Lecture 8 - Structure and Governance

Question 1

Explain Mintzberg on the design of firms

Answer 1

Mintzberg on the design of firms

Every organised human activity – from making pots to placing man on the moon – gives rise to two fundamental and opposing requirements:

• The division of labour into various tasks
• The coordination of these tasks to accomplish the activity

The structure of the organisation can be defined simply as the ways in which labour is divided into distinct tasks and coordination is achieved among these tasks.

Question 2

How does business strategy affect organisational structure?

Answer 2

The choice of organisational structure depends on the business strategy of the firm

Organisational structure is about

• How critical tasks are divided up
• How managers and employees make decisions
• Routines and information flows that support operations

Question 3

What are the implications of specialisation

Answer 3

Implication of specialisation: the basic tasks of organisation

High productivity requires specialisation

The effects of specialised individuals need to be integrated. This creates two problems:

1. The need for cooperation: the agency problem (employees goals is not owners goals)
2. The need for coordination: managing interdependency

Question 4

What affects the organising dimensions of a firm?

Answer 4

• A firm’s decisions regarding vertical and horizontal boundaries will influence its choice of organising dimensions
• Diversifying into a new business area will expand the set of formal groupings
• Decisions to outsource will contract a firm’s structure
• Formal groupings in large organisations can be based on functional areas (commonality of tasks), geography, products, types of customers and so on
• A firm should decide on the organising dimensions based on

Economies of scale and scope

Transaction costs

Agency costs

Question 5

What does coordination involve?

Answer 5

Coordination involves

• The flow of info to facilitate decisions that further the organisation’s objectives and
• The distribution of decision making rights and rule making authority within the organisation

Coordination and control choices affect both technical efficiency and agency efficiency

Question 6

Explain technical efficiency

Answer 6

Technical efficiency

• Coordination affects the technical efficiency by the provision of information needed to exploit economies of scale and scope.
• To accomplish improvements in technical efficiency, decision making rights should be allocated to those who have the best and timely information

Question 7

Explain agency efficiency and how a balance must be struck in the allocation of decision rights

Answer 7

Agency efficiency

Allocating decision rights to individuals will affect agency efficiency since the decision makers will have the opportunity for selfish behaviour

A balance must be struck between technical and agency efficiencies in the allocations of decision rights

Question 8

Explain centralisation

Answer 8

Centralisation and decentralisation

Authority becomes more centralised as decision making moves to higher levels

It is possible for a firm to be centralised in some dimensions while being decentralised in others

For example, Uni admin functions may be centralised while teaching function is decentralised

Question 9

When does coordination require centralisation

Answer 9

When does coordination require centralisation

• Trade-off between coordination vs. adaption – conventional view is centralisation is optimal when coordination is sufficiently important relative to adaption
• If central unit coordination hampers degree of adaption, then there might be an incentive for business units not to report info truthfully
• Hence, better to decentralise even when coordination is important – horizontal communication better than vertical communication

Question 10

Whats a good framework to use to decide whether to centralise or not?

Answer 10

Question 11

What are the different organisational structures for large businesses

Answer 11

Organisational structure of large businesses

The unitary functional structure (U-form)

The multidivisional structure (M-form)

The matrix structure

The network structure

Question 12

Describe the functional structure and its benefits

Answer 12

The functional structure

• Each department in the firm is responsible for a particular functional area such as finance or marketing
• U form promotes performance (efficiency) within the department but make coordination across departments difficult
• The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration

Question 13

Describe the multidivisional structure and its advantages/disadvantages

Answer 13

Is organised along such dimensions as

• Product line
• Geography or
• Type of customers

Divisional managers will be responsible for operating decisions and top mgmt. will handle strategic decisions.

Advantages

• Measuring divisional performance is easier
• Pay for performance schemes are easier to implement
• Division can coordinate functional activities
• Divisional managers compete for funds in the internal capital markets based on their operating performance in the past.

Disadvantages

• Struggles to cope with clients who span divisions
• Duplication of mgmt. effort

Question 14

Describe the matrix structure

Answer 14

The matrix structure

A firm that uses a matrix structure is organised along two (or more) dimensions – for example, product line and geography

In a two-dimensional matrix, an employee belongs to two hierarchies and has two bosses

The demands of competing dimensions should be roughly equal

Advantages

Matrix structure can help exploit economies of scale and scope – greater flexibility

Improves communication and provides basis for cooperation

Dual authority gives organisation multiple orientation so that functional specialists do not get wrapped up in their own concerns

Disadvantages

Conflict between managers

Costly to administer

Might slow down decision making due to need for consensus and mgmt.

Question 15

What are the forces for change for more collaborative models?

Answer 15

Forces of change resulting in more collaborative models:

Globalisation

• Higher mobility of capital and labour
• Knowledge economy

Technology intensity

• Shorter product cycle
• Complexity of R&D

Shift in industry borders

• Technology fusion
• New business models

Question 16

Describe the network structure

Answer 16

Network structure is preferred when coordination costs do not outweigh the gains in technical efficiency

Network structures are becoming more popular as the cost of organising has fallen (internet and cloud-based technologies)

Network of autonomous firms can function as virtual firm

Requires a polycentric decision-making structure

Network structure facilitates the flow of diverse information, leading to high level of new product development

Question 17

Name the four different network based organisational models

Answer 17

Question 18

Does structure follow strategy or vice versa?

Answer 18

Strategy vs structure

The U-form structure allowed firms in the 19th century to exploit the economies of scale in production, marketing and distribution

When firms began to diversify in the 20th century the U form became cumbersome and M form emerged as a better alternative

The M form lead to duplication of activities when firms expanded globally and created “international divisions”

As firms try to balance local responsiveness with global economies, a mix of matrix form and network form help create flexible organisations

Alfred Chandler argued that structure follows strategy

Structure could also influence the type of information processed by senior mgmt. and what strategies are implemented – strategy follows structure

Question 19

Should you separate businesses?

Answer 19

Question 20

What are the key principles of the UK Corporate Governance Code of Conduct

Answer 20

Leadership

• Every company should be headed by an effective board which is collectively responsible for the long-term – e.g., separation of Chairman and CEO

Effectiveness

• The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

Accountability

• The board should present a fair, balanced and understandable assessment of the company’s position and prospects.

Remuneration

• Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.

Relations with Shareholders

• There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.