Strategic Management/ Business Policy Power Point Set #10: Organization Structures & Incentive...
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- Strategic Management/ Business Policy Power Point Set #10:
Organization Structures & Incentive Systems
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- Corporate Governance Corporate governance represents the
relationship among stakeholders that is used to determine and
control the strategic direction and performance of organizations.
Agency costs are the sum of incentive costs, monitoring costs,
enforcement costs, and individual financial losses incurred by
principals because it is impossible to use governance mechanisms to
guarantee total compliance by the agent.
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- Agency Problems Berle and Means in The Modern Corporation
inquired whether we have any justification for assuming that those
in control of a modern corporation will also choose to operate it
in the interests of the stockholders? (1932: p. 121) What are the
institutions of capitalism which lessen the problem of the
separation of (share- holder) ownership (the risk-bearing
principals) from control (managerial decision-making agents)?
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- Agency Problems What are the institutions of capitalism that
lessen the problem of the separation of ownership from control? 1.
Takeovers (the market for corporate control); 2. Recruitment of
executives from outside the firm; 3. Monitoring by boards of
directors; 4. Compensation heavily weighted toward stock options;
5. Monitoring by institutional investors; 6. Debt (minimize free
cash flow; e.g., LBOs); 7. Separate Chairperson and CEO; and 8.
Internal control of Multidivisional --- miniature capital
market
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- Organizing the Diversified Firm The multidivisional
organization, as documented by Alfred D. Chandler in Strategy and
Structure, was pioneered in the 1920s by pioneering firms such as:
DuPont, General Motors, Sears and Standard Oil; By 1967, two-thirds
of Fortune 500 Companies are multidivisional.
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- Organizing the Diversified Firm Three key features of
organizational structure : 1. The division of tasks; 2. The depth
of the hierarchy (span of control); 3. The extent of authority
delegation (how much decentralization?)
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- Evolutionary Stability of the Multidivisional Form Parable of
the Two Watchmakers 10,000 parts Watchmaker #1 needs to put all
parts together or the watch falls apart and he needs to start all
over with his 10,000 parts. Watchmaker #2 has developed 100
subsystems of 100 parts. This is the principle of
near-decomposability (I.e., a system that contains localized
sub-systems)
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- Evolutionary Stability of the Multidivisional Form Hierarchical
systems (containing sub-systems) will evolve much more rapidly from
elementary constituents than will non-hierarchic systems containing
the same number of elements. In organization theory this is called
the effectiveness of loose coupling. The advantage of loose
coupling is that if there is poor performance in division 2 it does
not lead to failure of the entire system.
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- Effectiveness of Multidivisional Form Effective
Divisionalization involves: Identification of separable economic
activities within the firm; Giving quasi-autonomous standing to
each division (usually of a profit center nature); Monitoring the
efficiency performance of each division; Awarding incentives;
Allocating cash flow to high yield uses; and Performing strategic
planning (diversification, acquisition, and related
activities)
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- Weaknesses of Multidivisional Form Dysfunctional Aspects of the
Multidivisional: Emphasis on short-term perspective; Loss of
economies of scope; Duplication of R&D, marketing, etc.;
Emphasis on financial manipulation instead of developing firm
capabilities and resources; and Large conglomerates may have
excessive political power.
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