This Document Contains Chapters 10 to 11 Chapter 10 Corporate Governance ANSWERS TO REVIEW QUESTIONS 1. What is corporate governance? What factors account for the considerable amount of attention corporate governance receives from several parties, including shareholder activists, business press writers, and academic scholars? Why is governance necessary to control managers’ decisions? Corporate governance is a relationship among stakeholders that is used to determine and control the direction and performance of organizations. Corporate governance receives a great deal of attention because governance mechanisms sometimes fail to adequately monitor and control top-level managers’ strategic decisions. If the behavior of top-level mangers is not monitored and controlled effectively, this could mean that the firm will not be strategically competitive. Effective corporate governance is also of interest to nations. A country prospers as its firms grow and provide employment, wealth, and satisfaction—thus improving standards of living. These aspirations are met when firms are competitive internationally in a sustained way. Corporate governance reflects the standards of the company, which collectively reflect societal standards. Thus, in many corporations, shareholders attempt to hold top-level managers more accountable for their decisions and the results they generate. As with individual firms and their boards, nations that govern their corporations effectively may gain a competitive advantage over rival countries. As owners delegate strategy development and decision making to managers, conflicts of interest emerge—managers may select strategic alternatives that serve their own best interests, not those of the owners. Governance mechanisms help owners (shareholders) ensure that managers make strategic decision that are in the best interests of the former. If internal governance mechanisms are ineffective, the market for corporate control (an external governance mechanism) may be activated. 2. What is meant by the statement that ownership is separated from managerial control in the corporation? Why does this separation exist? Historically, US firms were managed by the founders/owners and their descendants. In these cases, corporate ownership and control resided in the same person(s). As firms grew larger, ownership and control were separated in most large corporations so that control of the firm shifted to professional managers while ownership was dispersed among unorganized stockholders who were removed from day-to-day management. These changes created the modern public corporation, which is based on the efficient separation of ownership and managerial control. Supporting the separation is a basic legal premise suggesting that the primary objective of a firm’s activities is to increase the corporation’s profit and thereby the financial gains of the owners (or shareholders). However, this right also requires that they accept the financial risk of the firm and its operation. As shareholders diversify their investments over a number of corporations, their risk declines (the poor performance or failure of any one firm in which they invest has less overall effect). Shareholders thus specialize in managing their investment risk while managers focus on decision making. Without management specialization in decision making and owner specialization in risk bearing, a firm probably would be limited by the abilities of its owners to manage and make effective strategic decisions. Therefore, in concept, the separation and specialization of ownership (risk bearing) and managerial control (decision making) should produce the highest returns. 3. What is an agency relationship? What is managerial opportunism? What assumptions do owners of corporations make about managers as agents? Despite its advantages, the separation of ownership and control may result in some potential costs (and risks) for owners by creating an agency relationship. An agency relationship exists when one or more persons (the principal or principals) hires another person or persons (the agent or agents) as a decision-making specialist to perform a service. In other words, the agency relationship exists when one party delegates decision making to another party in return for compensation. The owner-agent relationship enables the possibility of managerial opportunism, the seeking of self-interest with guile (i.e., cunning or deceit) where opportunism is represented by an inclination toward self-seeking behaviors. However, before observing the results of decisions, it is impossible to know which agents will behave opportunistically and which ones will not. A manager’s reputation is an imperfect guide to future behavior and opportunistic behavior cannot be observed until after it has occurred. 4. How is each of the three internal governance mechanisms—ownership concentration, boards of directors, and executive compensation—used to align the interests of managerial agents with those of the firm’s owners? Ownership concentration is an effective governance mechanism because owners of large blocks of stock (representing a higher percentage of ownership) have a greater financial interest in monitoring managerial decisions than do small shareholders (characterized as diffuse ownership). Increasingly, institutional investors such as stock mutual funds and public-pension funds hold large blocks of stock, and these shareholders aggressively monitor and take action against managers who receive excessive compensation and perks but achieve only poor firm performance. Monitoring and controlling managerial decisions are supposed to be accomplished through the firm’s board of directors, members of which are elected by shareholders to oversee managers and ensure that the firm is operated in the best interests of owners. Members can be classified into three categories—insiders (the CEO and other top-level managers), related outsiders (member who are not involved in day-to-day operations but have some relationship with the firm), and outsiders (members who are independent of the firm and its operations). Executive compensation can be used to help align the interests of managers and owners by tying managerial pay to firm performance through salaries, bonuses, and long-term incentives based on stock options. However, given the complexity and long-term nature of strategic decisions, it may be difficult to perfectly align compensation with firm performance. First, the strategic decisions made by top-level managers are typically complex and nonroutine, so direct supervision of executives is inappropriate for judging the quality of their decisions. Thus, compensation of top-level managers is usually determined by the firm’s financial performance. Second, the impact of an executive’s decisions is not immediate, making it difficult to assess the effect of decisions on the corporation’s performance. Third, a number of variables (unpredictable economic, social, or legal changes) intervene between top-level managerial behavior and firm performance, making it difficult to discern the effects of strategic decisions. 5. What trends exist regarding executive compensation? What is the effect of the increased use of long-term incentives on top-level managers’ strategic decisions? In recent times, many stakeholders, including shareholders, have been angered by what they consider the excessive compensation received by some top-level managers, especially CEOs. The primary reason for such large compensation packages is the inclusion of stock options and stock in the total pay packages. The primary reasons for compensating executives with stock is that it provides incentives to keep the stock price high, thus aligning manager and owner interests. However, there may be some unintended consequences. Research has shown that managers who own more than one percent of the firm’s stock are less likely to be forced out of their jobs, even when the firm is performing poorly. Increasingly, long-term incentive plans are becoming a critical part of compensation packages in US firms. The use of longer-term pay helps firms cope with or avoid potential agency problems. Because of this, the stock market generally reacts positively to the introduction of a long-range incentive plan for top executives. While some stock option-based compensation plans are well designed with option strike prices substantially higher than current stock prices, too many have been designed simply to give executives more wealth that will not immediately show up on the balance sheet. Research of stock option repricing where the strike price value of the option has been changed to be lower than it was originally set suggests that step is taken more frequently in high-risk situations. However, it also happens when firm performance was poor to restore the incentive effect for the option. But evidence also suggests that organizational politics are often involved. Additionally, research has found that repricing stock options does not appear to be a function of management entrenchment or ineffective governance; these firms often have had sudden and negative changes to their growth and profitability. They also frequently lose their top managers. Interestingly, institutional investors prefer compensation schemes that link pay with performance, including the use of stock options. Again, this evidence shows that no internal governance mechanism is perfect. Whereas stock options became highly popular as a means of compensating top executives and linking pay to performance, they also have become controversial of late. It seems that option awards became a means of providing large compensation packages and the options awarded did not relate to the firm’s performance, particularly when boards showed a propensity to reprice options at a lower strike price when stock prices fell precipitously. Because of the large number of options granted in recent years and the increasingly common practice of repricing them, some have called for expensing the options by the firm at the time they are awarded. This action could be quite costly to many firms’ stated profits. Thus, some firms have begun to move away from granting stock options. 6. What is the market for corporate control? What conditions generally cause this external governance mechanism to become active? How does this mechanism constrain top-level managers’ decisions and actions? The market for corporate control is an external governance mechanism that becomes active when a firm’s internal controls fail. The market for corporate control is composed of individuals and firms that buy ownership positions in (or take over) potentially undervalued corporations so they can form new divisions in established diversified companies or merge two previously separate firms. Because they are assumed to be the party responsible for formulating and implementing the strategy that led to poor performance, the top management team of the acquired company is usually replaced. Thus, the market for corporate control disciplines managers that are ineffective or act opportunistically. firm’s poor performance is an indication that internal governance mechanisms have failed (that is, their use did not result in managerial decisions that maximized shareholder value), opening the door to the involvement of the market for corporate control. Indeed, hostile takeovers are the major activity in the market for corporate control. 7. What is the nature of corporate governance in Germany, Japan, and China? In many private German firms, owner and manager may be the same individual and thus no agency problem will exist. Even in publicly traded corporations, there is often a dominant shareholder, so the problem is minimized. Thus, ownership concentration is an important means of corporate governance in Germany, just as it is in the US. Historically, banks have been at the center of the German corporate governance structure, which is the case in many continental European countries such as Italy and France. As lenders, banks become major shareholders when companies they had financed earlier seek funding on the stock market or default on loans. Although stakes are usually under 10 percent, there is no legal limit on how much of a firm’s stock banks can hold (except that a single ownership position cannot exceed 15 percent of the bank’s capital). Shareholders can tell the banks how to vote their ownership position, but they generally elect not to do so. Banks monitor and control managers both as lenders and as shareholders by electing representatives to supervisory boards. German firms with more than 2,000 employees are required to have a two-tier board structure. Through this structure, the supervision of management is separated from other duties normally assigned to a board of directors, especially the nomination of new board members. Thus, Germany’s two-tiered system places the responsibility to monitor and control managerial (or supervisory) decisions and actions in the hands of a separate group. Though all the functions of direction and management are the responsibility of the management board, appointment to this body is the responsibility of the supervisory tier. Employees, union members, and shareholders appoint members to the latter. Historically, German executives have not been dedicated to the maximization of shareholder value. However, corporate governance in Germany is changing. Due at least partially to the increasing globalization of business, many governance systems are beginning to gravitate toward the US system. Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. As part of a corporate family, individuals are members of a unit that envelops their lives—even the keiretsu is a family, and certainly more than an economic concept. Consensus, an important influence in Japanese corporate governance, calls for the expenditure of significant amounts of energy to win the hearts and minds of people whenever possible, as opposed to depending on edicts from top executives. Consensus is highly valued, even when it results in a slow and cumbersome decision-making process. As in Germany, banks play an important role in financing and monitoring large public firms in Japan. The bank owning the largest share of stocks and the largest amount of debt (the main bank) has the closest relationship with the company’s top executives. The main bank provides financial advice to the firm and also closely monitors managers. Thus, Japan has a bank-based financial and corporate governance structure compared to the United States’ market-based financial and governance structure. Aside from lending money (debt), a Japanese bank can hold up to five percent of a firm’s total stock; a group of related financial institutions can hold up to 40 percent. In many cases, main-bank relationships are part of a horizontal keiretsu (a group of firms tied together by cross-shareholdings). A keiretsu firm usually owns less than 2 percent of any other member firm; however, each company typically has a stake of that size in every firm in the keiretsu. As a result, somewhere between 30 percent and 90 percent of a typical firm is owned by other members of the keiretsu. Thus, a keiretsu is a system of relationship investments. As is the case in Germany, Japan’s corporate governance structure is changing. For example, because of their continuing development as economic organizations, the role of banks in the monitoring and control of managerial behavior and firm outcomes is less significant than it has been. The Asian economic crisis in the later part of the 1990s substantially harmed Japanese firms, making transparent the governance problems in the system. Corporate governance in China has undergone major changes over the past decade, along with the privatization of business and the development and integrity of the equity market. Though these changes are significant, the state still dominates the strategies that most firms employ. Research indicates that firms with higher state ownership have lower market value and more volatility than those with less. This is because the state imposes social goals on these firms and executives are not trying to maximize shareholder wealth. Overall, the Chinese system of corporate governance has been moving toward a Westernstyle model. Chinese executives are also being compensated based on firm financial performance. 8. How can corporate governance foster ethical decisions and behaviors on the part of managers as agents? In the United States, the focus of governance mechanisms is on the control of managerial decisions to ensure that shareholders’ interests will be served, but product market stakeholders (e.g., customers, suppliers, and host communities) and organizational stakeholders (e.g., managerial and nonmanagerial employees) are important as well. Therefore, at least the minimal interests or needs of all stakeholders must be satisfied by outcomes from the firm’s actions. Otherwise, dissatisfied stakeholders will decide to withdraw their support to one firm and provide it to another (e.g., customers will purchase products from a supplier offering an acceptable substitute). INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: WHAT IS HAPPENING TO EXECUTIVE PAY? The purpose of this exercise is to have students evaluate the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on executive compensation. Students were tasked with individually researching the impacts. Two resources that may be useful to you in understanding the impacts of the Act: • 2012 Trends and Developments in Executive Compensation – See Say and Pay ] • US trends in executive compensation http://www.towerswatson.com/enGB/Insights/Newsletters/Europe/executive-compensation-marketwatch/2013/04/US-trends-in-executive-compensation-Towers-Watson-webcastincreased-TSR-prevalence Guide a discussion through the questions in the exercise, and wrap up the discussion by tying executive compensation to internal governance. What is the effectiveness of executive compensation? EXERCISE 2: GOVERNANCE: DOES IT MATTER COMPETITIVELY? For this exercise, students are asked to evaluate the governance of a firm they might consider working for and then comparing that to one considered to be that firms top competitor. The main purpose of the exercise is to help make a connection between different governance elements (e.g., board composition, equity holdings by directors, executive compensation) and a firm’s financial performance. Students are asked to prepare a single page memo and a graphical comparison of performance that addresses the following questions: • Summarize what you consider to be the key aspects of the firm’s governance mechanisms. • Based on your review of the firm’s governance, did you change your opinion of the firm’s desirability as an employer? Why, or why not? A secondary goal of the exercise is to familiarize students with proxy statements and 10K filings as a resource for analyzing corporate governance. A related benefit is the use of the Securities and Exchange Commission EDGAR database (http://www.sec.gov/edgar.shtml). Because this exercise is completed individually, it can be helpful to spend some time in class debriefing the assignment. An easy way to do this is to restate the question “Based on your review of the firm’s governance, did you change your opinion of the firm’s desirability as an employer?” Ask for a show of hands for those that did change their opinion, and those that did not. Starting with the former group, ask: • What prompted the change in opinion? • Were there both positive and negative opinion changes? • How strong was the change – relatively minor, moderate, or substantial? Next, follow up with the “no change” group, and ask several students for the basis for their assessment. Finally, ask students how much weight they will play on corporate governance when considering future decisions about that firm. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: KNOWLEDGE BRINGS CORPORATE GOVERNANCE: WHISTLEBLOWING/STAFFORD GENERAL HOSPITAL RT: 6:00 Topic Key: Corporate governance, Agency relationship, Market for corporate control, International corporate governance, Global corporate governance When hospital staff failed to speak out about poor care, the challenge began to fall on relatives. Julie Bailey began to take on Stafford General Hospital. Believing that it would never happen to her, it happened at Stafford where she took her mom. Julie Bailey’s mother, Bella, had been taken to Stafford General Hospital in September 2007. But from her first impression, she believed something was wrong. She recognized that the patients in her mom’s ward couldn’t speak for themselves and the relatives visiting them were oblivious to what was going on. For 8 weeks, Bella’s family members maintained a 24hour watch at her bedside, keeping a record of what they saw. Julie Bailey reads the records they made that indicate the fear they had for being branded troublemakers. Bella Bailey died in the hospital in November 2007. Julie Bailey created a determined campaign in her café to make people aware of what she had seen but struggled make her voice heard. In an interview, Julie listed all the people she tried to speak to with the intent to try and tell as many people as possible. At that time she was unaware that the primary investigator of the Health Care Commission was planning to investigate high death rates at the hospital between 2005 and 2008. The report, when made public, showed managers putting targets ahead of patient care. With the mortality rates being further investigated, the report agreed there were serious concerns about patient care. It appeared that some doctors were even, privately, aware of the problems. The Commission report also said that the majority of doctors interviewed said they would not have been happy for a relative to have been treated there. Julie Bailey expressed her concern that it wasn’t good enough for their relatives but it was good enough for ours. She says if they had known or the doctors had spoken out none of their relatives would have been put there. A Staffordshire MP, Tony Wright—Labour, Cannock Chase, could not believe that doctors would be happy delivering that level of care and that nurses must have been unhappy working in that situation. He had helped introduce legislation to encourage employees to speak up. The Public Interest Disclosure Act of 1998 was intended to give whistleblowers legal protection from dismissal or victimization. Mr. Wright indicates that the whole point of these provisions was so that individuals could raise their concerns properly without threatening their job, without damaging their career, and without having to go to the media. However, in Staffordshire, there was a whole culture that discouraged complaints. The investigation indicated that nurses felt poorly supported as a profession and consultants appeared to have given up expressing their views since managers were said to dislike critical comments and ignored them. Mr. Wright says that the government should revisit what it said to health organizations in the past—such as the need to get whistleblower protection in place. The new leadership at Mid Staffordshire NHS Foundation Trust has now made it known that quality of care is now its primary concern. To this end, it is investing 12 million pounds in frontline clinical staff, improved training and facilities, and has published a new “no blame whistleblowing policy” aimed to bring poor practice out in the open. Also check out http://news.bbc.co.uk/2/hi/uk_news/england/staffordshire/7948293.stm Suggested Discussion Questions and Answers 1. What corporate governance mechanisms failed at Stafford General Hospital? o Text: Corporate governance is the set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations. o Stafford General Hospital Failures: (1) Ownership concentration— Managers at the hospital were putting targets ahead of patient care. In other words, there must have been some incorrect directive and incentive given to managers to be more concerned about meeting the numbers rather than with the patient care required by stakeholders. (2) With a hospital culture that discouraged complaints and a new leadership after the report, perhaps the oversight board of directors/leadership either instilled the culture to managers or they failed to have appropriate oversight of managers to ensure stakeholder satisfaction. (3) The last possible governance failure may have been in executive compensation in that Stafford leadership may have been compensated for the targets rather than stakeholder return. 2. Were there possibilities of agency problems within Stafford? Why or why not? Could managerial opportunism be an issue? o Text: Agency relationship exists when one or more person (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service. o Agency Problems at Stafford: Absolutely. It is very possible that overall leadership hired managers who had different interest and goals. Thus, managers pursued targets ahead of patient care. Also, due to expanded services of the hospital, managers could have become overloaded in responsibility and resorted to what was most important—managing the numbers. o Text: Managerial Opportunism is the seeking of self-interest with guile. o Stafford Managerial Opportunism: Stafford managers may have seen ways to earn extra compensation incentives by being more concerned for targets than patient care. 3. Can the Trust Foundation for Stafford be effective as a market for corporate control? o Text: The market for corporate control is an external governance mechanism that becomes active when a firm’s internal controls fail. o Trust Foundation: The Trust Foundation, while its intent may not be to diversify or merge hospitals, has taken over a very undervalued hospital to form one that takes necessary steps to improve patient care. Can it be effective? It must be. Investing 12 million pounds in frontline clinical staff, improved training and facilities and publishing a new “no blame whistleblowing policy” aimed to bring poor practice out in the open are appropriate steps in corporate control. 4. What role do you think the corporate governance structure of the United Kingdom played in the problems at Stafford? o Text: Effective corporate governance is also of interest to nations. Although corporate governance reflects company standards, it also collectively reflects country societal standards o United Kingdom: In the United Kingdom, the fundamental goal of business organizations is to maximize shareholder value. Therefore, this mentality became prevalent at Stafford and agents and principals operated the hospital in that manner. 5. How do you think the situation at Stafford will impact global corporate governance? o As countries and companies seek to attract foreign investments and awareness of global happenings become much quicker, the situation at Stafford can easily detract interest in foreign investment in United Kingdom hospital facilities, pronounce lack of global confidence in United Kingdom hospital facilities, and raise the global bar in hospital care and corporate governance due to concerns of repeating the Stafford situation across the world. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. The roles and responsibilities of top executives and members of a corporation’s board of directors are different. Traditionally, executives have been responsible for determining the firm’s strategic direction and implementing strategies to achieve it, whereas the board of directors has been responsible for monitoring and controlling managerial decisions and actions. Some argue that boards should become more involved with the formulation of a firm’s strategies. How would the board’s increased involvement in the selection of strategies affect a firm’s strategic competitiveness? What evidence can the students offer to support their position? Board Involvement in Strategy: Increased involvement of boards in strategy formulation can enhance strategic competitiveness by ensuring diverse perspectives and greater accountability. Boards can provide valuable insights based on their expertise and networks, leading to more informed decision-making. However, too much involvement may blur lines of responsibility and slow down the decisionmaking process. Evidence can be drawn from cases where proactive boards have steered companies towards successful innovations or adaptations in changing markets. 2. Ask students if they believe that large US firms have been over-governed by some corporate governance mechanisms and under-governed by others. Provide an example of each. Over and Under-Governance Examples: Students might argue that large U.S. firms are over-governed by mechanisms like shareholder meetings and extensive regulatory compliance, which can create inefficiencies. Conversely, they may find that firms are under-governed regarding executive compensation, where excessive pay packages are not aligned with performance. An example could be the scrutiny over excessive CEO pay amid poor company performance, highlighting a disconnect in governance mechanisms. 3. How can corporate governance mechanisms create conditions that allow top executives to develop a competitive advantage and focus on long-term performance? Have students use the Internet to search the business press and give an example of a firm in which this occurred. Creating Competitive Advantage through Governance: Corporate governance mechanisms can foster an environment where executives focus on long-term performance by aligning their incentives with shareholder interests. For example, companies like Unilever have implemented long-term incentive plans that reward executives for sustained performance, encouraging a focus on innovation and market positioning rather than short-term gains. This approach helps build a competitive advantage by promoting strategic consistency. 4. Some believe that the market for corporate control is not an effective governance mechanism. What factors might account for the ineffectiveness of this method of monitoring and controlling managerial decisions? Ineffectiveness of Market for Corporate Control: Factors contributing to the ineffectiveness of the market for corporate control include high transaction costs, regulatory barriers, and the potential for management entrenchment. In some cases, shareholders may lack sufficient information to make informed decisions about takeovers. Additionally, the fear of hostile takeovers can lead management to prioritize short-term strategies over long-term value creation, undermining the intended governance effect. 5. Present the following comment to the class: “As a top executive, the only agency relationship I am concerned about is the one between myself and the firm’s owners. I think that it would be a waste of my time and energy to worry about any other agency relationships.” What are these other agency relationships? How would students respond to this person? Do they accept or reject this view? Have them support their position. Other Agency Relationships: The top executive’s view neglects other crucial agency relationships, such as those with employees, suppliers, customers, and the broader community. Students might argue that neglecting these relationships can lead to disengagement, lower morale, and reputational damage. A more holistic approach acknowledges that a firm’s success depends on the health of all its relationships, which ultimately contributes to sustainable performance and shareholder value. Ethics Questions 1. As explained in this chapter, using corporate governance mechanisms should establish order between parties whose interests may be in conflict. Do owners of a firm have any ethical responsibilities to managers in a firm that uses governance mechanisms to establish order? If so, what are those responsibilities? Ethical Responsibilities of Owners to Managers: Owners have ethical responsibilities to managers, including fairness in compensation, transparency in expectations, and respect for professional autonomy. They should provide resources and support necessary for managers to fulfill their roles effectively. Additionally, owners should avoid micromanaging, allowing managers to leverage their expertise, thus fostering a collaborative and respectful working environment. 2. Is it ethical for a firm’s owner to assume that agents (managers hired to make decisions in the owner’s best interests) are averse to risk? Why or why not? Assuming Risk Aversion in Managers: It is not ethical for a firm’s owner to assume that managers are inherently risk-averse, as this generalization can lead to misunderstandings and poor decision-making. Managers may have varying risk tolerances based on their backgrounds and experiences. Ethical ownership involves recognizing individual differences and promoting a culture where informed risktaking is encouraged to drive innovation and growth. 3. What are the responsibilities of the board of directors to stakeholders other than shareholders? Board Responsibilities to Stakeholders: The board of directors has ethical responsibilities to various stakeholders beyond shareholders, including employees, customers, suppliers, and the community. They should ensure fair treatment of employees, promote product safety and quality, and support sustainable business practices. Additionally, the board must consider the long-term impacts of decisions on all stakeholders, balancing interests to foster a positive corporate reputation. 4. What ethical issues surround executive compensation? How can we determine whether top executives are paid too much? Ethical Issues in Executive Compensation: Ethical issues surrounding executive compensation include disparities between CEO pay and average employee wages, potential misalignment with company performance, and the influence of excessive bonuses on risk-taking behavior. To determine if executives are paid too much, one can analyze compensation relative to performance metrics, industry standards, and the overall impact on shareholder value. Transparency in compensation structures is essential for ethical evaluation. 5. Is it ethical for firms involved in the market for corporate control to target companies performing at levels exceeding the industry average? Why or why not? Targeting High-Performing Companies: It may be ethically questionable for firms involved in the market for corporate control to target companies exceeding industry averages, as this can disrupt successful operations and negatively impact employees and stakeholders. However, if the goal is to enhance overall value through synergies, ethical considerations may apply. A balanced approach should prioritize the interests of all stakeholders rather than solely focusing on financial gain. 6. What ethical issues, if any, do top executives face when asking their firm to provide them with a golden parachute? Ethical Issues of Golden Parachutes: Top executives face ethical issues when seeking golden parachutes, such as the perception of self-interest and the potential for moral hazard. These arrangements may be seen as unjust, particularly when they are disproportionately large relative to company performance. Transparency and alignment with company goals are crucial; firms should ensure that such packages are justified and contribute to long-term success rather than reward failure. 7. How can governance mechanisms be designed to ensure against managerial opportunism, ineffectiveness, and unethical behaviors? Designing Effective Governance Mechanisms: Governance mechanisms can be designed to mitigate managerial opportunism and unethical behavior by implementing checks and balances, such as independent audits, clear performance metrics, and transparent reporting practices. Establishing a strong ethical culture within the organization and providing training on ethical decision-making can further reinforce accountability. Additionally, regular evaluations of management performance and stakeholder feedback can help identify and address issues proactively. Internet Exercise The use of the Internet for buying and selling stocks has opened up markets to an unprecedented number of people. With the click of a mouse, one can buy shares of the hottest stocks. Not always so, though, warns the chairman of the SEC. Orders are not necessarily processed at the moment they are sent, and by the time the stock is purchased, the price may have risen ten-fold. Read more about investing through the Internet and the SEC’s efforts to combat growing Internet-based investment fraud at http://www.sec.gov. *e-project: Visit two online trading venues: the more traditional Merrill Lynch at www.merrill-lynch.com and the newer E*Trade at www.etrade.com. How well do these companies communicate the risks of a volatile market to their customers? Looking at the SEC’s recommendations, how does each company rate? Chapter 11 Organizational Structure and Controls ANSWERS TO REVIEW QUESTIONS 1. What is organizational structure and what are organizational controls? What are the differences between strategic controls and financial controls? What is the importance of these differences? Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes. Influencing managerial work, structure essentially details the work to be done and how that work is to be accomplished. Organizational controls guide the use of strategy, indicate how to compare actual and expected results, and suggest actions to take to improve performance when it falls below expectations. When properly matched with the strategy for which they were intended, structure and controls can be a competitive advantage. Strategic controls (largely subjective criteria) and financial controls (largely objective criteria) are the two types of organizational controls used to successfully implement a firm’s chosen strategy. Both types of controls are critical, although their degree of emphasis varies based on individual matches between strategy and structure. Strategic controls are concerned with examining the fit between what the firm might do (as suggested by opportunities in its external environment) and what it can do (as indicated by its competitive advantages). Effective strategic controls help the firm understand what it takes to be successful. Strategic controls demand rich communication between managers responsible for using them to judge the firm’s performance and those with primary responsibility for implementing the firm’s strategies. These frequent exchanges are both formal and informal in nature. Strategic controls are also used to evaluate the degree to which the firm focuses on the requirements to implement its strategies. For a business-level strategy, for example, the strategic controls are used to study primary and support activities to verify that those critical to successful execution of the business-level strategy are being properly emphasized and executed. With related corporate-level strategies, strategic controls are used to verify the sharing of appropriate strategic factors such as knowledge, markets, and technologies across businesses. To effectively use strategic controls when evaluating related diversification strategies, executives must have a deep understanding of the involved businesses. Partly because strategic controls are difficult to use with extensive diversification, financial controls are emphasized to evaluate the performance of the firm following the unrelated diversification strategy. The unrelated diversification strategy’s focus on financial outcomes requires the use of standardized financial controls to compare performances between units and managers. When using financial controls, firms evaluate their current performance against previous outcomes as well as their performance compared to competitors and industry averages. 2. What does it mean to say that strategy and structure have a reciprocal relationship? Strategic competitiveness can be attained only when the firm’s selected structure is congruent with its formulated strategy. As such, a strategy’s potential to create value is reached only when the firm configures itself in ways that allow the strategy to be implemented effectively. Thus, as firms evolve and change their strategies, new structural arrangements are required. Additionally, existing structures influence the future selection of strategies. Therefore, the two key strategic actions of strategy formulation and strategy implementation continuously interact to influence managerial choices about strategy and structure. Regardless of the strength of the reciprocal relationships between strategy and structure, those choosing the firm’s strategy and structure should be committed to matching each strategy with a structure that provides the stability needed to use current competitive advantages as well as the flexibility required to develop future advantages. This means, for example, that when changing strategies, the firm should simultaneously consider the structure that will be needed to support use of the new strategy. Research suggests that most firms experience a certain pattern of relationships between strategy and structure. Chandler found that firms tended to grow in somewhat predictable patterns—i.e., in the following order: (1) volume, (2) geography, (3) integration [vertical, horizontal], and (4) product diversification (see Figure 11.1). Chandler interpreted his findings to indicate that the firm’s growth patterns determine its structural form. As shown in Figure 11.1, sales growth creates coordination and control problems that the existing organizational structure can’t efficiently handle. Organizational growth creates the opportunity for the firm to change its strategy to try to become even more successful. However, the existing structure’s formal reporting relationships, procedures, controls, and authority and decision making processes lack the sophistication required to support use of the new strategy. A new structure is needed to help decision makers access the knowledge and understanding required to effectively integrate and coordinate actions to implement the new strategy. 3. What are the characteristics of the functional structures used to implement the cost leadership, differentiation, integrated cost leadership/differentiation, and focused business-level strategies? A functional structure is used to implement the cost leadership, differentiation, and integrated cost leadership/differentiation strategies. The functional structure consists of a chief executive officer and limited corporate staff with line managers in dominant functions such as production, accounting, marketing, R&D, engineering, and human resources. This structure allows for functional specialization, thereby facilitating knowledge sharing and idea development. Because the differences in orientation among organizational functions can impede communication and coordination, the central task of the CEO is to integrate the decisions and actions of individual business functions for the benefit of the entire corporation. This organizational form also facilitates career paths and professional development in specialized functional areas. The structural characteristics of specialization, centralization, and formalization play important roles in the successful implementation of the cost leadership strategy. Specialization refers to the type and numbers of job specialties that are required to perform the firm’s work. For the cost leadership strategy, managers divide the firm’s work into homogeneous subgroups. The basis for these subgroups is usually functional areas, products being produced, or clients served. By dividing and grouping work tasks into specialties, firms reduce their costs through the efficiencies achieved by employees specializing in a particular and often narrow set of activities. Firms using the differentiation strategy produce products that customers perceive as being different in ways that create value for them. With this strategy, the firm wants to sell nonstandardized products to customers with unique needs. Relatively complex and flexible reporting relationships, frequent use of cross-functional product development teams, and a strong focus on marketing and product R&D rather than manufacturing and process R&D (as with the cost leadership form of the functional structure) characterize the differentiation form of the functional structure (see Figure 11.3). This structure contributes to the emergence of a development-oriented culture—a culture in which employees try to find ways to further differentiate current products and to develop new, highly differentiated products. Continuous product innovation demands that people throughout the firm be able to interpret and take action based on information that is often ambiguous, incomplete, and uncertain. With a strong focus on the external environment to identify new opportunities, employees often gather this information from people outside the firm, such as customers and suppliers. Commonly, rapid responses to the possibilities indicated by the collected information are necessary, suggesting the need for decision-making responsibility and authority to be decentralized. To support creativity and the continuous pursuit of new sources of differentiation and new products, jobs in this structure are not highly specialized. This lack of specialization means that workers have a relatively large number of tasks in their job descriptions. Few formal rules and procedures are also characteristics of this structure. Low formalization, decentralization of decision-making authority and responsibility, and low specialization of work tasks combine to create a structure in which people interact frequently to exchange ideas about how to further differentiate current products while developing ideas for new products that can be differentiated to create value for customers. Firms using the integrated cost leadership/differentiation strategy want to sell products that create value because of their relatively low cost and reasonable sources of differentiation. The cost of these products is low “relative” to the cost leader’s prices while their differentiation is “reasonable” compared to the clearly unique features of the differentiator’s products. The integrated cost leadership/differentiation strategy is used frequently in the global economy, although it is difficult to successfully implement. This difficulty is due largely to the fact that different primary and support activities must be emphasized when using the cost leadership and differentiation strategies. To achieve the low-cost position, emphasis is placed on production and process engineering, with infrequent product changes. To achieve a differentiated position, marketing and new-product R&D are emphasized whereas production and process engineering are not. Thus, use of the integrated strategy results when the firm successfully combines activities intended to reduce costs with activities intended to create additional differentiation features. As a result, the integrated form of the functional structure must have decision-making patterns that are partially centralized and partially decentralized. Additionally, jobs are semi-specialized, and rules and procedures call for some formal and some informal job behavior. The focus strategy is best implemented by means of the simple structure. The simple structure is most appropriate for firms that follow a single business strategy and offer a line of products in a single geographic market and for firms implementing focused cost leadership or focused differentiation strategies. A simple structure is an organizational form in which the owner-manager makes all major decisions directly and monitors all activities, while the firm’s staff merely serves as an extension of the manager’s supervisory authority. It is characterized by little specialization of tasks, few rules, little formalization, unsophisticated information systems, and direct involvement of the owner-manager in all phases of day-today operations. At some point, however, the increased sales revenues resulting from success will necessitate changing from a simple to a functional structure. The challenge for managers is to recognize when a structural change is required to coordinate and control effectively the firm’s increasingly complex operations. 4. What are the differences among the three versions of the multidivisional (Mform) organizational structures that are used to implement the related constrained, the related linked, and the unrelated corporate-level diversification strategies? The three variants of the multidivisional or M-form structure that should be used to implement corporate-level strategies are the cooperative form, SBU form, and competitive form. The related constrained strategy is best implemented using the cooperative form of the multidivisional structure. This bears out in practice because the cooperative form is an organizational structure that uses many integration devices and horizontal human resource practices to foster cooperation and integration among the firm’s divisions. The cooperative form (see Figure 11.5) emphasizes horizontal links and relationships more than the two other variations of the multidivisional structure. Cooperation among divisions that are formed around either products offered or markets served is necessary to realize economies of scope and to facilitate the transferring of skills. Increasingly, it is important for these links to allow and support the sharing of a range of strategic assets, including employees’ “know-how” as well as tangible assets such as facilities and methods of operations. Firms implementing a related linked strategy usually employ the SBU (or strategic business unit) form of the multidivisional structure. The SBU form consists of at least three levels, with the top level being corporate headquarters; the next level, SBU groups; and the final level, divisions grouped by relatedness (either product or geographic market) within each SBU (see Figure 11.6). The firm’s business portfolio is organized into those related to one another within a SBU group and those unrelated in other SBU groups. Thus, divisions within groups are related, but groups are largely unrelated to each other. Within the SBU structure, divisions with similar products or technologies are organized to achieve synergy. Each SBU is a profit center that is controlled by the firm’s home office. An important benefit of this structural form is that individual decision makers, within their strategic business unit, look to SBU executives rather than headquarters personnel for strategic guidance. Firms implementing the unrelated strategy seek to create value through efficient internal capital allocations or by restructuring, buying, and selling businesses. The competitive form of the multidivisional structure is used to implement the unrelated diversification strategy. The competitive form (see Figure 11.7) is an organizational structure in which the controls used emphasize competition between separate (usually unrelated) divisions for corporate capital. To realize benefits from efficient resource allocations, divisions must have separate, identifiable profit performance and must be held accountable for such performance. The internal capital market requires organizational arrangements that emphasize competition rather than cooperation between divisions. To emphasize competitiveness among divisions, the home office maintains an arms-length relationship and does not intervene in divisional affairs except to audit operations and discipline managers of poorly performing divisions. 5. What organizational structures are used to implement the multidomestic, global, and transnational international strategies? The multidomestic strategy is one in which strategic and operating decisions are decentralized to business units in each country to facilitate tailoring products to local markets. However, it is sometimes difficult for firms to know how local their products should or can become. Firms implementing the multidomestic strategy often attempt to isolate themselves from global competitive forces by establishing protected market positions or by competing in industry segments that are most affected by differences among local countries. The worldwide geographic area structure (see Figure 11.8) is used to implement the multidomestic strategy. This structural form emphasizes national interests and facilitates managers’ efforts to satisfy local or cultural differences. Because the multidomestic strategy requires little coordination between different country markets, there is no need for integrating mechanisms among divisions in the worldwide geographic area structure. As such, formalization is low and coordination among units in a firm’s worldwide geographic area structure is often informal. Given its emphasis on international scale and scope economies, the global strategy is a strategy in which standardized products are offered across country markets and where competitive strategy is dictated by the firm’s home office. The worldwide product divisional structure (see Figure 11.9) is used to implement the global strategy. This structure represents an organizational form in which decision-making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among disparate divisional business units. This form is the “structure of choice” for rapidly growing firms seeking to manage their diversified product lines effectively. Integrating mechanisms also create effective coordination through mutual adjustments in personal interactions. Such integrating mechanisms include direct contact between managers, liaison roles between departments, temporary task forces or permanent teams, and integrating roles. As managers participate in cross-country transfers, they are socialized in the philosophy of managing an integrated strategy through a worldwide product divisional structure. A shared vision of the firm’s strategy and structure is developed through standardized policies and procedures (formalization) that facilitate implementation of this organizational form. The transnational strategy is an international strategy through which a firm seeks to provide the local responsiveness of the multidomestic strategy while achieving the global efficiency of the global strategy. The combination structure has characteristics and structural mechanisms that result in an emphasis on both geographic and product structures. Thus, this structure has the multidomestic strategy’s geographic area focus and the global strategy’s product focus. The structure used to implement the transnational strategy must be simultaneously centralized and decentralized, integrated and nonintegrated, and formalized and nonformalized. These seemingly opposing structural characteristics must be managed by a structure that is capable of encouraging all employees to understand the effects of cultural diversity on a firm’s operations. Accordingly, a strong educational component is needed to change the whole culture of the organization. If the cultural change is effective, the combination structure should allow the firm to learn how to gain competitive benefits in local economies by adapting capabilities and core competencies that often have been developed and nurtured in less culturally diverse competitive environments. 6. What is a strategic network? What is a strategic center firm? How is a strategic center used in business-level, corporate-level, and international cooperative strategies? A strategic network is a group of firms that has been formed to create value by participating in multiple cooperative arrangements, such as strategic alliances. An effective strategic network facilitates the discovery of opportunities beyond those identified by individual network participants. A strategic network can be a source of competitive advantage for its members when its operations create value that is difficult for competitors to duplicate and that network members can’t create by themselves. Strategic networks are used to implement business-level, corporate-level, and international cooperative strategies. Commonly, a strategic network is a loose federation of partners who participate in the network’s operations on a flexible basis. At the core or center of the strategic network, the strategic center firm is the one around which the network’s cooperative relationships revolve. Because of its central position, the strategic center firm is the foundation for the strategic network’s structure. Concerned with various aspects of organizational structure, such as formal reporting relationships and procedures, the strategic center firm manages what are often complex, cooperative interactions among network partners. The strategic center firm is engaged in four primary tasks as it manages the strategic network and controls its operations: Strategic outsourcing is one of the strategic center firm’s key functions. In addition to outsourcing more than do other members of the strategic network, the center firm also encourages member firms to go beyond contracting to solve problems and to initiate competitive courses action that the network can pursue. The competence-related role of the center firm is to build or develop the core competencies of other network member firms and encourage them to share capabilities and competencies with other network partners. Technology aspects of the center firm’s role include managing the development and sharing of technology-based ideas among network partners. Emphasizing the race to learn implies that the strategic center firm must encourage positive rivalry among partner firms that strengthen each partners’ as well as the network’s value chain. The effectiveness of the center firm is related to how well it learns how to manage learning processes among network partners. Taken together, the effective management of all aspects of the network by the strategic center firm is critical to the network’s ability to successfully implement business-level, corporatelevel and international cooperative strategies. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: STRATEGY AND STRUCTURE RESPONSES TO “SHOWROOMING” This exercise is designed to have students take a deeper look at strategy and structure with real world examples. Teams will select firms (small or large) negatively impacted by showrooming for your review so that you can avoid duplicates, or you may opt to assign companies for ease. Some suggested firms include: • Best Buy • Bed, Bath & Beyond • Toys R Us • Sears • Kohl’s • Barnes & Noble • Petsmart • Office Depot • Radioshack • JC Penny Have teams present which firms they analyzed and how structure and strategy has been influenced by showrooming. Create a master list of all strategies implemented by the firms in question to combat showrooming. Are these strategies effective? If not, are there other strategies that could be implemented to combat showrooming? EXERCISE 2: IS STRUCTURE CONTAGIOUS? This exercise also allows the instructor to reinforce current chapter topics as well as those from chapter 10 on governance. It would be beneficial to either assign pairs of competitors or allow students to choose between industries such as aviation or tools or retail or fast food and the like. The instructor should also encourage and or assign firms in the local area that would be interesting candidates. In this way students could interview the senior officers of the firm for experience and firsthand knowledge and that would also allow the class to see some differences in structure between firms of various sizes. Since the concept is structure it would also be a good learning tool for the instructor to prod the students to think through the firm’s business level strategy and corporate level strategy and how that influences the structure design. For example a firm that utilizes a dominant diversifications strategy will have a very different structure from one that utilizes an unrelated diversification strategy. This too reinforces the Chandler argument regarding the reciprocal relationship between strategy and structure. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: A MATCH FOR ORGANIZATIONAL STRUCTURE AND CONTROL— GM BANKRUPTCY RT: 00:59 Topic Key: Organizational structure, Organizational controls, Strategic controls, Strategy and structure relationships As it emerges from bankruptcy, the mighty General Motors (GM) Corporation will become the smaller GM company. Half its brands are being sold off or phased out leaving only Chevy, Buick, GMC, and Cadillac. The new GM is reportedly changing its logo background to green to emphasize its commitment to smaller more fuel efficient cars. The US Treasury will be the company’s biggest stockholder and the American taxpayer will own more than 60% of the new GM. The Obama administration has picked a new management team—Fritz Henderson as GM’s interim CEO, Ed Whitacre as GM’s chairman, and design guru, Robert Lutz has been asked to stay on. However, the government wants new blood throughout the company. Edmunds.com representatives says that how the GM organization unfolds is going to determine a new GM or just a smaller same old GM. Also check out http://www.gm.com/ Suggested Discussion Questions and Answers 1. Is GM’s organizational structure aligned with its strategies? If so, why? If not, what is needed? o Text: Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes. o From the video, the government has emphasized the need for new designs among the GM brands and has maintained a design guru for the GM staff. This and the attempt to change their logo to green in accord with the design of more efficient cars are both indicators of attempts to align structure and strategy. However, the government weave into the business also presents volatility in structural stability for GM. Flexibility and stability are much needed components of the GM structure. Because of GM’s historic strategic inertia, the government now has had to induce change upon the company. It will be very difficult for GM to return to a simple structure but must rather provide a functional and efficient one. This will provide for greater functional specialization particularly in areas of design and other knowledge that fuel innovation rather than stagnation. With a focus on efficiency, a multidivisional structure may have opportunity for development. o Instructor may consider more updated structural changes for discussion. 2. What organizational controls do you think were lacking in the old GM? What organizational controls are needed in the new GM? o Text: Organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. o Students answers will vary. 3. What specific strategic controls do you believe are key to GMs future success? Should GM’s value chain change? o Strategic Controls: GM must concern itself with what it might do and can do regarding information from the external environment and what it has to do to be competitive. o Financial Controls: Obvious need to measure performance against standards. o Value Chain: Yes, changes must be made to the value chain particularly in areas of primary activities. Support activities are available but the primary activities have been inefficient, i.e., speed of production and production adaptability to the market. 4. Recognizing GM’s current state, how do you see the new GM strategy and structure relationship? How do you see it evolving? o Due to governmental intervention, the GM strategy and structure remain less than a fit. According to the video, the realignment began with structure rather than strategy first. The government put the people in place and then said revamp your strategy. The strategy should be GM’s rather than the government’s, which according to the video is not the case. Though GM had smaller fuel-efficient cars in the pipeline before the bankruptcy they simply were not efficient in their production efforts which brought them to a government bailout. To this end, GM has a government structure driving to achieve a government strategy to stay afloat. Meeting targeted goals dictated by the government does not necessarily produce a long-term strategy. o The Evolution: It appears that government’s desire is to return GM to a functional structure with a limited staff with a focus on design that supports a strategy of differentiation. Text: Firms using the differentiation strategy produce products that customers hopefully perceive as being different in ways that create value for them. Such an approach can develop into continuous product innovation. Sales growth could evolve GM back into a multidivisional structure but still with no clear strategy. Ideally, GM needs to set its differentiation strategy with a functional structure and allow the differentiation to create or expand growth toward the multidivisional structure. At which time, GM may then need to look at changing strategies. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Why do firms experience evolutionary cycles in which there is a fit between strategy and structure, punctuated with periods in which strategy and structure are reshaped? Have students provide examples of global firms that have experienced this pattern. Evolutionary Cycles in Strategy and Structure: Firms undergo evolutionary cycles due to changing market conditions, competitive pressures, and internal dynamics that require realignment of strategy and structure. For example, General Electric has shifted its strategy and structure multiple times to adapt to technological advancements and market demands. These periods of fit and reshaping help organizations remain competitive and responsive to new challenges. 2. Ask students to select an organization (for example, an employer, a social club, or a nonprofit agency) of which they currently are members. What is this organization’s structure? Is the organization using the structure that is appropriate, given its strategy? If not, what structure should it use? Analyzing Organizational Structure: Students should examine an organization they belong to, assessing its structure (e.g., hierarchical, flat, matrix) and its alignment with strategy. For instance, a social club might use a hierarchical structure to maintain order but may benefit from a more flexible structure to foster member engagement. If misaligned, students can suggest a more suitable structure, such as a team-based approach to enhance collaboration. 3. Have students use the Internet to find a firm that uses the multidivisional structure. Which form of the multidivisional structure is the firm using? What is there about the firm that makes it appropriate for it to use the M-form? Identifying Multidivisional Structure: Students can research a firm like Procter & Gamble, which employs a multidivisional (M-form) structure. This structure allows P&G to manage its diverse product lines effectively, as each division operates semiindependently while contributing to overall corporate strategy. The M-form is appropriate due to P&G’s broad product portfolio and need for specialized focus in various markets. 4. Through reading the business press, students should identify a firm implementing the global strategy and one implementing the multidomestic strategy. What organizational structure is being used in each firm? Are these structures allowing each firm’s strategy to be implemented successfully? Why or why not? Global vs. Multidomestic Strategies: Students might identify a firm like Coca-Cola implementing a global strategy, using a centralized organizational structure to maintain brand consistency. In contrast, a firm like Unilever may utilize a multidomestic strategy with a decentralized structure, allowing local subsidiaries to tailor products to regional tastes. The effectiveness of these structures depends on their ability to support strategic objectives—Coca-Cola benefits from global efficiency, while Unilever excels in local responsiveness. 5. Students should define strategic and financial controls for a businessperson in the local community. Ask the businessperson to describe the use of each type of control in his or her business. In which type of control does the businessperson have the greatest confidence? Why? Defining Strategic and Financial Controls: Strategic controls focus on measuring how well an organization aligns with its strategic goals, while financial controls evaluate fiscal performance through metrics like profit margins and ROI. A local businessperson may describe using strategic controls for market positioning and financial controls for budgeting. Confidence might be highest in financial controls due to their quantifiable nature, providing clear indicators of business health. Ethics Questions 1. When a firm changes from the functional structure to the multidivisional structure, what responsibilities does it have to current employees? Responsibilities to Current Employees: When transitioning from a functional to a multidivisional structure, firms have ethical responsibilities to communicate transparently with current employees about changes. They should provide support through retraining, reassignments, and clear career pathways to alleviate uncertainty. Additionally, firms must ensure fair treatment during restructuring, addressing any concerns about job security or role changes to maintain trust and morale. 2. Are there ethical issues associated with the use of strategic controls? With the use of financial controls? If so, what are they? Ethical Issues with Strategic and Financial Controls: Ethical issues arise with strategic controls when performance metrics can lead to manipulation or a narrow focus on short-term results at the expense of long-term goals. Financial controls may encourage unethical behavior, such as creative accounting or cost-cutting that jeopardizes employee welfare. Both controls should be designed to promote transparency and integrity, aligning incentives with ethical standards. 3. Are there ethical issues involved in implementing the cooperative and competitive M-form structures? If so, what are they? As a top-level manager, how would you deal with them? Ethical Issues in M-form Structures: Implementing cooperative and competitive Mform structures can lead to ethical issues, such as favoritism in resource allocation or conflicts of interest between divisions. As a top-level manager, addressing these issues requires establishing clear policies, promoting a culture of fairness, and ensuring that all divisions operate with transparency and accountability, fostering collaboration over competition when appropriate. 4. Global and multidomestic strategies call for different competitive approaches. What ethical concerns might surface when firms attempt to market standardized products globally? When they develop different products or approaches for each local market? Ethical Concerns in Global Marketing: Marketing standardized products globally can raise ethical concerns related to cultural insensitivity and the potential for exploiting local markets. Conversely, developing unique products for each market may lead to ethical dilemmas about fairness and equity in resource allocation. Firms must balance global efficiency with local relevance, ensuring that their marketing strategies respect cultural differences and contribute positively to local communities. 5. What ethical issues are associated with the view that the “redesign of organizations throughout a society—indeed, globally—entails losses as well as gains”? Ethical Issues in Organizational Redesign: The view that organizational redesign entails both losses and gains raises ethical concerns about the impact on employees and communities. Ethical considerations include ensuring fair treatment for those who lose jobs and actively supporting their transition. Firms should approach redesigns with sensitivity, emphasizing the need for equitable distribution of benefits and addressing the broader social implications of their structural changes. Internet Exercise Many retail industries, such as DVD sales, are ideal for web-based organizational and selling structures. Visit the sites of some of the most popular venues: Amazon.com (http://www.amazon.com), Wherehouse.com (http://www.wherehouse.com), and CD Universie (http://www.cduniversie.com). Can you define the type of organizational structure each company uses? What attempts are being made by each to diversify and expand into other businesses? *e-project: Suppose you want to launch your own DVD sales company on the Internet that will have an immense global reach to the large Spanish-speaking market around the world. Suppose further that you have hired a web-design firm to construct a site for you. Based on your research of top sites, how will you describe your web design and business level strategy for this project? What organizational structure is appropriate to implement the business-level strategy selected? Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425184, 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147
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