Crux of OS&D course and learning from case studies

We got 4 case studies to understand the concept of organization structure and design, why we need it, what are the different models, and what works best for what situation. I’m presenting here the learning/takeaways from the 4 case studies we had in our class:

1.      Robin Hood Case (Strategy Formulation)

  • How to formulate a strategy
  • What is a sustainable competitive advantage, positional or competency based
  • Why we need a strategic competitive advantage (Organizations need to create value superior to their competitors)
  • Short term and long term strategy for companies
  • Process model of strategy formulation: Know the purpose, assume, analyze, and formulate strategy, followed by organization structure, and keep on doing it via measuring organization efficiency/output/performance, innovating and building competencies to remain ahead of others.

Key Learning: Organizational structure follows strategy. It’s defined to maintain competitive advantage, and strategy never follows the org design.

2.      Cunningham Motors (Make Vs. Buy)

  • Two ways to build organizations: Within organizations vs. markets
  • Why are companies’ movies towards outsourcing? It’s not about core/non-core, or cost reduction only, it’s also about value maximization. Four main reasons, cost reduction, accessing superior competencies and privileged assets, superior resource leverage, and risk diversification.
  • When can extreme outsourcing succeed: When we have modularity and standardization of outputs, I’m good in drawing and enforcing contracts, I can limit others opportunistic behavior, I can minimize uncertain conditions.
  • Markets do have hidden costs such as transaction costs and strategic risks. So, it may look like that basic org costs are more for producing something, but if we see total picture, org costs may score high on cost reduction.
  • Organizations get formed when markets fail
  • Organizations do have principle-agent issue. It can be solved in two ways, Live with goal divergence, but use direct supervision, rules and regulations, financial incentives and penalties, etc. or Increase Goal convergence, by socializing, aligning, inspiring, motivating and mentoring.
  • Outsourcing sometimes is mindset problem/core rigidities. This mindset is changing, as we are seeing outsourcing of strategic consulting, R&D, etc. by firms now, than never before.

Key Learning: Don’t be rigid when it comes to outsourcing. Now days with complicated technology, full vertical integration is almost impossible. If it fits the bill, and work is not strategic, do go for it. You can outsource even for strategic consulting. Make sure you have control over the markets from where you are buying.

3.      Old car manufacturers Vs. Henry Ford Vs. Alfred Sloan‘s way of managing things  (Craft Vs. Mass Vs. Variety)

  • Old Car manufacturers: “Craft” way, Handmade, highly customized, and highly differentiated for every customer, high on innovation, low on scale. Very high on cost.
  • Henry Ford: Vertical integration, assembly line, standardization, specialization, low variety, high efficiency, very low cost, mass manufacturing, economies of scale -> Totally opposite to the “craft” way of doing things.
  • Alfred Sloan: Multi-divisional structure, breaking the variety-scale trade off, more variety means increase in costs but keeping other things same as Henry’s model.

Key Learning: Choose the way that fits your strategy. Never try to be on both sides, but we can have some variety without sacrificing advantages of standardization, cost reduction and economies of scale.

4.      Acme and Omega (Organizational structured, Input based and Output based)

  • Org structures: Functional, Divisional, Hybrid and Matrix based
  • Functional: Input based, Advantages: Specialized within functions, good repo between managers and subordinates, efficient, feedback is taken positively, Disadvantages: lack the vision of overall goal, functional silos, and bureaucracy and communication issues within divisions. -> Good for medium/big enterprise working with defined output and less uncertainty. Mass production, like Acme. -> Cost Leader
  • Divisional:  Advantages: Output based, business units based on geographies, products, customers, etc., gets the overall vision of product, Disadvantages: Product silos, Redundancy, non-communicating product divisions, lower in depth specialization. -> Good for small/medium enterprise working with lots of uncertainty, complicated requirements, and complex solutions: R&D efforts, like Omega -> can charge premium for product specialization and customization.
  • Hybrid structure: This is combination of functional and divisional but they don’t interfere with each other, for ex. where divisions can be Finance, HR, etc. nonfunctional roles, and then we can have purchase, sales, development, production come under different business units.
  • Matrix structure: One employee, multiple bosses, both functions existing and simultaneously too, Product and functional managers have equal responsibilities and authorities. Advantages: Caters to highly changing environment, innovation driven by in depth specialization, not as redundant as divisional model, Disadvantages: Confusing, Can create politics if not implemented properly, Pseudo bosses, need high degree of coordination
  • Matrix structure looks very confusing, but is being implemented by organizations successfully. Here are the roles people play in this:

i.            Matrix Leader: Power balancing, dual evaluation, bring out conflicts in open, timely resolution, open debates, and provide directions, stretch and challenge.

ii.            Matrix Boss: Source of power is superior customer knowledge and not just hierarchy, treat the same level boss as customer, keeps in mind the bigger goal that is common to both bosses.

iii.            Two Boss Manager: Should not develop affiliations for favors from either of the boss, resolves conflicts involving both bosses

Key Learning: Structure should be such that it helps people to collaborate, rather than restrict any activity. It should render temporariness, so that processes and behavior matters, and not the structure, should prevent power bases so that changes are accepted, develop orientation towards learning and adapting. Matrix structure has got able characteristics, and is good for very large organizations, if implemented properly.

5.      VFM Solutions (Restructuring)

  • Three dimensions to consider while restructuring, strategic objective, job content and human dimension.
  • If size of proposed business is huge, it’s better to create it as a Business unit under upper management/CEO.
  • Also, need to check if new business is one off or strategic aligned with the objective.
  • Can new job be done with existing skill sets? Is there need for training?
  • Have I taken my current important colleagues into confidence and was there enough communication with them?

Key Learning: Restructuring is an important aspect, and where exactly to restructure should be determined after carefully accessing the attributes of the new business, skill set required and aspirations of the existing employees.

 

 

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Competitive Strategy and role of Organization Structure

What is Competitive Advantage: In simple words, it’s the “edge” a particular firm/company is having over it’s rivals and is able to generate more value for it’s stakeholders (customers, employees, suppliers,shareholders, etc)

Competitive Strategy is a strategy to maintain this advantage over rivals. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

There are two ways to sustain competitive advantage:

  1. Privileged Position: This is just by virtue of you position, and is not sustainable. For example, India is an IT Hub, because of privileged position(low cost, English speaking, good IQ and skilled workforce). Can India or Indian IT companies depend on this position based advantage forever. Time to “think”.
  2. Superior skills and competencies : This is a great way to keep you advantage intact by building on rare and non fungible skills required for a leader. Some examples are quality, brand loyalty, innovation, etc.

Important questions:

  • What is your source of competitive advantage ?
  • Are these based on privileged position or are these based on competencies ?
  • Is your competitive advantage sustainable ?
  • What must we do in the short run and in the long run to maintain / develop sustainable competitive advantage ?

(Refer Robin hood’s case)

Process model of strategy formulation:

  • 3 layered process
  • Step 1: What is the organization goal/purpose? What assumptions are we backing up? What does the analysis of the data available tell us? Do I have a competitive advantage, if yes, is that based on my privileged position or competencies.
  • Step 2:  Design competitive strategy based on your org goal, assumptions and analysis.What should be done to maintain my advantage, or get to my advantage over others.
  • Step 3: Form your organization design to achieve that strategy. Pls note that Org Design should follow Strategy and not other way around.
  • Step 4: Keep on innovating on the skills and processes, measure organization performance and build competencies.

This is an ongoing process, and companies keep on working on this aggresively to maintain supremacy.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji  Some information referred from Wikipedia/other listed sites.]

 

Alternative Dispute Resolution Mechanism [ADR]

As we know that court of law is a process of “expense” and “suspense”, with so many cases lingering around, and taking loads of time, there exists a good alternative for commercial contracts.

In cases of conflict in commercial contracts, there exists a mechanism called alternative dispute resolution mechanism(ADR). Following are the steps involved:

  1. Negotiations :Negotiation is a dialogue between two or more people or parties, intended to reach an understanding and resolve point of difference.
  2. Mediation: In case bilateral negotiations fail, then mediation comes in. Typically, a third party, the mediator, assists the parties to negotiate a settlement.
  3. Conciliation: Conciliation is an alternative dispute resolution (ADR) process whereby the parties to a dispute use a conciliator, who meets with the parties separately in an attempt to resolve their differences.In conciliation the parties seldom, if ever, actually face each other across the table in the presence of the conciliator.
  4. Arbitration: Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed, or legislation has decreed, will be final and binding. There are limited rights of review and appeal of arbitration awards.

Advantages of arbitration over courts:

  • Parties can choose their own judges
  • Judges are always uneven, both parties selecting same number of judges, and all judges selecting the final and neutral judge
  • Panel can be well versed with the domain
  • Anyone can be the arbitrator
  • The results are not open in public domain, until and unless both parties agree
  • It can be carried out anywhere and anytime
  • An arbitration can’t be challenged in the court after award is announced.

It can be challenged in courts only under two scenarios:

  1. Very conclusively prove that judges are biased
  2. In cases where Arbitration panel questions the law (Why is tax 30% or so.)

This comes under Indian Arbitration and Conciliation Act, 1996, which is exact copy of the International Law, and is universally acceptable.

Is a party doesn’t pay Arbitration Award, then the other party can go to the court. Court will not reopen the case, but will take the award as final, and get other party to pay.

Cost of arbitration can be shared by both parties, or final panel can award the cost to one party.

Lok Adalat is a form of arbitration.

[This blog is captured from “Managing Commercial contracts” class notes (by Prof S. Shankar . Some information referred from Wikipedia/other listed sites.]

Demand functions: How to read?

In our last quiz, we saw some demand equations with questions on elasticity, inferior/normal good, complimentary or substitute good, etc. Here I’ll explain how to deduce these from a demand equation. It was horrifying to look at complex equations, with an expectation to understand them, and then derive conclusions. On googling around, I found out that the rules are generic, and can be applied to any equation, given that the micro economics basics are clear. It boils down to common sense finally.

Lets define few things first:

Price Elasticity: If demand increases/decreases a lot more than price decrease/increase respectively, then it’s termed as more elastic. Lets say insulin, demand will not decrease if price increases, as there’s no substitute, hence it’s inelastic. Take coffee, demand will decrease much more than price increase, as there are many substitutes in place.

Complementary/ Substitute: This is self explanatory. Tea and coffee are substitutes. Tea and biscuits are complementary.

Inferior/Normal Good: If users stop using a particular good when their income increases, it’s termed as inferior good. On other hand, if demand of a particular good increases with increase in income, it’s a normal good. Examples, Hyundai Santro is an inferior good, as with more income I’ll buy Fortuner 🙂 . Gold is a normal good( in fact more than normal). If my income rises, I buy more.

Coming to equation:

Q = 100Px(-1.2) Pz(0.5) Y(0.7)

Q = Quantity demanded for X

Px = Price of X

Pz = Price of good Z

Y is the income

Is it price elastic or inelastic?

We see that Q is inversely proportional to Px, which is true for demand function. Now, lets make Px double i.e. Px = 2 Px. Other things equal, quantity demanded will decrease by 2(1.2) times, which is more than 2. Hence change in quantity > change in price, so this is price elastic.

Is Z a substitute or complement?

Increase price of Pz and you can see that quantity demanded for X will also increase. It means that X and Z are substitutes. On increasing price of Z, people are substituting it with X, and hence demand of X is increasing.

Is X inferior or normal good?

Increase the income, and you will see demand of X is rising. So it’s a normal good. Had it been inversely proportional, story would have been different.

Hope above was a simple analysis, and can be applied to any demand equation.

 

Is playing with price actually paying the price?

We have heard of terms such as subsidizing, limiting prices to maximum or minimum, etc. Most of these acts are done by governments in order to prevent certain interests, secure essential needs, prevent inflation, etc.

Let’s analyze some example, and see if economically it makes sense.

We all know that price is determined by market forces, and when demand meets supply, we have a price, demanded quantity and supplied quantity. Anybody who tries to play with price artificially is actually disturbing the equilibrium, and creating artificial demand or supply.

Simple examples below:

Setting Max price: Let’s say, price of bread is Rs 30 per bread as per natural demand-supply relationship. Now govt. thinks that bread is an essential commodity, and Rs 30 is too high, so they set the artificial price at Rs 20. What essentially it will do is increase the demand, and decreases the supply, causing shortage of bread. People will eat more bread, as it’s cheap that the natural price and increase the demand and supplier will try to cut supplies, as at this price, it may not be a decent proposition. Now co-relate this with oil subsidy, which is given to contain inflation.

Setting Min price: Let’s say, price of 1Kg of potatoes is Rs 15 per kg, again as per natural demand supply relationship. Now, govt. comes in to help farmers, saying this price is too less, and should be Rs 20 for farmers to get their due. So, it all starts with good intention, but from economist’s point of view, it means, demand is getting reduced, and supply will get increased. So, there will be surplus in the market. What to do with this surplus? Again govt. comes to help, and start buying to store, or destroy. As you can see, for a short run this is fine, but it’s not a viable model. It’s like funding a startup till it dies its own death.

Well there are many other non-economic reasons for which this a kind of policy exist, but above analysis is purely from economist eyes.

So, from economist’s view point, playing with prices is actually paying the price eventually 🙂

 

 

Demand Elasticities

It’s a measure of sensitivity of the Quantity demanded vis a vis changes in price. In simple words, does quantity change too much or too little on increase/decrease in price.

Mathematically,

E(d) = (Delta)Q/Q     ÷  (Delta)P/P

So,

E(d) >1 : If percentage change in quantity > percentage change in price, it’s called “Elastic” Demand. For ex, demand of air travel will decrease quite a bit with increase in price, and people may prefer trains or other means of transportation, and vice versa for decrease in price.

E(d) < 1: If percentage change in quantity < percentage change in price, it’s called “Inelastic” Demand. For ex, demand for oil is inelastic, as demand of oil doesn’t vary much with price.  As there are not many substitutes available. Other example is demand for insulin doesn’t change, and remains same, as there’s no other alternative.

E(d) = 0 : This is case of perfect inelastic demand. Quantity doesn’t change at any price.

E(d) = ∞ : This is case of perfect elastic demand. Small variations in price leads to huge changes in the quantity.

Elasticity of a product can be calculated from all the historical data, and is helpful in determining the future prices in case production increases or falls. For example, when oil producing countries go out to decrease the production, what will be its effect on price, etc.

Revenue projections w.r.t Elasticity:

Revenue is Price x Quantity Demanded.

If E(d) >1, then increase in price by x%(say 10%) will decrease in quantity demanded by more than x % (say 20%).

So old revenue = PQ

New revenue = (1.1)P x (0.8)Q = 0.88 PQ , so total effect is that revenue got decreased.

If E(d) <1, then increase in price by x%(say 10%) will decrease in quantity demanded by less than x % (say 5%).

So old revenue = PQ

New revenue = (1.1)P x (0.95)Q = 1.045 PQ , so total effect is that revenue got increased.

Managerial Accounting- Change in mindset

Why is Managerial Accounting required? Where does it help? Why it is so important now than before.

This kind of Accounting helps stake holders internal to the company to understand cost structure, make price decisions as well as plan and budget. The accounting practice is free from GAAP(though it can use it, but there’s no obligation) and can be tailor made for different requirements.

Let’s understand the change in mindset, and why managerial accounting plays more important role now than before.

Cost + Profit = Selling Price (Monopoly): This is the formula used by monopolistic organizations, where profit is at your discretion. Since it’s a monopoly, it can demand decent profit, and Selling Price is determined via cost and profit factors.

Selling Price – Cost = Profit (Competition): This is the competition era, where Selling Price is determined by market forces and organizations don’t have much say in it. With pressure on ever decreasing selling prices, and ever increasing costs, profits keeps on diminishing.

Selling Price – Profit = Cost (Change in mindset): The funny part is that we have written the same equation in different ways and mathematically all are same, but when it comes to accounting, meanings are different. In this, we are saying that selling price is determined by market, profit is something you would like to have and can’t reduce, and only thing to play with is cost.

Since cost has attained the center stage, managerial accounting has become that much more important, with real focus on reducing costs, and making decisions governed by cost(of course there are many other factors).

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