Sample Business Studies Paper on the Organization of Internal Business

The Organization of Internal Business

A lot of attention is required in the management of the internal business. The internal organization of a firm aims at meeting the organizational goals through sharing of responsibilities, supervision, and hierarchy. All organizations are made up of structures that are determined by the objectives of the business. Organizational architecture depicts how business operations should be carried out both internally and on the global market. Organizational architecture can enhance subsidiary integration, decentralized capacity creation, as well as internal knowledge transfer that can assist in reconciling potential inconsistency. An internal business can take different organizational choices that fit its strategy. These include vertical differentiation, horizontal division, integration mechanisms, and network structure (Hills, 2013). Organizational architecture is fundamental for internal and international business operations while organizational structure can be transformed to match with the organizational strategy.  

Organizational Architecture

Organizational architecture involves the arrangement of structure under which an organization operates. According to Soda and Zaheer (2012), organizational architecture involves “networks of connections among organizational members comprised of organizational structure, processes, and workflows”, which enables the business operators to access, exchange, or transmit critical organizational resources (p. 755). These resources include approvals, direction, information concerning different tasks, and communication. All types of organizations and businesses operate through the concept of organizational architecture, where different designs serve different purposes. For instance, a customer-focused firm may require an organizational architecture that solely based on satisfying various classes of customers while a manufacturing firm should establish a system that manufactures different types of products.

In organizational architecture, the assignment of decision rights is carried within the organization while the structural system assesses the performance of every employee, as well as the business unit, to ensure that every activity corresponds with the organizational strategy. It combines all the apparatus of a business functions appropriately to attain its goals. These apparatus include suppliers, distribution, workforce, and customers. These apparatus are vital in the operation of a firm, as they are exceedingly interdependent. Successful corporations that exercise organizational architecture assign decision rights in a manner that efficiently links decision-making authority with the required information for making value-enhancing resolutions (McCarthy, Fiolet & Dolfsma, 2011). The process design choices generate organization-environment fit, strategic configuration, as well as process optimization.

The choices available in the organizational architecture reflect the values of the organization. In most cases, market conditions, technology, as well as government regulations, usually work together to determine how the form can come up with an appropriate strategy and architecture. The strategy and architecture determine the firm’s value. However, it is not a guarantee that managers will establish value-maximizing architectures in their firms. Firm’s value can also be generated through management replacement, where new managers are brought in during corporate takeovers. Organizational architecture can also enable the organization to maintain its culture, which is essential in the achievement of goals. It is through the organizational architecture that a firm can enhance its communication systems and promote high employee productivity.

Organizational Structure

International businesses are influenced by the organizational structure, which exists in the country where the firms are planning to establish their business operations. Organizational structure involves the methods that organizations utilize in communication, distribution of tasks, and adapting to change. It determines how responsibilities, authority, and control should be coordinated to ensure efficient flow of information in various levels of management. Organizational structure is usually a dynamic aspect that can change over time due to the outcomes of new organizational and environmental circumstances (Gupta & Singh, 2014). It illustrates how information and knowledge move within the organization. In addition, it influences the distribution, as well as coordination of the organization’s resources and communication.

Organizational structure depends on the size of the company, geographic area, marketing approach, and types of customers. From a contingency theory’s perspective, the environment should be considered and adapted (Burton & Obel, 2004). There are three dimensions of organizational structure. They include vertical differentiation, horizontal differentiation, and integrating mechanisms (Hill, 2013).

  • Vertical Differentiation

Vertical differentiation involves the use of numerous levels to pass information within the firm. These levels separate the top-level managers from the employees who do not have managerial responsibilities in the firm. An organizational vertical differentiation portrays where the decision-making authority is concentrated in the organizational hierarchy. In this system, power can centralized on decentralized. Centralized power means having a concentrated level of authority, rather than having different centers of power. According to Hills (2013), centralized power is essential in facilitating coordination. For instance, an international firm can have a manufacturing plant in China and an administrative office in the US. The administration office in the US controls all other subsidiaries in the international market. Concentration of power in a single point guarantees consistency in decision-making. Centralization is the degree at which decisions are meant for the top management only. Centralization falls into systems theory, which purports that organizations operate in a hierarchy of rules and the hierarchies are sustained by boundaries.  

 An international company that employs centralized form of authority will find it easier for its top-level managers to make organizational changes without encountering opposition from the lower-level managers. Vertical differentiation divides the firm into several departments, which fall under the chief executive officer (CEO) who is at the top. The company can also avoid the replication of ideas by different sub-units that constitute the company. The high degree of centralization is a hindrance to absorptive and innovative capacity of an organization (Gupta & Singh, 2014). It also inhibits flexibility, as any new idea should always come from the top. Most banking institutions employ centralized method, where different branches are managed from the corporate headquarters. A suitable example of vertical differentiation is Apple Inc. Apple manages almost all features of its manufacturing, software improvement, marketing and retail chains.

However, other companies prefer decentralization of power to remove spread the burden of decision-making to other sub-units. Decentralization of power enables the top-level management to concentrate on important issues of the company while the lower-level managers can handle minor issues. Decentralization motivates research, as employees are willing to offer more on their responsibilities, in addition to promoting independence. Hill (2013) claimed that decentralization is beneficial for the firm’s flexibility, as lower level managers do not have to wait for orders from the top managers. Decentralization is suitable for the firms operating in the international markets because managers of the foreign branches have the autonomy to make decisions depending on the environmental situation. 

Some of the limits of vertical differentiation are that it increases the number of personnel in the firm who attract higher salaries. This structure cannot perform well without a strong management group at the top. Firms that employ vertical structure focus more on departmental goals, rather than the overall firm’s goals. Increased vertical differentiation decreases motivation, as well as coordination among employees and the functions. Operating costs rises due to too many middle managers and lack of coordination.   

  • Horizontal Differentiation

Most organizations commence with no formal arrangement. The management of such firms incorporates a few individuals with a few responsibilities. As the firm expands, the demand for a larger group of managers is inevitable. A large firm means more responsibilities, which causes a firm to undergo a horizontal differentiation as the firm expands its product offering. Horizontal differentiation involves having specialization with the firm. Horizontal differentiation employs regional organizational structure, where a firm focuses on localized strategies to attain its goals. Since competition may be unique in each region due to customers’ different needs, this system is suitable due to its flexibility to meet those needs. 

Due to its flexibility, horizontal differentiation enables the firm to merge with other firms that deal with similar products or its substitutes. For example, a firm that deals diamond can merge with other firms that deal with precious metals in its expansion strategies. Refrigerators that comes in white or black colors offers the same appeal, but to different customers. This would allow the firm to combine different functions, units, and skills in the firm (Gupta & Singh, 2014). Horizontal differentiation is preferable to quality improvement because it is quite cheap to implement. Flexibility in the structures allow for feedbacks, as functional managers can communicate freely with the firm’s CEO. Horizontal differentiation is built on open system theory, which permits feedback exchanges within the firm and outside the business.

Horizontal differentiation encourages the establishment of a functional structure, where each sub-structure has its function. This form of structure separates people according to their expertise. When people who carry out similar tasks are categorized in one group, they can perform better and learn from each other, thus, increasing operational flexibility. Functional structure assists in coordination and control of the firm, particularly when the firm switches to product divisional structure. These structures allow the firm to maintain its control as it expands both domestically and internationally. With functional structures, each part is assigned a different product line, where decisions for the manufacturing are normally decentralized to fit the product division.

Some of the limitations of horizontal differentiation are that it creates the necessity for coordination among functional structures. For instance, as computer firm must coordinate with a software firm to ensure that customers purchase a computer that is ready for use. Coordination is usually carried out through communication. However, coordinating many people with specialized skills is extremely difficult, as it requires a hierarchy in passing information. It becomes relatively hard to communicate through the functional structures. Complex horizontal differentiation calls for efficient information processing to achieve the right coordination and control. 

  • Integrating Mechanisms

The need for proper management leads to product division and hierarchy of power. However, such mechanism may not be applicable when structures become more complex for the top management to supervise them. This creates the need for integrating mechanisms that would enhance communication and coordination of different functions and divisions. Integration mechanisms seek to harmonize the firm’s value addition activities, in addition to making these activities interdependent. Transnational firms require effective coordination due to their locations, local responsiveness, and the capacity to offer multidirectional transmission of core competencies in the sub-units (Hill, 2013). In order to understand the aspects of integrating mechanisms, three factors are considered. They include:

  • Direct contact: managers can exercise direct contact in coordinating different functions to solve a particular problem in the system. Managers have the capacity to offer solutions where the lower-level managers have failed to strike an accord. In order to avoid pushing all the problems to the top-level managers, top managers can exploit complex integrating mechanisms to enhance coordination of product divisions, rather than solving the problems themselves, as this may increase bureaucratic costs. Direct contact may not work in situations where managers have different views concerning an issue, and this may inhibit proper coordination of subunits both internally and outside the country.
  • Liaison roles:  This involves coordination of different departments to come up with a resolution. Managers are responsible for coordination of activities in their departments, and coordinating with other departments eases strain between those functions (Hill, Jones & Schilling, 2014). Managers need to network effectively internally or externally on behalf of the firm. When the levels of contacts among different subunits increase, coordination may become difficult, hence liaison roles are required to encourage leaders of each subunits to coordinate with their colleagues on a regular basis. This would assist in assuaging the impediments to coordination.
  • Teams: Sometime, different functions in a system may have several similar problems that cannot be solved through direct contact or liaison roles. This is when teams are established from different function structures to come up with solutions to the firm’s problems. Many organizations are making use of teams to address various problems in their organizations and come up with appropriate solutions. Teams are vital when a product development requires coordination of more than one subunit. Teams from research and development, production, as well as marketing, are gathered together during product development and introduction (Hill, 2013).
  •  Matrix structures: When the level of integration becomes too complicated, the firm may establish a matrix structure, which involves facilitating maximum integration of different structures. Matrix structures are quite common in multinational corporations that operate in different parts of the globe. In this case, the firm can concentrate on local production, as well as international operations. An example of matrix structure is General Motors, where the firm is split into functional units that include production, sales, accounting, marketing, and distribution. These units work together with product unit to sell vehicle models all over the globe. Matrix structure is quite flexible, but has the possibility of creating confusion, as different units do not know where to report.
  • Network Structure

In this system, administration is the only functional structure of the firm, as other functional units, which include production, marketing, and finance are outsourced from other firms. A network structure, which is also called a virtual organization, does not create its own products. In addition, this type of structure incorporates a few permanent employees, particularly the top-level management, and part-time clerical workers. An example of a network structure is a uniform firm that is contracted to make games uniform for schools. Advantages of this type of organizational structure are that it is quite flexible and has the capacity to adapt to the environment almost immediately. Communication flows quite easily in such structure due to its decentralized state. Its disadvantages are that it depends on third parties, which may not be competent to undertake a given assignment. It is extremely difficult to manage the sub-contracted suppliers and workers while accountability is missing in this structure.

Matching Business Strategy with Organizational Change

Organizational architecture is normally utilized to achieve the firm’s strategy. When a firm changes its strategy, it should also consider changing its organizational structure to meet the needs of the new strategy. If the firm changes its structural system without changing its strategy, then the strategy will be transformed to correspond with the new structure. According to Hill (2013), a firm should be explicit on the choices of strategic emphasis to value addition and low cost, as well as correspond to its internal operations that support its strategies. When the structural situations of a firm are attractive while the resources and capabilities of maintaining a competitive position are in place, the structuralist approach can generate good returns.

The management of an internal business should change to fit the strategy of a firm. High performing firms know that management is the key to successful application of strategies. Firm’s managers come and go, but the management culture that the firm has adapted may not change. The firm’s management should establish standards, as well as targets under which the firm’s performance can be assessed. Firms need to focus on the leadership and management to ensure that they match with the direction that the firm has chosen to take. For instance, when a firm opts to acquire another firm that deal with different products, it has to change its managerial style and embrace a structure that encourages independence and product innovation. According to Hill, Jones and Schilling (2014), strategic leadership is paramount in the implementation of strategies aimed at achieve a competitive advantage. The hierarchical structure is not suitable for a firm that deals with different products. Such firms rely on the line managers, supervisors, as well as middle managers to make important decisions on the firm’s products while the CEO is charged with issues that concerns the firm’s expansion.

Firms should consider their sizes before switching to a new structure. A firm with a narrow focus on domestic market should adopt a functional structure, which allows for flexibility, decentralization, and product innovation. A functional structure incorporates the CEO at the top of the management, and the rest of the personnel fall in the horizontal line, depending on their functions. A functional structure allows for proper coordination and control, as each structure is expected to communicate with other structures to enhance achievement of strategic goals. As the firm grows, changing the functional structure is necessary to allow for product division and specialization in skills. Functional structures can be utilized to compare actual performance against what the firm has targeted to achieve.

Managers should develop strategies that fit their firms’ situation. Strategies should be predictable to foresee the future, and malleable to assess how the firm’s competitors can influence them (Reeves, Love & Tillmanns, 2012). If the firm’s strategy lacks predictability, it will be futile for the firm to change the organization structure, since the structure will work best on a conventional structure. A firm that matches its strategy to its current environment usually performs better than a firm that does not consider matching its policy to its structure. Acquiring a patent can assist a firm in foreseeing its future, as competitors cannot replicate its products. For instance, Apple has a patent in its iPad, which made Samsung to pay a heavy fine when it tried to copy the form’s patented products. Apple’s iPad Air is quite light, as compared to its competitors, making it exceptional in the market. 

Product differentiation can assist a firm in matching its strategy with its goals. Product differentiation involves making the firm’s products stand out amidst the competitors’ products. A firm can exercise the strategy of product differentiation by changing the packaging. This method is quite common in fast food industry, where efficiency and taste quality are essential in ensuring that the products attract more customers. Packaging in the fast food industry should indicate the nutritional benefits of the products, as many customers are sensitive to health benefits. For instance, McDonald’s has regularly promoted sandwiches through packaging and indicating the level of fat on the package, to encourage customers to purchase them.

Gaining technological advantage is essential for a business to achieve its goals. Technological advantage enhances productivity and market domination. If a firm would like to maintain its competitive edge and high profitability, it should focus on improving its technology through research and development. Decentralized structure is also vital in gaining technology advantage, as it encourages employees to be innovative, which results to discovering new tactics of production that could reduce cost and increase sales. Giant technology firms, such as Google, Apple, Samsung, and Microsoft, are trying to outperform each other through acquiring patents that would safeguard their technology. Today’s businesses are embracing organizational ambidexterity, which can only happen through technological changes. Mobile banking has gained grounds in Africa and India, and the mobile banking providers are working up and down to ensure that they maintain their competitive advantage through advancing their technology. To achieve the firm’s strategy, technology changes should be integrated into the firm’s overall systems, in addition to creating a management structure that support such changes.

Being flexible can assist a firm in maintaining its strategy. It involves mastering the environment, which incorporates customers, suppliers, and government regulations. During economic uncertainties and low productivity era, the firm should consider refining its strategy to fit the current environment needs. When a firm comes to such situation, a more adaptive approach is necessary to assist in refining its goals and tactics, which can, in turn, helps in using resources effectively (Reeves, Love & Tillmanns, 2012). Oil industry is usually hit by uncertainties and, thus, should consider adaptive approach, which would incorporate reducing current consumption costs, automating as many processes as possible, and identifying products that cause redundancy in the functionality of a system.

Pricing of products and services in a firm determines how the firm will earn its profits and revenue. The firm that employs pricing strategy must enjoy a market power that can allow discriminative pricing. In order to achieve the pricing strategy, a firm should keep its prices low to attract more customers than its competitors. Although selling at low price will result in low profit margins, the firm should invest on advertisement in order to sell more products and, consequently, make more money. A firm can employ price skimming, particularly when it focus on launching a new product in the market. Price skimming, which is normally used in technology industry, involves setting high prices on initial offers to recover the costs incurred in advertising and production. However, the demand of the new product must be inelastic to enable the firm to employ price skimming. When a firm realizes that certain regions enjoy high incomes, and the living standards in such regions are high, the firm can set the prices depending on geographical situations. The firm can decentralize its strategy through geographical pricing to benefit from such situations.

Conclusion

Organizations have numerous choices to take when it comes to internal business operations. These choices constitute the organizational structure that guides on how businesses should be managed to achieve their goals. Both domestic and global businesses operate through the concept of organizational architecture, where different designs serve different purposes. Vertical differentiation employs different levels to coordinate activities in the firm. This structure is essential for small businesses as it exercises a single center of power, but in complex situations, vertical differentiation is quite expensive due to too many levels of authority. Horizontal differentiation is necessary when a firm is in need of diversifying its product offering. Its advantage is that it is flexible and permits firms to enjoy product innovation. Horizontal differentiation is quite difficult to manage due to the level of specialization. Integration mechanisms combine both vertical and horizontal systems to enhance communication, as well as coordination of functions through direct contact, teamwork, liaison roles, and matrix structures. Organizational structure is essential in achieving business strategy, as the type of structure that the firm will take influences strategies.

References

Burton, R. M., & Obel, B. (2004). Strategic organizational diagnosis and design: The dynamics of fit. Boston [u.a.: Kluwer.

Gupta, B., & Singh, A. (2014). Strategy & Structural Dimensions – A Comparative Study of Four Industries. Indian Journal of Industrial Relations, 50(1), 180-192.

Hill, Charles W. L., Jones, Gareth R., & Schilling, Melissa A. (2014). Strategic Management: Theory & Cases: an Integrated Approach. Stamford, CT: Cengage Learning.

 Hill, W. (2013). International business: competing in the global marketplace. New York, NY: McGraw-Hill.

McCarthy, K., Fiolet, M., & Dolfsma, W. (2011). The Nature of the New Firm: Beyond the Boundaries of Organizations and Institutions. Cheltenham: Edward Elgar Pub.

Reeves, M., Love, C., & Tillmanns, P. (2012). Your Strategy Needs A Strategy (Cover Story). Harvard Business Review, 90(9), 76-83.

Soda, G., & Zaheer, A. (2012). A network perspective on organizational architecture: performance effects of the interplay of formal and informal organization. Strategic Management Journal, 33(6), 751-771. doi:10.1002/smj.1966