Organizational Structure & Controls
Organizational Structure – A firm’s formal role configuration, procedures,
governance, and control mechanisms, and authority and decision-making processes.
Simple Structure – An organizational form in which the owner-manager
makes all major decisions directly and monitors all activities, while the
staff serves as an extension of the manager’s supervisory authority.
Functional Structure – Consists of a chief executi9ve officer and limited
corporate staff, with functional line managers in dominant organizational
areas such as production, accounting, marketing, R&D, engineering,
and human resources.
Multidivisional (M-Form) – Structure – Composed of operating divisions
where each division represents a separate business or profit center and
the top corporate officer delegates responsibility for day-to-day operations
and business-unit strategy to division managers.
Strategic Business Unit (SBU) Form – A form of the multidivisional structure
consists of at least three levels, with the top level being the corporate
headquarters; the next level, SBU groups; and the final level, divisions
group by relatedness (either product or geographical market) within each
Strategic Control – The use of long-term and strategically relevant
criteria by corporate-level managers to evaluate the performance of division
managers and their units.
Financial Control – Objective criteria (e.g., return on investment)
that corporate-level managers use to evaluate the returns being earned
by individual business units and the managers responsible for their performance.
Centralization – The degree to which decision-making authority is retained
at higher managerial levels.
There are basic types of structures organizations can use: simple,
functional and multi-divisional. Organizations sometimes find that that
they have outgrown one structure and must adapt a new form in order to
effective handle more complexity and growth.
May be the most widely used structure, since most organizations are small
(less than 100 employees). This structure is utilized where an owner-manager
makes most of the decisions. While this structure is relatively efficient
from the standpoint of its flatness, it is difficult to maintain as the
organization grows in both complexity and size.
Decisions are made quickly
Owner-manager is aware of what is going on in the organization
Owner-manager makes decisions based on what is best for overall organization
If owner-manager is unavailable decisions may not be able to be made, thus
opportunities maybe lost.
Not good for larger more complex organizations.
In a functional structure jobs become differentiated around areas of specialty.
For example, accounting and human resource specialists are hired to handle
these specialized tasks. These specialists (functional line managers)
report to the CEO, but usually have autonomy for day-to-day decision-making,
e.g., hiring and firing personnel.
Organization has specialists who may be better equipped to make decisions
in their area of specialty
CEO can manager overall interest of the organization without having to
worry about mundane problems
If the CEO is unavailable problems can still be solved and opportunities
can be exploited
Functional-area managers tend to focus on local versus overall company
CEO may not be informed of potential problems or difficulties, thereby
catching them by surprise when it may be too late to reverse course.
Vertical communication may be difficult, thereby, causing duplication or
rivalry between departments.
The multidivisional structure centers on the use of separate businesses
or profit centers. The M-Form is used by many organizations that
compete in the global economy. General Electric is an example of
a company that uses this structure. Each unit is operated as a separate
business with its own corporate staff including President. Some parent
companies do little more than provide capital and guide units to an organizational-wide
strategy. The overall goal is to maximize the overall organization’s
performance. In order to accomplish this, managers at the “parent”
use a combination of strategic and financial controls.
To handle the problems that General Motors was experience in the early
part of the 1900s, CEO Alfred Sloan, Jr., reorganized GM round separate
divisions. Each division represented a distinct business that would
be self-contained and have its own functional hierarchy. Sloan’s
new structure delegated day-to-day operating responsibilities to division
managers. The small corporate level was responsible for determining
the firm’s long-term strategic direction and for exercising overall financial
control of semiautonomous divisions. Each division was to make its
own business-level strategic decisions that would feed into the overall
corporate strategy. Sloan's structural innovation had three important
It Enabled corporate officers to more accurately monitor the performance
of each business (simplified the problem of control)
It facilitate comparisons between divisions, which improved the resource
It stimulated managers of poor performing divisions to look for ways of
Allows organizations to greatly expand their operations
Units can work together thus benefiting for synergies
Has the potential to positively influence the firm’s diversification strategy
by encouraging managers to pursue additional market-place opportunities
Units may have to compete for scarce resources, e.g. financing
Separate units may not coordinate, therefore duplicating the wasting resources
Strategic controls entail the use of long-term and strategically
relevant criteria. They are behavioral in nature, meaning that they
require high levels of cognitive diversity among top-level managers.
Cognitive diversity captures the differences in beliefs about cause-effect
relationships and desired outcomes among top-level managers’ preferences.
Corporate-level managers rely on strategic control to gain an operational
understanding of the organization’s different operating units. The
use of strategic controls requires access to in depth information.
Information is often gathered by formal (reading reports, meeting etc.)
and informal (brief phone calls and discussions over lunch or unplanned
face-to-face meetings) means.
Entails corporate-level managers using objective criteria (ROI)
to evaluate the returns being earned by the individual business units.
Since these performance measures are largely independent, divisions often
do not collaborate with other divisions unless there is a mutual benefit
where each division will realize cost savings. However, when the
corporate-level managers implement strategies that require interdependence
the ability to access is reduced thereby reducing the ability of financial
control process to add value.
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