Organizational controls and structure in business

Introduction

Organizational structure can be defined as the formal system of task and authority relationships that control how people coordinate their actions and use resources to achieve organizational goals. (Jones, et al, 2010) [i] 

Organizational structure specifies:

The firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes; and,

The work to be done and how to do it, given the firm’s strategy or strategies

Developing an organizational structure that effectively supports the firm’s strategy is difficult, especially because of the uncertainty about the cause-effect relationship in the global economy’s rapidly changing and dynamic competitive environments. [ii] 

Organizational Controls

Organization Control includes any process designed to assure that organization plans are carried out the way they were designed. Control in the organizational context can be classified as:

1. Strategic controls

2. Financial controls

Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for conditions in external environment and the company’s competitive advantage. [iii] Strategic controls are concerned with examining the fit between:

What the firm might do (opportunities in its external environment)

What the firm can do (competitive advantages)

Financial controls, on the other hand, are largely objective criteria used to measure the firm’s performance against previously established quantitative standards.iii Financial controls have two criteria:

Accounting-based measures include:

Return on investment

Return on assets

Market-based measures include:

Economic Value Added (EVA)

Relative use of controls varies by type of strategy. Large diversified firms using a cost leadership strategy emphasize financial controls. Companies and business units using a differentiation strategy emphasize strategic controls. In relation with organizational structure, organizational controls are important to measure the effect caused by a change in the structure.

Relationships between Strategy and Structure

Strategy and structure have a reciprocal relationship. Structure flows from or follows the selection of the firm’s strategy but once in place, structure can influence current strategic actions as well as choices about future strategies.

Evolutionary Patterns of Strategy and Organizational Structure

The relationship between organization’s strategy and structure was studied extensively by Alfred D. Chandler in his legendary book Strategy and Structure: Chapters in the History of the American Industrial Enterprise. According to Chandler (1962), firms grow in predictable patterns:

First by volume

Then by geography

Then integration (vertical, horizontal)

And finally through product/business diversification

Chandler also says that a firm’s growth patterns determine its structural form. All organizations require some form of organizational structure to implement and manage their strategies. Firms frequently alter their structure as they grow in size and complexity. The three basic structure types are:

Simple structure

Functional structure

Multidivisional structure (M-form)

Global expansion structure

The following figure explains the change in organizational structure with growth and strategy.

D:Chap11graphicsMultidiv_fig 11.1.jpgD:Chap11graphicsFunctional_fig 11.1.jpgD:Chap11graphicsSimple_fig 11.1.jpg

Efficient implementation of formulated strategy

Efficient implementation of formulated strategy

D:Chap11graphicsSalesHigher_fig 11.1.jpgD:Chap11graphicsSalesLower_fig 11.1.jpg

Simple Structure

A simple structure is where the owner-manager makes all the major decisions and monitors all activities while the staff serves as an extension of the manager’s supervisory authority. (C. Levicki, 1999). This type of a structure is matched with focus strategies and business-level strategies where firms commonly compete by offering a single product line in a single geographic market.

Functional Structure

A functional structure is a design that groups people together on the basis of their common expertise and experiences or because they use the same resources. (Jones, et al, 2010) Functional structure supports use of business-level strategies and some corporate-level strategies single or dominant business with low levels of diversification.

Multi-divisional Structure

The multi-divisional structure (M-form) consists of operating divsions, each representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers. Multi-divisional structure has three major benefits:

Corporate officers are able to more accurately monitor the performance of each business, which simplifies the problem of control

Facilitates comparisons between divisions, which improves the resource allocation process

Stimulates managers of poorly performing divisions to look for ways of improving performance

International Strategies and Worldwide Structures

International strategies are becoming increasingly important for long-term competitive success in what continues to become a global economy. The following framework explains how organizations proper in a global economy:

Global expansion strategies

Global expansion strategies can be understood in terms of local responsiveness and geographical integration within the company. On the basis of these two parameters, four strategies of global expansion have been arrived at. These are:

International strategy

Multi-domestic strategy

Global strategy

Transnational strategy

International Strategy

In case of international strategy, firms decentralize all value-creation functions except for R&D and marketing.

Multi-domestic Strategy

Multi-domestic strategy is oriented towards local responsiveness by decentralizing control to subsidiaries and divisions in each country.

Global expansion Strategy

Global expansion strategy is oriented towards cost reduction, with all the principal value-creation functions centralized at the lowest cost global location.

Transnational Strategy

In a transnational strategy some functions are centralized, while others are decentralized at the global location best suited to achieving these objectives.

Transnational

Global Expansion

International integration

Multi-domestic Strategy

International Strategy

Local Responsiveness

An observation on structure and strategy

The theory developed above is only a guideline to how organizations might structure themselves in their pursuit of growth and global expansion. However, these are not universal rules and many organizations have prospered in spite of structures completely out of sync with those discussed above. Organizations can also use structures which are a hybrid of those detailed above.

This study analyses the cases of two organizations, ABB and Semco, which have used contrastingly different structures to implement their strategies.

ABB File:ABB logo.svg

“Asea Brown Boveri (ABB) is seen by more and more global business leaders as the model of the way that organizations will have to operate to thrive in the 21st century-that is, streamlined in structure, rapid in transferring information, having employees who are highly empowered, committed to continuous learning, running world-class HRD programs, and team working and networking globally.” [1] 

ABB became one of the most widely admired companies in the world, not because of its products, or its innovative technology, but because of its organizational structure. ABB prided itself on being an organization that its former CEO, Percy Barnevik, saw as being simultaneously global and local, big and small, centralized and decentralized.

Formation of ABB: Merger of Asea & Brown Boveri

ABB was created by the merger in 1987-88 of two companies whose roots lie in the nineteenth century: Asea, founded in Sweden in 1890, and Brown Boveri, established in Switzerland in 1891. The two companies were among the surge of industrial enterprises established towards the end of the 19th century to provide equipment for the rapidly expanding electrical power industry, which involved generating, transmitting, and distributing power, and using it in industrial motors.

The strategic commitment to the power industry and to a global strategy was demonstrated in a rapid series of alliances and acquisitions. These moves rapidly extended ABB’s international reach into North America and Eastern Europe. The speed with which these acquisitions were integrated into ABB was attributed to the flexibility of its new organization design.

Strategic Context

ABB’s largest business is producing and servicing the equipment for generating, transmitting, and distributing electrical power. The customers in this business are electric utilities around the world, many of which are state-owned or strongly state-regulated. Because national or local governments either directly own or indirectly control the utilities, they had a strong tendency to favor suppliers with a local manufacturing presence, both because local companies are contributing to the local economy and because they can be relied upon for servicing and replacement parts for the complex power systems, any breakdown of which can have enormous costs for local business and for the reputation of the utility. But they have also pressed suppliers to lower their prices and increase the lifetime of equipment, cutting profit margins for suppliers that are unable to achieve greater efficiency in production.

ABB is also a world leader in rail transportation systems, such as locomotives, light rail vehicles, and signaling. Again, this is a business in which rail networks are state-owned or state-regulated and subject to the same somewhat contradictory pressures to manufacture locally and to be locally responsive to customers, while achieving efficiency through scale economies and cost savings.

A third set of products in ABB is directed to a very different type of customer. Its building systems and industrial production systems are sold to industrial companies, whose concerns are much more focused on price.

ABB’s businesses require the company to be locally responsive and to maintain a credible local presence in each of its major markets, and simultaneously to be efficient and cost-competitive. Moreover, operating in 140 countries in a wide variety of product lines, many of which are closely related in the eyes of the customer, the company needs to have a high degree of intra-product and cross-product coordination if the company is to capture fully the benefits of its product diversity. However, it also needs to be able to respond quickly to customers and local problems, and to encourage its managers to take responsibility for their units.

Organizational Design of ABB

One of the first steps taken after the merger of Asea and Brown Boveri was announced in August 1987 was the creation of a task force of five top managers from each of the two companies to generate an organizational architecture for ABB. The task force had agreed on the principal features of the new organization. The structure was to be an international matrix of business and geography. The basic organizing principle was to create highly focused local companies reporting both to a worldwide business manager, who would be responsible for achieving efficiency in that product line and growing the business on a global scale, and to a country manager responsible for coordinating the various businesses within a particular country.

In drawing up the shortlists for the high level managers, emphasis was placed on identifying flexible individuals who could cooperate in multi-cultural environments and for whom innovation, risk-taking and the ability to motivate others were almost second nature. One of the goals of the new design was to push accountability, decision-making, and the responsibility for action far down the organizational hierarchy.

One of the first steps taken by the new top management was the radical reduction of the company headquarters. Within a few months, the headcount at corporate HQ in Zurich went from over 1,300 professional staff to just over 100.

Another crucial step in the process was the design of a company-wide information system, called ABACUS (Asea Brown Boveri Accounting and Communication System).ABACUS collected monthly performance data from each unit, put it into a standard currency (US dollars), and transmitted the information to its main data processing center in Sweden, which compiled the data and passed it to the top managers at the Swiss headquarters and to the designated managers at each level of the company.

The basic unit on which performance data are collected for ABACUS is the profit center, the smallest organizational unit in the new organization. Each month they report their performance data to the next highest level of the organization, the local operating company/Business Unit (BU) , which in turn put the data into the ABACUS system.

The local operating company composed of two or more profit centers and focused on single business and market. ABB’s strategy was to concentrate on radically reducing costs in each site, reducing throughput times, maximizing design and production flexibility, and focusing on local customer needs.

The local operating company president had CEO responsibilities for his operations. However, the heads of the local operating companies report to two bosses – one was the Business Area manager; the other was the country manager for the country in which the operating company was located.

The Business Side of the Matrix: The Business Area

The Business Area (BA) manager was responsible for the worldwide strategy and performance of a business.BA management tasks include coordinating technology development, deciding on transfer prices among local operating companies in the BA, transferring expertise within the BA, capturing economies of scale in purchasing, and, perhaps most important, allocation of markets and production to local operating companies.

The fact that the BA manager was also the head of a local operating company increased his or her motivation to push responsibility and decision-making down to the local operating companies, on the basis of time pressure, if not personal management philosophy. In addition, they were supported by a BA Board, which assisted the BA manager in setting strategy, reviewing performance, and identifying and addressing key problem areas. The BA Manager selected the members of the Board, and membership varied considerably depending on the nature of the business. The BA Board was an international group, and usually met in a different location for each of its meetings over the course of a year.

In addition to the BA Board, the BA had a number of functional councils that brought together key managers in a function for quarterly meetings to assess and exchange internal best practices and to identify and propose solutions for key problems in their area of expertise. For particular problems, the BA Board also formed task forces from among the high-potential younger managers in the BA.

The BA manager received monthly reports through ABACUS on the performance of each of the profit centers and operating companies in the BA. The BA manager decided how to disseminate this kind of information across the local operating companies.

One of the most important roles of the BA was the dissemination of best practice. Sharing information about performance and exposing managers to different ways of operating, through transfers and through travel help in achieving this. The combination of strict performance requirements with the resources for performance improvement was a powerful driver of change in ABB.

The Business Segment

The BA managers in turn reported to Business Segment Managers. Business segments were groupings of related BAs. Each segment was headed by a member of the Executive Committee, the highest-level organizational unit in the company.

The Country Level

The local operating company managers also reported to the country manager of the nation in which it is located. The country manager had profit-and-loss responsibilities for all ABB activities within that country. The country manager’s task was to realize the potential synergies across the various ABB local operating companies, to present a “local face” for major projects within that country, to provide the legal and political infrastructure for operations, to coordinate certain personnel development programs, and to make sure that the local political and social environment was understood and considered appropriately in business decisions.

The country manager received monthly reports through ABACUS on the performance of each of the local operating companies in the country, and could use these data to identify common problems they faced.

The heads of the local operating companies were supported in their contrasting duties to the country manager and the BA manager by a Steering Committee, with representatives from the national company, the BA, and other closely-related local operating companies in the same company. Performance evaluations of the president of the local operating companies were conducted by both the BA head and the country manager. Each share the same basic performance metrics, but each has somewhat different expectations.

Managing the Matrix: The Top Management

At the top of the company the two dimensions of the matrix met at the level of the Executive Committee, which was chaired by the CEO.

The CEO chaired the Committee, and each of the ten Executive VPs had responsibility for one or more of the segments and countries. The extent of their individual responsibilities varied by the scope of their tasks. Each BA manager and each country manager reported directly to a member of the Executive Committee.

With ABB’s acquisitions, the individual responsibilities assigned to Executive Committee members changed over time, especially in terms of geographies. The major change was on geography: instead of having different members responsible for a portfolio of different national companies, geographic responsibilities were clustered into three regions: Europe, the Americas, and Asia Pacific. Each member was assigned either one of the four industrial segments or one of three geographical regions.The move to make the geography side of the matrix report to Committee members with regional rather than individual country responsibilities also reflected ABB’s global strategy.

Each Executive Committee member was involved in the annual planning process of each of the BAs and geographic units reporting to him. But as important were their collective responsibilities in charting the overall strategic direction for the company.

Extensive communication in a company that operates in 140 countries required a common language, which in ABB’s case was English. Communication also took place on a more individual level, between the Executive Committee and their direct reports, and even between the Executive Committee and the heads of the local operating companies.

Executive Committee members had access to monthly performance data for all the operating companies, national companies, and business areas for which they were responsible. The ABACUS system provided rapid feedback on changes in the performance of any of these units, and the monthly data were routinely scrutinized carefully at the top of the company.

Alignment: Developing the Global Manager

One of the key challenges which faced ABB was developing managers who could work effectively in the demanding system. The development of the “global managers” who could occupy key positions in the Business Areas and at the top of the company on the Executive Committee was the most important task.

The global managers should be capable of balancing the often contradictory pulls of being locally responsive and globally efficient, pushing decision-making and responsibility for action down while enforcing accountability and control, and simultaneously encouraging local operating companies to be entrepreneurial while making sure that ABB does not lose the competitive advantage of being a multi-business global company. Keeping this philosophy in mind, such people were developed through the training programs, experience on cross-national teams, and rotation across locations. One of the hallmarks of the cadre of global managers was that they spent a lot of their time travelling internationally.

Region

Business SegmentExecutive Committee

Region

Local Operating Company

Profit Centers

Ce

Business Segment

Figure 1. ABB’s Organizational Structure from 1988-1998 (note: ABB has now moved on from a matrix organizational structure to a more customer-centric organizational structure).

Learning from the ABB organizational structure and its impact on its strategy and performance

ABB’s example clearly shows the example of an organization which can successfully compete on a global level by being both locally responsive as well as paying attention to its global integration strategy. Each local operating company head was given the freedom to operate as the CEO of his business and was free to make his own decisions. By fixing dual responsibility, both to the country manager as well as to the product manager on a global level, ABB was successful in achieving its strategic aim of becoming the leader in the electrical systems and the power generation and distribution business.

ABB successfully demonstrated how successful matrix organizations can be. Matrix organizations always had been an important theoretical concept but even other very large organizations with a global presence had failed in implementing it. Matrix organizations were widely touted to be as the organizations of the future in the 1970’s and organizations such as Citibank and IBM tried to model their organizations around the matrix structures, but failed, as they found the model too complicated. In fact, ABB was the first company on a global level to implement the matrix organizational model so efficiently. Seeing the success of ABB, many organizations around the world also adopted the matrix structure successfully.

The various performance indicators of ABB during the 1988-1996 period clearly showed that when the organizational structure is in sync with strategy of the organization and vice-versa, it results in achieving great results. ABB achieved the co-ordination of 210,000 employees, 310 business units and 5000 profit centers in 140 countries through the matrix structure. This demonstrated the crucial role of linking mechanisms in turning a complex kaleidoscope of grouping patterns into a smoothly functioning organization. ABB simultaneously achieved the goal of acting as a global powerhouse & amassing resources & know-how on a global scale and responding swiftly to meet the demand of local markets and customers.

ABB’s net income rose to $1.3 billion in 1996 and its stock price doubled between 1992 and 1996, reinforcing the choice of its organization structure.

The SEMCO Model

What makes the SEMCO model so interesting is that it for the first 20years it was in operation its structure and culture were autocratic and relied heavily on command and control management styles. However, for the last 20years it has been run democratically. SEMCO is a mode lf how companies who have not yet evolved into democratic cultures can make the transition with credible success.

What is also unique about the SEMCO model of democratic organization is how effectively it works in Brazil-a country that is still developing, often unstable and known for economic boons and busts. One could reason that in highly unpredictable environment, command and control corporate structures are even more inadequate for dealing with a dynamic socio-economic climate. Perhaps this is why the SEMCO’s adaptive model has been a highly effective model of company

Introduction

Semco a Brazilian company which manufactures over two thousand different products including industrial pumps, cooling towers etc. and also provides environmental and internet services, saw its revenues growing from $32 million in 1990 to $212 million in 2003.It achieved this growth rate in an economic environment characterized by staggering inflation, and chaotic national economic policy in Brazil. Between 1982 and 1998, Semco’s productivity increased nearly sevenfold and profits rose fivefold. Semco was also one of the most sought after Brazilian companies as far as employment was concerned. Turnover among its 3,000 employees was about 1% during the period 1994 to 2004. Repeat customers accounted for around 80% of Semco’s 2003 annual revenues. The culture at Semco was unique in the sense that there were no power-packed job titles; employees including top managers themselves did the photocopying, sent faxes, typed letters, and made and received phone calls. There were no executive dining rooms, and parking was strictly first-come, first-served. Organizational profits were shared with the employees and the salaries were set by the employees themselves. Behind this “maverick” organization was Ricardo Semler (Semler), the CEO of the company who referred to himself as the Chief Enzyme Officer Wrote Semler, “If you ask me to describe it in conventional business terms, I’d have to admit I have no idea what business Semco is in. For years, I have resisted defining Semco for a simple reason: once you say what business you’re in, you create boundaries for your employees, you restrict their thinking and give them a reason to ignore new opportunities.”

Semler’s way of thinking resulted in an organisation which had no conventional structure, no organisational chart; no fixed CEO, no VP’s, CFO’s, COO’s or CIO’s. There was no long term strategic business plans, no career plans, no job descriptions or dress codes for the employees. Some of the important organisational decisions like relocating a unit or acquiring a company were taken on the basis of employees’ votes.

History

Semler’s father, Antionio Curt Semler, an Austrian-born engineer, migrated to Argentina in1937. A visit to Brazil in 1952 prompted him to think about the prospects a “vast, undeveloped country” like Brazil presented. During this time, he was working on a centrifuge technology capable of separating oil from vegetables. With an urge to start his own business, he selected the city of Sao Paulo to start his venture, Semco, a contraction of Semler & Co, in 1953. Soon after, he obtained a patent for his technology. Through the 1960s and 1970s, Semco was mainly a manufacturer of marine pumps. In the late1960s, ninety percent of the sales of Semco were to the Brazilian shipbuilding industry. Semco was a hierarchical organization with twelve layers of management. According to a Fortune article, “Fear was the governing principle. Guards patrolled the factory floor, timed people’s trips to the bathroom, and frisked workers as they left the plant. Anyone unlucky enough to break a piece of equipment would replace it out of his own pocket.”According to Semler it was a company “with a pyramidal structure and a rule for every contingency.”

Enter Semler

In 1980, at the age of 21, Semler took over as the CEO of Semco. Semler’s views on running the company were completely different from those of his father. He felt that the company in its existing form was too rigid. He wanted to replace the old way of doing business and planning with a participatory style of management. But the old guard at Semco was not open to this, with the result that Semler fired two thirds of the top management. Semler started out with a functional organizational structure at Semco. Under this structure, decision-making took a long time and each department took independent decisions that sometimes were not in the interests of other departments. Then, the company shifted to a matrix structure. But, unhappy with its effectiveness, Semler changed the structure of the organization once again.

New Organization Structure: From Pyramid to circle

Though the company worked on the principle of no Organization structure but it actually had was a very flexible organization structure in the form of 3 concentric circles and few triangles floated in it.

The smaller innermost circle would include team of a dozen people the eqivalent of VP’s and above

Second circle would include the 7- 1o leaders of SEMCO’s business units and be called partners.

Last immense circles would hold virtually everyone else at Semco machine operators, cafeteria workers, janitors, salesman, security guards and so on. They will be called associates

The triangles- They will be distributed around the big circle each enclosing a single person we would call a coordinator. These people would comprise the first crucial level of Management A the marketing,sales and production supervisors, the engineering and assembly area foreman, anyone who had a basic leadership role in our old system.

Organizational Culture

The replication of business units into smaller units as and when the need arose created units small enough to operate with a commonly shared set of values, philosophy and culture. The organization was bound together by the three interdependent core values: Employee Participation, Profit Sharing and Free Flow of Information. These three values stemmed from the belief that participation in design and implementation of work procedures would give employees control over their work; profit sharing would bring in a sense of ownership; and the availability of information as and when needed would help the employees understand to improve their work practices continuously…

Leadership and Change Management

Semler can be credited with sustaining the radical changes at Semco. He nurtured changes that might have been viewed as taking away his power and authority. He created an empowered environment where employees could innovate continuously. An idea he generated would later permeate to the whole work force. For example, after seeing a company order file cabinets worth $50,000, which were meant only to keep documents which were hardly ever referred to, Semler said that every person in the company should clear his own file cabinets of documents which were never referred to and keep only those that were necessary. This soon became a biannual exercise at Semco…

Values of SEMCO:

The key values that propeeled the uniwue culture of Semco can be summarised as follows:

Making News

The Semco way of running an organization is slowly but steadily being accepted as a very effective method of business management. The BBC series ‘Re-engineering the Business, included Semco while focusing on the five most successful management structures across the globe. CIO magazine selected Semco (the only Latin American company in its list) among the most successfully re-engineered companies in the world. Fortune magazine referred to Semco as a “lab for creative management.