Policy Unit 3

Since business decisions are not made in a vacuum but are embedded within a societal context that expects ethical behavior, managers can improve their decision making by also considering:

1, When facing an ethical dilemma, a manager can ask whether the intended course of action falls within the acceptable norms of professional behavior as outlined in the organization's code of conduct and defined by the profession at large. 2. The manager should imagine whether he or she would feel comfortable explaining and defending the decision in public. How would the media report the business decision if it were to become public? How would the company's stakeholders feel about it?

Inside directors

Board members who are generally part of the company's senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.

Span of control

The number of employees who directly report to a manager.

Global strategy

part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

The topic of executive compensation—and CEO pay, in particular—has attracted significant attention in recent years. Two issues are at the forefront:

The absolute size of the CEO pay package compared with the pay of the average employee. The relationship between CEO pay and firm performance.

Board of directors

The centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders.

Organizational culture

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

Matrix structure

The idea behind the matrix structure is to combine the benefits of the M-form (domain expertise, economies of scale, and the efficient processing of information) with those of the functional structure (responsiveness and decentralized focus).

Several factors led to a shift in the knowledge landscape from closed innovation to open innovation

The increasing supply and mobility of skilled workers. The exponential growth of venture capital. The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. The increasing capability of external suppliers globally.

Organizational design

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

Porter's Diamond of National Competitive Advantage

1. factor conditions 2. demand conditions 3. competitive intensity in focal industry 4. related and supporting industries/complementors

CAGE distance framework

A decision framework based on the relative distance between home and a foreign target country along four dimensions: cultural distance, administrative and political distance, geographic distance, and economic distance.

Exploration

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

Shareholder capitalism

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

CEO/chairperson duality

Situation where the CEO of a publicly traded company is also the chairperson of the board of directors.

Integration-responsiveness framework

strategy framework that juxtaposes the pressures an MNE faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally.

National competitive advantage

world leadership in specific industries

To ensure that managers can reconnect economic and societal needs, Michael Porter recommends that managers focus on three things within the shared value creation framework:

1. Expand the customer base to bring in nonconsumers 2. Expand traditional internal firm value chains to include more nontraditional partners 3. Focus on creating new regional clusters

Advantages of going global

1. Gain access to a larger market 2. Gain access to low-cost input factors 3. Develop new competencies

Disadvantages of going global

1. Liability of foreignness 2. Loss of reputation 3. Loss of intellectual property

The public stock company enjoys four characteristics that make it an attractive corporate form:

1. Limited liability for investors. This characteristic means the 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. Limited liability encourages investments by the wider public and entrepreneurial risk-taking. 2. Transferability of investor ownership through the trading of shares of stock on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ,8 or exchanges in other countries. Each share represents only a minute fraction of ownership in a company, thus easing transferability. 3. Legal personality—that is, the law regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations. Legal personality allows a firm's continuation beyond the founder or the founder's family. 4. Separation of legal ownership and management control. In publicly traded companies, the stockholders (the principals, represented by the board of directors) are the legal owners of the company, and they delegate decision-making authority to professional managers (the agents).

The pattern for successful firms often follows a particular 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.

Open Innovation Principles

1. Not all smart people in the field work for us. We need smart people inside and outside the company 2. External R&D can create significant value 3. We dont have to originate the research to profit from it 4. If we make the best use of internal and external ideas, we will win 5. We should profit from others' use of our IP

Closed Innovation Principles

1. The smart people in the field work for us 2. To profit from R&D, we must discover it, develop it, and ship it ourselves. 3. If we discover it ourselves, we will get it to the market first 4. If we create the most and the best ideas in the industry, we will win 5. We should control our IP so that our competitors don't profit from our ideas

Multinational enterprise (MNE)

A firm that owns business operations in more than one country

Ambidexterity

A firm's ability to address trade-offs not only at one point but also over time. It encourages managers to balance exploitation with exploration.

Absorptive capacity

A firm's ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.

Inertia

A firm's resistance to change the status quo, which can set the stage for the firm's subsequent failure.

Open innovation

A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out.

Organizational structure

A key to determining how the work efforts of individuals and teams are orchestrated and how resources are distributed.

Shared value creation framework

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

Founder imprinting

A process by which the founder defines and shapes an organization's culture, which can persist for decades after his or her departure.

Leveraged buyout (LBO)

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.

Moral hazard

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.

Groupthink

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

Adverse selection

A situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives.

Corporate governance

A system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally.

Agency theory

A theory that views the firm as a nexus of legal contracts.

The MBA Oath

A voluntary student-led pledge of intention to serve the greater good. They promised to act responsibly and ethically and refrain from advancing their "own narrow ambitions" at the expense of others.

Advantages and disadvantages of a multidivisional structure

A: Accommodates growth (horizontal, vertical, and geographic), Clear profit & loss responsibilities at SBU level, run by CEO or equivalent, Efficient processing of information, Allows for different competitive strategies at SBU-Ievel, while integration takes place at corporate level D: Additional layer of corporate hierarchy (i.e., corporate headquarters) when moving from functional to M-Form structure, SBUs stand in competition to one another, Political infighting, Opportunistic behavior by SBUs

Advantages and disadvantages of a matrix structure

A: Accommodates growth (horizontal, vertical, and geographic), Combines advantages of functional structure with M-Form D: Two layers of organizational structure create multiple principal-agent relationships, Slow in decision making, Potentially inaccurate performance appraisals, Quite difficult to implement

Advantages and disadvantages of a functional structure

A: Clear, top-down lines of authority and decision making, Deeper domain expertise, Higher productivity due to specialization and division of labor, Responsive organization D: Emergence of silos (i.e., no effective communication across different departments), Growth is limited, Employee alienation, especially in startups that move from simple structure to functional one

Advantages and disadvantages of a simple structure

A: Fast decision-making, Nimble and responsive organization, Integration of expertise across areas, Given low bandwidth, organizations with simple structures are easily pushed into "crisis mode," requiring "all hands on deck" D: CEO overload, Lack of domain expertise in distinct business functions (e.g., accounting, finance, marketing, etc.), Unable to accommodate growth, No separation of strategic and day-to-day decision making

Business ethics

An agreed-upon code of conduct in business, based on societal norms.

Stock options

An incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right (but not the obligation) to buy a company's stock at a predetermined price sometime in the future.

Ambidextrous organization

An organization able to balance and harness different activities in trade-off situations.

Formalization

An organizational element that captures the extent to which employee behavior is steered by explicit and codified rules and procedures. Formalized structures are characterized by detailed written rules and policies of what to do in specific situations. Formalization is not necessarily negative; often it is necessary to achieve consistent and predictable results.

Specialization

An organizational element that describes the degree to which a task is divided into separate jobs (i.e., the division of labor). Larger firms, such as Fortune 100 companies, tend to have a high degree of specialization; smaller entrepreneurial ventures tend to have a low degree of specialization. Specialization requires a trade-off between breadth and depth of knowledge.

Hierarchy

An organizational element that determines the formal, position-based reporting lines and thus stipulates who reports to whom.

Centralization

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

Holacracy

An organizational structure in which decision-making authority is distributed through loose collections or circles of self-organizing teams.

Exploitation

Applying current knowledge to enhance firm performance in the short term.

Benefits and risks of a transnational strategy

B: Attempts to combine benefits of localization and standardization strategies simultaneously by creating a global matrix structure, Economies of scale, location, experience, and learning. R: Global matrix structure is costly and difficult to implement, leading to high failure rate, Some exchange-rate exposure, Higher risk of IP expropriation.

Benefits and risks of a multidomestic strategy

B: Highest-possible local responsiveness, Increased differentiation, Reduced exchange-rate exposure. R: Duplication of key business functions in multiple countries leads to high cost of implementation, Little or no economies of scale, Little or no learning across different regions, Higher risk of IP expropriation.

Benefits and risks of an international strategy

B: Leveraging core competencies, Economies of scale, Low-cost implementation through: Exporting or licensing (for products), Franchising (for services), Licensing (for trademarks). R: No or limited local responsiveness, Highly affected by exchange-rate fluctuations, IP embedded in product or service could be expropriated.

Benefits and risks of a global standardization strategy

B: Location economies: global division of labor based on wherever best-of-class capabilities reside at lowest cost, Economies of scale and standardization. R: No local responsiveness., Little or no product differentiation, Some exchange-rate exposure, "Race to the bottom" as wages increase, Some risk of IP expropriation.

Outside directors

Board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals.

Mechanistic organization

Characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making. Ex: McDonald's

Organic organization

Characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. Ex: W.L. Gore

Poison pill

Defensive provisions to deter hostile takeovers by making the target firm less attractive.

Stages of Globalization

Globalization 1.0 - 1900-1941 Globalization 2.0 - 1945-2000 Globalization 3.0 - 21st century

Strategic control-and-reward systems

Internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees).

The Integration-Responsiveness Framework: Global Strategy Positions and Representative MNEs

International, multi-domestic, global standardization, and transnational

Foreign direct investment (FDI)

Investment made by a foreign company in the economy of another country.

Input controls

Mechanisms in a strategic control-and-reward system that seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures that are considered before the value-creating activities.

Output controls

Mechanisms in a strategic control-and-reward system that seek to guide employee behavior by defining expected results (outputs), but leave the means to those results open to individual employees, groups, or SBUs.

Simple structure

Organizational structure in which the founders tend to make all the important strategic decisions as well as run the day-to-day operations. It is generally used by small firms with low organizational complexity. Typically, neither professional managers nor sophisticated systems are in place, which often leads to an overload for the founder and/or CEO when the firms experience growth.

Multidivisional structure (M-form)

Organizational structure that consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility. Because most large firms are diversified to some extent across different product lines and geographies, the M-form is a widely adopted organizational structure.

Functional structure

Organizational structure that groups employees into distinct functional areas based on domain expertise. These functional areas often correspond to distinct stages in the value chain such as R&D, engineering and manufacturing, and marketing and sales, as well as supporting areas such as human resources, finance, and accounting. The department head of each functional area reports to the CEO, who coordinates and integrates the work of each function.

Global-standardization strategy

Strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost. The global-standardization strategy arises out of the combination of high pressure for cost reductions and low pressure for local responsiveness. Because there is little or no differentiation or local responsiveness because products are standardized, price becomes the main competitive weapon.

Multidomestic strategy

Strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies. This strategy arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions. MNEs frequently use a multidomestic strategy when entering host countries with large and/or idiosyncratic domestic markets.

Transnational strategy

Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable). This strategy arises out of the combination of high pressure for local responsiveness and high pressure for cost reductions. A transnational strategy is generally used by MNEs that pursue a blue ocean strategy at the business level by attempting to reconcile product and/or service differentiations at low cost.

International strategy

Strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets. It is advantageous when the MNE faces low pressures for both local responsiveness and cost reductions.

Liability of foreignness

additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances

Global hypothesis

assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogeneous.

Death-of-distance hypothesis

assumption that geographic location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally

Location economies

cost advantages from performing a value creation activity at the optimal location for that activity

Cultural distance

cultural disparity between an internationally expanding firm's home country and its targeted host country

Local responsiveness

the need to tailor product and service offerings to fit local consumer preferences and host-country requirements

Globalization

the process by which businesses or other organizations develop international influence or start operating on an international scale.

National culture

the set of values that a society considers important and the norms of behavior that are approved or sanctioned in that society