Strategic Management & Competitive

Advantage: Concepts and Cases

Sixth Edition, Global Edition

Chapter 8
Organizing to Implement
Corporate Diversification

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Learning Objectives (1 of 2)

8.1 Describe the multidivisional, or M-form, organizational

structure and the roles of the board of directors, the senior
executive, corporate staff, divisional general managers,
and shared activity managers in making the M-form
structure work.

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Learning Objectives (2 of 2)

8.2 Describe how three management control processes—

measuring divisional performance, allocating corporate
capital, and transferring intermediate products—are used to
help implement a corporate diversification strategy.
8.3 Describe the role of management compensation in
helping to implement a corporate diversification strategy.

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The Strategic Management Process

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WHAT IS ORGANIZING AND WHY
IS IT IMPORTANT?
The previous chapters discussed diversification and how firms expand to
own multiple businesses in their portfolio. While embarking on
diversification moves to maximize economies of scope* is vital to having a
successful corporate strategy, a large diversified firm has to be managed
and governed efficiently.

Employees must be organized into groups, reporting relationships

established, resource allocation processes must be developed – in short,
the company should be organized to function as a diversified organization.

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The three components of organizing to
implement any strategy are:

1.Organizational Structure
2.Management Control
3.Compensation Policy

Are also important in implementing corporate

diversification strategies!!!

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Implementation Issues

• How Information Flows

• Where and By Whom Are Decisions Made
• How to Influence the Behavior of People

– How can the interests of employees be aligned

with the interests of the firm?

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The Need for Organizational Structure

Information Processing Requirements

• As organizations become larger and more complex,
information processing requirements exceed individual
capacity.
– Bounded rationality means that people have a limit
on their capacity to handle information.

• Organizational structure divides information processing

into manageable blocks (span of control).

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M-Form Structure

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The Board of Directors
• The board’s primary responsibility is to monitor decision
making in the firm, ensuring that it is consistent with the
interests of outside equity holders.

• A board’s composition is a key issue. Board members can

be internal or external.

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The Senior Executive

The main functions of the senior executive are to:

• formulate strategy, and

• implement strategy.

• Strategy formulation entails deciding which set of

businesses a diversified firm will operate in;
• Strategy implementation focuses on encouraging
behavior in a firm that is consistent with this strategy.

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The Office of the President (1 of 2)

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The Office of the President (2 of 2)

Information Filtering
• Information about the divisions’ businesses is filtered as
it rises to the senior executive.
– The senior executive can “manage” the
information flow.
▪ Information flow should not exceed the bounded
rationality of managers at any level in the
organization.
▪ Information flow should be matched with decision-
making authority.

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Division General Managers

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Shared Activity Managers

Division Division Division

Finance Production Finance Production

Engineering Engineering

Sales &
Shared Marketing
Activities
Human
Resources

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Management Controls
Three Issues

Evaluating Divisional Allocating Capital Transferring

Performance Intermediate
Playing Games: Products
Measurement:
• zero-based Setting Prices:
• Accounting measures budgeting
(ROA, ..etc.) • Transfer price
• Economic value added • Opportunity
(EVA) Cost
Ambiguity:
• allocating costs and
revenues
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Compensation Policies
Aligning Incentives
Research Shows

Tied to Stock Options

Performance

Not Tied to Cash Bonus

Performance
Salary

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Summary

• Successful implementation is a matter of:

– appropriately breaking information processing into
manageable blocks
– aligning the interests of owners and managers
• These can be accomplished through:
– Organizational Structure
– Management Controls
– Compensation Policies

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