CHAPTER 12
IMPLEMENTING STRATEGY THROUGH ORGANIZATION
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LEARNING OBJECTIVES
▪ Explain the concept of organization architecture.
▪ Articulate how strategy is implemented through
the right combination of organizational structure,
controls, incentives, process, culture, and people.
▪ Discuss how effective organizational design
enables a company to implement its business
level strategy.
▪ Discuss how effective organization design
enables a company to implement its corporate
level strategy.
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ORGANIZATION ARCHITECTURE
▪ The totality of a firm’s organizational
arrangements including its formal organizational
structure, control systems, incentive systems,
organizational culture, organization processes,
and human capital.
▪ Organizational structure: The combination of the
location of decision-making responsibilities, the
formal division of the organization into subunits,
and the establishment of integrating mechanisms
to coordinate the activities of the subunits.
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ORGANIZATIONAL ARCHITECTURE
▪ Controls: The metrics used to measure the
performance of subunits and make judgments
about how well managers are running them.
▪ Incentives: The devices used to encourage
desired employee behavior.
▪ Organization processes: The manner in which
decisions are made and work is performed
within the organization.
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ORGANIZATIONAL ARCHITECTURE
▪ Organization culture: The norms and value
systems that are shared among the employees of
an organization.
▪ People: The employees of an organization, as
well as the strategy used to recruit, compensate,
motivate and retain those individuals and the
type of people that they are in terms of their
skills, values, and orientation.
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ORGANIZATIONAL STRUCTURE
▪ Organizational structure can be thought of in
terms of three dimensions:
▪ Vertical differentiation: The location of decision
making responsibilities within a structure, referring
to centralization or decentralization, and number of
layers in a hierarchy, referring to whether to
organizational structure is tall or flat.
▪ Horizontal differentiation: The formal division of
the organization into subunits.
▪ Integrating mechanisms: Processes and procedures
used for coordination subunits.
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CENTRALIZATION AND
DECENTRALIZATION
▪ A firm’s vertical differentiation determines where
in its hierarchy the decision-making power is
concentrated.
▪ Centralization: Structure in which the decision making
authority is concentrated at a high level in the
management hierarchy
▪ Decentralization: Structure in which the decision
making authority is distributed to lower level managers
or other employees
▪ Autonomous sub-unit: A sub-unit that has all the
resources and decision-making power required to run the
operation on a day-to-day basis
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TALL ORGANIZATIONS
Limitations
• Communication problems
• Long time taken in decision-making and
adherence
• Distortion of commands and orders
• Increases expenses
Solution
• Delayering: The process of reducing the number of
levels in a management hierarchy
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INTEGRATING MECHANISMS
▪ Ways to increase communication and
coordination among functions and divisions:
▪ Direct contact
▪ Liaison roles
▪ Teams: Formation of a group that represents each
division or department:
▪ Facing a common problem
▪ With a goal of finding a solution to the problem
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STRUCTURAL FORMS
▪ Functional structure: The organizational
structure is built upon the division of labor
within the firm with different functions focusing
on different tasks
▪ Thus, there might be a production function, and R&D
function, a marketing function, a sales function, and so on.
▪ A top manager, such as the CEO, or a small top management
team, oversees these functions. Most single businesses of any
scale are organized along functional lines.
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MULTIDIVISIONAL STRUCTURE
▪ Multidivisional structure: An organizational
structure in which a firm is divided into divisions,
each of which is responsible for a distinct
business area.
▪ Allows a company to grow and diversify while reducing
coordination and control problems
▪ Uses self-contained divisions and has a separate
corporate headquarters staff
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MATRIX STRUCTURE
▪ Matrix structure: An organizational structure in
which managers try to achieve tight coordination
between functions, particularly R&D, production,
and marketing
▪ High technology firms based in rapidly changing
environments will sometimes adopt a matrix structure.
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STRATEGIC CONTROL SYSTEMS
▪ Mechanism that allows managers to monitor and
evaluate:
▪ whether their business model is working as intended.
▪ how their business model could be improved.
▪ Basic structure of competitive advantage:
▪
▪
▪
▪
Control and efficiency
Control and quality
Control and innovation
Control and responsiveness to customers
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FORMAL INTEGRATING MECHANISMS
▪ There is often a need to coordinate the activities
of different functions and divisions within an
organization to achieve strategic objectives.
▪ The formal integrating mechanisms used to
coordinate subunits vary in complexity from
simple direct contact and liaison roles, to teams,
to a matrix structure.
▪ In general, the greater the need for coordination
between sub-units (functions or divisions), the
more complex the formal integrating
mechanisms need to be.
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INFORMAL INTEGRATING
MECHANISMS
▪ Knowledge networks that are supported by an
organization culture that values teamwork and
cross-unit cooperation
▪ Knowledge network: A network for transmitting
information within an organization that is based not on
formal organization structure, but on informal contacts
between managers within an enterprise and on
distributed information systems.
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ORGANIZATION CONTROLS AND
INCENTIVES
▪ Control: The process through which managers
regulate the activities of individuals and units so
that they are consistent with the goals and
standards of the organization
▪ Goal: A desired future state that an organization
attempts to realize
▪ Standard: A performance requirement that the
organization is meant to attain on an ongoing basis
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METHODS OF CONTROL
▪ Personal control: Control by personal contact with
and direct supervision of subordinates
▪ Bureaucratic control: Control through a formal
system of written rules and procedures
▪ Output control: Goals that are set for units or
individuals to achieve and monitoring performance
against those goals
▪ Market control: The regulation of the behavior of
individuals and units within an enterprise by setting
up an internal market for some valuable resource(s),
such as capital
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INCENTIVE CONTROL
▪ Incentives: The devices used to encourage and
reward appropriate employee behavior
▪ When incentives are tied to team performance,
as is often the case, they have the added benefit
of encouraging cooperation between team
members and fostering a degree of peer control.
▪ Peer control: The pressure that employees exert on
others within their team or work group to perform
up to or in excess of the expectations of the
organization
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ORGANIZATIONAL CULTURE
▪ Specific collection of values and norms shared by
people and groups in an organization
▪ Values: The ideas or shared assumptions about what a group
believes to be good, right and desirable
▪ Norms: Social rules and guidelines that prescribe the appropriate
behavior in particular situations
▪ Culture can exert a profound influence on the
way people behave within an organization, on
the decisions that are made, on the things that
the organization pays attention to, and
ultimately, on the strategy and performance of
the firm.
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IMPLEMENTING STRATEGY THROUGH
ORGANIZATION ARCHITECTURE
▪ Strategy and Organization in the Single Business
Enterprise
▪ The business level strategy of the firm
▪ The nature of the environment in which the firm
competes
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STRATEGY, ENVIRONMENT AND THE
NEED FOR INTEGRATION
▪ The need for integration between functions is
greater for firms that are competing through
product development and innovation.
▪ In such organizations there is an ongoing need to
coordinate the R&D, production and marketing
functions of the firm to ensure that:
▪ new products are developed in a timely manner.
▪ that they can be efficiently produced and delivered.
▪ that they match consumer demands.
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INTEGRATION AND CONTROL SYSTEMS:
▪ Low Integration
▪ Bureaucratic controls in the form of budgets are used to
allocate financial resources to each function, and to
control spending by the functions. Output controls will
then be used to assess how well a function is
performing.
▪ High Integration
▪ Bureaucratic controls will again be used for financial
budgets and, as before, output controls will be applied
to the different functions. Output controls will also be
applied to cross-functional product development
teams.
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CHAPTER 11
CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS
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LEARNING OBJECTIVES
▪ Understand the relationship between
stakeholder management and corporate
performance.
▪ Explain why maximizing returns to stockholders
is often viewed as the preeminent goal in many
corporations.
▪ Describe the various governance mechanisms
that are used to align the interests of
stockholders and managers.
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LEARNING OBJECTIVES
▪ Explain why these governance mechanisms do
not always work as intended.
▪ Identify the main ethical issues that arise in
business and the causes of unethical behavior.
▪ Identify what managers can do to improve the
ethical climate of their organization, and to make
sure that business decisions do not violate good
ethical principles.
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STAKEHOLDERS
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STAKEHOLDERS AND CORPORATE
PERFORMANCE
▪ Stakeholders: Individuals or groups with an
interest, claim, or stake in the company
▪ Internal stakeholders: Stockholders and employees,
including executive officers, other managers, and board
members
▪ External stakeholders: All other individuals and groups
that have some claim on the company
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STEPS IN STAKEHOLDER IMPACT
ANALYSIS
▪ Identify stakeholders along with their interests
and concerns
▪ Identify the probable claims of stakeholders on
the organization
▪ Identify important stakeholders from the
organization’s perspective
▪ Identify the resulting strategic challenges
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PROFITABILITY, PROFIT GROWTH, AND
STAKEHOLDER CLAIMS
▪ Stockholders receive a return on investment
from dividend payments and capital appreciation
in the market value of a share
▪ Ways to grow profits:
▪ Participating in a market that is growing
▪ Taking market share from competitors
▪ Consolidating the industry through horizontal
integration
▪ Development of new markets through international
expansion, vertical integration, or diversification
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AGENCY THEORY
▪ Deals with business relationship problems when
decision-making authority is delegated from one
person to another
▪ Relationship between stockholders and senior
managers:
▪ Stockholder - Principal
▪ Senior managers - Agent
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AGENCY PROBLEM
▪ Information asymmetry: Agent has more
information about the resources being managed
than the principal
▪ Laws for monitoring agents:
▪ Codetermination law (Mitbestimmungsgesetz in
German law)
▪ Securities and Exchange Commission (SEC)
▪ Generally agreed-upon accounting principles (GAAP)
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AGENCY PROBLEM
▪ On-the-job consumption: Describes the behavior
of senior management’s use of company funds to
acquire perks
▪ Empire building - Buying new businesses to
increase the size of the company through
diversification
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CHALLENGES FOR PRINCIPALS
▪ Shaping the agents’ behavior to act in
accordance with the goals set
▪ Reducing the information asymmetry
▪ Developing mechanisms for removing agents
who do not act in accordance with the goals
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GOVERNANCE MECHANISMS
▪ Used by principals to:
▪ Align incentives with the agents
▪ Monitor and control agents
▪ Types:
▪
▪
▪
▪
Board of directors
Stock-based compensation
Financial statements
Takeover constraint
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BOARD OF DIRECTORS
▪ Inside directors: Senior employees of the
company
▪ Outside directors: Not full-time employees of
the company
▪ Provide objectivity to the monitoring and evaluation of
processes
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STOCK-BASED COMPENSATION
▪ Stock options: Right to purchase company stock
at a predetermined price at some point in the
future
▪ Strike price - Stock’s trading price when the option was
originally granted
▪ Motivate managers to adopt strategies that increase
the share price of the company
▪ Has become increasingly controversial
▪ Aligns management and stockholder interests
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FINANCIAL STATEMENTS AND
AUDITORS
▪ Quarterly and annual reports of publicly
traded companies are filed with the SEC:
▪ to give accurate information about the way
the agents run the company.
▪ SEC requires that the accounts be
audited by an independent and
accredited accounting firm:
▪ to make sure managers do not misrepresent
the financial information.
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TAKEOVER CONSTRAINT
▪ Risk of being acquired by another company
▪ Corporate raiders - Purchase large blocks of
shares in companies that appear to be pursuing
strategies inconsistent with maximizing
stockholder wealth
▪ Greenmail: Pushing companies to either change their
strategy to benefit stockholders, or charging a premium
for the stocks when the company wants to buy them
back
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GOVERNANCE MECHANISMS INSIDE A
COMPANY
▪ Strategic control systems - Formal target-setting,
measurement, and feedback systems
▪ Establish standards and targets against which
performance can be measured
▪ Create systems for measuring and monitoring
performance on a regular basis
▪ Compare actual performance against the established
targets
▪ Evaluate results and take corrective action if necessary
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GOVERNANCE MECHANISMS INSIDE A
COMPANY
▪ Employee incentives - Motivate employees to
work toward goals central to maximizing longterm profitability
▪ ESOPs
▪ Stock-option grants
▪ Bonus pay
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ETHICS AND STRATEGY
Ethics
• Accepted principles of right or wrong that govern the
conduct of a person, the members of a profession, or
the actions of an organization
Business ethics
• Accepted principles of right or wrong governing the
conduct of businesspeople
Ethical dilemmas
• Situations where there is no agreement over exactly
what the accepted principles of right and wrong are
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ETHICAL ISSUES IN STRATEGY
▪ Due to potential conflict between:
▪ Goals of the enterprise
▪ Goals of individual managers
▪ Fundamental rights of important stakeholders
▪ Noblesse oblige - Responsibility of people of high
birth to give something back to the society that
made their success possible
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RIGHTS OF STAKEHOLDERS
Stakeholders
Rights
Stockholders
• Timely and accurate information about their
investments
Customers
• Be fully informed about the products and services they
purchase
Employees
• Safe working conditions
• Fair compensation for the work they perform
• Just treatment by managers
Suppliers
• Expect contracts to be respected
Competitors
• Expect that the firm will abide by the rules of
competition and not violate the basic principles of
antitrust laws
Communities and
the general public
• Expect that a firm will not violate the basic
expectations that society places on enterprises
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UNETHICAL BEHAVIOR ARISING FROM
AGENCY PROBLEMS
Self-dealing
• Managers using company funds for personal use
Information manipulation
• Managers use their control over corporate data to distort or hide
information
• To enhance their own financial situation or the competitive
position of the firm
Anticompetitive behavior
• Aimed at harming actual or potential competitors to enhance the
long-run prospects of the firm
Opportunistic exploitation
• Managers rewriting the terms of a contract to make it favorable to
the firm
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UNETHICAL BEHAVIOR ARISING FROM
AGENCY PROBLEMS
Substandard working conditions
• Managers underinvest in working conditions or pay employees
below-market rates
• To reduce their production costs
Environmental degradation
• Occurs when a company’s actions directly or indirectly result in
pollution or other forms of environmental harm
Corruption
• Can arise when managers pay bribes to gain access to lucrative
business contracts
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ROOTS OF UNETHICAL BEHAVIOR
▪ Personal ethics: Generally accepted principles of
right and wrong governing the conduct of
individuals
▪ Failing to ask oneself if a decision is ethical
▪ Some organizational cultures de-emphasize
business ethics
▪ Pressure to meet unrealistic performance goals
▪ Unethical leadership
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BEHAVING ETHICALLY
▪ Favor hiring and promotion with a well-grounded
sense of personal ethics
▪ Build an organizational culture that places a high
value on ethical behavior
▪ Code of ethics: Formal statement of the ethical
priorities to which a business adheres
▪ Ensure that leaders practice and preach ethical
behavior
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BEHAVING ETHICALLY
▪ Ensure people consider the ethical dimension of
business decisions
▪ Use ethics officers
▪ Put strong governance processes in place
▪ Act with moral courage
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