
'The acquisition was good news for us. The hotel needs some refurbishment at the moment it has a
little too much 'faded gentility'. Byron from The Imperial seems an enthusiastic person. We've agreed
that this hotel needs to be re-positioned. I've been here a year, and before I joined the hotel was
losing its direction.'
Niall Gallagher (Manager, The Serpentine)
'This is a good hotel with a good occupancy rate. Our clients are mostly business people in Chittagong
for a few days. We also get tourists, which we need to encourage as our weekend occupancy needs
improving. Byron seems to be fairly open-minded in terms of ideas for the direction of the group. I'll
be interested in what he comes up with.'
Byron Tuffin (Group owner)
'I'm really excited about our future. The group now has different hotels. We now have different
coverage geographically and in terms of markets. We'll need to invest in refurbishment, though. I have
no problem with that. I fully understand and believe in the importance of the client. You have to make
each guest feel that he is the most important person in the hotel.'
Requirement
Prepare a memorandum covering the following.
(a)
An appropriate organisation structure for the group together with reasons for your
recommendation and the advantages your structure would bring.
(9 marks)
(b) A review of Byron's management style and your reasoned suggestions for a new management
structure, indicating the advantages of the new structure.
(9 marks)
(18 marks)
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Business strategy
12
Danley Ltd
Danley Ltd is a manufacturer of cars. It commenced business forty years ago and is currently organised
along divisional lines. An outline organisation chart is shown below.
Key
P
Production
Locations
Marketing
Small and family
Mymensingh
Pe
Personnel
Sports
Brahmanbaria
Accounting
Executive
Sylhat
Pu
Purchasing
The company is very keen to cut costs and improve profits before being floated on the Stock
Exchange in 20X5. The current organisation structure owes much to history, reflecting the purchase
of the sports car and executive car businesses in the past. Each division uses the same suppliers of
components for cars and has the same accounting system.
Both the small and family cars division and the sports cars division use production line systems,
whereas the executive cars division uses a small batch production system. Money is available for
investment in new production systems.
The following comments have been made to you.
Richard Ingram (Managing director, Danley Ltd)
'In view of our need to increase profits we have been looking carefully at the cars we produce. In
particular we are concerned about the sports cars division. It is a drain on our profits and cash, making
losses in the last two years.
We commissioned some research to provide back-up evidence for our decision to close the division.
Unfortunately, the consultant is in hospital and his work is incomplete. He was using something he
called the 'BCG matrix' in his analysis. I have his initial findings (see Appendix) and would like the work
finished as soon as possible as I'm interested to see how our other cars fare.'
Ben Sayers (Production manager, Executive cars division)
'Because of the slow production system we use where hold-ups between departments occur regularly,
we only make two types of executive car, yet we sell all we can make. The marketing department feels
that if we could make more types of car, including minor variations around a basic type, we could sell
more. I must say that most of my workers seem to get rather bored making the same two cars.'
Ray Pay (Purchasing manager, Small and family cars division)
'My department has been arguing for some time that we're missing out on cost savings by having three
purchasing functions. All purchasing can be done by one function. Unfortunately, some of the cost
savings will come from redundancies. The best people in the three functions should be put together to
form one function in Mymensingh.'
372
Appendix
A
Market growth
Total number of cars sold per year all suppliers
(i)
(ii)
(iii)
(iv)
Small cars
Family cars
Sports cars
Executive cars
20X1
200,000
150,000
100,000
50,000
20X2
210,000
172,500
101,000
60,000
Danley Ltd
40,000
30,000
10,000
5,000
Largest competitor
30,000
20,000
30,000
10,000
Rate of growth of markets (measured as a %)

Low growth = less than 10% pa
High growth = more than 10 % pa
B
Market share
Number of cars sold in 20X2
(i)
(ii)
(iii)
(iv)
Small cars
Family cars
Sports cars
Executive cars
Requirements
As an independent management consultant prepare a memorandum for the board of Danley Ltd which
covers the following.
(a)
The completion of the BCG product analysis together with a discussion of the results.
(10 marks)
(b) A recommendation, with reasons, for a revised organisation structure which would best suit the
circumstances of the firm.
(10 marks)
(20 marks)
Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved
these objectives, please tick them off.
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Business strategy
Answers to Self-test
1
Recommendation functional (bureaucratic)

Reasons:
Formal job descriptions
Clear reporting lines
Formal procedures
Co-ordinating mechanism standardisation of work.

2
Appoint both executive and non-executive directors to the board
Establish an audit committee to oversee the board
Create an internal audit function
An organisation where the main building block is the operating core (professionally skilled staff) and
the controlling mechanism is the standardisation of skills.
Suitable organisations:
Solicitors' practice
GP practice
Accountants' practice
The matrix structure involves overlaying a second set of hierarchical connections over the first but at
right angles to it. As an example consider Upazila Parishad.
UpazilaChief
Nirbahi
Officer (UNO)
executive
Head of
services
Unionof
Head
Parishad
boroughs
Services
supervisors
Union
Borough
Parishad
executives
Chairman
Officer
UnionBorough
Parishad 11 Union
Parishad22 Union
Parishad
Borough
Borough
3 3
Roads
Education
Health
In this structure service supervisors for roads, education, health, etc in accounting, economics and
marketing report to the head of services. Union Parishad officers report to the Union Parishad
Chairman. Each carries equal weight in terms of authority.
An individual (X above) who is part of Union Parishad 3 may at the same time be part of the team
responsible for roads. Thus the individual reports two ways to the service supervisor and to the
Union Parishad officer, and is subject to two lines of authority.
374
A centralised structure is a condition where the upper levels of an organisation's hierarchy retain the
authority to make most decisions. The authority of lower levels to make decisions is very limited.
A decentralised structure is a condition where authority to make most decisions is passed down to
lower levels of the hierarchy.
Upper levels of the hierarchy tend to set organisation objectives and strategies; lower levels are left to
decide about detailed operational plans and take day-to-day decisions.
Decisions are more quickly executed and are often better than in centralised systems as people who
'know what they're talking about' take them. Delegation is part of decentralisation because authority
must be delegated for decentralisation to occur.
The location and complexity of the work: If the work is technically sophisticated, requiring
a range of technical expertise or is physically widely distributed, then the smaller should be the
span of control.
The degree of delegation possible: The degree to which authority can be delegated to
subordinates to carry out their tasks, which in turn is influenced by the ability of the
subordinates. The less supervision required, the more the subordinates who can be controlled,
e.g. an audit team.
The following factors influence the span of control.

(a)
Drivers should understand what is required of them without much guidance, e.g. sticking to a set
timetable with fixed stopping points.
(b) Face to face contact is not often necessary.

(c)
Objective measures can be used to evaluate performance, e.g.

(i)
Bus mileage
(ii)
Takings per trip
(iii) Customer complaints

The managers' span of control is likely to be fairly large.
8
A single design director or project management director is unlikely to be able to control all the
projects of the practice at one point in time.
This overall directorship role would be allied with individuals or teams controlling individual jobs, e.g.
Design director
Project management director
Project 1
Designer A
Manager B
Project 2
Designer C
Manager D
9
The problem arises from two aspects of the organisation chart.

(a)
It completely ignores the 'information flows' around a business in this case budgets and
management accounts.
(b) The chart can encourage staff to interpret their roles very narrowly; in reality the responsibilities
of the production managers would necessarily include budget information.
The solution to the problem would be moving 'up' the organisation chart, and then back down again,
i.e. the finance director (and the managing director if necessary) ensuring that the production director
explains the importance of budget information to the business as a whole.
375
Business strategy
A combination of organisation chart and detailed job description, one of which would be
communicating budget details to the chief accountant, would also be of assistance.
10
North East Electricity Board

Report
To
NEEB Main Board
From
ABC Consultants
Date
September 20X4
Subject
NEEB's approach to planning
Introduction and terms of reference

We have been retained by NEEB to evaluate its current approach to planning and to suggest a
revised approach suitable for a privatised company subject to commercial pressures. In the
course of this review we also suggest what we see as a more suitable organisation structure.
Organisation structure
NEEB's current structure is functional. This type of structure is best suited to organisations with
a single or closely related group of products operating in a stable environment.
Clearly these conditions will no longer apply to NEEB post-privatisation. It may still be supplying
a single product (electricity) but its market will become much more dynamic.
Without knowing the extent of decentralisation in the company or attitudes towards delegation,
it is difficult to be definitive regarding an organisation structure.
We would recommend a divisional structure. This would bring a number of advantages. Such a
structure is shown below.
Board
Corporate
finance
Commercial and
industrial energy
Group services
- IT/Personnel
Domestic
supply
Residual
retailing division
Other
The benefits to NEEB of such a move include the following.
Easier assessment of divisional performance (each division becoming an investment centre).
Improved reaction to changes in market conditions (because decisions are being made by
sector specialists and there is a shorter chain of command).
Improved motivation if divisional directors are given responsibility for return on

investment/residual income.
This structure is logical because each division strictly represents a strategic business unit
(SBU) facing different forces and influences in the market.
The main problem which may occur is where the commercial division supplies the residential
division (or vice versa) at times of peak demand. The issue to be resolved then would be an
appropriate transfer price.
3
Approach to planning
3.1 Introduction current planning approach
NEEB's current planning approach reflects partly the structure of the company and partly
the environment in which it (a monopoly) operates.
376
This environment may be described as 'safe' in that it does not change rapidly. Similarly, it
has a single objective: to provide a secure, reliable electricity supply. Both of these
conditions will change once the company is privatised.
The company may best be described as 'production driven'. As such its planning process is
concerned solely with estimating demand and with securing appropriate resources (financial
and physical) to ensure sufficient capacity exists to meet that demand.
It may thus be described as reactive.
This approach is no longer sustainable once the company is privatised. The industry is about
to change dramatically on many fronts. There is a need for a new planning process to reflect
these new operating conditions.
3.2 Alternative planning process
The new planning process should be structured as follows.
External
analysis
Internal
analysis
SWOT
Determination
of corporate
objectives
Overall
strategy
selection
Feedback
and control
Strategy
implementation
This process is necessary to reflect two principal changes to the operating environment of
NEEB as follows.
(i)
The emergence of full competition, i.e. competition in both residential and

commercial/industrial sectors.
(ii)
NEEB will have shareholders. Thus it will face a potential constraint on its activity, i.e.
'discipline of the stock market'.
The framework outlined above will allow NEEB to examine influences on the business which
will affect it over the long term.
4
Application to NEEB
Examples of how the framework would be used are given below.
4.1 Environmental analysis
4.1.1 The legal framework
The company will be regulated by an agency called OFFER. Part of its remit is to define
a formula to restrict the rate at which electricity companies can increase prices. With
low volume growth in demand, this would restrict NEEB's ability to increase revenue
via price rises.
377
Business strategy
Thus longer term, all other things remaining the same, NEEB will have to look to
increase revenue in some other way.
4.1.2 Technological
Technology may improve to allow remote metering of usage. This would facilitate
reduction of headcount over time, lowering costs and raising profit. NEEB will have a
responsibility to its shareholders to improve earnings. Thus it may wish to carry out
research and development itself to develop cost-reducing technology.
4.2 Competitive forces
This type of analysis will probably never have been carried out before within NEEB. We can
look at one single element to see how it will impact NEEB buyers.
Focusing on large users (i.e. greater than 100,000 kilowatt hours) NEEB has a potential
national market of 40-50,000 nationwide. This market is now open to all twelve regional
electricity companies and to new entrants.
Buyer power of this group is high in the following circumstances.
(i)
The product is not differentiated, i.e. a commodity product. This applies to electricity.
(ii)
Switching costs are low. This is also true but may be reduced if penalty clauses could
be inserted for contract switching.
(iii) Threat of forward integration is low. This is clearly true as NEEB could not hope to
merge with all of its major users.
(iv) The number of suppliers is high. Again, this is true for NEEB so downward pressure on
prices will be high.
Thus, from a cursory analysis of one element of the competitive forces framework, NEEB
will clearly face intense downward price pressure from customers and intense competition
from those supplying an identical product.
From a planning viewpoint the message is clear: NEEB will have difficulty increasing revenues
from the electricity business (for a given level of demand).
4.3 Recommended planning approach
The points raised in 4.1 and 4.2 above help to identify the current position of NEEB coupled
with an analysis of internal elements (e.g. cost structure, resources). The strengths and
weaknesses of NEEB coupled with the opportunities and threats it faces can be summarised.
Once objectives have been decided the company can identify any gaps which exist between
forecast position/performance and desired position/performance.
The objective of this planning framework is to allow the development of strategies
consistent with achieving objectives (or closing gaps). Clearly such strategies build on
company strengths, eliminate weaknesses, counter threats and exploit opportunities.
The differences between the current approach and that being recommended are clear.
(i)
The current approach looks to respond to demand by ensuring that capacity is

adequate.
(ii)
The recommended approach takes a longer-term view. It forces the company to

examine factors which will impact on the business and over which it may have no
control.
(iii) By focusing explicitly on objectives it prompts the company to ask whether the
objectives can be met by current operations. If not, it provides a basis for possible
strategies which will allow the objectives to be achieved.
(iv) The current approach would look at competing strategies or investments from a
capital-rationing viewpoint because as a public enterprise it probably faces capital
rationing.
378
(v)
The recommended approach provides a framework to ascertain whether given

strategies/investments should be carried out. This is done using the
suitable/acceptable/viable process, and has the maximisation of shareholder wealth as a
fundamental benchmark.
(vi) The recommended approach will need much more formalised and detailed control/
feedback loops. This is using variances, etc. These are necessary because a poorly
implemented investment/strategy can have an impact on share price.
The approach to planning being recommended is known as strategic planning. It has a long
timescale, usually up to five years on a rolling basis. As such it is normally carried out by
senior management. It can be implemented at NEEB by requiring each division to carry out
such a process.
Each division, following analysis of its external/ environmental conditions, must state its
objectives. NEEB's board of directors would then ensure that these objectives are
compatible and goal congruent. Each division would prepare business plans to implement
strategies to achieve these objectives. These would be described as tactical plans.
They are necessarily of a shorter timescale than the strategic plan (usually up to three
years).
These plans would then be converted into individual annual budgets. These are essentially
operating plans.
4.4 Constraints
A company undergoing such a transition is bound to face constraints on growth, such as the
following.
(i)
Lack of marketing skills.
(ii)
Reorganisation/restructuring costs.
(iii) Timescale involved. Reducing headcount and changing culture takes time.
(iv) Lack of commercial skills.
All of these need to be in place in order to carry out a planning exercise such as that
suggested here. It has taken companies such as British Telecom ten years to achieve such
changes.
5
Conclusions and recommendations
NEEB clearly needs to change its planning procedure to one which will allow it to cope
more easily with changes in the industry.
The planning process will be greatly facilitated if the company adopts a divisionalised
structure.
NEEB faces a number of constraints in its attempt to introduce a new planning framework.
These will take a considerable amount of time to overcome.
379
Business strategy
11
Byron Tuffin
Memorandum
To
The Imperial Hotel Group Ltd
Prepared by ABC Consultants

Date
July 20X4
SubjectManagement and organisation structure

1
Current structure
The current structure is functional. This can be shown as follows.
This structure is perfectly suitable for a single hotel. However, despite the acquisitions being in
the same area of business (hotels), this structure is no longer available for the following reasons.
(a)
Decision-making will take too long due to
The sheer volume of information being made available

Different geographical coverage
(b) Centralised decisions will not make individuals react quickly enough to changes in the
market
(c)
It may stifle initiative and creativity of the individual hotel managers who may well have very
good marketing ideas.
Recommended structure
For the reasons outlined above and below we would recommend the adoption of a divisional
structure.
This would be as follows.
The following are the advantages of such a structure.

(a)
It is now much easier to assess the performance of each hotel and its manager
(b) Group services can set standards for the whole group
380
In maintenance
In service
(c)
The group may benefit from purchasing economies, e.g.
In cleaning services
Laundry arrangements
(d) Individual managers feel more motivated because they are directly responsible for the
performance of their hotel.
(e)
They can adapt more quickly to any changes in their respective markets.
(f)
Group services can usefully redirect and re-allocate funds to the hotel needing it most.
This structure will also facilitate any potential growth. With group support services in place,
extra hotels could be added as new divisions.
2
Management style and structure

Current style of structure
Byron Tuffin's current management seems to vary between authoritarian and decentralised.
At times he interferes with decisions taken by individual managers (see the comments of R
Fowler).
Conversely, he distances himself from detail and is only interested in top-level considerations and
decisions.
This ambiguity leads to inconsistent attitudes. Staff need to know exactly to whom to report and
the precise extent of their own authority.
Recommended style and management structure
We recommend that Byron introduce a management structure as outlined in the diagram above,
i.e.
A board of directors comprising the group service directors and directors of the other
three hotels plus at least one non-executive director.
The adoption of a decentralised management style.
The advantages of these two simple changes are numerous and include the following.
(a)
Clear and unambiguous reporting line it is very important that the exact extent of the
decentralisation is established. The limits should be defined in terms of spending limits,
hire/fire of staff, etc.
(b) It allows individual hotel managers to exercise initiative in running the hotels.
(c)
This delegation of authority will improve/maintain motivation of the hotel managers. They
are aware that their performance is to be assessed on the basis of the performance of the
individual hotel.
(d) It allows Byron to stay away from the 'detail' and thus to focus on group direction/strategy.
(e)
The board is now responsible for group direction; this is preferable to having Byron dictate
the direction and action of individual hotels. The Serpentine, for example, taps a different
market from the other hotels in the group and so requires a knowledge of a different
market. It is thus important that the board take decisions at this level. The non-executive
directors will provide a check on the activities of the directors.
381
Business strategy
12
Danley Ltd
Memorandum
To
The Board, Danley Ltd
Prepared by A J Fox, Management Consultant

Date
April 20X3
SubjectMarketing, production and organisation

1
BCG product analysis

Completion of the analysis
The BCG matrix measures a product's 'attractiveness' in two ways by looking at its relative
market share and the rate of market growth. The figures produced by the hospitalised consultant
are near completion.
The final analysis is shown below.
Product
Small cars
Family cars
Sports cars
Executive cars
Market growth
5% (low)
15% (high)
1% (low)
20% (high)
Relative market share index

1.33 (high)
1.50 (high)
0.33 (low)
0.50 (low)
BCG matrix
Discussion of results
The company has a product in each of the categories in the BCG matrix.
Small cars (cash cow): Such products should be generating substantial cash inflows. These
inflows are necessary to support other products (e.g. stars, question marks) which require cash.
The aim should be to hold the product's market position.
Family cars (star): Family cars have a high market share in a high growth market but are
unlikely to be generating positive cash flows due to the large amount of advertising necessary to
maintain the product's position against competitors. The aim should be to build this product into
a cash cow.
Executive cars (question marks): Such a product is a cash user and a substantial amount of
cash is required to turn the product into a star by building market share. As recognised in the
next section, the low market share may be due solely to the limited production capability with
the small batch production system.
Sports cars (dog): The dog product is typically a cash user confirming the company's
experience with the sports car division. Normally, withdrawal from the market would be
recommended a decision which Danley has already made.
382
Existing structure
The current organisation structure is divisional with the divisions based on type of product. With
the decision to close down the sports car division and the necessity to increase profits, a revision
of the structure is necessary.
Proposed structure
It is proposed that the existing divisional structure be maintained with two divisions small and
family cars, and executive cars. There are two reasons for this.
(1) Geography: The two divisions are based in Mymensingh and Sylhat, making control more
difficult if a functional structure were to be adopted (e.g. production under the control of
one manager).
(2) Product type: The products, although similar in some ways (i.e. cars), are sold in different
markets requiring different skills in, for example, marketing and production.
The proposed structure is shown below.
All purchasing and accounting functions are provided centrally, rather than having a repetition of functions
within each division. The reasons for this are that the same suppliers are used by both divisions for
components and both divisions have the same accounting systems. This should reduce costs.
Each division has its own personnel function in order that it does not seem too remote from employees,
which would be the case if, say, a central personnel function were established in Mymensingh or Sylhat.
383
Business strategy
Answers to Interactive questions
Answer to Interactive question 1

The bank basically serves two markets: the personal sector and the corporate sector. However, it would
perhaps be ill advised to organise the bank solely on that basis because:
(a)
The banking needs of customers in the personal sector are likely to be quite distinct. This market is
naturally segmented geographically. Users of the telephone banking service, for example, will want to
speak in their own language. Also, the competitive environment of financial services is likely to be
different in each country.
For the personal sector, a geographic organisation would be appropriate, although with the
centralisation of common administrative and account processing functions and technological expertise,
so that the bank gains from scale economies and avoids wasteful duplication.
(b) For the corporate sector, different considerations apply. If the bank is providing sophisticated foreign
currency accounts, these will be of most benefit to multi-nationals or companies which regularly
export from, or import to, their home markets. A geographical organisation structure may not be
appropriate, and arguably the bank's organisation should be centralised on a regional basis, with the
country offices, of course, at a lower level.

Boxer Ltd
Board

(a)
Adhocracy
(b) Professional bureaucracy
384

ROI using opening carrying amount:
Year 1 34 25 100 = 9%
Year 2 34 25 75 = 12%
Year 3 34 25 50 = 18%
Year 4 34 25 25 = 36%
ROI improves despite constant annual profits thus divisional managers might hang on to assets for too long.
(RI would also improve, giving the same problem.)
ROI using historic cost:
Years 1 4 34 25 100 = 9%
(RI would also be constant under these circumstances.)
ROI using historic cost overcomes the increasing return problem of using the carrying amount. However, it
is not perfect.

The manager would dispose of the asset after two years, i.e. she might get rid of the asset too quickly.
(The same problem occurs with RI with interest at 12%.)

Divisional ROI pre-project
Divisional ROI post-project
=
=
CU300k
CU1m
30%
CU325k
CU1.1m
29.5%
Although the project ROI is acceptable to the company (25%), the manager would not be motivated to
accept a project which lowers divisional ROI. In this particular circumstance, RI would lead to the right
decision as the absolute figure for the division would increase.
RI pre project
RI post project
300,000 20% (lm)

325,000 20% (1.1 m)
=
=
CU100k
CU105k
385
Business strategy

Residual income
Year 1
200k 20% (1m)
20k 20% (100k)
Year 2
220k 20% (1m)
40k 20% (100k)
Return on investment
Year 1
200k/1m
20k/100k
Year 2
220k/lm
40k/100k
Division 1
Division 2
20k
20k
Division 2
Division 1
20%
20%
22%
40%
It is much easier for the larger division to generate a further CU20k of residual income; hence using RI to
compare divisions of different sizes is misleading. ROI gives a better indication of performance.

(a)
Division B would reject the offer as there is a negative contribution of CU5 (30 20 15).
(b) If A has surplus capacity, it is acceptable to the company, as contribution is CU5 (30 15 10).
(c)
If A is at full capacity, there is a lost external sales contribution in A of CU10.
Therefore, for the company, contribution = CU5, thus reject. (B may also lose contribution.)

(a)
Company: transfers recommended, as contribution = CU5 (40 20 15).
(b) Selling division: transfers not recommended, as contribution = CU6 (40 31 15).

(a)
Actual recharge
CU18,000 4,000
6,000
= CU12,000
CU18,000 2,000
6,000
= CU6,000
4,000 CU2
2000 CU2
CU8,000
CU4,000
CU
CU
4,000
6,000
4,000
8,000
2,000
8,000
CU18,000
Expected recharge (per kwh)

CU1 + CU10,000 = CU2/kwh
10,000
(b)
Proportion of budgeted fixed cost

according to budget usage
Standard variable cost of
actual usage
CU12,000
CU16,000
In power plant CU(18,000 16,000) = CU2,000 adverse variance remaining uncharged due to inefficiency.
386

Corporate governance involves the set of rules which governs the structure and determines the objectives
of a company and regulates the relationship between the company's management, its board of directors and
shareholders.
Key aspects of good governance include transparency of corporate structures and operations,
accountability of managers and boards to shareholders and corporate responsibility towards employees,
creditors, suppliers and local community where the corporation operates.
387
Business strategy
388

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chapter 8

Strategy and structure

Strategy and structure

Mintzberg's organisational forms

Organisational structures for international

Decision making in organisations

Summary and Self-test

The Institute of Chartered Accountants in England and Wales, March 2009

Describe, in a given scenario, the advantages and disadvantages of alternative business

Evaluate the different types of organisational structure and recommend an appropriate

Specific syllabus references for this chapter are: 1f, g, 3d, e.

Stop and think

The Institute of Chartered Accountants in England and Wales, March 2009

STRATEGY AND STRUCTURE

The Institute of Chartered Accountants in England and Wales, March 2009

1 Strategy and structure

Structure needed to implement strategy

The roles carried out by individual staff members

The arrangement of primary groupings into departments and divisions

Impact of strategic choices on structure and vice versa

Strategy follows structure

The Institute of Chartered Accountants in England and Wales, March 2009

STRATEGY AND STRUCTURE

Highly centralised structures tend to stifle innovative strategic solutions

Divisionalised structures restrict collaboration and 'joined up' strategies

Bureaucratic structures focus on maintaining the status quo.

Management will restructure to implement new strategies

Worked example the NHS

The Institute of Chartered Accountants in England and Wales, March 2009

Dividing the people of an organisation into units is called divisionalisation.

The bases for this include functional, geographic, customer or product.

The Institute of Chartered Accountants in England and Wales, March 2009

STRATEGY AND STRUCTURE

It offers a career structure within the specialism.

Specialised resources and equipment are used efficiently.

It can enhance quality by deploying expertise.

It can promote the acquisition of technical skills.

It hampers cross-functional innovation and creativity.

The Institute of Chartered Accountants in England and Wales, March 2009

Advantages of geographic divisionalisation

It might be essential for overseas operations to cope with different environments.

Disadvantages of geographic divisionalisation

It struggles to cope with large clients who span the divisions.

It should be focused on how a business makes its profits.

The Institute of Chartered Accountants in England and Wales, March 2009

STRATEGY AND STRUCTURE

Brand divisionalisation has similar advantages and disadvantages to product divisionalisation. In

Customer or market segment divisionalisation

The Institute of Chartered Accountants in England and Wales, March 2009

Interactive question 1: Erewhon Bank

[Difficulty level: Intermediate]

Worked example: Matrix management

The matrix organisation imposes the multi-disciplinary approach on a permanent basis.

The Institute of Chartered Accountants in England and Wales, March 2009

STRATEGY AND STRUCTURE

Advantages of a matrix structure

It should improve communication within the organisation.

It provides a structure for allocating responsibility to managers for end-results. A product

It provides for inter-disciplinary co-operation and a mixing of skills and expertise.

Disadvantages of matrix organisation

It requires consensus and agreement which may slow down decision-making.

Interactive question 2 : Boxer Ltd

[Difficulty level: Intermediate]

The Institute of Chartered Accountants in England and Wales, March 2009