Chap - 8 Strategy and Structure

© The Institute of Chartered Accountants in England and Wales, March 2009 327

Contents

chapter 8

Strategy and structure

Introduction

Examination context

Topic List

1 Strategy and structure

2 Divisionalisation approaches

3 Mintzberg's organisational forms

4 Divisionalised organisations

5 Organisational structures for internationalbusiness

6 Governance

7 Decision making in organisations

Summary and Self-test

Answers to Self-test

Answers to Interactive questions

Business strategy

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

Introduction

Learning objectives Tick off

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

Evaluate the different types of organisational structure and recommend an appropriatestructure for a given strategy

Analyse the governance and management structures of businesses and identify weaknesses

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 tothe functions such as production, marketing etc, divisions, matrices etc). Structure deals with theimplementation of the strategy and has no influence on strategy choice.

In the emergent approach, the relationship between strategy and structure is much more complex. Theexisting structure may aid or hamper strategic choice. Thus in this view structure needs to be consideredalongside strategy choice.

Structure looks at how the various functions (e.g. production, marketing, finance etc) might be formallyarranged.

Stop and think

In the organisation you work for, does everything run smoothly? Or are there inadequate staff, or a divisionof staff into departments that often means the work doesn't get done as it should. In other words, is yourorganisation'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 matterswhich your audit work should consider.

Syllabus links

The rudiments of organisational structure were covered in section 1 of the syllabus for Business andFinance. This chapter reviews them and introduces the new concepts of structural configurations, networkorganisations and divisional control.

STRATEGY AND STRUCTURE


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Examination context

Exam requirements

The key element in this chapter is how structure links with strategy. Knowledge of organisational structuresin isolation from strategy would not normally be examined. The idea that there is no one ideal structure isimportant, as it means that issues of structure will need to interact with the strategy according to theparticular circumstances of the scenario.

This chapter contains references to a number of named studies. It is necessary to attribute the source ofthese studies in describing them. However, for examination purposes it is not the intention that the namesshould be quoted or reproduced without application. Rather, it is intended that the implications and resultsof these studies can be applied appropriately to practical scenarios to inform applied strategy andorganisational structure recommendations.

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1 Strategy and structure

Section overview

The management team and staff of a firm must be organised to carry out the operations and strategyof the business.

There is a debate about the direction of influence between strategy and structure. Does managementbuild a structure once it has decided strategy or does the structure determine the strategy throughits influence on the flows of information and managements assessment of what is possible?

1.1 Structure needed to implement strategy

A strategy without effective organisation of the people required to carry it out is doomed. Strategies canonly be implemented by, and through, people. Therefore the manner in which human resources are co-ordinated through hierarchical and lateral assignments of responsibility and authority becomes a centralmanagement 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, attendancemonitoring, corporate codes of conduct, bonus payment systems, budgetary control procedures anddisciplinary processes

The make-up of the senior management team, e.g. the corporate board, and the methods they use togovern the organisation. This includes the processes used to monitor financial results, to arrive atstrategic decisions and to manage risk.

The term corporate governance is often reserved to refer to the last of these (but would also includeexternal stakeholders). However, corporate governance requires that all are properly carried out andultimately 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 organisationalstructure to implement it.

The argument for structure following strategy was put forward by Chandler. He argues that the structureof 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, itsstructure 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 thoseresponsible for strategic management. For example government ministers can only respond to issuesthey 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 differentpower 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 beat 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 illustratesmany of the concepts used.

The UK National Health Service (NHS) is reputed to be the largest employer in Europe with nearly 500,000full-time equivalent employees. Its annual expenditure exceeds £90bn (about 8.5% of UK GDP). Its missionis 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 ofHealth (DOH) which is accountable to the UK Parliament through the Secretary of State for Health, apolitical appointee who will be assisted by several other politically appointed Health Ministers. Each PrimaryCare 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 downstandards for performance, including the balanced scorecard and will carry out audits of clinicalperformance and procedures. Financial and administrative affairs are subject to a detailed system of internalaudits in Trusts and each Trust receives periodic audits from a public watchdog the Audit Commission thatresult 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 thebasis of number of registered patients with additional fees paid for specified procedures. These paymentsare administered by 152 Primary Care Trusts (PCTs) organised regionally. The PCTs will have establishedsome direct services such as Community Nurses and Midwifery and increasingly employs their own GPs inHealth Centres. PCTs may also operate as Hospitals, Paramedic units etc. PCTs can contract with otherNHS divisions (e.g. hospitals belonging to another Trust) or with other organisations to buy-in additionalprocedures. 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 (sometimesreferred 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 oftencalled family doctors), with junior doctors graded as senior housemen and registrars. Nurses have similardifferentiation of role. Medical staff may also have specialist areas such as obstetrics, oncology, paediatricsetc. Administrative staff have administrative grades, including accountants, and ancillary staff have roles suchas porter, cleaner, cook etc. The job roles are assumed to reflect levels and breadth of training andexperience and exceeding one's role is regarded as a dangerous act of misconduct.

Business strategy


Teams: The NHS operates 24/7 and so most staff will find themselves organised into shifts. Therefore theywill work with different people according to the shift. Teams exist in areas such as running local surgerypractices, community nursing, paramedic care, physiotherapy, midwifery, intensive care, and in the operatingtheatre.

Departments: The signage in a hospital shows divisionalisation on the basis of specialism (e.g. Ear, Noseand Throat), customer (e.g. geriatrics, children's ward, women's ward), or geographical position (e.g. Northwing). 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 andother terms and conditions, the network of payments between Trusts that encourage them to use theircapacity, complex balanced scorecards of performance involving the monitoring of a multitude of KeyPerformance 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 ofprofessional bodies such as the British Medical Association, Royal Colleges of Nurses, Surgeons etc. andtheir professional disciplinary systems.

An influential government body has likened the NHS's organisational structure to the film set of a WildWest movie by saying 'it's thrown up quickly, there's nothing behind it, and it will last a few weeks until it’storn down and replaced with another one'. This refers to the constant organisational restructuring of theNHS 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 privatesector 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, andordering 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 Hospitalsable 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 andeffectiveness. This credit could also be put towards an operation bought from the private sector in theUK or overseas

Creation by DOH of a Leadership Centre to develop a cadre of managers able to innovate and changethe NHS beyond the alleged incrementalist improvements achieved by the established Trust and SHAmanagers.

Simplification and renaming of regional controllers from Regional Health Authorities to StrategicHealth Authorities.

2 Divisionalisation approaches

Section overview

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 particularcustomers or projects.



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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

It does not reflect the actual business processes by which value is created. This means that amechanism 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.

2.2 Geographic structure

Some authority is retained at Head Office (organised, perhaps, on a functional basis) but day-to-day serviceoperations are handled on a territorial basis. Within many sales departments, the sales staff are organisedon this basis.

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Advantages of geographic divisionalisation

Better and quicker local decision making at the point of contact between the organisation (e.g. asales executive) and its customers.

It may be less costly to establish area factories/offices than to run everything centrally (e.g. costs oftransportation and travelling may be reduced).

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

Disadvantages of geographic divisionalisation

Duplication of management effort, (e.g. a national organisation divided into ten regions might have acustomer liaison department in each regional office).

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

2.3 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 adivisional manager is given responsibility for the product or product line, with authority over personnel ofdifferent 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 productin 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 beco-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 managerialcomplexity of the organisation.

Brand: A brand is the name or design which identifies the products or services of a manufacturer orprovider 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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Branding implies a unique marketing position. It becomes necessary to have brand divisionalisation. Aswith product divisionalisation, some functional divisionalisation remains (especially on themanufacturing side) but brand managers have responsibility for the brand's marketing and this canaffect every function.

Brand divisionalisation has similar advantages and disadvantages to product divisionalisation. Inparticular, overhead costs and complexity of the management structure are increased, therelationships of a number of different brand departments with the manufacturing department, if thereis only one, being particularly difficult.

2.4 Customer or market segment divisionalisation

Divisionalisation by customer is commonly associated with sales departments and selling effort, but itmight also be used by a jobbing or contracting firm where a team of managers may be given theresponsibility 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.

2.5 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 theexample below, research and development is centrally organised, but the operating activities of the firm aregeographically arranged. This is an example of a hybrid structure.

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 themerger of a number of small local banks in these countries. These local banks were not large enough tocompete single-handedly in their home markets. The Erewhon Bank hopes to attract both retail andcorporate customers, through its use of home banking services and its heavily advertised Direct Bankservice, which is a branchless bank to which customers telephone, fax or post their instructions. The bankalso specialises in providing foreign currency accounts, and has set up a revolutionary service wherebyparticipating 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 betweendifferent functions, whilst at the same time maintaining functional divisionalisation. It can be a mixture of afunctional, 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 amanager 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 thisdeveloped project co-ordinators, responsible for co-ordinating line managers into solving a customer'sproblems. Up to this point, these new officials had no functional responsibilities.

Owing to increasingly heavy customer demands, Lockheed eventually created 'programme managers', withauthority for project budgets and programme design and scheduling. These managers therefore hadfunctional 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 departmentitself would be small or non-existent.

In some cases the matrix structure involves the appointment of a special manager responsible for a projector customer. They are charged with ensuring that the necessary departments pull together to achieve whatis 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 newchallenge or new task, and to task and structure, as the matrix may be short-term (as with projectteams) or readily amended.

It should improve communication within the organisation.

Dual authority gives the organisation multiple orientation so that functional specialists do not getwrapped up in their own concerns.

It provides a structure for allocating responsibility to managers for end-results. A productmanager is responsible for product profitability, and a project leader is responsible for ensuring thatthe 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 ofscale.

Disadvantages of matrix organisation

Dual authority threatens a conflict between managers. Where matrix structure exists it is importantthat the authority of superiors should not overlap and areas of authority must be clearly defined. Asubordinate 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 requiredin a simple structure of functional divisionalisation.

It may be difficult for the management to accept a matrix structure. It is possible that a managermay 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 [Difficulty level: Intermediate]

Boxer Ltd is a company which manufactures dried pasta, produces ready-to-eat meals and is about to startmaking 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 theBoxer 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 bythe retailers under their own name.

Boxer has recently recruited Jake La Motta from Sauce Specialists Ltd. He has considerable knowledge ofand contacts within the small delicatessen market. Boxer wishes to pursue a cautious approach to this newarea, incurring only limited investment.

Requirement

Design an appropriate structure for Boxer Ltd.


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2.7 Centralisation v decentralisation

Centralisation/decentralisation refers to how much authority/decision-making ability is diffused throughoutthe organisation.

Centralised structures: Upper levels retain authority to make decisions.

Decentralised structures: Ability to make decisions (i.e. commit people, money and resources) ispassed down to lower levels of the hierarchy.

Factors affecting amount of decentralisation

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 notcommunicated downwards.

Ability of management: The more able, the more decentralisation.

Speed of technological advancement: Lower managers likely to be more familiar with changingtechnology, therefore decentralise.

Geography of locations: If spread, decentralise.

Extent of local knowledge needed: If required, decentralise.

2.7.1 Advantages/disadvantages of decentralisation

Advantages

Senior management is free to concentrate on strategy: day to day decisions are delegated to lowerlevels 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

More difficult to co-ordinate organisation as lots of people are making the decisions rather then just afew.

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).

2.7.2 Span of Control

Introduction

The 'span of control' refers to the number of people reporting to one person.



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This influences the shape of the organisation:

TALL FLATV

Tall and flat organisational structures

A determinant of whether the organisation is tall or flat is the use of delegation – 'the transfer oflegitimate 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), sothe 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 bythe manager.

Level of organisational support: Personnel departments can remove the routine personnel tasksfrom a manager, enabling him to manage more people.

Level of 'danger' involved if delegation takes place: The more dangerous, the less people thatcan 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 fewerlevels of management. Office-based technology can facilitate a greater range of functions and self-checkingfor staff.

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Contingency approach to organisation structure

Modern contingency approach 'takes the view that there is no one best, universal structure. There are alarge number of variables, or situational factors, which influence organisational design and performance. Thecontingency 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. ifcertain 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 stableenvironments.

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 organicelements may exist side by side in any one organisation, e.g. in a hotel 'production' departments like thekitchens may be suited to a mechanistic structure but 'service' departments like marketing/reception maywork better with organic structures.

3 Mintzberg's organisational forms

Section overview

Mintzberg uses topological diagrams called organograms to represent the structures and co-ordinating 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 thenature of its competitive environment.

3.1 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 themain features by which both formal structure and power relationships are expressed in organisations. Allorganisations can be described by five distinct components that operate within the sixth, the ideology of theorganisation.



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The members of the organisation (individuals) are distributed to these five parts as demonstrated in thediagram below.

The operating core encompasses those members who perform work directly related to theproduction of goods and services.

The strategic apex has to ensure that the organisation serves its mission. The apex is responsible tothe 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). Theseare not the technostructure in that they have no standardised function or control over the work ofthe operating core.

The organisation has a sixth essential component that Mintzberg calls ideology. This is exactly equivalentto culture.

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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'. Anexample is a manager's refusal to delegate. A more direct example is the decision-making structure ina dictatorship, where power is closely controlled at the centre. It achieves this when the co-ordinatingmechanism is direct supervision. The force this most relates to is the force for direction (in otherwords for the need for people to be told what to do).

The technostructure's reason for existence is the design of procedures and standards. Forexample, 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 theydo. They prefer to work autonomously, achieving what other co-ordination is necessary by mutualadjustment. As professionals, they rely on outside training to standardise skills. This corresponds tothe force for proficiency.

The managers of the middle line seek to increase their autonomy from the strategic apex, and toincrease their control over the operating core, so that they can concentrate on their own segment ofthe market or with their own products. This corresponds to the force for concentration (onindividual product areas).

Support staff only gain influence when their expertise is vital. Mutual adjustment is the co-ordinating mechanism. This corresponds to the force for learning.

The forces for co-operation and competition largely determine how these elements relate to eachother.

Mintzberg discusses five configurations, covering the environment, the type of work and the complexity oftasks facing the organisation. These are outlined below.

Simple structure: Corresponding to theentrepreneurial organisation. The strategic apex –possibly consisting of a single owner-manager in asmall business - exercises direct control over theoperating core, and other functions are pared downto a minimum. There is little or no middle line, andthe technostructure and support staff are also absent.The fact that co-ordination is achieved by directsupervision means that this structure is flexible, andsuited to cope with dynamic environments.

Machine bureaucracy: Just as the simple structureis based on predominance of the strategic apex, sothe machine bureaucracy arises from the power of thetechnostructure. The emphasis is on regulation:bureaucratic processes govern all activities within theorganisation. This means that speedy reaction tochange is impracticable, and this arrangement is bestsuited to simple, static environments.



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Professional bureaucracy: This organisationalstructure arises from the predominance of theoperating core. The name is appropriate, because thistype of structure commonly arises in organisationswhere many members of staff have a high degree ofprofessional qualification (for example the medicalstaff in a hospital or the analysts and programmers ina software developer).

Divisionalised form: This is characterised by apowerful middle line in which a large class of middlemanagers each takes charge of a more or lessautonomous division. Depending on the extent oftheir autonomy, managers will be able to restrictinterference from the strategic apex to a minimum.

'Adhocracy': This refers to a complex and disorderlystructure in which procedures and processes are notformalised and core activities are carried out byproject teams. This structure is suited to a complexand dynamic environment.

Configuration Environment Internal factorsKey building

block

Keyco-ordinatingmechanism

Simple structure Simple Dynamic Small YoungSimple tasks

Strategic apex Direct supervision

Machinebureaucracy

Simple Static Large OldRegulated

Techno-structure Standardisation ofwork

Professionalbureaucracy

Complex Static ProfessionalSimple systems

Operating core Standardisation ofskills

Divisionalised Simple StaticDiverse

Very large OldDivisible tasks

Middle line Standardisation ofoutputs

Adhocracy/Innovative

Complex Dynamic Young Complextasks

Operating core Mutual adjustment

Missionary Simple Static Middle-agedSimple systems

Support staffIdeology

Standardisation ofnorms

Mintzberg mentions one other co-ordinating factor: mission. A missionary organisation is one weldedtogether by ideology or culture. There is job rotation, standardisation of values (norms) and littleexternal control (e.g. like a religious sect).

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Interactive question 3: Organisational configurations

[Difficulty level: Intermediate]

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 copyeditors, designers, party-throwers and people with contacts in the press. Clients contact one of thepartners who assembles a team to solve a client's problem, though the partner does not direct thesolution.

(b) Smithers Ltd is a small family company. The chief executive and founder is a strong leader and tends todominate decision making. He does not believe in discussing his decisions with staff. According toMintzberg what would be the key building block and the main co-ordinating mechanism in SmithersLtd?


3.3 Network organisations

Network organisations were introduced in Chapter 5. The idea of a network structure is applied bothwithin and between organisations.

Within the organisation, the term is used to mean something that resembles both the organic organisationdiscussed later in this chapter and the structure of informal relationships that exists in most organisationsalongside the formal structure. Such a lose, fluid approach is often used to achieve innovative response tochanging circumstances.

The network approach is also visible in the growing field of outsourcing as a strategic method. Complexrelationships can be developed between firms, who may both buy from and sell to each other, as well as thesimpler, more traditional practice of buying in services such as cleaning. These were discussed extensively inChapter 5.

Writers such as Ghoshal and Bartlett, mentioned in Chapter 1, point to the likelihood of such networksbecoming the corporations of the future, replacing formal organisation structures with innovations such asvirtual teams. Virtual teams are interconnected groups of people who may not be in the same office (oreven 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:

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 leanerand more flexible workforce, within a controlled framework. (The question is: how can this control beachieved?)

Leasing of facilities such as machinery, IT and accommodation (not just capital assets) is becomingmore 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. Databasesand communication create genuine interactive sharing of, and access to, common data.



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Network structures are also discerned between competitors, where co-operation on non-corecompetence 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 ofthe Toyota system of manufacturing, with its emphasis on JIT, quality and the elimination of waste has ledto 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 hasbeen an increase in the use of part-time and temporary contracts of employment. These allow rapid down-sizing in times of recession or slow growth and can save on the costs of benefits such as pensions, holidaypay and health insurance. The growth in the proportion of the workforce employed on such less-favourablecontracts has attracted political attention but continues. It has produced the phenomenon of the flexiblefirm or, as Handy calls it, the shamrock organisation.

Handy defines the shamrock organisation as a 'core of essential executives and workers supported byoutside contractors and part-time help'. This structure permits the buying-in of services as needed, withconsequent reductions in overhead costs. It is also known as the flexible firm.

The professional core arepermanently employed staff whoprovide the core competenciesand distinctive knowledge baseof the organisation.

The flexible labour force aretemporary and part-timeworkers who can be deployed,when required by peaks indemand (e.g. seasonal tasks orprojects).

Professionalcore

Contractualfringe

Flexiblelabourfource

Customers

Representation of Handy'sshamrock organisation

The contractual fringe areexternal providers (consultants,sub-contractors and freelancers)who can undertake non-coreactivities and/or providespecialist services moreeconomically than theorganisation could arrangeinternally. Many organisationsnow outsource activities suchas IT, logistics, maintenance,call-centre management and soon.

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 tobe conducted on a 'self-service' basis: booking tickets, downloading music/books, getting on-line help and soon. (Even low-tech equivalents, such as home-assembly furniture, enable the organisation to devolveactivities to customers and save costs.)

Organisations are increasingly seeking to be lean at the core – where activities are important to theircompetitive 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 structureand 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 themarket.

Business strategy


(a) 'Five years ago it was very difficult to develop a product for five different countries in Europe. Butnow, 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 graduallyrecognised 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 onpan-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 andtelling 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 rejectedbecause 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: indoorcommercial, indoor architectural and outdoor lighting. Each division is headed by a managing director withEurope-wide responsibilities. The group has also appointed a European commercial director to manage anddevelop the existing salesforces. 'The selling operations are still country-based because we want the pointof 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 theindoor commercial division, says the new system makes its easier for the group to transfer its bestmanufacturing and design practices across Europe and between divisions.

4 Divisionalised organisations

Section overview

Divisionalised organisations are ones which feature separate businesses within businesses, often as aresult of the development of diverse products or markets.

The control of the corporate centre over its divisions is termed corporate parenting and involvesthe development of control systems.

The styles of parenting identified by Goold and Campbell range from the use of complex strategicplanning techniques through the use of a balanced scorecard of financial and non-financialperformance measures to a third approach that relies solely on financial controls.

Using financial controls necessitates the development of responsibility centres and the use ofinvestment based control measures such as ROCE and residual income (RI).

Divisional inter-trading requires the setting of appropriate transfer prices.

4.1 Origins of divisionalised form

According to Chandler divisionalised forms arise from the diversification of the business. This is broaderthan Ansoff's formulation of diversification and in addition to vertical integration it includes developing thebusiness in new locations.

Divisionalised structures (sometimes called multi-divisional or M-form structures) are a response to theproblems management have in running a more diverse or geographically dispersed business. Topmanagement 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 functionalspecialisation at a large scale. Problems arise with the power of the head office, and control of theresources. 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 firmwith 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 actedindependently, the holding company itself must make some significant contribution, such as providingfinancial, marketing or technological expertise to the operating companies.

Advantages of divisionalised structure:

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 competitivechallenges.

It enables financial evaluation and comparison of performance of divisions, e.g. by measures such asreturn on capital employed.

It provides an organisation structure which reduces the number of levels of management. The topexecutives in each division should be able to report direct to the chief executive of the holdingcompany.

4.2 Rules for successful divisionalisation

Three key considerations in successful divisionalisation:

Autonomy: Divisional management should be able to run their businesses otherwise there is little tobe gained from having separate divisions.

Controllability: The factors against which divisional managers are evaluated should be within theircontrol.

Corporate optimality: Divisions should follow courses of action that bring the best result for thecorporation as a whole.

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, humanresource development or corporate branding which is irrelevant to, or conflicts with, the immediatebusiness needs of a division.

Inter-trading between divisions is important but there are disputes on the appropriate transfer pricebecause 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 downby 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 operatinginappropriately.

A major operator of health and leisure clubs has over 40 centres in a country. The centre manager hasprofit centre responsibility and is also evaluated on ROCE each year for the purposes of granting a bonuspool to the centre which is shared between the manager and staff. The clubs are ranked into gradesaccording to their size and the range of activities offered. All exercise equipment and facilities aredetermined by the grade of club and the replacement of equipment is on a strict 5 year basis. Members joina particular centre and pay fees to it. The fees they pay are based on the grade of club they join. Howevermembership of one club entitles them to use other clubs in the chain.

A number of problems have arisen:

Managers of lower grade clubs situated near higher grade clubs have canvassed members byemphasising that their fees are lower but that members can still use the higher grade club if theychoose.

Some clubs face competition from smaller independent fitness clubs which are able to undercut thenational pricing structure.

Managers of older clubs are complaining that they are being forced to replace equipment that is stillperfectly serviceable, and preferred by customers over newer versions which have slick but pointlessfeatures, 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 formarketing 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 equipmentand membership numbers are still growing and this is causing staff to leave or become despondent.

4.3 Performance management of divisions

Responsibility centres

Control requires that managers are appointed with clear domains of responsibility such as range ofactivities, geographical scope and resources. As covered above, these are the basis of divisionalisation.

From a financial control perspective responsibility centres are:

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 ITfunction

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



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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 divisionalperformance target is calculated as:

periodduring theemployedcapitalAverage

100%periodfor theProfit

The economic principle behind this measure, developed by Du Pont in the early 1900s, is that the returnderived should be in excess of the cost of capital of the firm in order to provide a suitable return toinvestors.

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 allcentral 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 ofidentifying where group value is being created or destroyed and also for the identification of high andlow performing divisional managers.

It is readily understood by management due to its similarity to an interest rate or other yield onassets.

It is cheap to calculate given that the financial reporting system will be calculating profits and assetvalues 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 investmentswhich 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 theminimum 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 afterwhich 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 isdysfunctional and so potentially is the use of ROI as a divisional performance measure.

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:

CUmProfit 158Cost of assets (CU610 @ 10%) (61)Residual income 97Divisional residual income with new projectProfit (CU158 + CU12) 170Cost of assets (CU610 + CU60) 10% (67)New residual income 103

Residual income is theoretically superior to ROI for the reasons shown above. However it is not widelyused 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 torisk.

It lacks the clear link to the ROCE of the group. Although in financial theory the marketcapitalisation of the firm will be the NPV of all its business units rather than being influenced by oneyear's ROCE and EPS, the fact remains that, for all its shortcomings, ROCE is still closely monitored bythe 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:

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 onewhich 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 inpreference to new assets. This could reduce the prestige of the organisation (e.g. shabby fittings) orlead to risk (e.g. leaking vessels). It may also lead to inappropriate outsourcing to avoid having theassets 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 itsdivisions to gain group synergies. Financial control measures alone cannot do this.



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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 ofCU34,000. 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 [Difficulty level: Easy]

A manager has the following data.

Year 1 Year 2 Year 3 Year 4Profit 20 15 10 5Historic cost 100 100 100 100ROI 20% 15% 10% 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? [Difficulty level: Easy]

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 ofCU25,000, if the manager were paid a bonus based on ROI?

Would the decision change if the manager's pay were based on RI?


Business strategy


Interactive question 7: Comparing divisions [Difficulty level: Easy]

A company has two divisions.

Target ROI = 20%

Division I Division 2

Capital CUlm CU100kProfitsYear I CU200k CU20kYear 2 CU220k 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 anotherdivision 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 carassembly plant

Transfer of staff or customers between divisions, e.g. a professional practice seconding staff from oneoffice to work on a project run by another office

Provision of central services, e.g. the group IT function selling hardware, training and user supportservices to divisions.

Consider the following example:

Transfer prices have several implications:

They determine the profits of divisions: If the upstream (supplying) Division A charges a highprice of CU15,000 for its cars then all of the final profit from the product (CU30m) will be enjoyed byit and none by the downstream Division B.

They affect performance evaluation: If Division A takes all the profit its manager will look better.

Division ACar ManufacturingCosts = CU12,000

per unit

Division BCar Sales

Costs = CU5,000 per

unit

Final Market10,000 units at

CU20,000



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They determine the tax to be paid: If Division A is in a different country does take all the profitfor 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 countrywhere dividends are subject to punitive withholding taxes. By charging a high price Division A is takingthe money out of Division B's country as a payment for the cars and not as a dividend and so avoidingthe withholding tax on dividends.

They may determine the price and final sales of the product: Suppose Division B decides toset 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 CU15,000then the final price would be CU23,000. This would clearly have a significant effect on volumes soldand therefore profits. Another situation is where the receiving division must pay an import tariff onits receipts of the components. Here charging a low transfer price will reduce the amount of the tariffand 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 fromthe market it may take it. For example, if division B could obtain supplies of cars elsewhere, say fromother dealers supplied by A, it might leave A with unsold stock. Conversely A might supply toalternative 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 ina break-even situation.

Variable cost (or marginal cost): This leaves the supplying division making nil contribution and soenduring 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 andopportunity cost.

Other methods of setting transfer prices

Managers of divisions will want to record a profit. For this reason the following transfer price settingmethods have been identified:

Negotiated prices: The transfer price is established by discussions between the divisional managersin a bargaining process.

Two-part transfer prices: The transfer price is set at variable cost to ensure corporate optimalitybut in addition to this price the supplying division records an extra amount in its sales ledger to arriveat a profit figure for evaluation purposes.

Central subsidy: The transfer price is set at variable cost but in addition to the revenue from this thedivision receives a central subsidy, a share of the profits from the final good in effect, in order to coverits 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 marketsit will influence the positioning of the product.

Costs of the system: Month ends determining and recording inter-company charges ('chasing woodendollars') is a non-value adding activity.

Motivational impacts of the system: Transfer prices affect evaluation of managers, bonuses for divisionsand the purchasing decisions of the divisions.

Business strategy


Interactive question 8: External offer [Difficulty level: Easy]

Unit costs Division A Division BCU CU

Variable 10 15Transfer price – 20Fixed costs 5 10Profit 5 25Selling price 20 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 [Difficulty level: Easy]

A multi-product company has two divisions.

Unit costs for a particular product

Manufacturing division Selling divisionCU CU

Variable 20.00 15.00Fixed (apportionment of costs incurred for all products) 11.00 –

31.00 15.00

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?




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Interactive question 10: Full or variable cost? [Difficulty level: Easy]

A corporate power plant serving divisions A and B:

Power plant

Budgeted fixed cost per month CU10,000Standard variable cost CU1/kwhActual total cost in January CU18,000

Usage of power plant in January

A BBudgeted usage (kwh) 4,000 6,000Actual usage (kwh) 4,000 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

International business needs structures based on divisionalised structures but varied to reflect thenational cultures of the countries where they are to be based. The research of Hofstede providesguidance to this.

The steps in becoming an international (or transnational) organisation are outlined.

5.1 Organisation structure and overseas operations

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

5.2 Becoming a transnational organisation

Definition

Transnational corporation (TNC): A firm that is able to co-ordinate and control operations in morethan one country, even if it does not have full ownership.

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 andglobal scale.

A TNC is not just a company that exports. It might develop in the following ways, as the level ofinvolvement 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 andEuropean motor manufacturers, selling to, and then building factories in the US. For certain kinds of serviceindustry, it is inevitable.

However, the model above concentrates on market opportunities, not the supply chain itself. We couldhave 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 themarketing 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 tocentralise its R&D in one place.



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6 Governance

Section overview

At its broadest corporate governance would cover all aspect controlling the organisation including itsstructure 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 properpolicies 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 ofbusinesses.

6.1 Introduction

Over the last decade, in the wake of a series of major corporate scandals of which the likes of Enron andWorldCom are only two of the latest, there has been a growing concern to make board stewardship ofpublic companies more effective.

It is important when deciding on an appropriate structure that practical matters of corporate governanceare not forgotten. Areas to consider include:

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.

6.2 Strategy and governance

Definition

Corporate governance: The set of rules which governs the structure and determines objectives of acompany and regulates the relationship between the company's management, its board of directors and itsshareholders.

Corporate governance is not primarily concerned with day-to-day management of operations bybusiness executives. The powers of executive managers to direct business operations are one aspectof governance, but management skills are not.

Similarly, corporate governance is not concerned with formulating business strategy, although theresponsibility of the board of directors and executive managers is for strategic decisions taken.

Corporate governance andstrategic management

Accountability

Supervision

Direction

Executive action

Corporategovernance

Rest of strategicmanagement

Business strategy


The diagram shows the distinction between governance and the rest of strategic management, withgovernance mainly concerned with accountability and supervision.

The two-tier board form of governance practised in Germany and Holland recognises this split. Theupper, supervisory board is responsible for monitoring and overseeing the work of the executive boardwhich runs the business, and has the power to hire and fire its members. The management body isresponsible 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 theCombined Code). The Combined Code does not require compliance but recommends best practice andadopts a 'comply or disclose' policy. Broadly the Combined Code covers:

Membership of the board to achieve a suitable balance of power. The chairman and chief executiveofficer should not be the same individual. There should be a sufficient number of non-executivedirectors on the board, and most of these should be independent.

Non-executives on the board should prevent the board from being dominated by the executivedirectors. The role of the non-executives is seen as critical in preventing a listed company from beingrun for the personal benefit of its senior executive directors. Amendments to the Combined Code in2003 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 shareholdersgreater influence over directors' remuneration have since resulted in the Directors' RemunerationReport Regulations.

The role of the audit committee of the board: This should consist of non-executive directors, andshould work with the external auditors.

6.4 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 theshareholders, at common law or by statute, and the company's annual report and accounts, forexample, 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 membersshould give ethical leadership. A board of directors should have the necessary skills, experience andintegrity, both individually and collectively, to govern the company effectively. A lack of collectiveexperience 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 thechairman 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 inits 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 ofany responsibility that could materially interfere with the exercise of independent judgement apart fromtheir fees and shareholding. Fees should be time related.



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They should be appointed by a formal selection process and appointment approved by the board for aspecific 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 finefor paying off labour leaders while he was a director at Volkswagen. Hartz acknowledged that he hadauthorised millions of euros in payments to members of the carmaker's influential works council to ensureclose ties to management. The money financed luxury trips, including visits to prostitutes in Brazil, withindividual tabs as high as $36,000.

The case threw a spotlight on corporate governance and the tight ties between executives and labour inGermany, especially at Volkswagen, the biggest carmaker in Europe, where workers have traditionallyhelped shape management strategy.

Hartz had faced up to 10 years in prison for plying senior worker representatives with company money, buthe avoided jail in return for confessing and because he did not enrich himself. Hartz was charged withbreach 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'sworks 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 insteadmeant 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 anunderlying cause of the country's economic stagnation – Germany's co-determination law, which givesworkers' representatives 50% of the seats on the supervisory boards of all large companies. What startedout conceptually as a law to ensure a balance between the interests of management and labour in manylarge companies has morphed into an insidious alliance aimed at not rocking the boat. CEOs and topmanagers depend on votes from the labour reps to be reappointed. Instead of making tough decisions onrestructuring or job cuts, German managers are inclined to delay or avoid change and instead curry favourwith union bosses sitting on their boards, often to the detriment of their companies. According to TheodorBaums, a corporate governance expert and professor of finance at Frankfurt's Goethe University, theimplicit 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 companiesbecause the carmaker is controlled by the traditionally left-leaning state of Lower Saxony. The state owns acontrolling 18% of VW's shares (Schröder once served on the VW board), and a special law preventshostile takeovers by limiting the voting rights of any single shareholder to 20%. State control has seeminglyensured that maintaining jobs in the region is a goal at VW that supersedes growth or profits. 'Volkswagenis 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 shareholdersand any other interested parties that there is an objective process for determining the financial rewards ofdirectors and any senior staff who are remunerated on a performance related system. The committee iscomposed of non-executive directors; members of the firm of external auditors have also sat on theremuneration committee. The committee advises and comments on the proposed reward structure; theboard of directors implements the necessary recommendations. Issues considered by the committee wouldbe 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.

Business strategy


It is important to remember that the corporate governance issues on rewards extend to the entire rewardpackage 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, paymentsby the company into a personal pension scheme arrangement for the individual, a bonus (often a cashbonus) tied perhaps to the annual financial performance of the company and various perks, such asmembership of the company's health insurance scheme, private use of company aircraft or boats, andso on).

Long-term compensation, consisting of share option schemes or company shares or the award ofadditional options depending on long-term performance indicators.

A severance payment arrangement, whereby the company is committed to giving the individual aminimum 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:

The fixed elements are the remuneration received by the director regardless of performance, such asfixed salary and salary-related pension.

The variable elements are the performance-related elements (cash bonuses, awards of share optionsor shares depending on performance, etc).

6.6 Risk profiles

An issue in corporate governance is that the directors of companies might take decisions intended toincrease profits without giving due regard to the risks. In some cases, companies may continue to operatewithout 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 itsdirectors.

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 toprofits or dividend growth, and their remuneration is not linked in any direct way to the risk aspects oftheir business. Risk management is now recognised, particularly in the UK, as an ingredient of soundcorporate governance.

The duties of the board of directors must include ensuring that there is an operative and effective system ofrisk management. Shareholders should feel confident that the board is aware of the risks faced by thecompany, 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, andprioritising actions to control and reduce risks.

(Adapted from Managing the Risk of Fraud – A Guide for Managers, HM Treasury, 1997)



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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 [Difficulty level: Easy]

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 responsibilityof 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, regulationand case law. Many corporate boards also assume broader responsibilities in other key areas, such as healthand safety or environmental practices. No similar set of legal minimum responsibilities exists for non-profitorganisations' boards. Many of the issues are the same but there are some that are of specific importance tothese sectors:

Accountability: This is fundamental to the corporate governance of public bodies, and in recentyears, the voluntary sector with regard to both the proper stewardship of public and donated fundsand 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,

Business strategy


including service users, the general public, funders and national government. Issues of accountabilityare not clear-cut and conflicts can arise, e.g. charity trustees have a legal duty to act in the interests oftheir beneficiaries, but if the charity is a membership body this may conflict with the wishes ofmembers.

Openness and transparency: There is a demand for open government and a distrust of decisionstaken 'behind closed doors'. Voluntary organisations also face calls for transparency.

Governance/board structures: The unitary board is not common in these sectors. Boards, or theirequivalent, 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 onperformance measurement and evaluation. Increasingly voluntary organisations are beginning to lookat ways of measuring outcomes.

Each group involved in a not-for-profit organisation – its board, management, staff, volunteers, donors andothers – plays a part in its governance system. The board's role and activities can be examined in terms offive distinct areas:

1 Responsibilities and mandate: In profit-oriented organisations, the board's minimumresponsibilities are established by statute, regulation and case law. No similar set of legal minimumresponsibilities exists for NFP boards. The board bears the ultimate responsibility, though it usuallydelegates the authority to run the organisation to a CEO and a management team. The board'sprimary role is to oversee management and ensure that the NFP's affairs are being conducted in a waywhich 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.

2 Structure and organisation: The structure and mandates of the board and each of its committeesshould be documented, to help ensure that board members, management and the NFP's stakeholdersclearly understand the board's role. The board should also consider the qualifications it requires ofindividual board members in order for them to help carry out the board's responsibilities

3 Processes and information: Processes of decision-making and consultation should be open and willneed to conform to procedures laid down in statute law (e.g. planning applications) or in accordancewith procedures laid down by the organisation itself. Information must be provided to interestedparties and may be subject to various legal duties of disclosure.

4 Performance assessment and accountability: Boards of directors are accountable for theiractions, and board members of all organisations are exposed to a growing personal liability resultingfrom the actions of the board and the organisation as a whole. Even though NFP board members arevolunteers, their liability is the same as that of remunerated members of corporate boards. Theresponsibilities 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.

5 Organisational culture

A key development for the corporate governance of the UK public sector was the Nolan Committeeon Standards in Public Life.



8

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 ortheir friends.

Integrity: Holders of public office should not place themselves under any financial or otherobligation to outside individuals or organisations that might influence them in the performance oftheir duties.

Objectivity: In carrying out public business, including making public appointments, awardingcontracts or recommending individuals for rewards and benefits, holders of public office shouldmake choices on merit.

Accountability: Holders of public office are accountable for their decisions and actions to thepublic 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 andactions that they take. They should give reasons for their decisions and restrict information onlywhen the wider public interest clearly demands.

Honesty: Holders of public office have a duty to declare any private interests relating to theirpublic duties and to take steps to resolve any conflicts arising in a way that protects the publicinterest.

Leadership: Holders of public office should promote and support these principles by leadershipand example.

7 Decision making in organisations

Section overview

The making of decisions in an organisation has been the subject of research that can be divided intorational and behavioural explanations.

The rational approach, familiar from techniques in management accounting such as NPV or make orbuy decisions, describes decision-making as a series of steps.

Behavioural explanations provide a richer, and probably more realistic, interpretation in which theways decisions are taken combine rational approaches and techniques with trial and error-basedheuristic approaches.

7.1 The rational decision-making model

The rational decision making model is a process that follows the orderly path from problem identificationthrough 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.

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 anacceptable 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 thesolutions 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 threedifferent 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, mathematicaltechniques etc.

Heuristic – the exploration of possibilities. The decision maker would use rule of thumb, gut feelingand experience.

The type of decision – may be categorised into three different types.

A structured decision: This is where all or most of the variables are known and can be totallyprogrammed. These decisions are routine and require little human judgement (e.g. setting a creditrating for a new customer).

An unstructured decision: These types of decisions are resistant to computerisation and dependmainly 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 anunstructured decision, in that it is partially programmable but still requires some human judgement(e.g. adjusting the credit rating of an existing customer).



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Summary and Self-test

Summary

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8

Self-test

Answer the following questions.

1 Greenleaf Ltd has grown from a small entrepreneurial company of five staff to a larger organisation ofthirty-five. The growth, though welcome, has thrown Greenleaf into chaos. No-one is sure what theyshould be doing and mistakes are beginning to be made.

Recommend, with reasons, a suitable organisation structure and suggest the mechanism required toco-ordinate the various parts of the organisation.

2 Suggest two ways in which a company can ensure corporate governance processes are incorporatedinto the organisation structure.

3 What is a professional bureaucracy? Give two examples of organisations that would suit this form ofstructure.

4 What is meant by a matrix organisation structure?

5 Compare and contrast centralisation and decentralisation.

6 How do 'the location and complexity of the work' and 'the degree of delegation possible' influence thespan of control?

7 Travel Fast Ltd is an established bus company. Its organisation chart shows a three-tier structure ofdirectors, managers and drivers.

What factors will influence the span of control of the managers?

8 A substantial architectural practice designing and managing the construction of various buildings islikely to be best suited to a matrix organisational structure.

Why?

9 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 productiondirector.

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 theNorth East.

The function of NEEB is to take electricity from electricity generators in the country and to distributethis 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.

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 sizefrom small village locations to large inner city shops up to 20,000 square feet. These retail outlets havea dual role.

(1) To provide a point where customers can pay their bills on a quarterly basis. They can also buystamps or make monthly payments towards their bills.

(2) To retail a large range of white goods (i.e. consumer durables such as refrigerators, washingmachines, dishwashers, etc) which are marketed under their 'own label' brand name Tricité. Thegoods are manufactured for NEEB under licence by famous name manufacturers. The stores alsosell a wide range of other electrical goods such as hi-fi, radios, toasters, etc. All of these tend tobe good brand names aimed at mass market consumption and are not the high end expensiveitems.

NEEB structureThe 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 toresidents 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 publicinterest'. 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. Aproportion of its capital expenditure budget is provided by central government. This will clearlychange 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. Thevariables in the forecast are numerous and include

Net population movements in the region

Penetration of consumer durables into homes (more durables mean increased demand forelectricity).

This plan is completed by the start of the last quarter in each year.



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(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 sametime. Given the timescale of some of the capital investments (i.e. taking two or three years totermination), some projects are completed three years after the initial demand forecast which ledto the preparation of the capital expenditure budget. Consequently any major error in thedemand 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 thecompany 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 ofcomparable electrical retailers. This is thought to reflect the reduced emphasis placed on retailing atthe expense of electricity provision. However, some goods do sell well and achieve a respectableshare of the regional market.

The future

The company is to be privatised in the next two years along with the rest of the industry. Thestructure 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. Theregional 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 includescompetition on the domestic and commercial front.

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Industry

Demand for electricity is forecast to grow nationally at 3% by volume per annum over the next decade. Ona regional basis there are substantial variations.

In terms of competitors the industry will split into two to represent the two distinct market segments ofresidential and industrial/commercial. Possible new entrants may emerge from power equipment companiessupplying small scale generators to large commercial/industrial users which will generate their ownelectricity. 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 tocompetitive threat. These are considered to be large users and represent a potentially lucrative market forpotential entrants. This market will number approximately 40,000 – 50,000 users. In addition to external ornew competition any of the other 11 regional electricity companies can seek to supply a major user in anyother region.

The industry overall is to be controlled by a regulator. The agency, called OFFER, has a remit to govern therate of increase of electricity prices. It also exists to intervene and prevent abuse of dominant position andunfair competition.

Privatisation will be total, i.e. all shares in NEEB will be sold at the time of privatisation. An initial restrictionwill 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 theproposed privatisation.

(i) A more appropriate organisation structure. (4 marks)

(ii) An assessment of NEEB's current approach to planning together with a suggested alternative planningprocess in outline form. (7 marks)

(iii) A discussion of the way in which the new planning process may be applied to NEEB, including acomparison with its current approach and an analysis of possible constraints in implementing the newsystem. (10 marks)

(21 marks)

11 Byron Tuffin

Byron Tuffin is the owner of four hotels. Three of these have been recently acquired; one is inRajshahi, one close to Chittagong and the third in Pabna. The original hotel is the Imperial, outsideCox’s Bazar. The Imperial has been in the Tuffin family for fifty years and was bequeathed to Byron byhis father.

The Imperial has forty rooms. Five of these are de-luxe suites with lounge/ante-room, bedroom andbathroom. Twenty are double bedrooms and the remainder are single rooms. The hotel has abeautiful location in ten acres of landscaped gardens and, being on a small hill, the rooms at the topcommand impressive views over the shore. The hotel makes good returns and has good all-year-roundoccupancy rates. Much more comes from special events like weddings and as a stopover forhoneymooning couples before departure elsewhere the next day.

The Regent in Rajshahi and The Orangery in Pabna are similar to The Imperial. The former has 30rooms 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 adifferent matter. As a consultant brought in by his bankers (who helped in the acquisitions) you havebeen called in to assist Byron in developing the company. During the course of your investigations youconduct many interviews: details from some of these are given below.



8

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 beenhere for two years and, although the job is fairly easy, the people here are great to work with. Byronis absolutely superb with customers: he checks their file (if they have one) before they arrive and hemakes them feel really special. They love him. On the other hand he does not want to be concernedwith detail. He forgets about decisions and he has trouble taking decisions without consultingeveryone else first. He thinks about 'direction of the hotel' etc, so I suppose he's more strategic. Hedoes interfere sometimes though, by ordering my staff about or bypassing me to get information fromthem.'

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 whoare 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 annoyme. 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 repairhis 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 withByron his response was '...why didn't you tell me you'd scheduled Angus for elsewhere ...'. That's notthe 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 ifthere is a problem. We have our weekly manager meetings which are fairly easy going. Byron is a goodman to work for – he does think 'big' though. He's always coming up with ideas for the hotel. He's alsoastonishing 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 alittle too much 'faded gentility'. Byron from The Imperial seems an enthusiastic person. We've agreedthat this hotel needs to be re-positioned. I've been here a year, and before I joined the hotel waslosing its direction.'

Niall Gallagher (Manager, The Serpentine)

'This is a good hotel with a good occupancy rate. Our clients are mostly business people in Chittagongfor a few days. We also get tourists, which we need to encourage as our weekend occupancy needsimproving. Byron seems to be fairly open-minded in terms of ideas for the direction of the group. I'llbe 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 differentcoverage geographically and in terms of markets. We'll need to invest in refurbishment, though. I haveno problem with that. I fully understand and believe in the importance of the client. You have to makeeach 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 yourrecommendation and the advantages your structure would bring. (9 marks)

(b) A review of Byron's management style and your reasoned suggestions for a new managementstructure, indicating the advantages of the new structure. (9 marks)

(18 marks)

Business strategy


12 Danley Ltd

Danley Ltd is a manufacturer of cars. It commenced business forty years ago and is currently organisedalong divisional lines. An outline organisation chart is shown below.

Key

P = Production Locations

M = Marketing Small and family Mymensingh

Pe = Personnel Sports Brahmanbaria

A = Accounting Executive Sylhat

Pu = Purchasing

The company is very keen to cut costs and improve profits before being floated on the StockExchange in 20X5. The current organisation structure owes much to history, reflecting the purchaseof the sports car and executive car businesses in the past. Each division uses the same suppliers ofcomponents 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 forinvestment 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. Inparticular we are concerned about the sports cars division. It is a drain on our profits and cash, makinglosses 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 hecalled the 'BCG matrix' in his analysis. I have his initial findings (see Appendix) and would like the workfinished 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 feelsthat if we could make more types of car, including minor variations around a basic type, we could sellmore. 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 threepurchasing functions. All purchasing can be done by one function. Unfortunately, some of the costsavings will come from redundancies. The best people in the three functions should be put together toform one function in Mymensingh.'



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Appendix

A Market growth

Total number of cars sold per year – all suppliers

20X1 20X2(i) Small cars 200,000 210,000(ii) Family cars 150,000 172,500(iii) Sports cars 100,000 101,000(iv) Executive cars 50,000 60,000

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

Danley Ltd Largest competitor(i) Small cars 40,000 30,000(ii) Family cars 30,000 20,000(iii) Sports cars 10,000 30,000(iv) Executive cars 5,000 10,000

Requirements

As an independent management consultant prepare a memorandum for the board of Danley Ltd whichcovers 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 thecircumstances of the firm. (10 marks)

(20 marks)

Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achievedthese objectives, please tick them off.

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

3 An organisation where the main building block is the operating core (professionally skilled staff) andthe controlling mechanism is the standardisation of skills.

Suitable organisations:

Solicitors' practice

GP practice

Accountants' practice

4 The matrix structure involves overlaying a second set of hierarchical connections over the first but atright angles to it. As an example consider Upazila Parishad.

Chief executive

Head ofservices

Head ofboroughs

Boroughexecutives

Servicessupervisors

Roads

Education

Health

Borough 1 Borough 2 Borough 3

0 0

0 00

0 0 0

X

Upazila Nirbahi Officer (UNO)

UnionParishad

Chairman

UnionParishadOfficer

Union Parishad 1 Union Parishad 2 Union Parishad 3

In this structure service supervisors for roads, education, health, etc in accounting, economics andmarketing report to the head of services. Union Parishad officers report to the Union ParishadChairman. 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 teamresponsible for roads. Thus the individual reports two ways – to the service supervisor and to theUnion Parishad officer, and is subject to two lines of authority.



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5 A centralised structure is a condition where the upper levels of an organisation's hierarchy retain theauthority 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 tolower levels of the hierarchy.

Upper levels of the hierarchy tend to set organisation objectives and strategies; lower levels are left todecide 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 authoritymust be delegated for decentralisation to occur.

6 The location and complexity of the work: If the work is technically sophisticated, requiringa range of technical expertise or is physically widely distributed, then the smaller should be thespan of control.

The degree of delegation possible: The degree to which authority can be delegated tosubordinates to carry out their tasks, which in turn is influenced by the ability of thesubordinates. The less supervision required, the more the subordinates who can be controlled,e.g. an audit team.

7 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 settimetable 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 theprojects 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 andmanagement accounts.

(b) The chart can encourage staff to interpret their roles very narrowly; in reality the responsibilitiesof 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 directorexplains the importance of budget information to the business as a whole.

Business strategy


A combination of organisation chart and detailed job description, one of which would becommunicating 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

1 Introduction and terms of reference

We have been retained by NEEB to evaluate its current approach to planning and to suggest arevised approach suitable for a privatised company subject to commercial pressures. In thecourse of this review we also suggest what we see as a more suitable organisation structure.

2 Organisation structure

NEEB's current structure is functional. This type of structure is best suited to organisations witha 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 supplyinga 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 astructure is shown below.

Board

Corporatefinance

Group services- IT/Personnel

Commercial andindustrial energy

Domesticsupply

Residualretailing 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 bysector specialists and there is a shorter chain of command).

Improved motivation if divisional directors are given responsibility for return oninvestment/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 residentialdivision (or vice versa) at times of peak demand. The issue to be resolved then would be anappropriate 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 partlythe environment in which it (a monopoly) operates.



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This environment may be described as 'safe' in that it does not change rapidly. Similarly, ithas a single objective: to provide a secure, reliable electricity supply. Both of theseconditions will change once the company is privatised.

The company may best be described as 'production driven'. As such its planning process isconcerned solely with estimating demand and with securing appropriate resources (financialand 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 aboutto change dramatically on many fronts. There is a need for a new planning process to reflectthese new operating conditions.

3.2 Alternative planning process

The new planning process should be structured as follows.

Externalanalysis

Internalanalysis

SWOT

Determinationof corporate

objectives

Overallstrategyselection

Strategyimplementation

Feedbackand control

This process is necessary to reflect two principal changes to the operating environment ofNEEB as follows.

(i) The emergence of full competition, i.e. competition in both residential andcommercial/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 whichwill 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 definea formula to restrict the rate at which electricity companies can increase prices. Withlow volume growth in demand, this would restrict NEEB's ability to increase revenuevia price rises.

Business strategy


Thus longer term, all other things remaining the same, NEEB will have to look toincrease revenue in some other way.

4.1.2 Technological

Technology may improve to allow remote metering of usage. This would facilitatereduction of headcount over time, lowering costs and raising profit. NEEB will have aresponsibility to its shareholders to improve earnings. Thus it may wish to carry outresearch 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 canlook 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 potentialnational market of 40-50,000 nationwide. This market is now open to all twelve regionalelectricity 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 couldbe inserted for contract switching.

(iii) Threat of forward integration is low. This is clearly true as NEEB could not hope tomerge with all of its major users.

(iv) The number of suppliers is high. Again, this is true for NEEB so downward pressure onprices will be high.

Thus, from a cursory analysis of one element of the competitive forces framework, NEEBwill clearly face intense downward price pressure from customers and intense competitionfrom those supplying an identical product.

From a planning viewpoint the message is clear: NEEB will have difficulty increasing revenuesfrom 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 coupledwith an analysis of internal elements (e.g. cost structure, resources). The strengths andweaknesses 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 betweenforecast position/performance and desired position/performance.

The objective of this planning framework is to allow the development of strategiesconsistent with achieving objectives (or closing gaps). Clearly such strategies build oncompany 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 isadequate.

(ii) The recommended approach takes a longer-term view. It forces the company toexamine factors which will impact on the business – and over which it may have nocontrol.

(iii) By focusing explicitly on objectives it prompts the company to ask whether theobjectives can be met by current operations. If not, it provides a basis for possiblestrategies which will allow the objectives to be achieved.

(iv) The current approach would look at competing strategies or investments from acapital-rationing viewpoint because as a public enterprise it probably faces capitalrationing.



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(v) The recommended approach provides a framework to ascertain whether givenstrategies/investments should be carried out. This is done using thesuitable/acceptable/viable process, and has the maximisation of shareholder wealth as afundamental 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 poorlyimplemented investment/strategy can have an impact on share price.

The approach to planning being recommended is known as strategic planning. It has a longtimescale, usually up to five years on a rolling basis. As such it is normally carried out bysenior management. It can be implemented at NEEB by requiring each division to carry outsuch a process.

Each division, following analysis of its external/ environmental conditions, must state itsobjectives. NEEB's board of directors would then ensure that these objectives arecompatible and goal congruent. Each division would prepare business plans to implementstrategies 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 threeyears).

These plans would then be converted into individual annual budgets. These are essentiallyoperating plans.

4.4 Constraints

A company undergoing such a transition is bound to face constraints on growth, such as thefollowing.

(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 thatsuggested here. It has taken companies such as British Telecom ten years to achieve suchchanges.

5 Conclusions and recommendations

NEEB clearly needs to change its planning procedure to one which will allow it to copemore easily with changes in the industry.

The planning process will be greatly facilitated if the company adopts a divisionalisedstructure.

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.

Business strategy


11 Byron Tuffin

Memorandum

To The Imperial Hotel Group Ltd

Prepared by ABC Consultants

Date July 20X4

SubjectManagement and organisation structure


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 inthe 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 themarket

(c) It may stifle initiative and creativity of the individual hotel managers who may well have verygood marketing ideas.

Recommended structure

For the reasons outlined above and below we would recommend the adoption of a divisionalstructure.

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

– In maintenance– In service



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(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 theperformance 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 RFowler).

Conversely, he distances himself from detail and is only interested in top-level considerations anddecisions.

This ambiguity leads to inconsistent attitudes. Staff need to know exactly to whom to report andthe 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 otherthree 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 thedecentralisation 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. Theyare aware that their performance is to be assessed on the basis of the performance of theindividual 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 dictatethe direction and action of individual hotels. The Serpentine, for example, taps a differentmarket from the other hotels in the group and so requires a knowledge of a differentmarket. It is thus important that the board take decisions at this level. The non-executivedirectors will provide a check on the activities of the directors.

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 relativemarket share and the rate of market growth. The figures produced by the hospitalised consultantare near completion.

The final analysis is shown below.

Product Market growth Relative market share indexSmall cars 5% (low) 1.33 (high)Family cars 15% (high) 1.50 (high)Sports cars 1% (low) 0.33 (low)Executive cars 20% (high) 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. Theseinflows 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 areunlikely to be generating positive cash flows due to the large amount of advertising necessary tomaintain the product's position against competitors. The aim should be to build this product intoa cash cow.

Executive cars (question marks): Such a product is a cash user and a substantial amount ofcash is required to turn the product into a star by building market share. As recognised in thenext section, the low market share may be due solely to the limited production capability withthe small batch production system.

Sports cars (dog): The dog product is typically a cash user – confirming the company'sexperience with the sports car division. Normally, withdrawal from the market would berecommended – a decision which Danley has already made.



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Existing structure

The current organisation structure is divisional with the divisions based on type of product. Withthe decision to close down the sports car division and the necessity to increase profits, a revisionof the structure is necessary.

Proposed structure

It is proposed that the existing divisional structure be maintained with two divisions – small andfamily cars, and executive cars. There are two reasons for this.

(1) Geography: The two divisions are based in Mymensingh and Sylhat, making control moredifficult if a functional structure were to be adopted (e.g. production under the control ofone manager).

(2) Product type: The products, although similar in some ways (i.e. cars), are sold in differentmarkets 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 functionswithin each division. The reasons for this are that the same suppliers are used by both divisions forcomponents 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.

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 wouldperhaps 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 isnaturally segmented geographically. Users of the telephone banking service, for example, will want tospeak in their own language. Also, the competitive environment of financial services is likely to bedifferent in each country.

For the personal sector, a geographic organisation would be appropriate, although with thecentralisation 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 foreigncurrency accounts, these will be of most benefit to multi-nationals or companies which regularlyexport from, or import to, their home markets. A geographical organisation structure may not beappropriate, and arguably the bank's organisation should be centralised on a regional basis, with thecountry offices, of course, at a lower level.


Boxer LtdBoard


(a) Adhocracy

(b) Professional bureaucracy



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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, itis 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 = CU300kCU1m

= 30%Divisional ROI post-project = CU325k

CU1.1m= 29.5%

Although the project ROI is acceptable to the company (25%), the manager would not be motivated toaccept a project which lowers divisional ROI. In this particular circumstance, RI would lead to the rightdecision as the absolute figure for the division would increase.

RI pre project 300,000 – 20% (lm) = CU100kRI post project 325,000 – 20% (1.1 m) = CU105k

Business strategy



Residual income

Division 1 Division 2Year 1200k – 20% (1m) –20k – 20% (100k) –Year 2220k – 20% (1m) 20k40k – 20% (100k) 20kReturn on investment Division 1 Division 2Year 1200k/1m 20%20k/100k 20%Year 2220k/lm 22%40k/100k 40%

It is much easier for the larger division to generate a further CU20k of residual income; hence using RI tocompare 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 B(a) Actual recharge

6,000

CU18,000 4,0006,000

CU18,000 2,000

= CU12,000 = CU6,000 CU18,000Expected recharge (per kwh)

CU1 +10,000

CU10,000 = CU2/kwh 4,000 CU2 2000 CU2

CU8,000 CU4,000 CU12,000

CU CU(b) Proportion of budgeted fixed cost

according to budget usage 4,000 6,000Standard variable cost ofactual usage 4,000 2,000

8,000 8,000 CU16,000

In power plant CU(18,000 – 16,000) = CU2,000 adverse variance remaining uncharged due to inefficiency.



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Corporate governance involves the set of rules which governs the structure and determines the objectivesof a company and regulates the relationship between the company's management, its board of directors andshareholders.

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.

Business strategy


Chap - 8 Strategy and Structure

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Transcript of Chap - 8 Strategy and Structure