Chapter 8: Organisational structure

Chapter learning objectives

Upon completion of this chapter you will be able to:

• advise on how organisations can be structured to deliver a selected strategy
• describe Mintzberg's six organisational configurations
• describe the types of control processes that can be used (input/output and direct/indirect), emphasising the planning process
• describe how responsibility and authority for operational and strategic decisions can be vested inside organisations in general
• describe from national, international and global perspectives the opportunities and problems arising from diversification and international scale
• describe, with examples, the use of:
  • outsourcing
  • strategic alliances
  • networks
  • the virtual organisations

1 Factors affecting organisational structure

The links between strategy and structure

The influences that have a bearing on organisational structure and design include:

• strategic objectives
• nature of the environment
• diversity
• future strategy
• technology
• people.

Explanation of these influences

• The organisation's strategic objectives – if co-ordination between specific parts of the organisation is of key importance then the structure should facilitate relationships between them.
• The nature of the environment in which the organisation is operating, now and in the future. Generally, product-based structures are more flexible and are more suitable in a dynamic or complex environment where organisations have to be adaptable.
• The diversity of the organisation – the needs of a multinational are different from those of a small company.
• The future strategy – for example, if a company may be making acquisitions in the future, then adopting a divisional structure now will make the acquired companies easier to assimilate.
• The technology available – IT has a significant impact on the structure, management and functioning of the organisation because of the effect it has on patterns of work, the formation and structure of groups, the nature of supervision and managerial roles. New technology has resulted in fewer management levels because it allows employees at clerical/operator level to take on a wider range of functions.
• The people within the organisation and their managerial skills.

Different structural types (functional, divisional, matrix) werestudied in detail in paper F1 (or old syllabus 1.3). The key emphasis inP3 is matching structure with strategy.

Functional advantages and disadvantages

Functional structure

Functional structures are usually found in smaller organisations,or within individual divisions in a larger organisation with adivisional structure.

Advantages

• Pooling of expertise, through the grouping of specialised tasks and staff.
• No duplication of functions and economies of scale.
• Senior managers are close to the operation of all functions.
• The facilitation of management and control of functional specialists (suited to centralised organisations).

Disadvantages

• 'Vertical' barriers between functions, that may affect work flow (creating co-ordination problems) and information flow (creating communication problems).
• Focuses on internal processes/inputs rather than outputs such as quality and customer satisfaction through a horizontal value chain.
• Struggles to cope with change, growth and diversification.
• Senior management may not have time to address strategic planning issues.

Illustration 1 – Example of a functional structure

An example of a functional structure.

Divisional advantages and disadvantages

Divisional structures

Where the functionally structured business grows bydiversification, a functional structure will be inappropriate, and thedivisional structure based on products, services or geographical areasis likely to be adopted.

Advantages

• Flexibility – divisions can be closed or created to respond to changes in organisational strategy.
• Specialist expertise is built up relating to a particular product or market segment.
• Managers of divisions have a greater personal interest in the strategy for their own division.
• The enabling of performance management (and hence control) of businesses by head office from a distance.

Disadvantages

• High central management costs.
• Duplication of effort with all functions represented within divisions.
• Vertical barriers between divisions that may prevent information sharing and co-operation between divisions.
• Strategic management can be a complex hierarchical process.

Illustration 2 – Illustration of a divisional structure

Factors affecting organisational structure

Each division is responsible for its own functions in relation to arelated group of products. Thus, each division may be regarded as aStrategic Business Unit (SBU). In this organisation:

• corporate strategic planning takes place at central board level
• divisional planning is concerned with developing a portfolio of products
• operational planning is at the functional level within divisions.

Different types of divisional structure

(1) Product divisions

(2) Geographical divisions

With geographic divisionalisation, theenterprise is organised by regions or countries. The major internationalaccountancy firms tend to follow this structure. A possible roadtransport company structure is outlined below:

Carried to completion, the geographic division becomes arelatively complete administrative unit in itself. The geographic unitcan itself be organised by function or product. The effect of thegeographic division at company level is to draw a territorial boundaryaroundthese basic components.

(3) Holding company structure

The holding company (group) structure is aradical form of divisionalisation. Subsidiaries are separate legalentities. The holding company can be an organisation with a permanentinvestment or one that buys and sells businesses. In its most extremeform, a holding company is really an investment company. It may simplyconsist of shareholdings in a variety of individual, unconnectedbusiness operations over which it exercises little or no control.

An example of a holding company structure is shown below.Central corporate staff and services may be very limited. The essentialdifferentiating feature for a holding company is the extent of theautonomy of the business units, particularly over strategic decisions.The advantages that a holding company can offer are based on the ideathat the constituent businesses will operate to their best potential ifleft alone, particularly as business environments become more turbulent.

There are other organisational advantages of the holding companystructure. For example:

• the organisation does not have to carry the burden of a high central overhead, since the office staff of the parent is likely to be quite small
• the holding company can spread the risk over many business ventures
• divestment of individual companies is easy.

Illustration 3 – Illustration of a matrix structure

Example of a matrix organisation

A multinational company produces three sets of product ranges(Product A, Product B and Product C) and sells the product in threegeographical areas (Europe, USA and South America). The management ofeach product range is equally important, as is the responsiveness to theneeds of the different geographical areas. The product managers andarea managers have equal weight. Thus the manager of the USA area mustliaise with the managers of Product A, B and C but does not haveauthority over them or vice versa.

Matrix advantages and disadvantages

Matrix organisations

The matrix structure is a two-dimensional structure combining both afunctional and divisional structure, for example product, service orgeographical divisions and functional areas, in order to capitalise oncombinations of expertise that exist in the organisation, but which arestifled by normal hierarchical structures. Matrix structures:

• organise horizontal groupings of individuals or units into teams that operationally deal with the strategic matter at hand
• are organic with open communications and flexible goals
• may be established as a permanent structure or be temporary to address a particular strategic commitment, such as an export research group to study international markets in a multi-product trading company might establish, or a unique product group for a limited-duration contract
• can creatively serve the needs of strategic change that otherwise might be constrained by more traditional structures
• retain functional economies and product, service or geographical co-ordination
• can improve motivation through:
  • people working participatively in teams
  • specialists broadening their outlook
  • encouraging competition within the organisation
• may lead to problems of dual authority with conflict between functional and product or geographical managers leading to individual stress arising from threats to occupational identity, reporting to more than one boss and unclear expectations
• may incur higher administrative costs.

Test your understanding 1

Describe four alternative organisation structures suitable for multinational organisations.

Centralisation v decentralisation

One factor in determining the flexibility of a structure is thelevel at which decisions are made. In centralised organisations theupper levels of an organisation's hierarchy retain the authority to takemost decisions. The choice of organisation will depend to a certainextent on the size of the organisation and the scale of its activities,such that the functional structure is likely to be centralised, and thedivisional structure is likely to be decentralised. Decentralisation:

• is more likely in large-scale organisations
• gives authority to make specific decisions to units and people at lower levels in the organisation's hierarchy
• allows front-line staff to respond flexibly to customer demands without reference upwards to senior management
• allows local management (of dispersed units) to respond flexibly to local market conditions without reference upwards to head office.

Advantages and disadvantages

Research shows that centralisation of strategic decisions anddelegation of tactical and operating decisions can be very effective.Advantages of centralisation are:

• co-ordinated decisions and better management control, therefore less sub-optimising
• conformity with overall objectives – goal congruence is more likely to be achieved
• standardisation, e.g. variety reduction and rationalisation
• balance between functions, divisions, etc. – increased flexibility in use of resources
• economies of scale – general management, finance, purchasing, production, etc.
• top managers become better decision makers, because they have proven ability and they are more experienced
• speedier central decisions may be made in a crisis – delegation can be time-consuming.

There are a number of disadvantages.

• Those of lower rank experience reduced job satisfaction.
• Frequently, senior management do not possess sufficient knowledge of all organisational activities. Therefore, their ability to make decisions is narrowed and delegation becomes essential.
• Centralisation places stress and responsibility onto senior management.
• Subordinates experience restricted opportunity for career development toward senior management positions.
• Decisions often take considerable time. This restricts the flexibility of the organisation, as well as using valuable time. In addition, slower decision making impairs effective communication. Such communication problems may affect industrial relations.

2 Mintzberg's structural configurations

Building blocks and co-ordinating mechanisms

Mintzberg argues that the organisation structure exists toco-ordinate the activities of different individuals and work processesand that the nature of co-ordination changes with the increasing size ofan organisation. He suggests that there are six main types of structurewith configurations based on the following building blocks

• strategic apex – higher levels of management
• technostructure – provides technical input that is not part of the core activities
• operating core – members involved in producing goods and services
• middle line – middle and lower-level management
• support staff – support that is not part of the operating core
• ideology – beliefs and values.

Linking mechanisms

The detailed configuration of the organisation is also made up of linking (co-ordinating) mechanisms:

• a formally determined hierarchy of decision levels, power and responsibility
• a formal flow of information around the organisation
• an informal communication network, the 'grapevine'
• formal work constellations whereby sections of the organisation set up and operate formal co-ordinating mechanisms such as working parties and committees
• a system of ad hoc decision processes whereby the organisation responds in a particular manner when it faces a problem.

Mintzberg's configurations

Explanation

The importance and relative size of these building blocks will varywith organisations and the configuration chosen to support theorganisation's strategies will depend of the mix of building block andco-ordinating mechanism. Mintzberg discusses six possibleconfigurations, related to the environment, the type of work and thecomplexity of tasks facing the organisation. These are outlined below.

• Simple structure. The strategic apex, possibly consisting of a single owner-manager in a small business, exercises direct control over the operating core, and other functions are pared down to a minimum. There is little or no middle line, and technostructure and support staff are also absent. Co-ordination is achieved by direct supervision, so that this structure is flexible, and suited to dynamic environments.
• Machine bureaucracy, which arises from the power of the technostructure. The emphasis is on regulation: bureaucratic processes govern all activities within the organisation. This means that speedy reaction to change is impracticable, and this arrangement is best suited to simple, static environments.
• Professional bureaucracy, which arises from the predominance of the operating core. This type of structure commonly arises in organisations where many members of staff have a high degree of professional qualification (for example the medical staff in a hospital or the analysts and programmers in a software developer).
• Divisionalised form, which is characterised by a powerful middle line in which a large class of middle managers each takes charge of a more or less autonomous division. Depending on the extent of their autonomy, managers will be able to restrict interference from the strategic apex to a minimum.
• The 'adhocracy', a complex and disorderly structure in which procedures and processes are not formalised and core activities are carried out by project teams. This structure is suited to a complex and dynamic environment. There are two types of adhocracy:
  • operating adhocracy – innovates and solves problems directly on behalf of its clients. Admin work and operating work are blended together (consultancy firm, advertising agency)
  • administrative adhocracy – undertakes projects to serve itself, so it has its own operating core (research department, hi-tech companies).
• Missionary organisations, organisations formed on a basis of a common set of beliefs and values shared by all workers in the organisation. Firm belief in such norms implies an unwillingness to compromise or change, and this means that such organisations are only likely to prosper in simple, static environments.

Link between the structures and the building blocks

As the business and its structure grows, different building blocks develop and can become more important:

Example of the development of the blocks

In a simple structure there is unlikely to be any other blocksother than the strategic apex (probably a single entrepreneur or smallmanagement team) and the operating core. There will be littledecentralisation and all of the power will focus on the strategic apex.The strategic apex will provide quick decision making and the operatingcore will have little power or involvement. There will be very few rulesor controls on the strategic apex.

However, as the organisation grows it will require greater rulesand controls. Standardised practices will appear. This will develop thetechnostructure. The technostructure might, for example, be theaccounting function. They will create standard cost cards forproduction, they will impose limits on spending, they will implementchecks and internal controls etc. This will be done in order to achievestandardisation of performance and output and to improve the efficiencyof operations as tasks become repetitive. The strategic apex willdelegate power to the technostructure who in turn will impose controlsand limits of the strategic apex. In this way the technostructurebecomes the key building block as the firm becomes a machinebureaucracy.

As the business continues to grow and develop, further blocks willdevelop and some will begin to exert more control over the business thanothers.

Combining structures

Care should be taken when combining structures or imposingstructures on new business units, as conflicts might arise between thedifferent building blocks. For example, if a business with a machinebureaucracy (and therefore lots of rules, standardisation and controls)were to acquire an adhocracy (where the balance between the blocks ismore even, and there is flexibility in the application of rules andcontrols), there may be difficulties both in achieving businessobjectives and in motivating staff.

3 Planning and control processes

Classification of control processes

Organisations and their strategies are managed and controlled bythe formal and informal processes at work within them. There are anumber of different possible processes, any or all of which may operatealongside one another. These processes may be:

• formal or informal
• focused on inputs or on outputs
• direct or indirect processes.

Classification of control processes

These processes may be:

• formal processes that are structured and documented
• informal
• focused on the control of resources, or inputs, such as finance or staff
• result-oriented, based on meeting targets or objectives, that is on outputs
• direct processes, formally monitoring and controlling inputs or outputs
• indirect processes, where the organisation's infrastructure such as hierarchies, relationships and culture are designed to produce certain behaviour in the organisation.

Illustration 4 – Planning and control processes

Formal control process

Examples of control processes include:

• 'all enquiries are to be processed within 48 hours of receipt'
• quality sampling to ensure process meets specification
• the budgeting process.

Generic control processes

A number of generic processes are used within organisations to ensure the strategy is delivered.

• Direct supervision – hands-on control of inputs by a small number of senior managers. This is typically found in small organisations, and is not possible in large or complex organisations.
• Planning processes, that also control inputs by monitoring their utilisation. This could include the standardisation of work processes, for example.
• Performance management using targets based on key performance indicators. In large organisations these targets are usually set by the centre based on required outputs. Management of business units is hands-off, or indirect, with business units allowed to achieve the targets in their own way.
• Internal market processes such as transfer pricing and the use of service level agreements between individual business units. This method is particularly common with services such as information technology.
• The culture of the organisation, where a culture is deliberately developed by means such as training and personal development in order to indirectly encourage behaviour required by the strategy. This may have an impact both on the use of inputs and the results. While this can be very effective, once established the culture may be difficult to change if new behaviour is required at a later date.
• Self-control by individual employees – where leadership and support frameworks are used to encourage individuals to work independently and use their initiative to produce particular results.

Planning processes

Organisations commonly manage strategy implementation throughformal processes, using plans to control the deployment of resources. Aparticularly important process is the use of budgets to develop plansfor the allocation and use of financial resources against which actualuse is monitored.

Although they are designed to be fixed and clearly laid down, it isimportant that planning systems are flexible enough to allow forvariations in the needs of different parts of the business and changingdemands on departments and business units due to external or internaldevelopments. For this reason bottom-up planning is used to allowbusiness units to have an impact on the plans, generally by a process ofnegotiation with the centre, to reach a balance between the needs ofindividual units and those of the organisation as a whole.

There are several possible approaches to the development of plans and budgets.

• Centralised, top-down allocation of resources based on a particular formula, which may be combined with bottom-up planning to finalised resource plans.
• The use of computerised planning systems such as enterprise resource planning (ERP) systems that enable integrated management of all parts of the business.
• The implementation of standardised work processes such as quality management systems or through the use of IT systems designed to ensure processes are carried out in a particular way.

Illustration on planning and control processes

Production control processes

Control processes involved in production include:

• cost recording
• variance analysis
• lead times monitoring
• quality control inspections
• monitoring of rejection levels
• achievement of delivery times.

Test your understanding 2

Classify the six types of control processes into the following diagram:

4 Managing international companies

Ansoff's matrix was discussed in Chapter 6 as a model for exploringdirections for growth. In this section global strategies are consideredand their implications for structure.

Reasons why companies pursue a strategy of international diversification

• There are increasing opportunities from global markets, either where products themselves are becoming global or where the organisation's customers operate on a global basis.
• If local markets are saturated or limited, it may be possible to sell products into new locations using existing skills and infrastructure.
• Risks may be spread as poor results in one market due to local economic conditions can be balanced against good conditions in another.
• It may be possible to take advantage of particular aspects of different locations and markets such as low labour costs.

Driving and restraining forces for international expansion

Driving forces:

• Technology
• Culture
• Market needs
• Cost
• Free markets
• Economic integration
• Peace/political stability
• Management vision
• Strategic intent
• Global strategy and action

Restraining factors:

• Culture
• Market differences
• Cost
• National controls
• Nationalism
• War
• Management myopia/short-sightedness
• Organisation history
• Domestic focus

Possible strategies for geographical diversification

• A multi-domestic strategy where products and services are tailored to individual countries and markets, with many activities specific to particular countries.
• A global strategy, where standard products are sold in different countries.
• A balance between the two above strategies, where products are largely global but have minor modifications to suit the requirements of individual countries. There will generally be a trade-off between scale economies and the need to tailor products or services to local markets.

The concept of globalisation

Globalisation, if it can be seen as a single concept at all, is avery complex one. The term provides a collective label for a wholeseries of trends and changes related to the significance of geography inshaping organisations and the interactions between them. For example,many local markets are globalising as their governments reduce importrestrictions and tariffs, or as other countries re-open traderelationships. This not only means that goods and services becomeavailable from other parts of the world, but that the nature ofcompetition changes from local to global, in turn affecting the way thatlocal firms must operate in order to survive and thrive.

A somewhat different type of globalisation concerns thehomogenising of tastes across geographies. Food, once highly local instyle, has become more global in many respects. This is not simply whathas been called the culinary imperialism of America being rolled outacross the world via Coca-Cola and McDonalds. The changing economics oftransportation and increased experience of foreign travel have enabledconsumers to break away from largely national determinants of taste, andre-segment across countries on more individual lines. It is not thateveryone is moving to a single global standard, but that shared tastestranscend national borders. Some consumers are moving towards atraditional Italian diet whether they live in London, Toronto orStockholm, while others eat increasing quantities of Chinese stylestir-fries, whether in New York, Adelaide or Madrid.

In this context globalisation simply means that geographic location is no longer the key determinant of behaviour.

Other forms of globalisation can also be distinguished. More andmore firms have a presence in multiple locations across the world,rather than simply exporting from a home base. But, perhaps moreimportantly, as such firms seek to standardise approaches or gainpurchasing economies, they increasingly demand co-ordinated,multi-country support from their suppliers. This requires the suppliersnot only to be present in different parts of the world, but also tomanage the relationships between their local units in new ways.

Multinational and global structures

The critical issue in deciding global structure is the extent towhich local independence or responsiveness should take precedence overglobal co-ordination.

• The different types of multinational structure are shown in the diagram below:

International divisions

• Here the home-based structure may be retained at first, whether functional or divisional, but the overseas interests are managed through a special international division.
• The international subsidiaries will draw on the products of the home company and gain advantage from this technology transfer.
• The disadvantage is a lack of local tailoring of products or technology.
• Such structures tend to work best where there is a wide geographical spread but quite closely related products.

International subsidiaries

• Are geographically based and operate independently by country.
• In these companies virtually all the management functions are nationally based, allowing for higher degrees of local responsiveness.
• The control of the parent company is likely to be dependent on some form of planning and reporting system and perhaps an ultimate veto over national strategies, but the extent of global co-ordination is likely to be low.
• The main problem lies in failing to achieve synergy between business units.

Global product companies

• Represent a move away from the international divisional or subsidiary structure to an integrated structure.
• Here the multinational is split into product divisions, which are then managed on an international basis.
• The logic of such an approach is that it should promote cost efficiency (particularly of production) on an international basis, and should provide enhanced transfer of resources (particularly technology) between geographical regions.
• The international development of many Japanese companies in electronics and car manufacture has been managed in this way.
• Research has shown that the theoretical benefits of the global product structure are not always realised. Although cost efficiency is improved, it does not appear that technology transfer is necessarily enhanced. Also, while the structure is well suited to promoting defensive or consolidation strategies, it does not seem to meet the expected benefits of better strategic planning and is not suited to the promotion of aggressive or expansionist strategies.

Transnational corporations

• Are matrix-like structures that attempt to combine the local responsiveness of the international subsidiary with the advantages of co-ordination found in global product companies.
• A major strength is in transferring knowledge across borders.
• The key lies in creating an integrated network of interdependent resources and capabilities.

Potential problems for transnational corporations

• Managers must be able and willing to work hard to simultaneously improve their specific focus (e.g. region, product, function) as well as looking at the global picture.
• The same control problems as found in matrices.

5 External relationships

Types of external relationships

Relationships with other organisations can be as important inensuring success as the internal structure. There are a number of formsthat these relationships can take, including:

• outsourcing, where products and services, such as IT, that were previously provided within the organisation are supplied by outside organisations
• strategic alliances, co-operative business activities, formed by two or more separate organisations for strategic purposes
• networks, relationships outside the traditional organisation boundaries
• virtual organisations, which are constructed from administratively and geographically distributed business units or organisations that have rejected the traditional work patterns of bringing people to one location for a fixed period, and organising them into departments and functions.

Outsourcing

Outsourcing has become increasingly common in organisations. Thestrategic arguments concerning outsourcing were discussed in chapter 6.The key aspects were:

Advantages and disadvantages of outsourcing

Advantages

• The main perceived benefit of outsourcing is reduced cost. Using external services can be much cheaper than employing in-house IT staff and not using them fully or efficiently.
• It is used to overcome skills shortages. For example, the IT function of the organisation may not have all the resources necessary to carry out the full range of activities required, or requirements of the organisation might not justify an in-house IT department, particularly in the areas of systems development. Facilities management specialists will have a larger pool of technical staff than the organisation.
• Outsourcing can bring flexibility. Using external providers allows an organisation to be flexible in its choice of services and it can buy in services as and when it needs them.
• It is argued that outsourcing allows organisations to focus on their core skills and activities where they have a clear competitive advantage, and sub-contract non-core activities. Outsourcing frees up management time, and allows management to concentrate on those areas of the business that are most critical. However, defining core activities can be problematic. Different definitions include the following activities:
  • activities critical to the performance of the organisation
  • activities that create current potential for profits and returns (or non-financial benefits, in the case of public sector organisations)
  • activities that will drive the future growth, innovation or rejuvenation of the organisation.
• Outsourcing is not without risks as there is no direct management control over the organisation providing the services.

Disadvantages

• Dependency on supplier for the quality of service provision. When a company cedes control to a single supplier, it becomes dependent on the quality of the supplier's skills, management, technology and service know-how.
• A risk of loss of confidentiality, particularly if the external supplier performs similar services for rival companies.
• Difficulties in agreeing and enforcing contract terms.
• The length of contract (the risk of being 'locked in').
• Lost in-house expertise and knowledge.
• A loss of competitive advantage (if the function being outsourced is a core competence, they must not be outsourced).
• Outsourcing might be seen by management as a way of off-loading problems onto someone else, rather than as a way of managing them constructively.

The notion of working 'in partnership', which is encouraged byvendors, is problematic. Firstly, it should be remembered that clientorganisations and vendors are usually both commercial organisations withseparate income statements and balance sheets, and different goals andobjectives. While each organisation may wish for an effective andsuccessful partnership, problems arise when the outsourcing companyfails to realise the expectations of the client. A common example is thesituation whereby the vendor imposes additional fees for work that wasnot in the original contract.

The client organisation should have a management team withresponsibility for the oversight of the contract, to ensure that servicelevels are met and that any problems are resolved. Outsourcing can be arisky option, and it is essential that the risks should be properlycontrolled. Equally, the internal controls should be as effective withoutsourcing as they would be if the function operated in-house.

Test your understanding 3

A company is considering whether to outsource its IT provision.

Suggest some areas of conflict between the business and its supplier.

Strategic alliances

Strategic alliances can take many forms, from loose informalagreements, partnerships and formal joint ventures to contracting outservices to outside suppliers.

• Strategic alliances are co-operative business activities, formed by two or more separate organisations for strategic purposes.
• Ownership, operational responsibilities, financial risks and rewards are allocated to each member, while preserving their separate identity and autonomy.
• Strategic alliances are long-term collaborations bringing together the strengths of two or more organisations to achieve strategic goals.
• For example, IBM formed links with Ricoh for distribution of low-end computers. This allowed them to move into the Japanese market quickly, inexpensively and with a relatively high prospect for success.
• Alliances can also help result in improved access to information and technology.
• Some organisations form alliances to retain some of the innovation and flexibility that is characteristic of small companies. They are balancing bureaucracy and entrepreneurship by forming closer working relationships with other organisations.
• Strategic alliances may be used to extend an organisation's reach without increasing its size.
• Other alliances are motivated by the benefits associated with a global strategy, especially where the organisation lacks a key success factor for some market. This may be distribution, a brand name, a selling organisation, technology, R&D or manufacturing capability. To remedy this deficiency internally would often require excessive time and money.

Networks

Outsourcing and strategic alliances are examples of ways in whichan organisation depends on relationships with other externalorganisations. There are a number of other important forms of networks.

• Networks of experts which come together for a particular project or purpose, either on a short- or long-term basis.
• Teleworking, where individuals are based in different locations but work together through the use of information technology.
• One-stop-shops, where a group of organisations are co-ordinated centrally so that there is one contact point for the customer with the aim of providing a comprehensive and seamless service.
• Service networks, where the members of the network provide services to customers through any other members of the network.

Illustration 5 – External relationships

Example of a successful network – Amazon

Amazon is now one of the best known on-line retailers. Amazonoperates its website but relies on external book publishers and othersuppliers, book warehouses, couriers and credit card companies todeliver the rest of the customer experience. These partners are alsoexpected to provide Amazon with information on, for example, stockavailability, delivery times, promotional material, etc. The customerfeels that they are dealing with one organisation, not many. Inaddition, the Amazon Marketplace allows other organisations andindividuals to sell their goods through the Amazon website, and itsAssociates system provides a means for others to earn referral fees bydirecting customers from their own website to Amazon products.

Virtual organisations

Virtual organisations are the most extreme form of outsourcing,alliances and networks. The core organisation carries out very fewactivities and as much work as possible is carried out by otherorganisations. Virtual organisations have a number of characteristics.

• Virtual organisation entails the development of relationships with a broad range of potential partners, each having a particular competency that complements the others.
• Virtual organising capitalises on the mobility and responsiveness of telecommunications to overcome problems of distance.
• Timing is a key aspect of relationships, with key players using responsiveness and availability to decide between alternatives.
• There must be trust between players separated in space for virtual organisation to be effective.
• Most virtual organisations have an operating core.

Example of a virtual organisation

Test your understanding 4

How important do you feel IT is to developing a virtual organisation?

6 Chapter summary

Test your understanding answers

Test your understanding 1

The following organisational structures would be suitable for a multinational company.

• International divisional structure – this structure consists of a centralised parent company in one country and functions such as sales and marketing, production, distribution and research and development are established in the various countries where the company has divisions.
• Geographical structure – this structure follows on from the international divisional. In this instance the company is divided up into regions. The long-term strategic plan is formulated by headquarters; the short-term decisions/strategic plan are taken care of in the region. If the region is large, further sub-division may take place (e.g. by product).
• Product-based structure – here, the regions will not be based on geographical area but on products. The divisions are given responsibility for profits. The regions, although defined by products, may be split down into more manageable sub-divisions by geographical area.
• Matrix structure – this structure aims to balance product needs and geographical needs. Functional reporting may also be introduced making the structure more complicated.

Test your understanding 2

Test your understanding 3

The organisation might be interested in ensuring that its IS/ITfunction remains dynamic, and responds to changes in IT technology andchanges in its information systems requirements.

The external supplier, on the other hand, might be more interestedin stability and minimal change, in order to keep costs under controland avoid the risks that inevitably arise with system changes andupgrades.

Test your understanding 4

The idea of the virtual 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 teamworking
• the development of a greater sense of collective responsibility
• the creation of more collaborative relationships among co-workers.

A key element in supporting the transformation is IT.

• 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.

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