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Chapter 8

Chapter 8. The Strategic Management Process. External Analysis. Strategic Choice. Strategy Implementation. Competitive Advantage. Mission. Objectives. Internal Analysis. Implementing Corporate Diversification. How Information Flows. Where and By Whom are Decisions Made.

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Chapter 8

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  1. Chapter 8

  2. The Strategic Management Process External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Internal Analysis Implementing Corporate Diversification

  3. How Information Flows Where and By Whom are Decisions Made How to Influence the Behavior of People Implementation Issues • how can the interests of employees be aligned with the interests of the firm?

  4. The Need for Organizational Structure Information Processing Requirements • as organizations become larger and more complex, information processing requirements exceed individual capacity • bounded rationality • organizational structure divides information processing into manageable blocks (span of control)

  5. M-Form Structure Board of Directors Senior Executive Corporate Human Resources Corporate R&D Corporate Marketing Corporate Finance Strategic Planning Division Division Division Engineering Accounting Production Finance Sales & Marketing Human Resources

  6. Interests of Owners and Managers May Diverge The Agency Relationship A Trade Off M-Form Structure Divides Information Processing Requirements Into Manageable Blocks Divides Owners From Managers

  7. Principals Monitors Agents The Agency Relationship Managing Agency Division General Managers Individual Shareholders Senior Executives Board Of Directors Shared Activity Managers Institutional Shareholders Corporate Staff Dual Role

  8. Chairman Chairman CEO COO Chairman CEO CEO COO Chairman CEO COO COO The Office of the President Chairman of the Board (monitoring) Chief Executive Officer (strategy formulation) Chief Operating Officer (strategy implementation)

  9. 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

  10. Division General Managers Senior Executive Corporate Human Resources Corporate R&D Corporate Marketing Corporate Finance Strategic Planning Division Division Division Engineering Accounting Production Finance Sales & Marketing Human Resources

  11. Division Engineering Engineering Production Production Finance Finance Sales & Marketing Human Resources Shared Activity Managers Division Division Cost Centers Shared Activities Profit Centers

  12. Transferring Intermediate Products Evaluating Divisional Performance Allocating Capital Management Controls 3 Issues Measurement: Playing Games: Setting Prices: • accounting • managers want to look good • negotiation • economic value added (EVA) • cost • zero-based budgeting • market-based Ambiguity: • dual pricing • allocating costs & revenues

  13. 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

  14. Compensation Policies Aligning Incentives Research shows… Theory predicts… Stock Options Long Time Horizon Tied to Performance Stock Grants Cash Bonus Short Time Horizon Not Tied to Performance Salary

  15. MBO Divest Assets Spin-off IPO 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 or,

  16. Multi-Domestic Strategy Global Strategy International Implementation Decentralized Federation: Centralized Hub: • highly autonomous units • facilitates global integration • very responsive locally • exploits a global product Coordinated Federation: • less autonomous • exploits scale economies • some shared activities between divisions

  17. Transnational Structure International Implementation • facilitates both local responsiveness and global integration • country managers are responsible for exploiting economies of scope • corporate HQ constantly scans the globe looking for best practices

  18. 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

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