1. Organizing to Implement Diversification
Chapter 8
Organizing to Implement Diversification

2. The Strategic Management Process
External
Analysis
Strategic
Choice
Strategy
Implementation
Competitive
Advantage
Mission
Objectives
Internal
Analysis
Implementing
Corporate
Diversification

3. 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?

4. 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)

5. M-Form Structure Board of Directors Senior Executive Division Division
Corporate
Human
Resources
Corporate R&D
Corporate Finance
Strategic Planning
Corporate Marketing
Division
Division
Division
Finance
Production
Engineering
Accounting
Sales &
Marketing
Human
Resources

6. Interests of Owners and
The Agency Relationship
A Trade Off
M-Form Structure
Divides Information Processing Requirements Into Manageable Blocks
Divides Owners
From Managers
Interests of Owners and
Managers May Diverge

7. The Agency Relationship
Managing Agency
Monitors
Principals
Agents
Division
General
Managers
Individual
Shareholders
Senior
Executives
Board Of
Directors
Shared
Activity
Managers
Institutional
Shareholders
Corporate
Staff
Dual
Role

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

9. 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

10. Division General Managers
Senior Executive
Corporate
Human
Resources
Corporate R&D
Corporate Finance
Strategic Planning
Corporate Marketing
Division
Division
Division
Finance
Production
Engineering
Accounting
Sales &
Marketing
Human
Resources

11. Shared Activity Managers
Division
Division
Division
Finance
Production
Finance
Production
Engineering
Engineering
Human
Resources
Sales &
Marketing
Cost Centers
Shared
Activities
Profit Centers

12. Management Controls 3 Issues Evaluating Divisional Performance
Allocating
Capital
Transferring
Intermediate
Products
Measurement:
Playing Games:
Setting Prices:
• accounting
• managers want
to look good
• negotiation
• economic value
added (EVA)
• cost
• zero-based
budgeting
• market-based
Ambiguity:
• dual pricing
• allocating costs
& revenues

13. 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

14. Compensation Policies
Aligning Incentives
Research shows…
Theory predicts…
Tied to
Performance
Stock Options
Long Time
Horizon
Stock Grants
Cash Bonus
Short Time
Horizon
Not Tied to
Performance
Salary

15. 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
Assets
Spin-off
or,
IPO

16. 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

17. End of lecture segment

18. Segment 2
Implementation issues in related versus unrelated diversification

19. Unrelated Diversification
For unrelated diversification, the multibusiness model is based on general managerial capabilities in entrepreneurship, organizational design, or strategy.
Operates as a ‘portfolio’ of independent businesses
Divisions have considerable autonomy
No integration among divisions is necessary
Businesses bought & sold as conditions change
Idea of ‘corporate culture’ is meaningless
No exchanges or linkages among divisions
Easiest and cheapest strategy to manage
Lowest level of bureaucratic costs
Controls to evaluate divisional performance easily and accurately
Each division evaluated by output controls, e.g. ROIC
Sophisticated accounting controls
1. Because there are no linkages between divisions, unrelated diversification is the easiest
and cheapest strategy to manage, with the lowest level of bureaucratic costs.
a) Normally, a multidivisional structure is used for this strategy and the corporate
headquarters tends to be small because the need for integration among divisions
is low.
b) The control used is principally financial control and corporate headquarters uses
measures such as ROIC as the main means of evaluating each division’s
performance. They treat the corporation’s businesses as an investment portfolio,
attempting to allocate resources so as to realize the greatest profitability.
c) Divisions are completely autonomous, thus, the idea of corporate culture is
meaningless.

20. Vertical Integration
The vertically integrated company requires the centralized control – in order to achieve the benefits from the sequential flow of resources from one division to the next.
Bureaucratic costs are more complex and expensive than unrelated diversification
Multidivisional structure provides necessary controls to achieve benefits from the control of resource transfers
Must strike balance between centralized and decentralized control
Divisions must have input regarding resource transfer
Integration is managed through a combination of corporate and divisional controls
Vertical integration is the next most expensive strategy to coordinate. Bureaucratic
costs are higher because corporate headquarters must control sequential resource
transfers from one division to the next.
a) By adopting the multidivisional structure, a vertically integrated company gains
centralized control, and corporate managers can control resource transfers
between divisions.
b) Market and behavior controls are also applied as the company seeks to
standardize resource transfers and to use budgets, as well as ROIC, to evaluate
divisional performance. The company also uses rules as a control mechanism.
c) In addition, handling resource transfers increases the need for integration, and
task forces are likely to be established to guide interdivisional coordination.

21. Related Diversification
Principle benefits of related diversification come from transferring, sharing, or leveraging functional resources or skills and some exchange of distinctive competencies across divisions.
Gains derived from the transfer, sharing, or leveraging across divisions
Output control difficult as businesses share resources
Integration and control at divisional level required
Incentives and rewards for cooperation necessary
3. Related diversification increases the number of linkages between divisions that have to
be managed, making this strategy the most expensive.
a) Output control is difficult to measure due to extensive cooperation, so culture
control is used more frequently.
b) Integrating roles and teams are required to integrate the work of multiple
divisions.
c) Reward systems must be carefully designed to ensure that managers have an
incentive to share resources.
Problem: We know there needs to be integration, but we do not know how much

22. Corporate Strategy and Structure and Control