functional areas and organisational structure full notes, Dispense di Economia Aziendale

Scarica functional areas and organisational structure full notes e più Dispense in PDF di Economia Aziendale solo su Docsity! 3. Economic activities within firms Economic activity is carried out to satisfy personal needs, it takes place within firms: systems of interdependent and coordinated activities. Firms produce economic goods, in particular private goods —> manufactures. Economic activity carried out in firms can be grouped into functional areas and specialised skill sets. Functional areas: Are subset of processes characterised by a function. They are: Institutional structure design: or design of the institutional structure of the firm. Provide the overall design of the firm: decisions about the firm’s goals, partnerships, defines its legal status and liquidates the organisation if it is needed. Designing the structure of a firm also means designing shareholder structure, designing governing bodies, hiring employees, choosing the board of directors and shareholder assembly. On top of that, this area should determine the equity capital (4 debt capital since it is not repaid to the investors, it is usually taken by the owners who buy the company's common stocks) that is to say: who provide the related risk capital. It deals with activities related to break-ups, acquisitions, partnerships and alliances. Operations: Is the set of all the activities that allow the firm to carry out economic production. Revenues and costs are generated here. (Net income) operations can be internal or external; external operations take place when external actors are involved and transactions are made. We can say that internal operations are in-between two different types of external operations: buying input and selling outputs. We have core operations that are those operations that identify the function of the company. Through these operations the company mainly carries out economic production. Core operations generate costs for the purchase of raw materials, and revenues from sales. For example in a manufacturing firm core operations are: purchasing production factors, carrying out physical transformation and selling products. Core operations are: the R&D department’s whose aim is to produce goods that respond to customers’ expectations at the lowest possible cost to keep prices competitive. To establishes product features and production methods. R&D evaluate customers needs and tries to satisfy them. It also deals with problem solving of existing products. Purchasing good and services from cooperative and reliable suppliers: buy raw materials and equipment. Supplier identification, analyses quotations and bids to place orders. It also deals with supplier relationship management Manufacturing: assembling raw materials. Technical skills and economic skills are required to balance the tendency to standardisation that manufacture has, opposed tendency if compared to the need for variability and variety which customers expect. Sales and Marketing: selling products at the highest possible price to earn the highest possible profit—> optimise economic profitability. | has to check competitors’ offers, it has to design sales policies and advertise the company’s products. It uses advertisements and contacts potential customers—> communication. Logistical processes: operations related with the transportation and store of raw materials and finished products. Need for multidisciplinary skills: include purchasing and production plannings Remark: The just mentioned core operation are all interdependent; in a new product's development: R&D comes up with new ideas, marketing understand customers latest needs, purchasing establishes contacts with new suppliers. Also processing customers order implies interdependent activities: sales unit takes the order, logistic plans shipping and production, manufacturing handles production. The more dynamic and the more these departments communicate, the faster the firm will be to respond to new orders and requests. Core operations give rise to sets of transactions of private and public goods. Transactions for private goods include sales and purchases, these implies the need of money as a mean for tradeoffs. Money can be paid right away or after an established time through settlement debts and credits. A transaction can be isolated or part of an agreement. Apart from core operations, with a firm many other operations take place, as for example: Debt and equity management (or finance): serve to cover cash deficits, refers to the activities undertaken to cover the firm’s financial needs that arise from core operations: is the money needed to establish a firm and support its development. Firms almost always have to incur in capital providers to cover their needs, this is because they often incur in expenses before being able to make a revenue. Financial needs of a firm depend on the length of the production cycle, on the length of the cash conversion cycle. Debts and equity differ: equity implies that an amount of money is provided by an investor in exchange for a share, therefore the risk taker is a shareholder that has a decisional power which can be exercised in shareholders’ meetings. The lender of this money runs a risk since if the firm fails he will lose all the invested money. Equity costs to the firm since it will have to pay shareholders through dividends: rewarding are more flexible than the cost of debt that are interests. Debt capital is the amount that a bank lends to a firm, is not as risky as equity and requires the firm to pay back the debt plus an interest rate until a point in the future. Lower risk—>lower expected reward. Why is equity capital also referred to as risk capital? Because shareholders provide the firm with money to carry out a certain operation, the shareholder in return will earn a compensation proportional to the firm’s net earnings; however the amount of compensation is uncertain and might as well be a loss. Shareholders can reinvest the money gained with the firm’s profit or can choose to sell their shares making a profit (capital gains) or taking a loss. Reimbursement for equity capital takes place when the firm is liquidates, but if a shareholder decides to sell his shares before the time, he has the power to do so. Transactions for debt capital involve the availability of a given quantity of financial means for a given period of time after which the borrower has to give back the money borrowed plus an interest previously decided (that depends on the risk of the operations, on the length of the loan, on the amount of the loan). Management of non-core investments: These operations take place when a firm has a surplus of funds not required for core operations. By reinvesting these funds, a firm might as well increase its profit and earn supplemental revenues beyond core operations’ ones. Earnings of non-core operations might be positives or negatives. Usually these extra funds are reinvested in non risky markets for exam ple they are deposited in a bank (loan capital transactions). However a firm may also decide to use extra funds for risk capital transactions: investing in another firm by buying its shares (risk capital transactions). Insurance management: A firm is always exposed to many risks, some of these are particular risks that can be covered through insurances, while general economic risk is the chance that the organisation generates profits or losses. An insurance has the prime aim of coverage for damages resulting from possible negative events. The premium is the price that the insured party has to pay to be insured. Insurance for particular risks: theft, fire accident.) and insurance for specific risks: coverage for negative events within non-core operation, core operations, tax management. Tax management: Computing and paying taxes. Firms are required to pay taxes: expenditure and not revenue. Government requires the payment of taxes in exchange for the right to utilise public goods. persuade people in each unit to share information. Last we have temporary teams were people can perform coordination for a limited time through informal communication. - standardisation: * standardised skills: training programs where people learn how to perform a task consistent with managers’ expectation, * standardised process: when a task becomes a routine activity it is performed better: jobs descriptions and procedures, * standardised outputs: common goals: ex: assign sales target. -_formal hierarchy: necessary as the number of employees increases. Work coordinated through direct supervision, in this case we have legitimate power: people have to obey to what the level above of the hierarchy says. The problem of this third type of coordination is that it is much slower and inefficient with respect to communication between employees. Moreover as many more employees a company has, as many managers are needed: managers are able to supervise only a limited number of employees—> higher costs. This type of coordination also limits autonomy and participation of employees who are not involved in decision making process. - Collaboration Elements of organisational structure: Span of control: It is the number of people reporting to the next level above in the hierarchy. Narrow or wide span of control. employees—> supervisor—> manager How many people is a manager able to supervise? Nowadays we tend to have wide span of control (30/40 employees reporting to a supervisor) while in the past they used to be narrower (20 employees max per supervisor). What has changes? Nowadays we have self-directed teams, so supervisor is supplemented with other coordinating mechanisms: in this case we have formal hierarchy that plays a supporting role to standardisation and informal communication. Wider span of control possible when employees perform routine tasks, standardised skills, there are other coordinating mechanisms. Narrow span of control is necessary with new tasks, because they need coaching and with interdependent jobs. TALL HIERARCHIES: Opposed to wide span of control; needed as companies grow they either widen span of control ore increase vertical divisional structure. However as we have seen before, taller hierarchies (formal hierarchy) tend to have low quality and less timely information: people frame the information in a positive light and tend to summarise it as they pass it to the above level. Tall hierarchies # flat hierarchies were information is less manipulated. Tall hierarchy: more managers —> higher costs, hence companies try to reduce the staff responsible for making the product. Moreover another problem that might arise with tall hierarchies is that employees feel less and less engaged in their work, feeling less empowered. Due to a higher specialisation, span of control has increased in the last years. More innovative companies tend to have a less strict hierarchical structure since individual initiative is encouraged. (De)Centralisation: Centralisation: formal decision making authority is held by a small group of people generally at the top. Most of the activities of the firm are managed by the CEO. While decentralisation: managed by specific managers that directly report to the CEO. Usually smaller companies have a more centralised structure than bigger one. A centralised stricture helps the company to grow faster, but when it is big enough, a centralised structure might cause overload of work forthe CEO and inefficiency. As companies grow and get older they need more managers and a more decentralised structure substitute the old one so that decision power and authority are dispersed throughout the company. A company can have different degrees of centralisation in different areas of the company. An example are sales: sales are decentralised Formalisation: ls the degree to which companies standardise behaviour through rules and procedures. More formalised companies rely on more forms of standardisation to coordinate work. Employees have precisely defined roles. Older companies tend to be more formalised because activities become routinised. Formalisation has cons: less organisational flexibility: no space for customised response that is strictly connected to discourage organisational creativity and learning. In the long run formalisation increases job dissatisfaction and work stress. Rules and procedures become the interest of attention instead of producing a product. Departmentalisation = Types of organisational structure: Specifies how employees and their activities are grouped together. It establishes the chain of command, it encourages informal communication. Mechanistic or organic structure: tall hierarchy or flat hierarchy? - Functional: organises employees around specific knowledge or process: employees with particular skills are grouped into areas for that specific skill. Organisational units are arranged by task similarities. Usually centralised with a single accountability. Company divided into functional areas, each one carrying out its task to form together the final product. - Pros: group together people—> specialised pool of talents, increases employee identity with specialisation. Direct supervision of people with the same issues: easier and cost saving; specialisation—>technical excellence within a firm. - Cons: focus on skills rather than on company's product, lack of management expertise, lack of cooperation and coordination, people might not develop a broader understanding of the business. It is mainly used in small organisations with simple product lines. As companies start diversifying their portfolio functional structure is not sufficient anymore. - Divisional: organises employees around outputs or around geographic areas; employees could be organised around specific customer groups, around distinct outputs. Different products of the same firm are often traded differently since they have different market and a different production system. Lately companies are shifting away from geographic divisional areas due to internet and globalisation: more global clients, requests aren't as varied as they used to be. Each division contains allthe necessary resources and functions within it to support its product line or its geography. - Cons: duplication due to lack of coordination across divisions, lack of cooperation, expertise is spread across different divisions, risk of overlapping of functions. It is manly used when products need distinct product techniques. - Pros: it is outcome focused, direct employees’ attention to product and customers rather than on specialisation, it facilitates cross-functional collaboration: anyone knows what to do. This structure allows managers to know always who to blame. Specialisation + decentralised decision making - Matrix: structure which overlays two structures to leverage benefits. Several divisions which interact with functional areas common to all divisions. This structure takes place when the same importance is given to two or more dimensions (ex: product division and geographic division, project-functional matrix structure), this structure allows to_coordinate across multiple dimensions like multiple products, multiple functions, multiple locations. Pure matrix structure is rare, in that case two leaders would have the same power, indeed we are more used to seeing to one set of groups. * Pros: efficient use of resources, better communication and flexibility, focus on clients and products. * Cons: complex system that requires excessive staff, conflict among managers that share power, in general higher level of conflicts and stress, decisions right are not clear. Risk of overlapping between activities. Employees have two bosses, hence two sets of priorities: instructions are usually misaligned and employees might create confusion in reporting to two different bosses. Moreover matrix structure is often blamed of bringing accountability ambiguities—> corporate ethical misconduct. Not anyone has to report to two bosses, this is just the case of country-specific product managers. Double function, the secondary one is the vertical one. - Team-based: self-directed groups —> wide span of control with minimal supervision. Highly decentralised since day-to-day decisions are made by team members. They are self-directed teams that organise around work processes. Low formalisation: no standardisation procedures, hence very flexible—>Individual initiative is encouraged: greater autonomy. Low administration costs and quicker decision making process, the team is usually product-focused. Cons: ongoing interpersonal training costs, increasing role ambiguity, duplication of resources on top of competition across teams. *just remember that organisational culture refers to a set of shared assumptions that guide behaviours. *The organisational structure of a firm highly influences its profitability and efficiency—> Procter and gamble.