Strategic Management/ Business Policy

Strategic Management/ Strategic Management/ Business PolicyBusiness Policy

Joe Mahoney

Corporate GovernanceCorporate Governance

Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations.

Corporate GovernanceCorporate Governance

An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service.

An agency relationship exists when:

Shareholders (Principals)

Firm Owners

Managers (Agents)

DecisionMakers

which creates

Agency RelationshipRisk Bearing Specialist

(Principal)

Managerial Decision-Making Specialist

(Agent)

HireHire

Agency Theory

The Basic Tasks of OrganizationThe Basic Tasks of Organization

ORGANIZATIONAL CHALLENGE: design structure & systems that:

• Permit specialization• Facilitate coordination by grouping individuals & link

groups with systems of communication, decision making, & control

• Deploy incentives to align individual & firm goals

Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees = goals of ownersTHE AGENCY PROBLEM

Corporate GovernanceCorporate GovernanceAgency 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.

Agency ProblemsAgency ProblemsBerle and Means (1932) 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 ownership from control?

Agency ProblemsWhat are the “institutions of capitalism” which lessen the problem of the separation of ownership from control?

1. Takeovers (the market for corporate control)2. Recruitment of executives from outside the firm3. Monitoring by boards of directors4. Executive compensation heavily weighted toward stock options5. Monitoring by institutional investors

Managerial Economics 10e © 2003 South-Western/Thomson Learning 16–6

Institutional Stock Ownership Among Large U.S. FirmsInstitutional Stock Ownership Among Large U.S. FirmsInstitutional Stock Ownership Among Large U.S. Firms

Figure 16.4bFigure 16.4b

Agency ProblemsAgency Problems

What are the “institutions of capitalism” which lessen the problem of the separation of ownership from control?

6. Debt (minimize free cash flow). E.g., LBOs

7. Separate chairperson and CEO8. Internal control of multidivisional as a “miniature capital market”

Organizing the Diversified FirmOrganizing the Diversified Firm

A brief historythe separation of the corporate headquarters

The types of organizational structuresU Form = single businessH Form = holding companyM Form = multidivisional

Innovative firms: Dupont, General Motors, Sears, and Standard Oil (see Alfred D. Chandler, Strategy and Structure)

Organizing the Diversified FirmOrganizing the Diversified Firm

Three key features of organizational structure:

1. The principle governing the division of tasks;2. The depth of the hierarchy (span of control);3. The extent of authority delegation (how much centralization?)

©2000South-Western College Publishing

Cincinnati, OhioDaft, Organizational Theory and Design, 7/e

11-7

Choice Processes in the Choice Processes in the Carnegie ModelCarnegie Model

Hold joint discussionand interpret goals and problems

Share opinions

Establish problem priorities

Obtain social supportfor problem, solution

Adopt the firstalternativethat is acceptableto the coalition

Conduct a simple,local search

Use established procedures ifappropriate

Create a solutionif needed

Managers havediverse goals,opinions, values,experience

Information is limitedManagers havemany constraints

Uncertainty Coalition Formation Search

Satisficing

Conflict

(a) Self Organizing Team:

10 interactions

(b) Hierarchy:

4 interactions

How Hierarchy Economizes on CoordinationHow Hierarchy Economizes on Coordination

Tightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation

Loose-coupled, modular hierarchy: organizing a complex system into sub-systems and components linked by standardized interfaces permits decentralized adaptation

Hierarchy Allows Flexible AdaptationHierarchy Allows Flexible Adaptation

The Diffusion of the M-Form OrganizationThe Diffusion of the M-Form Organization

Organization Form 1949 1959 1969Functional (U-Form) 76% 49% 21%Product Division (M-Form) 20% 48% 76%Geographic Division (M-Form) 0% 2% 2%Holding Company (H-Form) 4% 1% 2%

Evolutionary Stability of the Multidivisional Form

There are properties common to a very broad class of complex systems

• physical systems• chemical systems• biological systems• social systems• business systems (e.g., Southwest

Airlines)


Think of a hierarchy as a set of “Chinese boxes” (I.e., a box within a box, within a box, etc.)

Nature loves sub-systems!Chemical system Biological systems

• Molecules - Tissues• Atoms - Cells• Nuclei - Genes• Electrons - Chromosomes• Elementary Particles - DNA


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)


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. In comparison to the multidivisional structure, the early functionally centralized organizations had all activities interrelated which was not a good survival property.

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; andPerforming strategic planning (diversification, acquisition, and related activities)

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;Large conglomerates may have excessive political power.

Multidivisional FormThe multidivisional structure was an adaptive response to the strategy of diversification.

“Unless (multidivisional) structure follows (diversification) strategy, inefficiency results”

• Alfred D. Chandler, 1962, Strategy and Structure, p. 314

• Dupont ---> multi-divisional <------ General Motors family-owned holding company

Board of Directors

President’s Council Corporate Functions

North American Operations

Delphi Automotive Systems

International Operations

GM Acceptance Corporation

Hughes Electronics

Midsize & Luxury Car Group

Small Car Group

GM Power Train Group

Vehicle Sales, & Marketing Group

Development & Technical Cooperation Group

GM Europe

Asian & Pacific Operations

Latin American, African, & Middle East Operation

General Motors’ Organization Structure, 1997General Motors’ Organization Structure, 1997

General Electric’s Organization Structure, 1995General Electric’s Organization Structure, 1995

Board of Directors

Corporate Executive Office

Lighting NBC Motors

Transportation Systems

Aircraft Engines

Industrial Power Systems

Medical Systems

Appliances

Capital Services

Information Services

Electrical Distribution & Control

Plastics

Corporate Staff Functions: Tax, Treasury, Audit. M&A, Legal, Business Public Relations, Government Development Relations, Leadership Development

Service DivisionsAerospace Environmental GE Licensing/ Marketing Technology Programs Supply Trading &Sales

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

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Multidivisional StructureMultidivisional Structure

Oil Division(FunctionalStructure)

PharmaceuticalsDivision (ProductTeam Structure)

Plastics Division(Matrix Structure)

Typical ChemicalTypical ChemicalCompanyCompany

Corporate Headquarters Staff

CEO

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

11-10

Sources of Sources of Bureaucratic CostsBureaucratic Costs

Number ofMiddle

ManagersMotivational

ProblemsCoordination

ProblemInformationDistortion

BureaucraticCosts


Cincinnati, OhioDaft, Organization Theory and Design 7/e

3-34

ProductManager A

ProductManager B

ProductManager C

ProductManager D

Directorof ProductOperations

DesignVice

President

MfgVice

President

MarketingVice

PresidentController

Procure-ment

Manager

President

DualDual--Authority Structure in a Authority Structure in a Matrix OrganizationMatrix Organization



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Matrix Structure forMatrix Structure forWorldwide Steel CompanyWorldwide Steel Company

President

IndustrialRelations

VicePresident

Mfg.Services

VicePresident

FinanceVice

President

MarketingVice

President

Mfg.Vice

President

MetallurgyVice

President

Field SalesVice

President

Open DieBusiness Mgr.

Ring ProductsBusiness Mgr.

Wheels & AxlesBusiness Mgr.

SteelmakingBusiness Mgr.

Vertical Functions

Horiz

ontal

Func

tions


Cincinnati, OhioDaft, Organizational Theory and Design, 7/e

13-22

Global Matrix StructureGlobal Matrix StructureInternational

ExecutiveCommittee

PowerTransformers

Germany Norway Argentina/Brazil

Spain/Portugal

Transportation

Industry

BusinessAreas

Country Managers

LocalCompanies



3-39

Strengths of Matrix structureStrengths of Matrix structure Achieves coordination necessary to meet Achieves coordination necessary to meet

dual demands from environmentdual demands from environment Flexible sharing of human resources Flexible sharing of human resources

across productsacross products Suited to complex decisions and frequent Suited to complex decisions and frequent

changes in unstable environmentchanges in unstable environment Provides opportunity for functional and Provides opportunity for functional and

product skill developmentproduct skill development Best in mediumBest in medium--sized organizations with sized organizations with

multiple products.multiple products.



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Weaknesses of Matrix structureWeaknesses of Matrix structure Causes participants to experience dual authority, Causes participants to experience dual authority,

which can be frustrating and confusing.which can be frustrating and confusing. Participants need to have good interpersonal Participants need to have good interpersonal

skills and extensive training.skills and extensive training. Is timeIs time--consuming: involves frequent meetings consuming: involves frequent meetings

and conflict resolution sessions.and conflict resolution sessions. Will not work unless participants understand it Will not work unless participants understand it

and adopt collegial rather than verticaland adopt collegial rather than vertical--type type relationships.relationships.

Requires dual pressure from environment to Requires dual pressure from environment to maintain power balance.maintain power balance.



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FunctionalStructure

Hybrid StructureHybrid StructurePart 1. Sun Petrochemical ProductsPart 1. Sun Petrochemical Products

President

TechnologyVice

President

FinancialServicesVice Pres.

HumanResourcesDirector

ChiefCounsel

ChemicalsVice

President

LubricantsVice

President

FuelsVice

PresidentProductStructure

Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982): 46-66;and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.



3-47

Hybrid StructureHybrid StructurePart 2. Ford Customer Service DivisionPart 2. Ford Customer Service Division

Director andProcess Owner

Director andProcess Owner

Sources: Based on Linda S. Ackerman, “Transition Management:An In-Depth Look at Managing Complex Change,” Organizational Dynamics(Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

HumanResources

Strategy andCommunicationFinance

Vice President andGeneral Manager

Teams

Teams

Director andProcess Owner Teams

Technical Support Group

Vehicle Service and Programs Group

Parts Supply / Logistics Group

FunctionalStructure

Horiz

ontal

Stru

cture

Teams

Teams



3-50

Symptoms of Symptoms of Structural DeficiencyStructural Deficiency

Decision making is delayed or lacking in Decision making is delayed or lacking in qualityquality

The organization does not respond The organization does not respond innovatively to a changing environmentinnovatively to a changing environment

Too much conflict from departments being Too much conflict from departments being at cross purposes is evidentat cross purposes is evident

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Strategic Management/ Business Policy