Chapter 4: Changes in business structure and management accounting

Chapter learning objectives

Upon completion of this chapter you will be able to:

  • identify and discuss the particular information needs of organisations adopting a functional, divisional or network form and the implications for performance management
  • discuss the concept of business integration and the linkages between people, operations, strategy and technology
  • assess the influence of business process re-engineering (BPR) on systems development and improvements in organisational performance
  • analyse the role that performance management systems play in business integration using models such as the value chain and McKinsey's 7S's
  • identify and discuss the required changes in management accounting systems as a consequence of empowering staff to manage sectors of a business.

1 Organisational forms

1.1 Introduction

Different types of organisational structure were studied in paper F1 and P3.

In P5 you could be asked to discuss the information needs oforganisations adopting a particular structure and/or the implications ofa particular structure for performance management.

1.2 Functional structure

What is a functional structure?

  • The organisation is divided into activities or functions.
  • A manager is placed in charge of each function.
  • A narrow band of senior management co-ordinates the functions and retains the authority to make most of the decisions, i.e. decision making tends to be centralised.

Information needs of a functional structure

The centralised structure results in:

  • Data being passed from the functional level to the upper level.
  • Data is then aggregated and analysed at the upper level for planning and control purposes.
  • Feedback is then given at functional level.

Test your understanding 1

Discuss ONE potential advantage and ONE disadvantage of a functional structure for performance management.

1.3 Divisional structure

What is a divisional structure?

  • A divisional organisation is divided along product or geographical lines.
  • Divisional structures tend to be decentralised, i.e. the divisional managers have the authority to make most of the decisions.

Information needs of a divisional structure

The decentralised structure results in:

  • Information being required lower down the hierarchy.
  • For example, information will be required by the divisions for budgeting purposes.

Test your understanding 2

Discuss the potential advantages and disadvantages of a divisional structure for performance management.

Note: Divisional performance appraisal will be reviewed in detail in chapter 8.

Test your understanding 3

A Inc is a diversified business with strategic business units(SBUs) in very different business areas. It is organised with each SBUbeing a separate division.

B Inc is a multinational with different parts of the supply chain in different countries. It is also divisionalised.

Comment on the differences in performance management issues for each company.

1.4 Network (virtual) structures

Illustration 1 – Network structures

Many internet companies are examples of networks – Amazon being perhaps one of the best known on-line retailers.

  • Amazon operates its website but relies on external book publishers, book warehouses, couriers and credit card companies to deliver the rest of the customer experience.
  • These partners are also expected to provide Amazon with information on, for example, stock availability, delivery times, promotional material, etc.
  • The customer feels that they are dealing with one organisation, not many.

Information needs of a network structure

With network structures targeted information is needed to make decisions:

  • Each party needs to have feedback as to how it is performing in relation to others.
  • Those responsible for regulating the performance of the organisation will also need information for decision making to enable them to take resource allocation decisions.
  • Control is normally exercised via shared goals and, in the case of inter-organisational collaborations, contractual agreements.

Test your understanding 4

The idea of the network organisation emphasises:

  • the decentralisation of control
  • the creation of more flexible patterns of working
  • a greater empowerment of the workforce
  • the displacement of hierarchy by team working
  • the development of a greater sense of collective responsibility
  • the creation of more collaborative relationships among co-workers.

Comment on the importance of information to such an organisation.

2 Business integration

2.1 What is business integration?

Business integrationmeans that all aspects of the business must be aligned to secure themost efficient use of the organisation's resources so that it canachieve its objectives effectively.

Modern writers such as Hammer and Davenport arguethat many organisations have departments and functions that try tomaximise their own performance and efficiency at the expense of thewhole.

Their proposed solution is twofold:

(1)Processes need to be viewed as complete entities that stretch from initial order to final delivery of a product.

(2)IT needs to be used to integrate these activities.

Four aspects in particular need to be linked.

  • people
  • operations
  • strategy
  • technology.

Test your understanding 5

XYZ has a conventional functional structure. Assesshow many different people in the organisation may have to deal withcustomers, and the problems this creates.

There are two frameworks for understanding integrated processes and the linkages within them:

  • Porter's value chain model.
  • McKinsey's 7S model

2.2 Porter's value chain

The value chain is the linked set of value-creating activities fromthe acquisition of raw materials to the delivery of the final productto the customer.

  • Margin, i.e. profit will be achieved if the customer is willing to pay more for the product/service than the sum of the costs of all the activities in the value chain.
  • Value chain analysis aims to maximise margin by understanding how the value chain activities are performed and how they interact with each other.
  • There are five primary activities and four support activities.

Illustration 2 - Value chain activities

Primary activities

Support activities

Illustration 3 - Value chain

Value chain analysis helps managers to decide how individualactivities might be changed to reduce costs of operation or to improvethe value of the organisation's offerings. Such changes will increasemargin.

For example, a clothes manufacturer may spend large amounts on:

  • buying good quality raw materials (inbound logistics)
  • hand-finishing garments (operations)
  • building a successful brand image (marketing)
  • running its own fleet of delivery trucks in order to deliver finished clothes quickly to customers (outbound logistics).

All of these should add value to the product, allowing the company to charge a premium for its clothes.

Another clothes manufacturer may:

  • reduce the cost of its raw materials by buying in cheaper supplies from abroad (inbound logistics)
  • making all its clothes using machinery that runs 24 hours a day (operations)
  • delaying distribution until delivery trucks can be filled with garments for a particular location (outbound logistics).

All of these should enable the company to gain economies of scale and to sell clothes at a cheaper price than its rivals.

Evaluation of the value chain

Advantages of the value chain model

  • Particularly useful for focusing on how each activity in the process adds to the firm's overall competitive advantage.
  • Emphasises critical success factors (CSFs) within each activity and overall.
  • Examines both primary activities (e.g. production) and support activities, such as HRM, which may otherwise be dismissed as overheads.
  • Highlights linkages between activities.

Disadvantages of the value chain model

  • It is more suited to a manufacturing environment and can be hard to apply to a service provider.
  • It is intended as a quantitative analysis tool but this can be time consuming since it often requires recalibrating the system to allocate costs to individual activities.

Test your understanding 6

Many European clothing manufacturers, even those aiming at the topend of the market, outsource production to countries with lower wagecosts such as Sri Lanka and China.

Comment on whether you feel this is an example of poor integration (or poor linkage in Porter's terminology).

Uses in performance management

  • As well as being part of strategic analysis to identify strengths or weaknesses, the value chain can be used for ongoing performance management as targets can be set and monitored for the different activities.
  • This enables the performance of the overall process to be assessed and managed.

Question focus: Now attempt question 6 from chapter 13.

2.3 McKinseys 7s model

The McKinsey 7S model describes an organisation as consisting of seven interrelated internal elements.

A change in one element will have repercussions on the others. Allseven elements must be aligned to ensure organisational success, e.g:

  • to determine how best to implement a strategy
  • to improve organisational performance
  • to examine the effects of future changes within a company
  • to align departments or processes during a merger or acquisition.

McKinseys 7S model

There are three hard elements of business behaviour

  • Strategy - What will the company do?
  • Structure - How should it be organised?
  • Systems - What procedures need to be in place (few or many)?

Hard elements are easier to define or identify and management can directly influence them.

There are four soft elements

  • Staff - What staff will we require?
  • Style - What management style will work best?
  • Shared values - What culture (attitudes) will be most suitable?
  • Skills - What skills will our staff/company need?

Soft elements are more difficult to describe, less tangible and are more influenced by culture.

3 Business Process Re-engineering (BPR)

3.1 What is BPR?

BPR is the fundamental rethinking and radical redesign of business processesto achieve dramatic improvements in critical, contemporary measures ofperformance, such as cost, quality, service and speed. Improved customersatisfaction is often the primary aim.

Illustration 4 - IBM and BPR

Prior to re-engineering, it took IBM Credit between one and twoweeks to issue credit, often losing customers during this period.

  • On investigation it was found that performing the actual work only took 90 minutes. The rest of the time (more than seven days!) was spent passing the form from one department to the next.
  • The solution was to replace specialists (e.g. credit checkers) with generalists – one person (a deal 'structurer') processes the entire application from beginning to end.
  • Post re-engineering, the process took only minutes or hours.

Test your understanding 7

A business process is a series of activities that are linkedtogether in order to achieve given objectives. For example, materialshandling might be classed as a business process in which the separateactivities are scheduling production, storing materials, processingpurchase orders, inspecting materials and paying suppliers.

Suggest ways in which materials handling might be re-engineered.

Features of a re-engineered process

The following are common features of re-engineered processes:

  • several jobs are combined into one
  • workers make real decisions
  • work is performed where it makes most sense
  • checks and controls are reduced
  • reconciliation processes are reduced
  • a case manager provides a point of contact.

3.2 The influence of BPR on organisational performance

  • Despite some success stories, e.g. at IBM and Ford, BPR became unpopular in the late 1990s due to some widely discussed failures.
  • Numerous organisations have attempted to redesign their business processes but have failed to enjoy the enormous improvements in organisational performance that were promised.
  • The key to realising these improvements in performance seems to be continuous learning. As problems emerge, they must be identified, analysed and communicated in order to improve the future success rate of BPR.

Advantages and disadvantages of BPR

Advantages of BPR

  • BPR revolves around customer needs and helps to give an appropriate focus to the business.
  • BPR provides cost advantages that assist the organisation's competitive position.
  • BPR encourages a long-term strategic view of operational processes by asking radical questions about how things are done and how processes could be improved.
  • BPR helps overcome the short-sighted approaches that sometimes emerge from excessive concentration on functional boundaries. By focusing on entire processes the exercise can streamline activities throughout the organisation.
  • BPR can help to reduce organisational complexity by eliminating unnecessary activities.

Criticisms of BPR

  • BPR was sometimes seen (incorrectly) as a means of making small improvements in existing practices. In reality, it should be a more radical approach that questions whether existing practices make any sense in their present form.
  • BPR was often perceived (incorrectly) as a single, once-for-all cost-cutting exercise. In reality, it is not primarily concerned with cost cutting (though cost reductions often result), and should be regarded as on-going rather than once-for-all. This misconception often creates hostility in the minds of staff who see the exercise as a threat to their security.
  • BPR requires a far-reaching and long-term commitment by management and staff. Securing this is not an easy task, and many organisations have rejected the whole idea as not worth the effort.
  • In many cases business processes were not redesigned but merely automated.
  • In some cases the efficiency of one department was improved at the expense of the overall process. To make BPR work requires a focus on integrated processes (as discussed above) that often involves obliterating existing processes and creating new ones.
  • Some companies became so focused on improving internal processes that they failed to keep up with competitors' activities in the market.

Most companies are now more likely to talk about 'business process redesign' instead.

3.3 The influence of BPR on systems development

BPR results in more automation and greater use of IT/IS to integrate processes.

Some of the key technologies that allow fundamental shifts in business operations to occur are:

  • shared database access from any location
  • expert systems (a database system providing expert knowledge and advice) to devolve expertise
  • powerful communication networks for remote offices
  • wireless communication for on-the-spot decision making
  • tracking technology for warehouses and delivery systems
  • internet services to re-engineer channels of distribution.

Question focus: Now attempt question 7 from chapter 13.

4 Staff empowerment

4.1 Introduction

Empowerment is the delegation of certain aspects of business decisions to those lower down in the hierarchy.

For example, customer service staff may have the discretion to issue on-the-spot refunds or discounts.

4.2 Changes to management accounting systems as a result of staff empowerment

Characteristics of the information needs of an empowered organisation.

  • There may have to be a budget for each empowered team of members of staff.
  • Transparency and immediacy.
  • Common definitions to allow comparison across the organisation.
  • Mixture of financial and non-financial information.
  • Relevant to each empowered team of members of staff.

If staff are empowered to manage sectors of a business thentypically there will need to be a number of changes in the managementaccounting system.

  • These individuals or teams will need targeted information to make decisions.
  • Individuals and teams will need feedback on their performance.

Chapter summary

Test your understanding answers

Test your understanding 1

One advantage of a functional structure for performancemanagement is that it is easier to control the performance of variousfunctions due to the centralised approach taken.

One disadvantage of a functional structure for performancemanagement is that it is difficult to assess the performance ofindividual products or markets and it is therefore unsuitable fordiversified organisations.

Test your understanding 2

Test your understanding 3

A Inc

  • Given that business units are in unrelated markets, there is likely to be more devolved management, with the use of divisional performance measures and reliance on the measurement systems, particularly financial reporting, for control.

B Inc

  • There is a need for a high level of interaction between business units, so senior management control is more important, whether in terms of standardisation or detailed operational targets.
  • The performance measurement system may aid communication between managers and provide a common language.

Test your understanding 4

Information is key to a successful network organisation:

  • this is mainly through the systems that facilitate co-ordination and communication, decision making and the sharing of knowledge, skills and resources
  • information systems can reduce the number of levels in an organisation by providing managers with information to manage and control larger numbers of workers spread over greater distances and by giving lower-level employees more decision-making authority
  • it is no longer necessary for these employees to work standard hours every day, nor work in an office or even the same country as their manager
  • with the emergence of global networks, team members can collaborate closely even from distant locations
  • information technology permits tight co-ordination of geographically dispersed workers across time zones and cultures
  • different companies can join together to provide goods and services.

Test your understanding 5

(1)Sales staff to make the original sale.

(2)Delivery staff to arrange delivery.

(3)Accounts staff chasing up payment if invoices are overdue.

(4)Customer service staff if there is a problem with the product.

Possible problems include:

  • delivery staff may be unaware of any special delivery requirements agreed by the sales staff
  • accounts staff may be unaware of any special discounts offered.
  • aggressive credit controllers could damage sales negotiations for potential new sales
  • credit controllers might not be aware of special terms offered to the client to win their business
  • customers may resent having to re-explain their circumstances to each point of contact
  • customer service may be unaware of the key factors in why the client bought the product and hence not prioritise buying.

Customer service could be improved by having one customer-facing point of contact.

Test your understanding 6

Firms following a cost leadership strategy have found thatoutsourcing to China, say, has cut costs considerably, even after takinginto account distribution costs.

Differentiators have, on the whole, found that they have savedcosts without compromising quality. Thus the apparent conflict betweenlow cost production and high quality branding has not been a problem.Furthermore the perceived quality of Chinese garments is rising withsome manufacturers claiming that quality in higher than in olderEuropean factories.

Note: Commercial awareness – given that many firms do it,be wary of criticising the approach too heavily! They must have theirreasons.

Test your understanding 7

In the case of materials handling, the activity of processing purchase orders might be re-engineered by:

  • integrating the production planning system with that of the supplier (an exercise in supply chain management (or SCM)) and thus sending purchase orders direct to the supplier without any intermediate administrative activity
  • joint quality control procedures might be agreed thus avoiding the need to check incoming materials. In this manner, the cost of material procurement, receiving, holding and handling is reduced.

Created at 5/24/2012 4:27 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 5/25/2012 12:55 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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