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    Organizational Structure

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    Superior Living, Inc. is a private, domestic US manufacturer of home furniture targeted at US consumers ages 21 to 54 (from first time apartment renters to empty nesters). The company generates US$250 million in revenues from six product lines: outdoor patio, luxury, durable rental, children's furniture, rare woods, and space saver. The company sells its products through a number of retailers and has a solid business reputation with distributors and customers.
    Superior Living has divisions for each of the product lines, and each division includes sales, marketing, and manufacturing personnel. The other functional areas-human resources, finance, and information technology-support the entire company. You are the Vice President of Finance, reporting to the Chief Financial Officer (CFO).
    Your role includes the responsibility for financial analysis and financial reporting. This includes developing financial statements, monitoring performance metrics, educating the senior officer team on key financial decisions, and valuing new business opportunities that are presented to the Board of Directors.
    Superior Living is looking to go public in the next 6 to 8 months with an initial public offering (IPO). In addition, the company is aggressively pursuing new business opportunities which may include expansion via acquisition and the development and implementation of new product lines. All of this will require the company to manage its finances extremely well. You are the key officer to lead in this responsibility.
    The CFO has asked you to meet with her to outline the financial plans for the next 12 months. She needs you to develop the three financial statements for the end of the fiscal year, determine the capital investments required for the upcoming year, develop the operating budget, and outline the plan for the IPO. To do this, you will work closely with the VP of Accounting and the head of Strategic Planning.
    You know that the next 12 months can determine the long-term success of Superior Living. The CEO and Board of Directors have made it clear to you and the CFO that the financial plans for the next year should be based on sound, fundamental financial principles and contain as little risk as possible.
    Finally, you understand the company very well and know that the division chiefs-the senior vice presidents who lead the product divisions-wield a great deal of power and must agree to financial plans. Many of them have expressed that they will need significant expenditures next year, stating that "running rate will not be enough," referencing the company's longstanding process of developing expense budgets based on the previous year's expenditures plus a small percentage increase. Furthermore, they all have stated that if a merger should occur, it should be with a product line that compliments their division and is brought under their control.

    You are concerned about the company's largest division--luxury--because cost has been increasing much faster than revenue for the last 3 years. However, the head of the division, who reports directly to the CEO, believes that increased cost is simply a result of internal charge backs for what he terms as "overhead." On many occasions, he has stated that "IT and HR are hiring too many people and driving up my costs." Discuss with the CEO how the structure of the company impacts the cost of the luxury division. Be sure to discuss how changes could be made to incentivize the head of the three areas to work together to control costs.

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    Solution Preview

    The structure of an organization significantly affects the cost structure of an organization. For example, in highly bureaucratic and traditional organizational structures, operating costs pertaining to HR are higher due to multiple levels or hierarchies of employees, resulting in higher salaries and related costs. Further, the decision making in such organizations are slower and thereby, efficiency is reduced.

    In today's modern organizations, companies have become leaner and are pursuing a flat ...

    Solution Summary

    The structure of an organization significantly affects the cost structure of an organization. For example, in highly bureaucratic and traditional organizational structures.