Organizational Structure Simulation

SIMULATION TITLE:Organizational Structure SIMULATION DESCRIPTION:Holden Evan, Inc. is a global powerhouse in branded consumer packaged goods. The company has a divisional structure with three distinct SBUs: Beauty, Health, and Home and Family. Last year the company's Health SBU generated negative press for its disastrous entry into China when sales flopped. The same year, each of Holden Evan's SBUs was caught off guard by dramatic increases in the costs of several manufacturing inputs. The CEO tasks you, the newly-hired SVP of Worldwide Operations, with making a thorough study as to what caused the disasters last year, and with providing thoughtful recommendations. You earned100percent. Background Holden Evan, Inc. is a global powerhouse in branded consumer packaged goods. The company is organized into three distinct Strategic Business Units (SBUs): Beauty, Health, and Home and Family. Holden Evan's corporate strategy is built around its leading market brands. Products of all SBUs are marketed to consumers and sold (with few exceptions) to the same retailers in all markets. The company's growth is driven by ongoing marketing and brand management. Each of the SBUs has limited autonomy and is responsible for its own marketing, expansion of product lines, and performance. The parent company is the ultimate overseer and handles legal and financial functions. Background Last year the company's Health SBU generated negative press for its disastrous entry into China. For years, the SBU had performed its own research and analysis of the Chinese market from its U.S. headquarters. When the SBU finally introduced its products into China, sales flopped. The SBU spent more than $200 million entering the new market with little to show for it. It was discovered that the Beauty SBU, which had been selling its products in China for years, possessed reams of up-to-date information about the Chinese market; none of this information was ever shared with its sister SBU. Background The same year, each of Holden Evan's SBUs was caught off guard by dramatic increases in the costs of many of their manufacturing inputs including energy, raw grains, and chemicals. Some brands were rendered unprofitable by these costs. Corporate profit margins dipped for the first time in years. Background You are the newly-hired SVP of Worldwide Operations for Holden Evan. The CEO tasks you with making a thorough study about what caused the disasters last year and thoughtful recommendations on how to avoid occurrences like this in the future. Organizational Culture Your initial impressions working at Holden Evan reinforce everything you heard and read about the company. Most employees are highly educated, self-motivated, technically proficient professionals who appear able to handle diverse problems. They require little direction or supervision and for the most part exhibit high standards of professional conduct. The headquarters staff is more structured and formal, but the people are no less educated, motivated, and professional. The Chief Financial OfÏcer, Chief Counsel, Senior Vice President of Operations, and heads of the three SBUs all report to the CEO. Before you dive into issues regarding organizational structure, you need to confirm which general organizational form is most appropriate for Holden Evan given what you have learned about the company's corporate culture, employees, and work habits. Choosing an Organizational Form Based on your observations, what organizational form will you choose for Holden Evan? YOU CHOSE OPTION1 The organic form. Flexibility is important to adapt to changing conditions, and Holden Evan's senior staff generally need few rules and little direct supervision. You correctly chose the organic organizational form for Holden Evan. This was appropriate because the employees are professionals who can be trusted to work without extreme rules and regulations. This form will help employees respond to problems on their own, giving the company flexibility and the ability to respond quickly. Meet Your Team Your direct supervisor is the Chief Executive OfÏcer of Holden Evan. You have a team of three Business Analysts: Enrique, Melissa, and Susan, who have all been at Holden Evan for years. They can advise you on the ins and outs of Holden Evan's corporate structure, culture, and operations. Holden Evan's Divisional Structure You ask your analysts to prepare a study of Holden Evan's current organizational structure, its inner workings, and their perception of what happened during the Health SBU's disastrous entry into the China market. Enrique provides you with a chart of Holden Evan's current organizational structure (below). Enrique says, "'Executive Leadership/ Control' refers primarily to the Chief Executive OfÏcer of the parent company, who provides leadership to the SBU managers. Each of the SBUs has limited autonomy. The SBU manager has authority over his SBU and is responsible for its performance. Each SBU has its own marketing, sales, research and development, manufacturing, procurement, human resources, and accounting functions. The parent company provides finance and legal support to each of the SBUs." Workings of Divisional Structure Melissa reports on the inner workings of the company. She says: "The SBUs are accountable to the parent company for their performance, which historically has worked pretty well; but the SBUs also compete with each other. Each SBU is pretty much self-sufÏcient, with only finance and legal services provided by the parent company. Some of the competition is healthy, such as the three Research and Development functions competing in terms of innovation and successful new products, or the procurement functions competing to keep the costs of raw materials down. Other ways the SBUs compete may not be so healthy, such as the three marketing teams competing by not sharing market intelligence or the human resources functions competing for the same, highly-qualified candidates or even recruiting from other SBUs." The China Market Debacle Susan reports on the factors that led to the Health SBU's disastrous entry into the market in China. "The Health SBU has a large marketing team here at headquarters. They are usually very effective, but in the case of the China market they really messed up. They knew the Beauty SBU successfully entered China two years ago, but they were convinced they could do it better. They never approached the Beauty SBU to tap into their China market data and research. Instead, they decided to perform all their research from headquarters because they thought they could do a better job. The Health SBU's focus on outperforming another SBU led them to use expensive and inferior marketing information. That's probably why they failed so miserably." Making a Decision You now have enough information about Holden Evan's corporate structure and how it has worked or fallen short in the past. You decide to make a recommendation to address the problems that led to the China market debacle. What is your recommendation? YOU CHOSE OPTION3 Stay with the divisional SBU structure, but merge the marketing and sales functions into a single division for the entire company. To avoid a repeat of the problems that led to the “China debacle,” you chose to modify Holden Evan’s divisional structure by combining the marketing departments of the three SBUs into a single marketing department serving all brands and SBU’s. This was an optimal choice. A single marketing department will prevent duplication of work (such as researching the Chinese market) and decrease competition. It will also foster information sharing throughout the marketing operation Evaluating the Organizational Structure The company's next big push is to introduce the products of the Health SBU into India. How will your restructured marketing team approach this effort and avoid the problems associated with the push into China? YOU CHOSE OPTION2 By combining the marketing team into one group, the new team will be able to capitalize on previous knowledge, avoid duplication of effort, and hopefully decrease competition. You recognized that combining the three SBU marketing teams should eliminate unhealthy SBU competition, duplication of effort, and lack of information sharing. Evaluating the Organizational Structure The marketing team will be responsible for managing each brand on an ongoing basis. How is this organizational structure the best choice for brand management? YOU CHOSE OPTION3 A consolidated marketing group will allow individual brand managers to use the resources of the entire marketing organization rather than just the resources of their SBU. You answered that a consolidated marketing group will allow individual brand managers to use the resources of the entire marketing organization rather than just the resources of their SBU. This was an optimal choice. Addressing Increased Costs You turn your attention to the commodity price spikes last year. You ask your analyst team to report on the company's procurement processes and the reasons that the price spikes caught the company off guard. After a week of investigation, the team reports back to you. Enrique says: "Raw materials are purchased by the procurement teams of each SBU. The goal of each procurement team is to purchase commodities at the lowest possible price, which they do by buying when they believe prices are low, and holding inventory. The teams compete against each other by measuring actual purchase prices against prevailing market prices." Addressing Increased Costs Melissa says: "At the time of the commodity price spikes last year, the three procurement teams were doing a good job of keeping costs down compared with spot market prices. Their ‘lowest price' strategy worked, but worldwide spot market prices for electricity, raw grains, and chemicals all spiked at about the same time. The procurement teams weren't expecting this." Addressing Increased Costs Susan says: "What bothers me most about the price spikes last year is that our major competitors made it through the year with far better profit margins on similar products. I'm certain these competitors purchase similar volumes of energy, raw grains, and chemicals in relation to their sales volumes; but they managed the market price spikes much better than we did. The only way they could achieve this is by hedging: buying contracts to ensure against price swings." Addressing Increased Costs The information from Susan is distressing. Holden Evan is a branded consumer products powerhouse; it is not a commodity price hedging company. Building and maintaining a sophisticated commodity hedging team would be prohibitively expensive; but you can't leave Holden Evan exposed to future commodity price spikes. You wonder if there is a good way to outsource commodity price hedging to an outside firm with strong capabilities in this area. You are also concerned about the wisdom of having a separate procurement team for each SBU. It is clear that combining the buying power of all three SBUs would produce savings. Addressing Increased Costs What action will you take to more effectively manage commodity costs? YOU CHOSE OPTION3 Consolidate your three SBU procurement teams into one. Enter into agreements with suppliers of energy, raw grains, and chemicals, to utilize their hedging expertise to protect Holden Evan against price spikes and earn fees based on the savings they generate for your company. You correctly recognized the benefits of combining your three SBU procurement teams. You also recognized that partnering with major suppliers with extensive commodity hedging expertise can result in Holden Evan enjoying the benefits of effective commodity price hedging without taking on the risk of establishing an in-house hedging team. This is a beneficial application of a network organizational structure. Shared Services You consider the remaining functions within each SBU: research and development, manufacturing, human resources, and accounting. You believe you could generate significant savings by consolidating functions which are not product-specific. What are the best options for consolidation? YOU CHOSE OPTION3 Consolidate human resources and accounting. You chose to consolidate human resources and accounting. Although consolidation is never easy and both Human Resources and Accounting do add value to the organization, these were the optimal areas to consolidate. These two departments are not SBU- or productspecific, unlike research and development and manufacturing. Shared Services You ask your analyst team to study the human resources and accounting functions of each SBU. They report back to you after a week: Enrique reports: "The HR function of each SBU appears to be pretty entrenched. The HR departments are reasonably effective in their basic functions, but are not at all respected by the employees they serve. Complaints are common. Senior management of each SBU is so focused on growing revenues they haven't noticed the growing expense of the human resources function." Shared Services Melissa reports: "The accounting functions of the Health SBU and Beauty SBU are pretty lean and highly effective. Generally speaking they work well together with other functions within the SBU, they tend to produce high quality work on a timely basis, their accuracy and adherence to accounting standards is strong, and their work is timely. The costs in these departments are not out of line. The accounting function within the Home and Family SBU is a different story. The professionalism is evident as in the other SBUs, but something is out of whack with their costs, and should be investigated." You thank Enrique and Melissa for their reports and consider the information presented to you. Shared Services What will you recommend regarding the accounting and human resources functions within the SBUs? YOU CHOSE OPTION1 You launch a corporate level performance review and audit of the human resources departments of all three SBUs and the accounting department of the Home and Family SBU to determine whether they are effective and why their costs are high. You chose to launch a corporate level performance review and audit of the human resources departments of all three SBUs and the accounting department of the Home and Family SBU to determine whether they are effective and why their costs are high. Based on the preliminary report by your analysts this was the optimal choice, because the report revealed signs of mismanagement within these functions and a lack of attention by SBU senior management. A corporate level review and audit is appropriate. 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