Organisational Management and Information Systems: Doug Mchardie Highlights Two Key Models-Porter's Value Chain and Mintzberg's Organigram-That Focus on Organisational Interrelationships

By Mchardie, Doug | Financial Management (UK), December 2007 | Go to article overview

Organisational Management and Information Systems: Doug Mchardie Highlights Two Key Models-Porter's Value Chain and Mintzberg's Organigram-That Focus on Organisational Interrelationships


Mchardie, Doug, Financial Management (UK)


You may be tempted to consider the Organisational Management and Information Systems syllabus as a series of unrelated topics that can be learned in isolation. The reality is that paper P4 emphasises the basic building blocks of a modern business and, more crucially, how they relate to each other.

Michael Porter, a leading authority on competitive strategy, has developed a range of pragmatic strategic models. His value chain (1985) is covered in the P4 syllabus. It serves as an overview of the activities that occur in an organisation (see diagram 1). It's based on a manufacturing company, but it can be adapted for other contexts. The basic idea of the value chain is that a company makes its products by performing a series of interrelated activities that will combine to generate a customer perception of value. The higher the value placed on the products, the more likely it is that the customers will:

* Pay a higher price for the products.

* Buy the company's products again.

* Tell other people that the company's products are worth buying.

All of these factors contribute to sales growth and can be a source of competitive advantage. To achieve such a perception, the organisation's activities need to be things that will enhance customer value in an economical and efficient way.

[ILLUSTRATIONS OMITTED]

If you visit a restaurant, you can compare the experience with the alternative of eating at home. The restaurant adds value by making the meal, delivering it to your table and washing up afterwards. Other elements of customer service are also provided while you are its guest--ambience, for example. The activities that create the dining experience--buying food (procurement), making meals (operations) and waiting on customers (service)--incur a cost to the restaurant. You place a value on the meal, which will influence your decisions on whether to dine there again, what tip to pay etc. The extent to which this value exceeds the cost of the activities in providing it is the profit that the restaurant makes.

The value chain is split into organisation-wide support activities and primary activities related to making products and dealing with customers. The primary activities include inbound logistics (the management of raw material stocks); operations, including the manufacturing process; and outbound logistics (the warehousing and dispatch of goods). The support activities include IT and R&D (under the "technology development" heading), procurement and HR management.

A business can use the value chain to identity ways to increase its profits. These could include continuing existing activities but at a lower cost--eg, by achieving procurement economies--or performing different activities that will also be valued by customers.

Porter highlighted the importance of the connections between activities--the value chain is only as strong as its weakest link. Poor co-ordination between parts of the business could lead to costly mistakes and a loss of customer satisfaction. For example, the sales team might promise an order that the production department can't deliver on time. The interrelatedness of a business's activities reflects the approach taken by P4, which will often require you to discuss linked areas--eg, capacity management and marketing.

Henry Mintzberg, a keen observer of organisational behaviour, created the organigram, a visual description of the key elements of an organisation (see diagram 2) in 1979. The model starts with the strategic apex of senior managers, from which the direction of the organisation is set. That direction is converted into tasks, which are overseen by the middle line of managers. Their staff, known as the operating core, actually produce the goods and services. Support staff--eg, finance and HR--assist the rest of the organisation. And the techno-structure strives for standardisation--eg, compliance and quality control.

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