5.4 Assignment: Capstone Project Part 3 Implementation

TAKE-AWAY CONCEPTS

This chapter explored the three key levers that managers have at their disposal when designing their firms for competitive advantage—structure, culture, and control—as summarized by the following learning objectives and related take-away concepts.

LO 11-1 / Define organizational design and list its three components.

· Organizational design is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.

· The key components of organizational design are structure, culture, and control.

· The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.

LO 11-2 / Explain how organizational inertia can lead established firms to failure.

· Organizational inertia can lead to the failure of established firms when a tightly coupled system of strategy and structure experiences internal or external shifts.

· Firm failure happens through a dynamic, four-step process (see  Exhibit 11.2 ).

LO 11-3 / Define organizational structure and describe its four elements.

· An organizational structure determines how firms orchestrate employees’ work efforts and distribute resources. It defines how firms divide and integrate tasks, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how employees coordinate work efforts.

· The four building blocks of an organizational structure are specialization, formalization, centralization, and hierarchy (see  Exhibit 11.3 ).

LO 11-4 / Compare and contrast mechanistic versus organic organizations.

· Organic organizations are characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making.

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· Mechanistic organizations are described by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making.

· The comparative effectiveness of mechanistic versus organic organizational forms depends on the context.

LO 11-5 / Describe different organizational structures and match them with appropriate strategies.

· To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm’s business strategy.

· The strategy–structure relationship is dynamic, changing in a predictable pattern—from simple to functional structure, then to multidivisional (M-form) and matrix structure—as firms grow in size and complexity.

· In a simple structure, the founder tends to make all the important strategic decisions as well as run the day-to-day operations.

· A functional structure groups employees into distinct functional areas based on domain expertise. Its different variations are matched with different business strategies: cost leadership, differentiation, and blue ocean (see  Exhibit 11.6 ).

· The multidivisional (M-form) structure consists of several distinct SBUs, each with its own profit-and-loss responsibility. Each SBU operates more or less independently from one another, led by a CEO responsible for the business strategy of the unit and its day-to-day operations (see  Exhibit 11.7 ).

· The matrix structure is a mixture of two organizational forms: the M-form and the functional structure (see  Exhibit 11.9 ).

· Exhibits 11.8  and  11.10  show how best to match different corporate and global strategies with respective organizational structures.

LO 11-6 / Evaluate closed and open innovation, and derive implications for organizational structure.

· Closed innovation is a framework for R&D that proposes impenetrable firm boundaries. Key to success in the closed innovation model is that the firm discovers, develops, and commercializes new products internally.

· Open innovation is 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 off.

· Exhibit 11.12  compares and contrasts principles of closed and open innovation.

LO 11-7 / Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.

· Organizational culture describes the collectively shared values and norms of its members.

· Values define what is considered important, and norms define appropriate employee attitudes and behaviors.

· Corporate culture finds its expression in artifacts, which are observable expressions of an organization’s culture.

LO 11-8 / Compare and contrast different strategic control-and-reward systems.

· Strategic control-and-reward systems are internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees).

· Strategic control-and-reward systems allow managers to specify goals, measure progress, and provide performance feedback.

· In addition to the balanced-scorecard framework, managers can use organizational culture, input controls, and output controls as part of the firm’s strategic control-and-reward systems.

· Input controls define and direct employee behavior through explicit and codified rules and standard operating procedures.

· Output controls guide employee behavior by defining expected results, but leave the means to those results open to individual employees, groups, or SBUs.

In this final chapter, we looked at stakeholder strategy, corporate governance, business ethics, and strategic leadership, as summarized by the following learning objectives and related take-away concepts.

LO 12-1 / Describe the shared value creation framework and its relationship to competitive advantage.

· By focusing on financial performance, many companies have defined value creation too narrowly.

· Companies should instead focus on creating shared value, a concept that includes value creation for both shareholders and society.

· The shared value creation framework seeks to identify connections between economic and social needs, and then leverage them into competitive advantage.

LO 12-2 / Explain the role of corporate governance.

· Corporate governance involves mechanisms used to direct and control an enterprise to ensure that it pursues its strategic goals successfully and legally.

· Corporate governance attempts to address the principal–agent problem, which describes any situation in which an agent performs activities on behalf of a principal.

LO 12-3 / Apply agency theory to explain why and how companies use governance mechanisms to align interests of principals and agents.

· Agency theory views the firm as a nexus of legal contracts.

· The principal–agent problem concerns the relationship between owners (shareholders) and managers and also cascades down the organizational hierarchy.

· The risk of opportunism on behalf of agents is exacerbated by information asymmetry: Agents are generally better informed than the principals.

· Governance mechanisms are used to align incentives between principals and agents.

· Governance mechanisms need to be designed in such a fashion as to overcome two specific agency problems: adverse selection and moral hazard.

LO 12-4 / Evaluate the board of directors as the central governance mechanism for public stock companies.

· The shareholders are the legal owners of a publicly traded company and appoint a board of directors to represent their interests.

· The day-to-day business operations of a publicly traded stock company are conducted by its managers and employees, under the direction of the chief executive officer (CEO) and the oversight of the board of directors. The board of directors is composed of inside and outside directors, who are elected by the shareholders.

· Inside directors are generally part of the company’s senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO).

· Outside directors are not employees of the firm. They frequently are senior executives from other firms or full-time professionals who are appointed to a board and who serve on several boards simultaneously.

LO 12-5 / Evaluate other governance mechanisms.

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· Other important corporate mechanisms are executive compensation, the market for corporate control, and financial statement auditors, government regulators, and industry analysts.

· Executive compensation has attracted significant attention in recent years. Two issues are at the forefront: (1) the absolute size of the CEO pay package compared with the pay of the average employee and (2) the relationship between firm performance and CEO pay.

· The board of directors and executive compensation are internal corporate governance mechanisms. The market for corporate control is an important external corporate governance mechanism. It consists of activist investors who seek to gain control of an underperforming corporation by buying shares of its stock in the open market.

· All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws. Auditors and industry analysts study these public financial statements carefully for clues of a firm’s future valuations, financial irregularities, and strategy.

LO 12-6 / Explain the relationship between strategy and business ethics.

· The ethical pursuit of competitive advantage lays the foundation for long-term superior performance.

· Law and ethics are not synonymous; obeying the law is the minimum that society expects of a corporation and its managers.

· A manager’s actions can be completely legal, but ethically questionable.

· Some argue that management needs an accepted code of conduct that holds members to a high professional standard and imposes consequences for misconduct.