1. Implementing Strategy in Companies that Compete Across Industries and Countries 13 Chapter Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version GARETH R. JONES /CHARLES W. L. HILL Theory of Strategic Management 10th ed.

2. Learning Objective:After reading this chapter, you should be able to discuss the reasons why companies pursuing different corporate strategies need to implement these strategies using different combinations of organizational structure, control, and culture. Learning Objective: After reading this chapter, you should be able to discuss the reasons why companies pursuing different corporate strategies need to implement these strategies using different combinations of organizational structure, control, and culture. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Companies that pursue a multibusiness model based on related diversification face many problems and costs in managing the handoffs or transfers between the value chain functions of its business units around the world. MANAGING CORPORATE STRATEGY THROUGH MULTIDIVISIONAL STRUCTURE

3. 13-3  A multidivisional structure has two organizational design advantages over a functional or product structure: 1)In each industry in which a company operates, strategic managers group all its different business operations in that industry into one division or subunit. Each industry division contains all the value chain functions and is thus called a self-contained division. 2)The office of corporate headquarters staff is created to monitor divisional activities and exercise financial control over each division. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MANAGING CORPORATE STRATEGY THROUGH MULTIDIVISIONAL STRUCTURE

4. 13-4 Learning Objective:After reading this chapter, you should be able to describe the advantages and disadvantages of a multidivisional structure. Learning Objective: After reading this chapter, you should be able to describe the advantages and disadvantages of a multidivisional structure. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Because each division has its own profit center, financial controls can be applied to each business on the basis of profitability.  Divisional managers develop their own business model and strategies; this allows corporate managers to focus on the multibusiness model. ADVANTAGES OF A MULTIDIVISIONAL STRUCTURE

5. 13-5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The division of responsibilities between corporate and divisional managers in the multidivisional structure allows a company to overcome organizational problems, such as communication problems and information overload.  The multidivisional structure allows top managers to identify divisions with problems, such as organizational slack (unproductive use of functional resources) that would otherwise go undetected. ADVANTAGES OF A MULTIDIVISIONAL STRUCTURE

6. 13-6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Corporate managers face the problem of deciding how much authority and control to delegate to divisional managers, and how much authority to retain at corporate headquarters. If corporate managers retain too much power and authority, the managers of business divisions lack the autonomy required to handle rapidly changing competitive conditions. When too much authority is delegated to divisions, managers may start to pursue strategies that benefit their own division, but add little to the whole company’s profitability. PROBLEMS IN IMPLEMENTING A MULTIDIVISIONAL STRUCTURE

7. 13-7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  If too much emphasis is placed on each division’s individual profitability, divisional managers may engage in information distortion, that is, they manipulate the facts they supply to corporate managers to hide declining divisional profits, or use strategies that give only short-term benefits.  When divisions compete against themselves for scarce resources, this rivalry makes it difficult—or impossible—to obtain the gains from transferring, sharing, or leveraging distinctive competencies. PROBLEMS IN IMPLEMENTING A MULTIDIVISIONAL STRUCTURE

8. 13-8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Competition among divisions may lead to battles over transfer pricing, that is, establishing the fair or “competitive” price of a resource or skill developed in one division that is to be transferred and sold to other divisions that require it.  Because each division has its own set of value chain functions, functional resources are duplicated across divisions; thus, multidivisional structures are expensive to operate. For example, R&D and marketing are especially costly. PROBLEMS IN IMPLEMENTING A MULTIDIVISIONAL STRUCTURE

9. 13-9 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Because there are no exchanges or linkages among divisions unrelated diversification is the easiest and cheapest strategy to manage. The primary advantage of the unrelated diversification structure is that it allows corporate managers to evaluate division performance accurately. Divisions usually have considerable autonomy unless they fail to reach their ROIC goals, in which case corporate managers will intervene in the operations of a division to help solve problems. STRUCTURE, CONTROL, CULTURE, AND CORPORATE-LEVEL STRATEGY

10. 13-10 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Vertical integration is a more expensive strategy to manage than unrelated diversification because sequential resource flows from one division to the next must be coordinated.  The way to distribute authority between corporate and divisional managers must be carefully considered in vertical integration companies.  To facilitate communication among divisions, corporate managers create teams composed of both corporate and divisional managers. STRUCTURE, CONTROL, CULTURE, AND CORPORATE-LEVEL STRATEGY

11. 13-11 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  In related diversification, the gains from pursuing this multibusiness model are derived from the transfer, sharing, and leveraging of R&D knowledge, industry information, customer bases, and so on, across divisions.  A company needs to develop a corporate culture that stresses cooperation among divisions and the corporate team rather than focusing purely on divisional goals.  With related diversification, rewarding divisions is more difficult because divisions share activities. STRUCTURE, CONTROL, CULTURE, AND CORPORATE-LEVEL STRATEGY

12. 13-12 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Information Technology (IT) provides a common software platform that can make it much less problematic for divisions to share information and obtain the benefits from leveraging their competencies.  IT facilitates output and financial control, making it easier for corporate headquarters to monitor divisional performance and selectively decide when to intervene.  IT makes it easier to manage the problems that can occur in a multidivisional structure. THE ROLE OF INFORMATION TECHNOLOGY

13. Learning Objective:After reading this chapter, you should be able to explain why companies that pursue different kinds of global expansion strategies choose different kinds of global structures and control systems to implement these strategies. Learning Objective: After reading this chapter, you should be able to explain why companies that pursue different kinds of global expansion strategies choose different kinds of global structures and control systems to implement these strategies. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Companies can use four basic strategies as they establish production facilities and market abroad: 1)A localization strategy 2)An international strategy 3)A global standardization strategy 4)A transnational strategy IMPLEMENTING STRATEGY ACROSS COUNTRIES

14. 13-14 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  When using this structure, a company duplicates all value creation activities and establishes overseas divisions in every country or world area in which it operates.  Authority is decentralized to managers in each overseas division, and these managers devise the appropriate strategy for responding to the needs of the local environment.  Overseas divisions have little contact with other divisions, so no integrating mechanism is needed. IMPLEMENTING STRATEGY ACROSS COUNTRIES Implementing a Localization Strategy

15. 13-15 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  To manage the challenging problem of coordinating the flow of different products across different countries, many companies create global divisions.  Global operations are managed as a separate divisional business, with managers given the authority and responsibility for coordinating domestic product divisions with overseas markets.  The global division monitors and controls the overseas subsidiaries that market the products. IMPLEMENTING STRATEGY ACROSS COUNTRIES Implementing an International Strategy

16. 13-16 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  When a company embarks on a global standardization strategy, it locates its manufacturing and other value-chain activities at the global location that will allow it to increase efficiency, quality, and innovation.  To coordinate and integrate its global-chain activities, a product-group headquarters is created to coordinate the company’s home and overseas operations. IMPLEMENTING STRATEGY ACROSS COUNTRIES Implementing a Global Standardization Strategy

17. 13-17 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  In the 1990s, many companies implemented a global-matrix structure to simultaneously lower their global cost structures and differentiate their activities through superior innovation and responsiveness to customers globally.  Implementing a matrix structure decentralizes control to overseas managers and provides them with considerable flexibility for managing local issues, yet gives top management centralized control they need to coordinate global activities. IMPLEMENTING STRATEGY ACROSS COUNTRIES Implementing a Transnational Strategy

18. 13-18 Learning Objective:After reading this chapter, you should be able to discuss the strategy implementation problems associated with the three primary methods used to enter new industries: internal new venturing, joint ventures, and mergers. Learning Objective: After reading this chapter, you should be able to discuss the strategy implementation problems associated with the three primary methods used to enter new industries: internal new venturing, joint ventures, and mergers. ENTRY MODE AND IMPLEMENTATION © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Corporation managers must treat the internal new venturing process as a form of entrepreneurship and the managers who are to pioneer new ventures as intrapreneurs, that is, internal entrepreneurs. Internal New Venturing

19. 13-19 ENTRY MODE AND IMPLEMENTATION © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Another approach to internal new venturing is to separate the new venture unit from the rest of the organization to encourage new product development.  The new-venture division uses controls that reinforce its entrepreneurial spirit.  The upfront R&D costs of new venturing are high, and its success is uncertain.  If strategic thinking is lacking in a new-venture division, the result is failure. Internal New Venturing

20. 13-20 ENTRY MODE AND IMPLEMENTATION © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A joint venture occurs when two companies agree to pool resources and capabilities and establish a new business unit to develop a new product and a business model that will allow it to bring the new product to market successfully.  Allocating authority and responsibility is the first major implementation issue upon which companies must decide.  It can be dangerous because one party might decide to take the technology and “go it alone.” Joint Ventures

21. 13-21 ENTRY MODE AND IMPLEMENTATION © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  One of the primary reasons acquisitions perform poorly is that many companies do not anticipate difficulties associated with mergers or integrating new companies into their existing operations.  One problem with a mishandled merger is that skilled managers who feel they have been demoted will leave the company.  Even in a closely related industry, managers must realize that each company has unique norms, values, and culture. Mergers and Acquisitions

22. 13-22 Learning Objective:After reading this chapter, you should be able to identify the ways in which advanced Information Technology (IT) may reduce bureaucratic costs and allow a company to more effectively implement its business model. Learning Objective: After reading this chapter, you should be able to identify the ways in which advanced Information Technology (IT) may reduce bureaucratic costs and allow a company to more effectively implement its business model. INFORMATION TECHNOLOGY, THE INTERNET, AND OUTSOURCING © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  IT drastically increases the number of ways in which strategic managers can effectively implement their strategies. Information Technology and Strategy Implementation

23. 13-23 INFORMATION TECHNOLOGY, THE INTERNET, AND OUTSOURCING © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  IT is an important factor that promotes the development of functional competencies and capabilities.  IT enables a company to transfer its knowledge and expertise across functional groups and integrate that knowledge into a function’s operations, so it can deliver new and improved products to the customers.  IT allows managers to flatten the hierarchy. Information Technology and Strategy Implementation

24. 13-24 INFORMATION TECHNOLOGY, THE INTERNET, AND OUTSOURCING © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Some companies make the most cost-effective use of their employees’ skills by using a virtual organization structure, which is composed of people who are linked by laptops, smartphones, etc. and may never see one another face-to-face.  In virtual organizations, consultants connect through their laptops to a company’s centralized knowledge management system, which allows for other employees who have the expertise to solve the problems that they encountered. Information Technology and Strategy Implementation

25. 13-25 INFORMATION TECHNOLOGY, THE INTERNET, AND OUTSOURCING © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  IT has affected a company’s ability to pursue strategic outsourcing to strengthen its business model.  Recall that outsourcing occurs as companies use short- and long-term contracts and strategic alliances to form relationships with other companies.  The business-to-business (B2B) network allows companies in adjacent industries to use the same software platform to link to each other. Strategic Outsourcing and Network Structure