2.2 Organizational structure Topic Practice

Describe one advantage and one disadvantage for M M of decentralization (lines 44-45).

2. Wong Corporation (WC)
Wong Corporation (WC) manufactures clothes dryers. WC pays tax at a rate of 20 %. WC has a hierarchical organization structure. Table 3 shows selected forecasted financial information for the company for 2022, and Table 4 shows its annual cash flow forecast for 2022.

State two features of a hierarchical organizational structure.

Aran and Kayla decided to launch Detox using batch production. It has now been on the market for six months. Detox is showing strong growth, although sales for the first six months were less than a quarter of Kayla's target of 160000 bottles for the first year. The price of Detox is $ 2.50 per bottle. The cost of goods sold is $ 160000 and the operating costs before interest and tax are $ 20000 per year.

Enrich sales have not grown much and Aran is very disappointed. Customers, mainly athletes, do not use the product frequently and it is difficult to find new customers. However, research into customer perceptions indicates a very strong brand, resulting largely from Accord's corporate social responsibility (CSR) and strong customer loyalty.

Aran does not like the way the business is organized by product and wants to change it so that it is organized by function instead.

Following the success of Detox, Kayla wants to produce a range of snack bars based on Enrich flavours and recipes. Accord would use the Enrich brand name for the snack bars. The market for healthy snack bars is very competitive and dominated by a few large companies who spend large amounts of money on advertising. The market is growing rapidly - some market researchers estimate by 34 % per annum. There are many examples of small businesses entering the market successfully on a small scale. Kayla estimates the proposal would involve an investment of $ 100000, with forecast net returns of $ 80000 for four years. Aran thinks that the money could be better spent on marketing Enrich drinks.

With reference to Accord, explain one advantage and one disadvantage of an organizational structure based on product.

3. Ace Industries (AI)
Ace Industries ( A I ) manufactures plastic containers, mostly for the soft and fruit juice industries. The operations management department uses flow production for its standard-sized products and batch production for its customized products.
Al's sales are growing rapidly. It currently has a 6 % share of the plastic container market. However, it has recently struggled to meet customized orders on time. Some customers have complained about product quality. Currently, A I is organized by region, which allows the company to have strong relationships with customers, who feel that A I knows them and cares about their interests. The human resource department is proposing restructuring the organization by function. Not everyone at A I agrees with this change. Many think that the problems of late delivery and poor quality could be solved through greater delegation.
Lloyd Rinnegrat, Chief Financial Officer, has suggested that Al's management think more deeply about their rapid growth. Except Lloyd, most people at A I believe that rapidly growing sales are good - that by increasing its market share A I will, in the long run, benefit by being a large organization. However, Lloyd argues that being a small organization has many merits, as shown by the changes in Al's recent gross profit margins and net profit margins.

The marketing department has predicted that the soft and fruit juice industries are moving away from major mass-produced drinks and toward niche products, such as exotic fruit drinks and speciality beverages for very particular markets.

3. Healthy Nation (HN)
Healthy Nation (HN) is a pharmaceutical organization that used to operate in the public sector, selling its medicines (drugs) to hospitals at very low prices.
With increasing government funding over several years, H N increased the number of employees in its Research and Development Department, which was staffed by scientists, and in the Manufacturing Department. However, both departments were inflexible and inefficient. Resources were significantly under-utilized, and innovation limited.
HN's structure used to be hierarchical, with a very long chain of command and channels of communication. Senior management made the decisions and set the production levels. Consequently, the scientists in the Research and Development Department never developed decision-making skills, and development of new medicines was slow. In 2021, after many years of losses, the government sold H N to a profit-maximizing global pharmaceutical manufacturer, Global Pharma (GP).
To improve productivity, efficiency and flexibility, the management of GP reorganized HN as a shamrock organization by:
- outsourcing the production function to a well-known manufacturer
- retaining the Research and Development Department, along with its scientists and support staff, and employing additional staff when required.
In addition, two major changes were announced:
- Establishing performance-related pay for the scientists based on a new appraisal system to increase productivity levels.
- Using an expensive external company to provide cognitive training to the scientists to develop innovative decision-making and improve teamwork.
These changes have proved to be very unpopular, and the scientists in particular are resisting the changes and the short time frame in which they will be implemented.

Explain one benefit and one limitation for GP resulting from the implementation of the shamrock organization structure for H N.

3. Hums Athletics (HA)
Hums Athletics (HA) manufactures running shorts, sweat shirts, and sports bras. Operating only in the secondary sector, HA has a head office and three manufacturing facilities, one for each product. These are located in its home country in Europe. Labour costs are high. The quality of labour is excellent.
HA produces goods under its own HA brand, which it sells to wholesalers. HA also manufactures for other sportswear companies. HA puts the other sportswear companies' logos on the running shorts, sweat shirts, and sports bras. Sales to other sportswear companies are an important revenue stream for H A.
HA has many levels of hierarchy. Managers at each level have a narrow span of control, and the company is organized by product. HA's management believe that these features of organizational structure ensure product quality, which they view as essential for brand loyalty.
The sportswear manufacturing industry is becoming more competitive. Some foreign manufacturers have begun using penetration pricing to gain market share. For three years, none of HA's revenue streams have increased, despite increasing unit sales. HA's gross and net profit margins have declined. However, its sales have increased for the last three years. HA has had to raise additional external finance to increase production.
In response to the increasing competition, H A is considering two options:
- Option 1: Outsourcing some of its manufacturing overseas.
- Option 2: Entering the rapidly growing online business-to-consumer (B2C) retail market.
Market research has shown that consumers increasingly expect to buy online.

Draw an organization chart for H A.

5. Creative Software Systems (CSS)
Creative Software Systems (CSS), a private limited company, designs custom software packages for public sector organizations. Ebru Aga is the sole shareholder, though she is considering an employee share ownership scheme.
For years, CSS managed its employees closely, setting individual targets for performance and requiring regular progress reports. Following Adams's equity theory, CSS tied financial rewards to frequently measured performance outcomes. Though managers clearly explained to individual employees how additional financial rewards were linked to specific contributions they made, many employees still felt the system was unfair.
After reading Daniel Pink's theory of motivation, Ebru reconsidered her management style and CSS's system of financial rewards. She liked when Pink reported that a major American company allowed employees to work 20 % of their time on projects of their choice. Ebru implemented the following three changes:
- Change 1: Adopting a project-based organizational structure for CSS projects.
- Change 2: Eliminating performance-related pay (PRP).
- Change 3: Allowing employees to spend 20 % of their time on any project they wish, either one of CSS's or their own "dream project".
Employees' reactions were mixed. Some employees were thrilled. They had many ideas of their own that they wanted to explore. Other employees, however, did not like the change. In the 20 % of their time given to any project they wished, they chose to work on projects given to them by CSS. They felt it was unfair. Although they were advancing important projects of the company, they would no longer get performance-related pay (PRP), while others spent their time on projects that might not contribute to CSS's profitability.

Explain one advantage and one disadvantage for CSS of implementing a project

based organizational structure (Change 1).