MGMT 352 Strategic Management Final Exam Prep Part II

Auditors, Government Regulators, and Industry Analysts

all public companies listed on the US stock exchanges must file a number of financial statements with SEC All public financial statements must follow GAAP and audited by public accounts Industry analysts often base their buy, hold, or sell recommendations on financial statements filed with the SEC and other business news

Shared Value

a concept that involves creating economic value for shareholders while also creating social value by addressing society's needs

Inertia

a firm's resistance to change the status quo, can set the stage for the firm's subsequent failure. They optimize their organizational structure to the current situation

Shared Value Creation Framework

a model proposing that managers have a dual focus on shareholder value creation and value creation for society.

Socialization

a process whereby employees internalize an organization's values and norms through immersion in day-to-day operations

Leveraged Buyout

a single investor or group of investors buys with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private Private companies are not required to disclose financial statements. They focus more on long-term viability Hostile Takeover attempt is successful, the new owner frequently replaces the old management and board of directors to manage the company in a way that creates more value for shareholders.

Exploitation

apply current knowledge to enhance firm performance in the short term

Key components of organizational design

structure, culture, and control

Group-think

a situation in which opinions coalesce around a leader without individuals critically evaluating and challenging that leader's opinions and assumptions

Casual Ambiguity

a situation in which the cause and effect of a phenomenon are not readily apparent casual relationships among values, norms, artifacts, and firm's performance may be hard to establish, even for people who work within the organization. Employees may become aware of the effect culture has on performance only after significant organizational changes occur. it encompasses not only interactions among employees across layers of hierarchy, but also the firm's outside relationships with its customer and suppliers. Initial structure, culture, and control mechanisms established in a new firm can be a significant predictor of later success.

Disadvantages of M-Form

adding another layer of corporate hierarchy (corporate headquarters) increasing bureaucracy, red tape, and duplication of efforts slows decision making because in many instances a CEO of an SBU must get approval from corporate headquarters SBUs frequently end up competing with each other. A high-performing SBU will be rewarded with higher capital budgets and strategic freedom however processes such as resource allocation or transfer pricing between SBUs becomes riddled with corporate politics and turf wars

Business ethics

agreed-upon code of ethics in business, based on societal norms lay the foundation and provide training for "behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society" Staying within the firms is a minimum acceptable standard mortgages offer borrowers the choice to pay less than required interest, which is then added to the principal while the interest rate can adjust upward

Fiduciary Responsiblity

the board is elected by the shareholders to represent their interests board proposes a slate of nominees, although shareholders can directly nominate director candidates.

Control

Internal Governance mechanisms to align the incentives of principals (shareholders) and agents (employees)

The pattern of a successful firm follows this path

1. Mastery of , and fit with, the current environment 2. Success, usually measured by financial measurements 3. Structures, measures, and systems to accommodate and manage size 4. A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment

CEO Pay and Firm Performance

2/3 of CEO pay is linked to firm performance Weak positive link between pay and performance Behavioral economics caution that incentives that are too high-powered may have a negative effect on job performance Focus on bonus instead of job performance

Internal Shifts

Accelerated growth, change in business model, entry into new markets, change in TMT, mergers and acquisitions

Culture

Collectively shared values and norms of an organization's members; a key building block of organizational design

How Managers can reconnect economic and societal needs

Expand the customer base to bring in nonconsumers bottom of pyramid in the global economy can yield significant business opportunities, which if satisfied, could improve the living standard of the world's poorest provide small loans to impoverished villagers, who used it to climb out of poverty Expand traditional internal firm value chains to include more nontraditional partners such as nongovernmental organizations Example: Habitat for Humanity and Greenpeace Focus on creating new region clusters: Silicon Valley

Organizational Culture and Competitive Advantage

Firm's unique culture must help it in some way to increase its economic value creation by either increasing the perceived value of the product/service and/or lower its cost of production/delivery. Organizational Culture should also be valuable, rare, difficult to imitate, and firm must be organized to capture the value created. Valuable = lowering costs and increasing perceived value Rare = none of their competitors has an identical culture Non-Imitable = despite attempts by competitors Organized = to capture some part of incremental economic value created due to their unique cultures

Globalized Business International

Functional

Single Business Blue Ocean Strategy

Functional-Ambidextrous Organization

Single Business Cost Leadership

Functional-Mechanistic Organization

Single Business Differentiation

Functional-Organic Organization

Globalized Business Transnational

Global Matrix - Balanced Centralized/Decentralized

Separation of legal ownership and management control

In publicly-traded companies, the stockholders are legal owners of the company

Building Blocks of Organizational Structure

Key building blocks of structure: specialization, formalization, centralization, and hierarchy

4 attractive characteristics of public firms

Limited Liability for Investors Transferability of Investor Ownership Legal Personality Separation of Legal Ownership and Management Control

Related or Unrelated Diversification

M-Form and related diversification strategy tend to concentrate on decision making at the top of the organization Doing so allows a high level of integration. It helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for related diversification

Diversified Business Related Diversification

M-Form - Cooperative, centralized, centralized decision making

Globalized Business Global Standardized

M-Form -Centralized decision-making

Globalized Business Multi-domestic

M-Form- Decentralized decision-making

Diversified Business Unrelated Diversification

M-form-Competitive, decentralized decision-making

Global-Standardization Strategy

MNE attempts to reap significant economies of scale as well as location economies by pursing a global division based on wherever best-of-class capabilities reside at the lowest cost. cost-leadership strategy multidivisional structure, driving down costs across different geographic areas

Cost Leadership Strategy

Mechanistic Organization reducing the firm's cost below that of competitors while offering acceptable value no-frills, standardized product or service to mainstream customer centralized, with well-defined lines of authority up and down the hierarchy cost leader needs to create incentives to foster process innovation in order to drive down cost focus on economies of scale

External Shift

PESTEL factors

Absolute Size of Package

Ratio of CEO to average employee pay in the United States is about 300 to 1. Salary, stock options, equity grants, bonuses, and pension payments

Shareholder Capitalism

Shareholders- the providers of necessary risk capital and the legal owners of public companies have the most legitimate claim on profits.

Levels of Hierarchy within a public company

State or society grants a charter of incorporation to the company's shareholders, who have ownership in the company. The shareholders appoint a board of directors to govern and oversee the firm's management. The managers hire, supervise, and coordinate employees to manufacture products and provide services

Organizational structure must follow strategy in order for firms to achieve superior performance Structure follows strategy

True

Importance of Artifacts, Norms, Values

Values > Norms > Artifacts

Mechanistic Organizations

are characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making McDonalds is an example every process is documented in detail, decision power is centralized at top of the organization, headquarters talk about menu variations

Inside Directors

are generally part of the company's senior management teams, such as CFO and COO They provide the board with necessary information pertaining to the company's internal workings and performance Inside board members' interests align with management and CEO rather than shareholders.

Strategic Control-and-Rewind

are internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees) rewards employees who apply the values well in their day-to-day decision making allows customer service employees to select their work hours Organizational Culture can be a powerful motivator It can be an effective control system Normas, informal and tacit in nature act as a social control mechanism Each member's compensation depends in part of the group's overall productivity

Outsiders Director

are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously They watch out for interests of shareholders.

Matrix Structure

benefits of M-Form and Functional Structure M-form (domain expertise, economies of scale, and efficient processing of information) and efficient processing of information with those of the functional structure (responsiveness and decentralized focus) Firms use a global matrix structure to pursue a transnational strategy, high local responsiveness with highest cost savings available SBU is charged with driving down costs through economies of scale and other efficiencies cross-function teams work to be permanent rather than project-based Network structure helps to connect centers of excellence, whatever their global location communities of practice, which store important organizational learning expertise

Board independence

board members are directly responsible to shareholders, they have an incentive to ensure that shareholders' interests are pursued. If not, they can experience a loss in reputation or can be removed outright

Formalization

captures the extent to which employee behavior is steered by explicit and codified rules and procedures. characterized by detailed written rules and policies of what to do in specific situations. These are often codified in employee handbooks it is necessary for consistent and predictable results it can slow decision making, reduce creativity and innovation, and hinder customer service

Founder Imprinting

company founders define and shape an organization's culture, which can persist for many decades after their departure. Founders set the initial strategy, structure, and culture of an organization by transforming their vision into reality reinforced by strong preference to recruit, retain, and promote employees who subscribe to the same values More people with similar values are attracted to that organization

International Strategy

company leverages its home-based core competency by moving into foreign markets. Low pressure for local responsiveness and cost reduction differentiation strategy matches with functional organizational structure

Corporate Governance

concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally Lack of it can cause accounting scandals like Enron They attempt to address the principal-agent problem, which the agent performs activities on behalf on of a principal Agents (managers) are more concerned with own livelihood than the principal (shareholders) The risk of opportunism on behalf of agents is exacerbated by information asymmetry: the agents are generally better informed than the principals Example: Insider Trading is example of informational asymmetry

Poison Pill

defensive provisions to deter hostile takeovers by making the target firm less attractive could allow existing shareholders to buy additional shares at a steep discount

Norms

define appropriate employee attitudes behaviors

Values

define what is considered important

Organizational Structure

defines how jobs and tasks are divided and integrated delineates reporting relationships up and down hierarchy defines formal communication channels prescribes how individuals and teams coordinate their work efforts Key building blocks of structure: specialization, formalization, centralization, and hierarchy

Ambidexterity

describes a firm's ability to address trade-offs not only at one point but also over time managers must constantly analyze their existing business processes and routines, looking for ways to change them in order to resolve trade-offs across internal value chain activities and time

Moral Hazard

describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party bailing out homeowners from their mortgage obligations or bailing out banks from the consequences of undue risk-taking in lending. The costs of default are rolled over to society. agent is able to do work but may decide not do. Like a researcher doing personal project instead of work project to open own company

Organizational Culture

describes the collectively shared values and norms of an organization's members

Specialization

describes the degree to which a task is divided into separate jobs, that is division of labor Larger firms have high degree specialization, while smaller entrepreneurial ventures tend to have a low degree of specialization Which a high degree of division of labor increases productivity, it can also have unintended side effects such as reduced employee job satisfaction due to the repetition of tasks.

Standard Operating Procedures

detailed operating procedures to ensure consistent quality and service worldwide specify the conversion process from beginning to end in great detail to guarantee standardization and minimize deviation

Structure

determines how the work efforts of individuals and teams are orchestrated and how resources are distributedd

Hierarchy

determines the formal, position-based reporting lines and thus stipulates who reports to whom If many hierarchy exist between frontline employee and CEO in firm A, it has a tall structure In flat structures, the span of control is wide, meaning one manager supervises many employees Flat organizations put more pressure on remaining managers who have to supervise and monitor more direct reports due to an increased span of control

Strong Cultures

emerge when the company's core values are widely shared among the firm's employees and when the norms have been internalized

Disadvantages of Functional Structure

facilitates rich and extensive communication between members of the same department, but frequently lacks effective communication channels across departments CEO must take on the necessary coordination and integration work To solve this, a firm can set up cross-functional teams. In these temporary teams, members come from different functional areas to work together on a specific project or product, usually from start to completion. A second critical drawback is it cannot effectively address a higher level of diversification, which often stems from further growth

Agency Theory

firm as a nexus of legal contracts corporations are viewed as a set of legal contracts between different parties Agency theory finds its everyday application in employment contracts informational advantage over management, who tells that a project took longer to accomplish than it actually did, so they can spend time on YouTube Creating a second company with the purpose of siphoning and stealing secrets for another company

Single business or dominant strategy at the corporate level gain at least 70% of their revenue from their primary activity

functional structure

Simple Structure

generally is used by small firms with low organizational complexity founders tend to make all the important strategic decisions Flat hierarchies operated in a decentralized fashion. They exhibit a low degree of formalization and specialization

Executive Compensation

grants stock options as part of the compensation package it gives the recipient the right, but not the obligation to buy a company's stock at a predetermined price sometime in the future. If the company's share price rises above the negotiated strike price, the executive stands to reap significant gains Two issues at the forefront 1. absolute size of the CEO pay package compared with the pay of the average employee 2. The relationship between CEO pay and firm performance

Functional Structure

groups employees into distinct functional areas based on domain expertise these functional areas include distinct stages in the value chain such as R&D, engineering and manufacturing, marketing and sales it allows for a higher degree of specialization and deeper domain expertise than a simple structure. Higher specialization also allows for a greater division of labor, which is linked to higher productivity it is centrally coordinated by the CEO. A functional structure allows for an efficient top-down and bottom-up communication chain between the CEO and functional departments.

CEO/chairperson duality

holding both the role of CEO and chairperson of the board has been declining somewhat in recent years A board of directors broadly oversees a company's business activities CEO acts a liason between the company and the board CEO is public face of the company CEO has valuable information that can help in chairing the board effectively, however, it can influence the board unduly though setting the meeting agendas or suggesting board appointees who are friendly toward the CEO

Core rigidity

if a firm relies too long on the competency without honing, refining, and upgrading as the firm and the environment change. Over time, the original core competency is no longer a good fit and turns from an asset into a liability The primary means of cultural change is for the corporate board of directors to bring in new leadership at the top, which is then charged to make changes in strategy and structure. After all, executives shape corporate culture in their decisions on how to structure the organization and its activities, allocate its resources, and develop its system of rewards.

Disadvantages of Matrix Structure

implementing two layers of organizational structure creates significant organizational complexity and increases administrative costs Slow decision making and increase bureaucratic costs complexity increases when expanding, especially globally Unclear reporting structure causes confusion and delays creating multiple principal-agent relationships

Artifacts

include elements such as the design and layout of physical space (e.g. cubicles or private offices), symbols ( the type of clothing worn by employees), vocabulary, what stories are told, what events are celebrated

Adverse Selection

information asymmetry increases the likelihood of selecting inferior options. Agents misrepresents his/her ability to do the job Principal may not be able to accurately assess whether the agent can do the work for which he or she is being paid. Once hired, the principal may not be able to accurately assess whether the agent can do the work for which he or she is being paid Employees can free-ride off efforts of others

Organizational Design

is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization

Organic Organizations

low degree of specialization and formalization, flat organizational structure, and decentralized decision making Fluid and flexible information among employees in horizontal and vertical directions, and higher employee motivation, retention, and creativity faster decision making, higher employee motivation, retention, satisfaction higher rate of entrepreneurial behaviors and innovation allow firms to foster R&D and marketing, as a core competency

Multi-domestic Strategy

maximize local responsiveness in the face of low pressures for cost reductions. Global strategy would be multidivisional organizational structure, which would allow MNE to set up different divisions based on geographic regions. Different geographic divisions operate more or less as standalone SBUs to maximize local responsiveness Decision Making is decentralized

Differentiation Strategy

offering products or services at a higher perceived value, while controlling costs Sells a non-standardized product or service to specific market segments in which customers are willing to pay a higher price. Organic Organization Decision making tends to decentralized to foster and incentivize continuous innovation and creativity as well as flexibility and mutual adjustment across areas constantly upgrade necessary core competencies in R&D, innovation, and marketing

Firms using M-Form to support an unrelated-diversification

often decentralize decision making, which allows general managers to respond to specific circumstances, and leads to a low level of integration at corporate headquarters decentralized decision making competition among SBUs for resources

Ambidextrous Organization

one that enables managers to balance and harness different activities in trade-off situations lean manufacturing systems, total quality management, just-in-time inventory management, and six sigma.

Multidivisional Structure

or M-form consists of several distinct strategic business units (SBUs), each with its own profit-and-loss responsibility Each SBU is operated more less independently from one another, and each is led by a CEO who is responsible for the unit's business strategy and its day-to-day operations. A widely adopted organizational structure Corporations use SBUs to organize around different businesses and product lines or around different geographic regions. Each SBU represents a self-contained business with its own hierarchy and organizational structure Corporate office supports all of company's SBUs, but are centralized at corporate headquarters to benefit from economies of scale and to avoid duplication within each SBU

Externalities

pollution, wasted energy, and costly accidents actually creates internal costs, at least in lost reputation if not directly on the bottom line

Blue-Ocean Strategy

reconciliation between differentiation and low cost it must balance centralization to control costs with decentralization to foster creativity and innovation it needs several distinct core competencies to both drive up perceived value and lower cost It must pursue both product and process innovation in an attempt to reap economies of scale and scope. Low-cost position requires an organizational structure that relies on strict budget controls Differentiation requires an organizational structure that allows creativity and customer responsiveness to thrive, which typically necessitates looser organizational structure and controls

Centralization

refers to the degree to which decision making is concentrated at the top of the organization. Centralized decision making correlates with slow response time and reduced customer satisfaction Top-down strategic planning takes place in highly centralized organizations Planned emergence is found more in decentralized organizations

Exploration

searching for new knowledge that may enhance a firm's future performance

Input Controls

seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures used when the goal is to define the ways and means to reach a strategic goal and to ensure a predictable outcome management designs these mechanisms so they are considered before employees make any business decisions use of budgets before employees are allowed to allocate money towards a project Companies using M form, the corporate headquarters determines the budgets for each division

Output Controls

seek to guide employee behavior by defining expected results (output) but leave the means to the results open to individual employees, groups, or SBUs. Firms frequently tie employee compensation and rewards to predetermined goals, such as specific sales targets. When factors internal to the firm determine the relationship between effort and expected performance, outcome controls are especially effective. Results-Only-Work-Environment that use extrinsic motivation Autonomy (about what to do), Mastery (how to do it), Purpose (why to do it)

Limited Liability for Investor

shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Encourages economic risk taking

Board of directors

the centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders goals of some shareholders, such as institutional investors (retirement funds, governmental bodies, are generally the long-term viability of the enterprise combined with profitable growth. Long-term viability and growth should allow dividends and stock appreciation Selecting, Evaluating, and Compensating the CEO Overseeing the company's succession plan Providing guidance to the CEO in the selection evaluation, and compensation of other senior executives Reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions such as large acquisitions Conducting a thorough risk assessment and proposing options to mitigate risk. The boards of directors of the financial firms at the center of the global financial crisis were faulted for not noticing or not appreciating the risks the firms were exposed to

Legal Personality

the law regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations allows continuation beyond the founder or founder's family

Span of control

the number of employees who directly report to a manager

Code of Conduct

to go beyond the minimum acceptable standard codified in law, many organizations have "this" allow an organization to overcome moral hazards and adverse selections as they attempt to resonate with employees' deeper value of justice, fairness, honesty integrity, and reciprocity When facing an ethical dilemma, a manager can ask whether the intended course of action falls within the acceptable norms of professional behavior The manager should imagine whether he or she would feel comfortable explaining and defending the decision in public.

Transferability of Investor Ownership

trading of shares of stock on exchanges such as the New York Stock Exchange and NASDAQ or exchanges in other countries. Each share represents only a minute fraction ownership in a company

The Market for Corporate Control

whereas the board of directors and executive compensation are internal corporate-governance mechanisms market for corporate control is an external corporate-governance mechanism activist investors who seek to gain control of an underperforming corporation by buying shares of its stock in the open market If a company is poorly managed, its performance suffers and its stock price falls as more and more investors sell their shares. Once shares fall to a low enough level, the firm may become the target of a hostile takeover when new bidders believe they can fix the internal problems that are causing the performance decline