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Implementing Corporate Diversification

By Dwi Joko Pramudito WA Song Young Kang Jay B Barney, Chapter 12. Implementing Corporate Diversification. Agency Cost Organizational Structure Management Control System Compensation Policies. Agency Cost.

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Implementing Corporate Diversification

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  1. By Dwi Joko Pramudito WA Song Young Kang Jay B Barney, Chapter 12 Implementing Corporate Diversification

  2. Agency Cost • Organizational Structure • Management Control System • Compensation Policies

  3. Agency Cost • The cost of actions taken to reduce agency problems and the cost of unresolved agency problems • Source of Agency Costs: • Managerial Perquisites • Managerial Risk Aversion

  4. Agency Costs • Monitoring, Bonding and Residual Agency Costs • Monitoring mechanisms are institutional devices through which a firm’s equity holder can observe, measure, evaluate and control managerial behavior • Bonding mechanisms are investments or policies that manager adopt to reassure outside equity holders that they will behave in ways consistent with equity holders’ interests when making decision

  5. Organizational Structure

  6. Major Component of the M-Form Structure

  7. Major Component of the M-Form Structure

  8. Major Component of the M-Form Structure

  9. Management Control Systems • Management controls fall into two categories: • Financial or output control Focus on the financial and other results of manager’s strategic and other decision • Strategic or process control focus on the quality of the strategic decision process in which a manager has engaged

  10. Evaluating Divisional Performance • Measuring divisional performance with accounting numbers • Setting account performance standards • Establishing budgets • Limits of accounting measures of divisional performance • Managerial discretion • Short term bias • Agency problem

  11. Evaluating Divisional Performance • Measuring divisional economic performance: • EVA (economic value added) • EVA = adjusted accounting earning – (WACC x total capital employed by division)

  12. Allocating Corporate Capital • Zero-Based Capital Budgeting • List all capital allocation requests from divisions in a firm, rank them from “most important” to “least important” and then fund all the projects a firm can afford • Cross-Divisional Capital Allocation • Firms bring their division general managers (with their staffs) together with the senior executive (with corporate staffs) and the shared activity managers, to decide collectively how capital should be allocated

  13. Transferring Intermediate Product

  14. Compensation Policies • A firm’s compensation policies constitute a final set of monitoring and bonding mechanism for implementing a diversification strategy • A study showed that if a substantial percentage of a CEO’s compensation came in the form of stock and stock options in the firm, changes in compensation would be closely linked with changes in the firm’s performance

  15. Thank You

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