1. CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS
Chapter 11
CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS

2. Learning Objectives
Understand relationship between stakeholder management & corporate performance
Explain why maximizing returns to stockholders often viewed as primary goal
Describe governance mechanisms to align interest of stockholders & management
Explain why governance methods don’t always work
Identify ethical issues that arise in business & causes of unethical behavior
Identify what managers do to improve the ethical climate and ensure decisions don’t violate ethical principles
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3. Stakeholders and Corporate Performance
Stakeholders: Individuals/groups with an interest/claim/or stake in company
Internal (e.g., employees, stockholders)
External (e.g., customers, creditors, governments)
Company must consider stakeholder claims in developing & implementing strategy
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4. Stakeholders and the Enterprise
Figure 11.1
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5. Stakeholder Impact Analysis
Identify:
Stakeholders
Stakeholders’ interests/concerns
Claims stakeholders likely to make
Stakeholders most important from organization’s perspective
Resulting strategic challenges
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6. Unique Role of Stockholders
Company’s legal owners and providers of risk capital, a major source of capital to operate a business.
Maximizing long-run profitability & profit growth is route to maximizing returns to shareholders, as well as satisfying claims of most other stakeholder groups.
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7. Profitability, Profit Growth, and Stakeholder Claims
To grow profits, companies must be doing one or more of the following:
Participating in growing market
Taking market share away from competitors
Consolidating industry via horizontal integration
Developing new markets
Stockholders receive their returns as:
Dividend payments
Capital appreciation in market value of shares
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8. Agency Theory
Agency relationship - whenever one party delegates decision-making authority or control over resources to another.
Principal-Agent Relationships
Principal Agent
Agency Problem:
Agents & principals may have different goals
Agents goals not in best interests of principals
Agents may take advantage of information asymmetries to maximize interests at expense of principals
Difficult for principals to measure performance
Authority
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9. Challenge for Principals
Confronted with agency problems:
Shape behavior of agents to act in accordance with goals set by principals
Reduce information asymmetry between agents & principals
Develop mechanisms for removing agents not acting in accordance with goals of principals
Principals try to deal with these challenges through a series of governance mechanisms.
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10. Governance Mechanisms
Governance mechanisms limit agency problem by aligning incentives between agents & principals - monitor/control.
Mechanisms include:
Board of Directors
Stock-Based Compensation
Financial Statements & Auditors
Takeover Constraint
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11. Governance Mechanisms Inside Company
Internal agency problems can be reduced by:
Strategic Control Systems
Establish standards for performance
Create systems- measure & monitor performance
Compare actual against targets
Evaluate results- take corrective actions
Employee Incentives
Stock options and ownership plans
Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers
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12. Ethics- accepted principles of right/wrong governing conduct ...
Ethics and Strategy
Ethics- accepted principles of right/wrong governing conduct ...
Ethical dilemmas:
No agreement over accepted principles
None of available alternatives seem acceptable
Many accepted principles codified in laws:
Tort – product liability
Contract– contracts/breaches of contracts
Intellectual property– protection of intellectual property
Antitrust law – competitive behavior
Securities law – issuing/selling securities
Behaving ethically=beyond staying within law
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13. An ethical strategy is one that does not violate the accepted principles.

14. Ethical Issues in Strategy
Self-dealing
Information manipulation
Anticompetitive behavior
Opportunistic exploitation
Substandard working conditions
Environmental degradation
Corruption
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15. Roots of Unethical Behavior
Why do some managers behave unethically?
Personal ethics code- profound influence on behavior
Don’t realize behaving unethically- failing to ask right questions
Organization culture- doesn’t emphasize ethics; only considers economic consequences
Unrealistic goals- encourage/legitimize unethical behavior
Unethical leadership- encourages/tolerates behavior that is ethically suspect
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16. Behaving Ethically
To make sure ethical issues are considered in business decisions, managers should:
Hire/promote people with sense of personal ethics.
Place high value on ethical behavior and ingrain in the organizational culture.
Ensure leaders articulate and act in ethical manner.
Require that ethics be part of decision-making process.
Use ethics officers.
Enforce strong corporate governance processes.
Act with moral courage- encourage others to do so.
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17. IMPLEMENTING STRATEGY IN COMPANIES THAT COMPETE IN A SINGLE INDUSTRY
Chapter 12
IMPLEMENTING STRATEGY IN COMPANIES THAT COMPETE IN A SINGLE INDUSTRY

18. Organizational Design
“...the process of deciding how a company should create, use, and combine organizational structure, control systems, and culture to pursue a business model successfully.”

19. Implementing Strategy Through Organizational Design
Organizational Structure- assigns employees to specific value creation tasks & roles
Control System
Incentives to motivate employees
Specific feedback on performance
Organizational Culture- values, norms, beliefs, & attitudes shared within organization
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20. Implementing Strategy Through Organizational Design
Figure 12.1
Organizational structure, control, and culture shape people’s behaviors, values, and attitudes – and determine how they will implement an organization’s business model and strategies.
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21. Building Blocks of Organizational Structure
Grouping tasks, functions, & divisions
Allocating authority & responsibility
Integration & integrating mechanisms
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22.  Grouping Tasks, Functions & Divisions
Organizational structure – follows range & variety of tasks an organization pursues.
Companies group people & tasks into functions, & then functions into divisions.
Function - collection of people who work together & perform same tasks/hold similar positions.
Division- way of grouping functions to allow organization to better serve customers.
Handoffs- work exchanges between people, functions, & subunits.
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23.  Allocating Authority and Responsibility
Organizational Structure
Decision Making
Centralized- Tall
Decentralized- Flat
Principle of the Minimum Chain of Command- choose hierarchy with the fewest levels of authority necessary to use organizational resources efficiently and effectively
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24. Tall and Flat Structures
Figure 12.2
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25.  Integration and Integrating Mechanisms
Direct contact
Liaison roles
Teams
The greater the complexity of an organization’s structure, the greater the need for formal coordination among people, functions, and divisions.
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26. Steps in Designing an Effective Control System
Figure 12.3
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27. Strategic Reward Systems
Linking to reward systems to control systems
Decide which behaviors to reward
Create control system to measure & link to reward
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28. Traits of Corporate Cultures
Bias for action
Nature of organization’s mission
How to operate organization
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29. Building Distinctive Competencies at Functional Level
Functional Structure Advantages
People doing similar functions learn from each other.
People monitor and improve work processes.
Managers have greater control over activities.
Managing easier with separately managed specialized groups.
Role of Strategic Control
Managers/employees monitor/improve operating procedures.
Easier to apply output control.
Developing Culture- Managers implement functional strategy & develop incentive systems.
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30. Functional Structure Figure 12.5
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31. Role of Strategic Control
“... stretch and encourage managers and employees to excel in their quest to raise performance.”

32. Culture at Functional Level
Manufacturing
R & D
Sales etc.
Most firms have distinct cultures at functional level
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33. Product Structure: Wide Product Line
Group product line into product groups
Centralize support value chain functions to lower costs
Divide support functions into product-oriented teams who focus on needs of one product group.
Measure performance of each product group separately
Link rewards to performance of product group
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34. Nokia’s Product Structure
Figure 12.7
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35. Market Structure
Focuses on ability to meet needs of distinct and important sets of customers or different customer groups.

36. Increase Responsiveness to Customer Groups
Identify needs of each customer group.
Group people/functions by customer or market segments.
Make different managers responsible for developing products for each group of customers.
Market structure brings managers & employees closer to specific groups of customers.
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37. Market Structure Figure 12.8
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38. Matrix & Product Team Structures
In fast-changing, high-tech environments, competitive success depends on fast mobilization of company skills and resources to ensure product development and implementation meet customer needs.

39. Matrix/Product-Team Structures
Value chain activities grouped by function and by product or project
Flat & decentralized
Promotes innovation & speed
Norms & values based on innovation & product excellence
Product-team
Tasks divided along product/project lines
Functional specialists part of permanent cross- functional teams
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40. Matrix Structure
Figure 12.10

41. Product-Team Structure
Figure 12.11
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42. Restructuring and Reengineering
Streamlining hierarchy reducing levels
Downsizing workforce to lower costs
Reasons to restructure/downsize:
Change in business environment
Excess capacity
Too tall & inflexible
Improve competitive advantage & stay on top
Reengineering
Fundamental rethinking/radical redesign of business processes to achieve dramatic improvements
Focuses on processes not on functions
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