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SIMULATION TITLE: Organizational Structure

SIMULATION DESCRIPTION: Holden Evan, Inc. is a global powerhouse in branded


consumer packaged goods. The company has a divisional structure with three distinct SBUs:
Beauty, Health, and Home and Family. Last year the company's Health SBU generated negative
press for its disastrous entry into China when sales flopped. The same year, each of Holden
Evan's SBUs was caught off guard by dramatic increases in the costs of several manufacturing
inputs. The CEO tasks you, the newly-hired SVP of Worldwide Operations, with making a
thorough study as to what caused the disasters last year, and with providing thoughtful
recommendations.

You earned 66 percent.

Background

Holden Evan, Inc. is a global powerhouse in branded consumer packaged goods. The company is
organized into three distinct Strategic Business Units (SBUs): Beauty, Health, and Home and
Family. Holden Evan's corporate strategy is built around its leading market brands. Products of
all SBUs are marketed to consumers and sold (with few exceptions) to the same retailers in all
markets. The company's growth is driven by ongoing marketing and brand management. Each of
the SBUs has limited autonomy and is responsible for its own marketing, expansion of product
lines, and performance. The parent company is the ultimate overseer and handles legal and
financial functions.

Background

Last year the company's Health SBU generated negative press for its disastrous entry into China.
For years, the SBU had performed its own research and analysis of the Chinese market from its
U.S. headquarters. When the SBU finally introduced its products into China, sales flopped. The
SBU spent more than $200 million entering the new market with little to show for it. It was
discovered that the Beauty SBU, which had been selling its products in China for years,
possessed reams of up-to-date information about the Chinese market; none of this information
was ever shared with its sister SBU.

Background

The same year, each of Holden Evan's SBUs was caught off guard by dramatic increases in the
costs of many of their manufacturing inputs including energy, raw grains, and chemicals. Some
brands were rendered unprofitable by these costs. Corporate profit margins dipped for the first
time in years.

Background

You are the newly-hired SVP of Worldwide Operations for Holden Evan. The CEO tasks you
with making a thorough study about what caused the disasters last year and thoughtful
recommendations on how to avoid occurrences like this in the future.

Organizational Culture

Your initial impressions working at Holden Evan reinforce everything you heard and read about
the company. Most employees are highly educated, self-motivated, technically proficient
professionals who appear able to handle diverse problems. They require little direction or
supervision and for the most part exhibit high standards of professional conduct.
The headquarters staff is more structured and formal, but the people are no less educated,
motivated, and professional. The Chief Financial Officer, Chief Counsel, Senior Vice President
of Operations, and heads of the three SBUs all report to the CEO.

Before you dive into issues regarding organizational structure, you need to confirm which
general organizational form is most appropriate for Holden Evan given what you have learned
about the company's corporate culture, employees, and work habits.

Choosing an Organizational Form

Based on your observations, what organizational form will you choose for Holden Evan?

YOU CHOSE OPTION 1


The organic form. Flexibility is important to adapt to changing conditions, and Holden Evan's
senior staff generally need few rules and little direct supervision.

You correctly chose the organic organizational form for Holden Evan. This was appropriate
because the employees are professionals who can be trusted to work without extreme rules and
regulations. This form will help employees respond to problems on their own, giving the
company flexibility and the ability to respond quickly.

Meet Your Team

Your direct supervisor is the Chief Executive Officer of Holden Evan.


You have a team of three Business Analysts: Enrique, Melissa, and Susan, who have all been at
Holden Evan for years. They can advise you on the ins and outs of Holden Evan's corporate
structure, culture, and operations.

Holden Evan's Divisional Structure

You ask your analysts to prepare a study of Holden Evan's current organizational structure, its
inner workings, and their perception of what happened during the Health SBU's disastrous entry
into the China market. Enrique provides you with a chart of Holden Evan's current organizational
structure (below).

Enrique says, "'Executive Leadership/ Control' refers primarily to the Chief Executive Officer of
the parent company, who provides leadership to the SBU managers. Each of the SBUs has
limited autonomy. The SBU manager has authority over his SBU and is responsible for its
performance. Each SBU has its own marketing, sales, research and development, manufacturing,
procurement, human resources, and accounting functions. The parent company provides finance
and legal support to each of the SBUs."

Workings of Divisional Structure

Melissa reports on the inner workings of the company. She says:

"The SBUs are accountable to the parent company for their performance, which historically has
worked pretty well; but the SBUs also compete with each other. Each SBU is pretty much self-
sufficient, with only finance and legal services provided by the parent company. Some of the
competition is healthy, such as the three Research and Development functions competing in
terms of innovation and successful new products, or the procurement functions competing to
keep the costs of raw materials down. Other ways the SBUs compete may not be so healthy, such
as the three marketing teams competing by not sharing market intelligence or the human
resources functions competing for the same, highly-qualified candidates or even recruiting from
other SBUs."

The China Market Debacle

Susan reports on the factors that led to the Health SBU's disastrous entry into the market in
China.

"The Health SBU has a large marketing team here at headquarters. They are usually very
effective, but in the case of the China market they really messed up. They knew the Beauty SBU
successfully entered China two years ago, but they were convinced they could do it better. They
never approached the Beauty SBU to tap into their China market data and research. Instead, they
decided to perform all their research from headquarters because they thought they could do a
better job. The Health SBU's focus on outperforming another SBU led them to use expensive and
inferior marketing information. That's probably why they failed so miserably."

Making a Decision

You now have enough information about Holden Evan's corporate structure and how it has
worked or fallen short in the past. You decide to make a recommendation to address the
problems that led to the China market debacle. What is your recommendation?

YOU CHOSE OPTION 1


Eliminate the SBUs and switch to a project-based matrix structure because that is the best choice
for all modern, multinational corporations.
To avoid a repeat of the problems that led to the “China debacle,” you chose to replace Holden
Evan’s divisional structure with a project-based matrix structure. The project-based matrix
structure does not facilitate ongoing brand management and does not eliminate
counterproductive competition between marketing departments. Instead, seek a structure that
integrates the talent and information of those departments.

Evaluating the Organizational Structure

The company's next big push is introducing the products of the Health SBU into India. How will
the matrix structure avoid the problems encountered in China last year?

YOU CHOSE OPTION 2


The matrix organization will allow employees from different specialties to work together as a
group, share information, and respond quickly to problems.

You stated that the matrix organization would allow employees from different specialties to
work together as a group, share information, and respond quickly to problems. This was the
optimal choice.

Evaluating the Organizational Structure

Marketing employees will need to manage the company's brands in the India market on an
ongoing basis. How will the matrix organization facilitate this?

YOU CHOSE OPTION 2


New project teams will be created periodically to manage the brands.
You answered that new project teams will be created periodically to manage the brands.
Although this strategy works within the matrix organization, it would not be the most optimal for
the company, which will need to manage its brands continuously. Instead the organization needs
a modified structure that allows for consistent brand management.

Addressing Increased Costs

You turn your attention to the commodity price spikes last year. You ask your analyst team to
report on the company's procurement processes and the reasons that the price spikes caught the
company off guard. After a week of investigation, the team reports back to you.

Enrique says:

"Raw materials are purchased by the procurement teams of each SBU. The goal of each
procurement team is to purchase commodities at the lowest possible price, which they do by
buying when they believe prices are low, and holding inventory. The teams compete against each
other by measuring actual purchase prices against prevailing market prices."

Addressing Increased Costs

Melissa says:

"At the time of the commodity price spikes last year, the three procurement teams were doing a
good job of keeping costs down compared with spot market prices. Their ‘lowest price' strategy
worked, but worldwide spot market prices for electricity, raw grains, and chemicals all spiked at
about the same time. The procurement teams weren't expecting this."

Addressing Increased Costs

Susan says:

"What bothers me most about the price spikes last year is that our major competitors made it
through the year with far better profit margins on similar products. I'm certain these competitors
purchase similar volumes of energy, raw grains, and chemicals in relation to their sales volumes;
but they managed the market price spikes much better than we did. The only way they could
achieve this is by hedging: buying contracts to ensure against price swings."

Addressing Increased Costs

The information from Susan is distressing. Holden Evan is a branded consumer products
powerhouse; it is not a commodity price hedging company. Building and maintaining a
sophisticated commodity hedging team would be prohibitively expensive; but you can't leave
Holden Evan exposed to future commodity price spikes. You wonder if there is a good way to
outsource commodity price hedging to an outside firm with strong capabilities in this area.

You are also concerned about the wisdom of having a separate procurement team for each SBU.
It is clear that combining the buying power of all three SBUs would produce savings.

Addressing Increased Costs


What action will you take to more effectively manage commodity costs?

YOU CHOSE OPTION 3


Consolidate your three SBU procurement teams into one. Enter into agreements with suppliers of
energy, raw grains, and chemicals, to utilize their hedging expertise to protect Holden Evan
against price spikes and earn fees based on the savings they generate for your company.

You correctly recognized the benefits of combining your three SBU procurement teams. You
also recognized that partnering with major suppliers with extensive commodity hedging
expertise can result in Holden Evan enjoying the benefits of effective commodity price hedging
without taking on the risk of establishing an in-house hedging team. This is a beneficial
application of a network organizational structure.

Shared Services

You consider the remaining functions within each SBU: research and development,
manufacturing, human resources, and accounting. You believe you could generate significant
savings by consolidating functions which are not product-specific. What are the best options for
consolidation?

YOU CHOSE OPTION 3


Consolidate human resources and accounting.

You chose to consolidate human resources and accounting. Although consolidation is never easy
and both Human Resources and Accounting do add value to the organization, these were the
optimal areas to consolidate. These two departments are not SBU- or product-specific, unlike
research and development and manufacturing.
Shared Services

You ask your analyst team to study the human resources and accounting functions of each SBU.
They report back to you after a week:

Enrique reports:
"The HR function of each SBU appears to be pretty entrenched. The HR departments are
reasonably effective in their basic functions, but are not at all respected by the employees they
serve. Complaints are common. Senior management of each SBU is so focused on growing
revenues they haven't noticed the growing expense of the human resources function."

Shared Services

Melissa reports:
"The accounting functions of the Health SBU and Beauty SBU are pretty lean and highly
effective. Generally speaking they work well together with other functions within the SBU, they
tend to produce high quality work on a timely basis, their accuracy and adherence to accounting
standards is strong, and their work is timely. The costs in these departments are not out of line.

The accounting function within the Home and Family SBU is a different story. The
professionalism is evident as in the other SBUs, but something is out of whack with their costs,
and should be investigated."

You thank Enrique and Melissa for their reports and consider the information presented to you.
Shared Services

What will you recommend regarding the accounting and human resources functions within the
SBUs?

YOU CHOSE OPTION 1


You launch a corporate level performance review and audit of the human resources departments
of all three SBUs and the accounting department of the Home and Family SBU to determine
whether they are effective and why their costs are high.

You chose to launch a corporate level performance review and audit of the human resources
departments of all three SBUs and the accounting department of the Home and Family SBU to
determine whether they are effective and why their costs are high. Based on the preliminary
report by your analysts this was the optimal choice, because the report revealed signs of
mismanagement within these functions and a lack of attention by SBU senior management. A
corporate level review and audit is appropriate.