Organizational Structure & Controls


Definitions:

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 SBU.

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.
 

Simple Structure:

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.

Strengths:

Weaknesses:

Functional Structure:

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.

Strengths:

Weaknesses:

Multidivisional Structure:

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.
 

Example:

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 outcomes:
 
  1. It Enabled corporate officers to more accurately monitor the performance of each business (simplified the problem of control)
  2. It facilitate comparisons between divisions, which improved the resource allocation process
  3. It stimulated managers of poor performing divisions to look for ways of improving performance.

Strengths:

Wea nesses:

Strategic Controls:


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.
 

Financial Control:


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.
 
 

 Return to Lecture Notes |  Back to Main Menu