Download Organizaing to Implement Corporate Diversification

Chapter 8
Organizing to Implement
Diversification
The Strategic Management Process
External
Analysis
Mission
Strategic
Choice
Objectives
Internal
Analysis
Strategy
Implementation
Competitive
Advantage
Implementing
Corporate
Diversification
8-2
Implementation Issues
How Information Flows
Where and By Whom are Decisions Made
How to Influence the Behavior of People
• how can the interests of employees
be aligned with the interests of the firm?
8-3
The Need for Organizational Structure
Information Processing Requirements
• as organizations become larger and more complex,
information processing requirements exceed
individual capacity
• bounded rationality
• satisficing
• organizational structure divides information
processing into manageable blocks (span of control)
8-4
M-Form Structure
Board of Directors
Senior Executive
Corporate
R&D
Corporate
Finance
Division
Finance
Strategic
Planning
Division
Production
Sales &
Marketing
Corporate
Human
Resources
Corporate
Marketing
Engineering
Division
Accounting
Human
Resources
8-5
The Agency Relationship
A Trade Off
M-Form Structure
Divides Information
Processing
Requirements Into
Manageable Blocks
Divides Owners
From Managers
Interests of Owners and
Managers May Diverge
8-6
The Agency Relationship
Managing Agency
Principals
Monitors
Individual
Shareholders
Agents
Senior
Executives
Division
General
Managers
Corporate
Staff
Shared
Activity
Managers
Board
Of
Directors
Institutional
Shareholders
Dual
Role
8-7
The Office of the President
One Person
Two People
Three People
Chairman
of the
Board
Chairman
Chairman
(monitoring)
CEO
Chief
Executive
Officer
Chairman
(strategy formulation)
COO
Chief
Operating
Officer
(strategy implementation)
COO
CEO
CEO
Chairman
CEO
COO
COO
8-8
The Office of the President
Information Filtering
• information about the divisions’ businesses
is filtered as it rises to the senior executive
• the senior executive can ‘manage’ the information
flow
• information flow should not exceed the
bounded rationality of managers at any
level in the organization
• information should flow should be matched
with decision-making authority
8-9
Division General Managers
Senior Executive
Corporate
R&D
Corporate
Finance
Division
Finance
Strategic
Planning
Division
Production
Sales &
Marketing
Corporate
Human
Resources
Corporate
Marketing
Engineering
Division
Accounting
Human
Resources
8-10
Shared Activity Managers
Division
Finance
Production
Finance
Engineering
Shared
Activities
Division
Division
Production
Engineering
Sales &
Marketing
Cost Centers
Human
Resources
Profit Centers
8-11
Management Controls
3 Issues
Evaluating
Divisional
Performance
Measurement:
• accounting
• economic value
added (EVA)
Ambiguity:
• allocating costs
& revenues
Allocating
Capital
Playing Games:
• managers want
to look good
• zero-based
budgeting
Transferring
Intermediate
Products
Setting Prices:
• negotiation
• cost
• market-based
• dual pricing
8-12
Compensation Policies
Compensation Committee
In theory…
• represents interests of owners in setting compensation
of top executive team
• sets compensation based on performance or market
In practice…
• sometimes appear to be beholden to executives
• compensation decisions often bear little relationship
to performance
8-13
Compensation Policies
Aligning Incentives
Research shows…
Tied to
Performance
Not Tied to
Performance
Theory predicts…
Stock Options
Stock Grants
Cash Bonus
Salary
Long Time
Horizon
Short Time
Horizon
8-14
Refocusing
Corporate level strategy may call for
exiting a business
• a conglomeration discount may exist
• the corporation may lack necessary skills
• expected economies of scope may not exist
• the corporation may need funds for core activities
MBO
Divest
Assets
or,
Spin-off
IPO
8-15
Summary
Successful implementation is a matter of:
• appropriately breaking information processing
into manageable blocks
• aligning the interests of owners and managers
These can be accomplished through:
• Organizational Structure
• Management Controls
• Compensation Policies
8-16
8-17
Implementation issues in related versus unrelated
diversification
8-18
Unrelated Diversification
For unrelated diversification, the multibusiness model is based on
general managerial capabilities in entrepreneurship,
organizational design, or strategy.
•
•
•
Operates as a ‘portfolio’ of independent businesses
▫ Divisions have considerable autonomy
▫ No integration among divisions is necessary
▫ Businesses bought & sold as conditions change
▫ Idea of ‘corporate culture’ is meaningless
No exchanges or linkages among divisions
▫ Easiest and cheapest strategy to manage
▫ Lowest level of bureaucratic costs
Controls to evaluate divisional performance easily and accurately
▫ Each division evaluated by output controls, e.g. ROIC
▫ Sophisticated accounting controls
8-19
Vertical Integration
The vertically integrated company requires the
centralized control – in order to achieve the benefits
from the sequential flow of resources from one
division to the next.
• Bureaucratic costs are more complex and expensive than
unrelated diversification
• Multidivisional structure provides necessary controls to
achieve benefits from the control of resource transfers
• Must strike balance between centralized and decentralized
control
• Divisions must have input regarding resource transfer
• Integration is managed through a combination of corporate
and divisional controls
8-20
Related Diversification
Principle benefits of related diversification
come from transferring, sharing, or
leveraging functional resources or skills and
some exchange of distinctive competencies
across divisions.
• Gains derived from the transfer, sharing, or leveraging
across divisions
• Output control difficult as businesses share
resources
• Integration and control at divisional level required
• Incentives and rewards for cooperation necessary
Problem: We know there needs to be integration, but we do
not know how much
8-21
Corporate Strategy and Structure and
Control
8-22