Chapter 8

Organizing to
Implement
Corporate
Diversification

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 8-1

 Organizing to Implement Corporate Diversification

The Strategic Management Process

External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Internal
Analysis Implementing
Corporate
Diversification

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-22
 Organizing to Implement Corporate Diversification

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?

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-33
 Organizing to Implement Corporate Diversification

The Need for Organizational Structure

Information Processing Requirements

• as organizations become larger and more complex,

information processing requirements exceed
individual capacity

• bounded rationality
• satisficing

• organizational structure divides information

processing into manageable blocks (span of control)

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-44
 Organizing to Implement Corporate Diversification

M-Form Structure
Board of Directors

Senior Executive

Corporate Corporate
Corporate Strategic Corporate
R&D Human
Finance Planning Marketing
Resources

Division Division Division

Finance Production Engineering Accounting

Sales & Human

Marketing Resources
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.
Strategic Management & Competitive Advantage – Barney & Hesterly 8-55
 Organizing to Implement Corporate Diversification

The Agency Relationship

A Trade Off

M-Form Structure

Divides Information
Divides Owners
Processing Requirements
From Managers
Into Manageable Blocks

Interests of Owners and

Managers May Diverge

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-66
 Organizing to Implement Corporate Diversification

The Agency Relationship

Managing Agency

Principals Monitors Agents

Division
Individual Senior
General
Shareholders Executives
Board Managers
Of
Directors Shared
Institutional Corporate
Activity
Shareholders Staff
Dual Managers
Role

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-77
 Organizing to Implement Corporate Diversification

The Office of the President

One Person Two People Three People
Chairman
of the Chairman Chairman
Board
(monitoring)
CEO
Chief Chairman COO
Executive CEO
CEO
Officer
(strategy formulation) COO
Chairman
Chief
Operating CEO COO
Officer
(strategy implementation) COO

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-88
 Organizing to Implement Corporate Diversification

The Office of the President

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 should flow should be matched

with decision-making authority

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-99
 Organizing to Implement Corporate Diversification

Division General Managers

Senior Executive

Corporate Corporate
Corporate Strategic Corporate
R&D Human
Finance Planning Marketing
Resources

Division Division Division

Finance Production Engineering Accounting

Sales & Human

Marketing Resources

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-10
10
 Organizing to Implement Corporate Diversification

Shared Activity Managers

Division Division Division

Finance Production Finance Production

Engineering Engineering

Sales &
Cost Centers
Shared Marketing
Activities
Human
Resources Profit Centers

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-11
11
 Organizing to Implement Corporate Diversification

Management Controls
3 Issues

Evaluating Transferring
Allocating
Divisional Intermediate
Capital
Performance Products

Measurement: Playing Games: Setting Prices:

• accounting • managers want • negotiation
• economic value to look good
• cost
added (EVA) • zero-based
• market-based
Ambiguity: budgeting
• dual pricing
• allocating costs
& revenues
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.
Strategic Management & Competitive Advantage – Barney & Hesterly 8-12
12
 Organizing to Implement Corporate Diversification

Compensation Policies

Compensation Committee
In theory…
• represents interests of owners in setting compensation
of top executive team
• sets compensation based on performance or market

In practice…
• sometimes appear to be beholden to executives
• compensation decisions often bear little relationship
to performance

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-13
13
 Organizing to Implement Corporate Diversification

Compensation Policies
Aligning Incentives

Research shows… Theory predicts…

Tied to Stock Options Long Time

Performance Horizon
Stock Grants

Cash Bonus Short Time

Not Tied to
Performance Horizon
Salary

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-14
14
 Organizing to Implement Corporate Diversification

Refocusing
Corporate level strategy may call for
exiting a business
• a conglomeration discount may exist
• the corporation may lack necessary skills
• expected economies of scope may not exist

• the corporation may need funds for core activities

MBO
Divest
or, Spin-off
Assets
IPO
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.
Strategic Management & Competitive Advantage – Barney & Hesterly 8-15
15
 Organizing to Implement Corporate Diversification

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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-16
16
 Organizing to Implement Corporate Diversification

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

Strategic Management & Competitive Advantage – Barney & Hesterly 8-17
17