Chapter 8 Strategy Implementation and Control Manli Huang School of Business Administration,

1. Chapter 8 Strategy Implementation and Control Manli Huang Schoolof Business Administration, Research Center of Chinese Strategic Management, SCUT

2. Part 1:The Adjustment of Corporate Governance • Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations • Used in corporations to establish order between the firm’s owners and its top-level managers • Concerned with identifying ways to ensure that strategic decisions are made effectively

3. Strategy development and decision-making by managers 1.Modern Firms and Agency Theory Basis of the modern corporation Shareholders purchase stock, becoming Residual Claimants Shareholders reduce risk efficiently by holding diversified portfolios Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks Risk bearing by shareholders

4. An agency relationship exists when: Agency Relationship Shareholders (Principals) Risk Bearing Specialist (Principal) Hire Firm Owners Managerial Decision-Making Specialist (Agent) Managers (Agents) whichcreates Decision Makers

5. Example: Overdiversification because increased productdiversification leads to lower employment risk for managers and greater compensation The Agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately. Solution :Principals engage in incentive-based performance contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market to mitigate the agency problem.

6. Manager and Shareholder Risk and Diversification Shareholder (Business) Risk Profile Managerial (Employment) Risk Profile S Risk M Level of Diversification A Related Constrained Related Linked Dominant Business B Unrelated Businesses

7. Principals may engage in monitoring behavior to assess the activities and decisions of managers • However, dispersed shareholding makes it difficult andinefficient to monitor management’s behavior For example :Boards of Directors have a fiduciary duty to shareholders to monitor management - However, Boards of Directors are often accused of being lax in performing this function

8. 2.Governance Mechanisms Ownership Concentration Boards of Directors Executive Compensation Multidivisional Organizational Structure

9. Ownership Concentration - Large block shareholders have a strong incentive to monitor management closely -Their large stakes make it worth their while to spend time, effort and expense to monitor closely -They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

10. Boards of Directors - Insiders - Related Outsiders - Outsiders - Review and ratify important decisions - Set compensation of CEO and decide when to replace the CEO - Lack contact with day to day operations

11. Recommendations for more effective Board Governance • - Increase diversity of board members backgrounds • - Strengthen internal management and accountingcontrol systems • - Establish formal processes for evaluation of the board’s performance

12. Executive Compensation Salary, Bonuses, Long term incentive compensation • Executive decisions are complex and non-routine • Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes • In addition, stock ownership (long-term incentivecompensation) makes managers more susceptible to market changes which are partially beyond theircontrol Incentive systems do not guarantee that managers make the right decisions, but they do increase the likelihood that managers will do the things for which they are rewarded

13. Multidivisional Organizational Structure Designed to control managerial opportunism • Corporate office and Board monitor managers strategic decisions • Increased managerial interest in wealthmaximization M-form structure does not necessarily limit corporate-level managers’ self-serving actions • May lead to greater rather than less diversification Broadly diversified product lines makes it difficult for top-level managers to evaluate the strategic decisions of divisional managers

14. Part 2:Effective Strategic Leadership • The strategic leadership includes board of directors and top managers. • The effective strategic leadership needs a good cooperative relation between the board of directors and top managers. • The effective strategic leadership needs the board of directors to set up suitable top management team and choose suitable CEO. • The effective strategic leadership need top management team and CEO can availably lead.

15. Effective Strategic Leadership shapes the development of Strategic Intent Strategic Mission and influence Successful Strategic Actions Formulation of Strategies Implementation of Strategies

16. 1.Relation Between the Board of Directors and Top Managers • The top management teams are comprised of the key managers who are responsible for formulating and implementing the organization’s strategies. The teams know the internal and external situation and have the ability and information for formulating strategy. They still are responsible for implementing the strategy.

17. The board of directors representing the benefits of shareholder investigate, evaluate and approve the strategy and supervise the strategy implementation. They care about that whether their benefit is represented by top managers or not, but they are irresponsible for the strategy formulation and implementation.

18. The Problem in The Strategic Management The board of directors always supervise the top managers in fact Top managers can gain so much power that they are virtually independent of oversight by the board of directors The most effective forms of governance share power and influence among the CEO and Board of Directors

19. 2 The Choice of top managers • The top managers is a team which includes all top-level members and parts of key functional managers. • The composing of the knowledge, experience, age, career and so on and the way of the interaction of top management team have important influence to speed and quality of the strategic decision and the strategy implementation. • Top management team and CEO are crucial to firm's strategic transformation.

20. Strategic Leadership Strategic Leadership involves： • The ability to anticipate, envision, maintain flexibility and empower others to create strategic change • Multi-functional work that involves working through others • Consideration of the entire enterprise rather than just a subunit • Requires a Managerial frame of reference

21. External Environment Factors which affect... Industry Structure Rate of market growth sum and type of competitors Managerial Discretion Political/Legal constraints Product differentiation Organizational Characteristics Size and age Culture Characteristics of the Manager Resource availability Tolerance for ambiguity Employee interaction Commitment to the firm Interpersonal skills Aspiration level Self-confidence

22. Top management team • A heterogeneous top management team with varied expertise and knowledge can draw on multiple perspectives when evaluating alternative strategies and building consensus. • A top management team must also be able to function effectively as a team in order to implement strategies. A heterogeneous team makes this more difficult.

23. Managerial Labor Markets The internal labor market is comprised of the career path alternatives available to a firm’s managers Selecting internal candidates for management positions helps to build on valuable firm-specific knowledge The external labor market includes the collection of career opportunities for managers outside their firm Selecting an outsider often brings fresh insights and may energize the firm with innovative new ideas

24. Effects of CEO Succession and Top Management Team Composition on Strategy Managerial Labor Market： CEO Succession External CEO Succession Internal CEO Succession Ambiguous： Possible change in Top Management Team and Strategy Homogeneous Stable Strategy Top Management Team Composition Stable Strategy with Innovation Heterogeneous Strategic Change

25. 3 Exercise of Effective Leadership Determining Strategic Direction Effective Strategic Leadership Exploiting & Maintaining Core Competencies Establishing matched organization and control system Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees Developing Human Capital Sustaining an Effective Organizational Culture Emphasizing Ethical Practices

26. Part 3:Organizational Structure and Controls • All organizations require some form of organizational structure to implement and manage their strategies • According to MBV, firms frequently alter their structure as they grow in size and complexity, therefore the structure must follow strategy.

27. According to RBV, when firms consider whether to expand or not or to choose which industry to expand ,they will consider their own organization structures. And the strategy also needs to adapt structure.

28. 1.The Evolution of Firm and Change of Organizational Structure • Three basic structure types • Simple Structure • Functional Structure • Multi-divisional Structure • (M-form) • 3 phases of the evolution of firm • Original phase • Developing phase • Diversified phase

29. Simple Structure Owner / Manager Owner/Manager makes all major decision directly and monitors all activities Difficult to maintain this structure as the firm grows in size and complexity

30. Functional Structure • First stage beyond a Simple Structure • Appropriate for single or dominant-business firms • Allows specialization of tasks * Production * Engineering * Sales & Marketing * Finance * Accounting * Human Resources • Overcomes information processing limits of single owner/manager • Functional department heads report to Chief Executive Officer who integrates decisions and actions from a company-wide point of view • Risks conflicts between myopic function managers

31. Functional Structure CEO Differentiation Business-level strategy usually employs a decentralized structure and emphasizes Product R&D and Sales & Marketing Low Cost Business-level strategy usually employs a centralized structure and emphasizes Process R&D and Operations Human Resources Sales & Marketing Finance R&D Production Accounting

32. Multi-Divisional Structure CEO Corporate Human Resources Corporate R&D Corporate Finance Strategic Planning Corporate Marketing Division Division Division Division Human Resources Sales & Marketing Finance R&D Production Accounting

33. 2.Multi-Divisional Structure Three variations of the Multi-Divisional Structure Multi-Divisional Form Strategy Type Related-Constrained Cooperative Form Strategic Business Unit (SBU) Structure Related-Linked Competitive Form Unrelated /Holding Company

34. Cooperative Form Multi-Divisional Structure Each division is operated as a separate business Adapt to diversified operation The crucial task of manager is exploiting the comprehensive performance of division The managers use strategy control and finance control The managers have to look for balance in the following aspect • Each division compete for fund • Create cooperation opportunity for the sake of the development of comprehensive benefit The ultimate goal is maximize the performance of the whole firm

35. Multi-Divisional Structure The decision-making of managers in a Multi-Divisional structure may be: * Centralized or Decentralized *Bureaucratic or Non-bureaucratic Balance on these dimensions may change over time Structure will evolve over time with： * Changes in Strategy * Degree of Diversification * Geographic scope * Nature of competition

36. SBU’s Help to Solve Complexity Issues CEO Corporate Office (Staff) A Strategic Business Unit A A Strategic Business Unit B C Strategic Business Unit C D Strategic Business Unit D Division Division Division Strategic Business Units (SBU) are used to organize related businesses into groups for strategy development

37. Holding Company Structure • Appropriate for widely diversified firms operating in many unrelated businesses • Each business is treated as a separate profit center or investment center competing for corporate resources • Corporate office acts as a central capital market • Corporate staff evaluates financial performance • Portfolio of business units or companies is balanced through acquisitions or divestitures • Corporate staff generally lacks deep understanding of strategic issues facing individual businesses • Creates no obvious benefit to shareholders who can diversify on their own

38. 日本松下电器1985年的组织结构

39. Type of Related- Mixed Related Unrelated Strategy Constrained or Unrelated Degree of Centralized Decentralized Centralized at Corporate Office Centralization in SBUs to Division Use of Extensive Moderate Nonexistent Integrating Synergies Synergies Synergies Mechanisms Divisional Subjective/ Strategic & Financial Performance Strategic Financial Criteria Appraisal Criteria Criteria Attributes of Various Structural Forms Cooperative M-Form SBU M-Form Competitive M-Form Structural Characteristics Divisional Linked to Linked to Linked to Incentive Corporate Corporation, Divisional Compensation Performance Division & SBU Performance

40. 3.Multi-Divisional Structure for Global Strategy

41. Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Product B Human Resources Sales & Marketing Finance Engineering Production Accounting Human Resources Sales & Marketing Finance Engineering Production Accounting

42. Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Product B Product C Product D North America Europe Asia Human Resources Sales & Marketing Finance Engineering Production Accounting

43. Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Product A Product B Product C Product D A Structural evolution based on Product lines usually implies a Global International Strategy

44. Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Africa Australia North America Latin America Europe Asia Product A Product B Product C Product D Product A

45. Evolution of Multi-Divisional Structure CEO Corporate Office (Staff) Africa Australia North America Latin America Europe 亚洲Asia Product A Product B Product C Product D A Structural evolution based on Geographic lines usually implies a Multi-Domestic International Strategy

46. Evolution of Multi-Divisional Structure A Transnational International Strategy is likely to utilize a structure and that results in emphasis on both geographic and product structures

47. Global matrix structure Product x area (eg:ABB company) or Customer x product (eg:Citibank) matricx CEO 产品 1 产品 2 产品 3 产品 4 顾客 4 or 区域 4 顾客 3 or 区域 3 顾客 2 or 区域 2 顾客 1 or 区域 1