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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