Organization Summary

1. Introduction to Organizations A business organization is an entity formed for the purpose of carrying on commercial enterprise. Such an organization is predicated on systems of law governing contract and exchange, property rights and incorporation. Organizations are made of people Organizations divide and coordinate labor among members Organizations pursue shared goals and objectives Organizations exist because of a basic dilemma: Unlimited needs vs. limited resources. The solution to this problem is division of labor and specialization. This brings up a new problem: How to coordinate of the labor parts? Contracts, organizational design, mgmt&leadership The organizational challenge: To design structure & systems that Permit specialization Create incentives to align individual & firm goals Facilitate Coordination by grouping individuals & link groups with systems of communication, decision making & control

Problems: The need for cooperation ( The Agency Problem) The need for coordination (Managing interdependency) Lack of knowledge (coordination problem) Lack of motivation (motivation problem)

Why Organizations exist: The use of an organization allows people jointly to create value! ncrease specialization and the division of labor (specialized engineers) Use large-scale technology (economies of scale, economies of scope) Manage the external environment (economic, social and political factors) Economize on transaction costs (costs associated with negotiating and monitoring) Exert power and control (come to work in a predictable way, accept authority)

The triangle of the organization, the person and its role/function tries to explain the tensions that can appear. The person, its role/function and the organization in total have different goals and tasks and are influenced by different factors.

2. Organization Theories 2.1 Introduction to the study of organizations Theory: Statement of concepts and their interrelationships that shows how and/or why a phenomenon occurs. The use of theory: Scientific utility: Advancement that improves conceptual rigor or the specificity of an idea and/or enhances its potential to be operationalized and tested Practical utility: Theory can be directly applied to the problems practicing managers and organizational practitioners face

There are many different organizational theories because many different aspects matter Individual factors (Psychology) Group factors (Sociology, Social Psychology, Political Science) Organizational factors (Economics)

In organizations there are not as stable and predictable laws as in physics. Management should be compared to medicine and and engineering (does it work?), not to physics and biology (is it true) Cause of individual, group and organization effectiveness: Individual effectiveness- Causes: Ability, Skill, Knowledge, Attitude, Motivation, Stress Group effectiveness- Causes: Cohesiveness, Leadership, Structure, Status, Roles, Organizational effectiveness- Causes: Environment, Technology, strategic choices, Structures, Processes, Culture

Management performs the functions of Planning, Organizing, Leading, Controlling to coordinate the behavior of Individuals, Groups, Organizations to attain Individual effectiveness, Group effectiveness, Organizational effectiveness. 2.2 Organization theories Bureaucratic Theory (Max Weber, 1864-1920)

Initial Situation in 1800: Organizations were simply extensions of families and hiring/promotion were based on favoritism. Subjectivity dominated objectivity the inefficiencies of these organizations became apparent through the Industrial Revolution. Characteristics of a efficient and rational bureaucracy proposed by Weber Clearly defined authority and responsibility for each worker, Hierarchy of authority Personnel selection based on technical competence Impersonal and uniform rules for individual performance Equipment and privileges belong to positions not to persons Administrators are career officials working for a fixed salary

Administrative theory (Henri Fayol, 1841-1925)

Two management functions: Coordination  Scalar principle: Hierarchical distribution of authority in a pyramid-like structure  Unity of command: Workers should only have one superior  Span of control: optimal number of subordinates  Exceptions principle: lower-level employees should handle routine events, whereas top administrators should deal with unusual problems and issues Specialization  Departmentalization principle: Similar tasks and functions should be grouped with the same department or unit  Differentiation between line and staff functions: Line functions contribute directly to pursuit of primary organizational goals Staff functions are support activities Scientific Management (Frederick Taylor, 1856-1915)

Decisions should be based on precise, scientific study of individual events. Which method of doing a job delivers the greatest output? Standardize procedures, Select workers with most skills, Train workers to follow standard procedures, Carefully plan work, Provide incentives to increase output

By linking output directly to payment he wanted to satisfy two stakeholders (Employees, Shareholders) but he did not realize that human do not want to be treated like machines The classical organization theories focused on structure, functional division of work and organizational goals (Meso- and macro-level). The focus of neo-classical organizational theories: micro level (human needs and relations, alignment of give-and-take relationships, expectancies of employees towards the organization as factor of stability) Behavioral decision theory (Simon 1916-2011 , March 1928 today)

Individuals can only decide rationally to certain extend. This is caused by imperfect knowledge, limited ex ante evaluation of future outcomes and the incapability to consider all alternatives Organizations improve decision making by reducing complexity + uncertainty Division of labor: problems are divided in sun-problems and individuals are only confronted with a subset of goals and alternatives Standardization of processes: no need to necessitate evaluation of all alternatives Hierarchy: Decision space of subordinates is limited, complexity/uncertainty reduced Communication: Aggregation and filter of information Indoctrination: subordinates indentify with organizational values, goals and mission

Transaction cost theory

Transaction costs: Costs in excess of the actual amount paid to the input supplier when acquiring inputs including the cost of searching, the cost of negotiating a price, etc. Transaction costs vary with the amount of transaction specific investments, the uncertainty and the frequency of transactions. In case of low uncertainty and low required amount of investments transactions should be done within markets. With increasing investments and uncertainty transactions should be done within institutions. Hiring Process: Search Evaluate Negotiate Instruct Control
Agency theory

Primary interests of principals (maximize RoI) and workers (Minimal effort with a maximum of remuneration) are essentially different Main problem: information disadvantage. Four Property rights: Use the property (USUS), Change the property (ABUSUS), Right to transfer or sell the property (IUS ABUTENDI) and right to any benefit from the property (USUS FRUCTUS) Which assignment of property is the optimum - Two criteria for the evaluation: Deadweight by external effects VS Transaction costs

Institutionalism: Assumption: Companies perform well when they are perceived by the larger environment to have a legitimate right to exist. The environment is composed of norms and values from stakeholders. Organizational isomorphism: Organization adopts certain norm because of pressure by other organizations ore by society in general. ( Coercive isomorphism) Organizations intentionally imitate and copy one another to increase their legitimacy. (Mimetic isomorphism) Organizations indirectly adopt norms and values by movement of employees and managers between organizations and exchange within associations (Normative isomorphism)

3. Corporate Governance 3.1 Agency Theory Assumption: A contract aligns the utility function of the agent with the utility function of principal. Due to information asymmetry contracts are mostly incomplete three theoretical solutions: Direct regulation of agents behavior by the principal Improvement of the information system Sharing of results between principal and agent 3.2 Boards in organizations The CEO can influence organizational effectiveness and decision making in 5 principal ways The CEO is responsible for setting the organizations goals and designing its structure The CEO selects key executives to occupy the topmost levels of the managerial hierarchy The CEO determines top management s rewards and incentives The CEO controls the allocation of scarce resources such as money and decision-making power among the organizations functional areas or business divisions The CEO s actions and reputation have a major impact on stakeholders views of the organization and affect the organizations ability to attract resources from environment

Board of directors: representation of the shareholders Basic functions: Advising and counseling top management, Monitoring and controlling top management Developing corporate strategy

Monitoring functions: Establish policies and objectives of the firm Elect, monitor, advice, evaluate and compensate the corporate officers and approve actions Protect the value of the corporate assets Monitor, approve and report on financial condition including required reports Delegate selected board powers to other, as necessary Ensure that the corporate charter and by-laws are enforced and revised, as necessary Maintain integrity of the board

Different board systems in US/Germany One Tier vs. Two Tier (Aufsichtsrat + Vorstand) In Comparison to UK/US governance structures the German system is more stable. Even though this structure helps to prevent wrong-doing critics maintain that it slows decision making. The German/Japanese system concentrates on stakeholder value. But they started to adopt shareholder value view (as strongly implemented in the US firms as instruments to create value)

3.3 Agency problems in boards

Product diversification as an example of an agency problem: Shareholder risk profile: Diversification as long as economies of scale/scope realized Managerial risk profile: Diversification may lower performance, reduces employment risk 3.4 Potential solutions of the agency problem in boards

Difficulties with pay for performance (study finds no relationship between pay change and return) :

nformation asymmetry: Compensation committee is responsible for CEO compensation they lack key information which can be provided (selectively) by CEO nvolvement of compensation consultants: They are hired by CEO problems of objectivity Outside board members are often selected by CEO may only select loyal people What is the right measure for performance?

Markets as disciplinary forces of the management: Stock market: Reaction on company performance, announcement of strategy, events etc. Labor Market: Potential to move among firms demand higher salaries, poor performance = no demand from the markets for executive Debt Market: Companies credit rating are downgraded when companies perform poorly

Corporate takeovers: The market for corporate control M&A can be seen as a market for corporate control: poor performance leads to low market valuation. Under-valued corporations are potential takeover targets. Managers are replaced. However this market seems not to function efficiently: takeover attempts are focused on above-average performing firms + many firms have golden parachutes for managers Other examples for managerial defense tactics against hostile takeovers: Poison Pill: Preferred Stock in the merged firm offered to shareholders at a attractive ROE Capital Structure Change: Dilution of stock, making it more costly for a bidder to acquire 3.5 Good Corporate Governance Definition of corporate governance: Set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations Growing concerns about corporate governance: Economic changes and influences: Globalization of capital markets, Mechanisms to remove under-performing management, Institutional ownership has become more concentrated Trust in companies and their managers declines worldwide Increasing concerns about sustainability

Corporate Governance only matters in times of economic concentration in times of growth it is considered as reducing a company s ability to act quickly. Investors care little about long-time risks. Economic concentration and corporate collapse increase focus on firms risk taking. German Corporate Government Index: The Cope addresses international criticisms on internal legal structures of German companies. It includes (among others): Collaboration, roles and responsibilities of shareholders, executive board and board of directors Informational duties of the executive board Transparency on executive and director compensation Publication and content of reports Global Compact of United Nations: It consists of 10 principles; membership does not mean that the 10 principles are fully followed. The goals are: to facilitate and encourage dialogue.

4. Inside the Corporation I 4.1 Why analyzing the firm s internal environment When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus Resources and capabilities are the primary source of profitability. Resources (tangible + intangible) are the fundament for any capabilities of the company. From the capabilities the core competencies are made out. The process of discovering core competencies is based on two aspects: Value Chain Analysis (Outsource) and the Four Criteria for Sustainable Advantage (Valuable, Rare, Costly to imitate, Nonsubstitutable). From the outside: Key Success Factors how do customers choose? What do we need to survive competition? What resources & capabilities do we need to deliver these factors? From the inside: The value chain separates activities into Primary activities: transformation of inputs and the interface with customer Secondary activities: provide support for primary activities Firm understands the party of its operations that create value and those that do not 4.2 Resources, capabilities, competencies Tangible resources: Assets that can be observed and quantified (manufacturing facilities) Intangible resources: Assets that are rooted in firm history (Technology, Reputation, Culture) Human resources: Assets that depend on humans (Skills/know-how, Motivation) Out of these resources the organizational capabilities are made up. Combined with a strategy which is influenced by the Industry Key Success Factors a competitive advantage is generated. Capabilities exist when resources have been purposely integrated to achieve a specific task or set of tasks. They are based on developing, carrying and exchanging information and knowledge through the firm s human capital. Concerning human capital companies face the challenge of distributing knowledge among members of organizational units and providing an attractive environment preventing employees from leaving the firm 4.3 Core competencies and competitive advantage What does the rent-earning potential of resources and capabilities depend on? The extent of the competitive advantage established (Scarcity, Relevance) Sustainability of the competitive advantage (Durability, Transferability, Replicability) Appropriability (Property rights, Relative bargaining power, Embeddedness)

Core Competencies: resources/capabilities that serve as source for competitive advantage

Valuables capabilities: allow the firm to exploit opportunities or neutralize threats in its external environment Example: Competence in Financial Services Rare capabilities: Are capability that few competitors posses Example: Patents Costly-To-Imitate capabilities: cannot be easily developed Example: Brands, Trust/Friends Non-substitutable capabilities: capabilities with no strategic equivalents Example: Apple A company s resources and capabilities can be assessed by weighting them with the importance of the particular attribute for the specific industry. If an attribute is important while the company is weak in it this makes out a key weakness. 4.4) Human capital as a main source of competitive advantage Human capital is part of intangible resources. It is the sum of the skills, knowledge and general attributes of the people in an organization. Human capital does not depreciate when it is used it is commonly enhanced through use! Knowledge has become a critical resource for firms. Firms with superior knowledge can use it to gain a competitive advantage. Because most knowledge is held by associates, it is important to acquire and hold a highly knowledgeable workforce to well perform. Human assets contribute to value added. This contribution to the value added results in even more valuable human assets which create even more value added. Value Chain: Human Capital Behavior Economic Value The Difference between a human and machinery is the performance fluctuation

5. Inside the Corporation II 5.1 Challenges in developing capabilities Research finds: Capabilities are not simply the outcome of the resources upon which they are based. It seems there is one resource to be critical in the development of capabilities Managers with the requisite knowledge of capability building Also capabilities are path dependant and a consequence of companys childhood experiences Integrating resources to create organizational capability: Strategic Intent: Drive and direction of organization and effective leadership Organizational Structure: Effective coordination requires that the team performing a capability is housed within an organizational units Management Systems: Team performing a capability needs information (changing circumstances), incentives (promote cooperation and effort) and resource allocation. Culture as an intangible resource: Key influences on coordination an firm priorities. It s important for the capacity of organizational members to comprehend one another and to collaborate without continual managerial direction

Capabilities can act as barriers if they are developed over a long time and embodied /embedded within organizational structure. The more highly developed a firm s capabilities are the more difficult it is to adapt to new circumstances. Core Capabilities = rigidities ? Flexibility of organizational routines: Operations display variation and can adapt Dynamic capabilities: capacity to change may be regarded as organizational capability 5.2 Capability development Approaches to capability development: M&A/Strategic alliances, internal development, Knowledge Management (systematic approaches: storing, replicating, accessing knowledge) M&A - Acquiring companies that already developed the desired capability can shorten the process of capability development however acquisitions bear major risks: Expensive because of acquisition premium Acquired firms come with surplus of resources already existent in company Capabilities must be integrated (cultural/personality clashes) may destroy capability Selecting and integrating acquisitions itself is an organizational capability

Strategic alliances are a cooperative relationship between firms involving the sharing of resources in pursuit of common goals (Reduces costs and risks). However, a key issue is whether the partners want to access or to acquire the other s capabilities. Again managing alliance relationships is itself a critical organizational capability that compromises: Trust building, Developing knowledge sharing routines, Coordination

Internal Development: Integrating resources requires organization and management system and is facilitated by culture and strategic intent. That is: Bring together the requisite human and nonhuman resources Locate the resources within a suitable organizational unit Establish processes that perform the capability Allow processes to develop through routinization Design management systems that support capability Lead the entire effort through the appropriate strategic intent.

Developing new capabilities may benefit from structures, system and culture that are different from those that support the firm s existing capabilities. Separated incubator units combine the flexibility and autonomy of startups and the resources/capabilities of company Knowledge Management: The systematic leveraging of information and expertise to improve organizational innovation, responsiveness, productivity and competency. The Knowledge-based view of the firm: The firm is an assemblage of knowledge assets and value is created by deploying this knowledge. Knowledge management is the most important resource of the firm and the essence of organizational capability. Explicit Knowledge: Knowing About easy to exploit within firm but difficult to protect

Tacit Knowledge: Knowing How Basis for sustainable competitive advantage but challenge is to replicate it internally Knowledge Generation ( Exploration ): Knowledge Creation + Knowledge Acquisition Knowledge Application ( Exploitation ): Knowledge Integration + Knowledge Sharing + Knowledge Replication + Knowledge Storage & Organization + Knowledge Measurement + Knowledge Identification

Designing a knowledge management system: What knowledge processes are critical to creating value and advantage? What are the characteristics of the relevant knowledge?

What mechanisms are needed for the generation and application of the relevant knowledge What organizational conditions need to be in place in order for knowledge management mechanisms to work? 5.3 Strategic Leadership

Effective strategic leaders attract and manage human capital. Establish a context where stakeholder perform efficiently and manage to deal with diverse, complex and ambiguous situations. Transactional leadership entails engaging followers through exchange with their leaders Typically is done through clarification and specification of  What is expected of followers  Leaders interventions when standards are not met

Transformational leadership entails motivating followers: To exceed the expectations others have of them To continuously enrich their capabilities To place the interests of the organization above their own

6. Inside the Corporation III 6.1 Manufacturing and service technology Firm s effectiveness is contingent upon an alignment of strategy, structure and technology, especially when competitive conditions change. But being geared to best practices reduces the probability for innovations Failing to adopt appropriate new technologies and failing to realign strategy can result in below average performance Technology: work processes, techniques, machines and actions used to transform organizational inputs (materials, information, ideas) into outputs (products services) Service Technology: Intangible output, Production and consumption take place simultaneously, Labor- and knowledge intensive, Customer interaction higher, human element very important, Quality is perceived and difficult to measure, Rapid response time is usually necessary, Site of facility is extremely important Manufacturing Technology: Tangible Product, Products can be inventoried for later consumption, Capital asset-intensive, Little direct customer interaction, Human element may be less important, Quality is directly measures, Longer response time is acceptable, Site of facility is moderately important A service innovation creates new markets Service innovations generate high returns Two dimensions characterize service innovations: Type of benefit + Type of service

Flexible manufacturing system link together manufacturing components that previously stood alone. Robots, Machines, Product Design and Engineering are coordinated by computers. Several technologies support the manufacturing process: Computer-aided design Computer-aided manufacturing Integrated information network Product life-cycle management

FMS allows companies to produce customized products in mass production Lean manufacturing aims to cut waste and improve quality by training employees in continuous improvement and problem solving focus on people. This requires an adequate organizational system (decision-making, organizational culture supporting participation)

Mass customization aims to produce enough variety in products and/or services so that nearly everyone finds what he wants at a reasonable price A process by which firms apply technology and management methods To provide product variety and customization Through flexibility and quick responsiveness 6.2 Non-core department technology Departmental technologies can be analyzed along two dimensions that are relevant: Variety: Task variety refers to the number of exceptions in the work Analyzability: Tasks are highly analyzable when tasks can be reduced to steps

6.3 Department Design Differences in technologies can be set out in relation to the following dimension: Formalization: Standardization and division of labor into small tasks Decentralization: Differentiation between decisions made by employees/central Worker skill level: Refers to education, experience and trainings Span of control: Number of employees who report to a single supervisor Communication and coordination: communication activity, frequency, medium

6.4 Workflow interdependence among departments

Pooled interdependence: Work does not flow between units Each department contributes to a common good, but works independently Mediating technologies: banks or brokers mediate between buyers and sellers

Sequential interdependence: Parts produced by one department become inputs to another department Effectiveness of a department depends on the prior department Greater need for horizontal mechanisms Long-linked technologies

Recriprocal interdependence: Output of one department is input of another department and vice versa Outputs of departments influence them reciprocal Intensive technologies

7. Organizational Structure and Design 7.1 Organizational Structure and Design Organizational Structure: Abstract concept. Pattern of jobs and groups of jobs in an organization. An important cause of individual and group behavior (1st perspective) Dominated by persistence and patterned regularity of predictable (2nd perspective)

Organizational Design: The process by which managers select and manage aspects of structure and culture so that an organization can control the activities necessary to achieve its goals. Management decisions and actions that result in a specific organization structure

The difference between the two is that de organizational design is an umbrella concept including structural and process issues. It includes concepts such as unit grouping, unit size, planning and control systems, behavioral formalization (rules, policies and procedures), decision making and centralization/decentralization. It is important because poor organizational design is the decline of the organization. Good organizational design can increase ability to: Deal with contingencies, achieve a competitive advantage, effectively manage diversity, Raise companies efficiency, and innovate. Poor organizational design can lead to sales/profit fall, control lose of organizational structure and culture, inability to change/adapt to new conditions, talents leave, resources become harder to acquire, process of value creation slows down. 7.2 Important dimensions of organizational design Contextual dimensions characterize organizations as a whole and the broader organizational setting Structural dimensions provide a basis to compare the composition of organizations Structural Dimensions: Formalization: Reliance on written documentation. Specialization: Degree of subdivision of tasks in separate jobs. Hierarchy of authority: Vertical lines on organizational chart: who reports whom Centralization: Delegating decisions to lower levels results in lower centralization Professionalism: level of formal education and training of employees. Personal Ratios: Ratio of people in various functions and departments(direct vs. indirect)

Contextual Dimensions: Size: Measured for whole organization or components (Number of employees) Organizational Technology: Tools, techniques and actions used to transform input to output Environment: All elements outside the boundary of the organization Goals and strategy: Define the purpose and competitive techniques which set it apart Culture: Set of shared key values, beliefs, understandings and norms of employees

7.3 Five key design decisions 1.) Division of Labor Three different ways: Division in personal specialties, Horizontal/Vertical Specialization Vertical Specialization (Hierarchy of authority): Hierarchy economizes on coordination and increases adaptability Increase number of managers and increase number of levels in hierarchy face to face control Personal control creates greater opportunities Problems with tall hierarchies: Communication problems: Communication takes longer and can be false through manipulation or distortion more than 7-8 levels means potential Breakdown! Motivation problems: Relative authority and area of responsibility decreases per level Bureaucratic cost: Manager costs 300 000$ per year The Parkinson s law problem: officials want to multiply subordinates to enlarge empire The ideal number of hierarchical levels = The minimum chain of command

Managerial implications: No matter what your position in an organization is, draw a chart so you can identify the distribution of authority and the division of labor Analyze each person s role that you work with and the relationship among the roles. Analyze relationship among departments/functions. Mission: Value Creation

2.) Departmentalization Defining organizational units Common principles Grouping by: Task, Product, Geography, Process Other factors: Economies of scale/utilization, Learning, Standardization of control systems Those individuals whose tasks require the most intensive coordination should work within the same organizational unit

Three basic organizational forms: Functional Structure, Multidivisional Structure, Matrix Structure Functional Grouping: All employees placed together performing similar functions, work processes or knowledge and skills. Conditions: Small number of similar products, few locations, one mayor type of customer Advantages: People in a function can learn from each other and increase skills. Employees with common skills can supervise and control each other (Peer supervision is important for cooperation) Disadvantages: Communication, measurement, location , customer

Divisional Grouping: People are organized according what the organization produces. Advantages: Increased organizational effectiveness and control, profitable growth Disadvantages: Managing the corporate-divisional relationship, coordination between divisions, transfer pricing, bureaucratic cost and communication problems Multifocused grouping (matrix/hybrid) The organization embraces two structural grouping alternatives simultaneously Advantages: Cross-functional teams reduce functional barriers, overcome subunit orientation Team member from different functions learn from each other Effectively use skills of specialized employees by moving from product to product as needed Dual focus on function and product promotes concern for both cost and quality

Disadvantages: Lacks bureaucratic structure, Control Structure with stable expectations and clearly defined hierarchy, role ambiguities Full time integrators: For certain tasks like project management for new product development Horizontal grouping: Employees are organized by core work processes, the end-to-end information and material flows that provide directly to customers ore strategic development. New product development is often organized like that Virtual Networking Grouping: Organization is a loosely connected cluster of components. The Departments are separate organizations electronically connected for sharing information and completion of tasks and can be spread all over the world. The more complex the more problems Advantages: organization can act in organic way quickly alter network in response to environment Disadvantage: Coordination problems between different companies performing different parts of the work trust between companies to share ideas 3.) Span of control Span of control: The number of subordinates a manager directly managers . Number of subordinate s relationships increases exponentially Recommendation: Complex and dissimilar tasks small span of control Advantage (wide span of control): Lower management costs Disadvantage: manager loses easily control of subordinates or their relationships 4.) Authority Centralized: The authority to make important decisions is retained by managers at top of hierarchy Advantages: Top managers can coordinate organizational activities and keep focused on goals Disadvantages: Top managers have to decide day-to-day resource issues little time for rest Decentralized: Authority is delegated to managers at all levels Advantages: Promotes flexibility, responsiveness, motivation, short term flexibility Disadvantages: planning and coordination becomes difficult, manager pursue own goals/objectives

5.) Formalization Formalization: Use of written rules and procedures to standardize operations Standardization: Conformity to specific models or examples defined by sets of rules/norms Mutual adjustment: The compromise that emerges when decision making and coordination are evolutionary processes and people use their judgment rather than rules to address a problem. In general people at higher levels and in functions performing complex and uncertain tasks rely more on mutual adjustment Advantages (formalization): Better control of employee behavior Disadvantages: may stifle innovation; leave no room for creativity and imaginative responses 7.4) Mechanistic and organic structures

8. Organizational design and performance management 8.1 Organizational performance The purpose of most organizations is to make profit therefore the measure for their performance is financial profitability lecture focuses on profit-oriented organizations Forward-Looking overall performance measures: Stock market value Best available estimate of expected cash flows into future Only available for listed companies, expectations tend to be volatile

Backward-Looking overall performance measures: Accounting ratios For example ROIC, ROE, ROA, gross margin, operating margin, net margin The longer the time period under consideration, the greater the convergence

8.2 Organizational design and performance Organizational design influences the organizational structure, the organizational culture and the strategic control systems to coordinate and motivate employees. By this it is tried to achieve superior Efficiency, Quality, Innovation, and Responsiveness to customers 8.3 Creating a strategic control system Personal control system: Shape and influence the behaviour of a person in face-to-face interaction. Direct supervision from a manager farther up the hierarchy or a group of peers. Output control system: Managers estimate and forecast appropriate performance goals and measure actual performance. Incentives for good performance are set to motivate employees. Behaviour control system: Establishment of a comprehensive system of rules and procedures. Intent is to standardize the way or means of reaching goals Purpose of strategic control systems: allow managers to monitor and evaluate whether strategy and structure are working, how they can be improved and how they could be improved ,if not working used to create incentives to keep employees motivated formal target-setting, measurement and feedback system that allow to evaluate whether a company is doing well and implements its strategy successfully

Areas affected by strategic control: Quality, Efficiency, Innovation, Responsiveness Strategic control system should be: flexible, provide accurate information, in timely manner 4 Steps: Establish standards/targets Create Measuring/Monitoring Systems Compare actual performance against the established targets Evaluate results and take actions! Each level sets controls which provide the contest for the level below it. Standards used at each level should not cause problems at other levels. The measures should be tied to goals

The role of IT concerning strategic control systems: easier developing of cost-effectively output and behaviour controls, better information IT is a form of behavioural control itself standardizes behaviour When employees use the same platform to provide information this is output control Integrating mechanisms: provides people at all levels/functions with more information

The IT evolved in a direction in which it gets more complex and is used in higher management levels. From Operations (Data Warehousing/Mining) over Decision Making (Management Information System) to Control (Balanced Score Card) to Adding strategic value: Internal Coordination: Intranets, Knowledge Management, Resource Planning External Coordination: Integrated enterprises, E-Business, CRM

8.4 Complementing financial performance measurement Add non financial strategic measures and targets because short term pursuit of financial targets is unlikely to result in long-term profit maximization. The overall corporate goal must be linked to strategic and operational goals. But mistakes can be made: Not linking measures to strategy: Not validating the links: Is there a casual relationship between actions and outcomes? Not setting right performance targets: nonfinancial performance not always beneficial Measuring incorrectly: lack of statistic validity or different methodologies

8.5 Strategic reward systems There are five criteria which a reward system should encourage: (1) Attraction and retention of valued staff (2) Predictability of behaviour (3) Above average performance (4) Working flexibility (5) Innovation

Flat time-time rates: Fulfilment of agreed hours of work. Basic rate is often job evaluation Presence of incentive? No Usual frequency of payment? Weekly or monthly, reward for extra time Unit to which basis for payment is related: Individual

Output Incentives: A set of formula relating to level of output/sales achieved Presence of Incentive: Yes: Payment is dependent on work achieved or at least bonus Weekly Individual Workgroup or department

Gain Sharing: Increase in productivity/saving in cost due to new work rules and methods, negotiated improvement in flexibility of staffing Presence of Incentive? Yes, maybe one-off payment, savings, additional skill Usual frequency of payment: Once-and-for-all, periodic bonus/payment Often plant-wide ; may be limited to specific groups

Profit sharing and stock ownership: Dividend payment and appreciation of stock values Presence of Incentive: Yes but weak and indirect Frequency: Yearly, dividend distribution half-yearly Whole company or could be profit-center such as division/subsidiary

Considerations in the choice of reward system: Trade-off between fine-tuning for wide range of circumstances and administration cost If jobs have payment arrangements the employees will to be flexible is jeopardized Combinations are possible for example time-based + incentive elements Tradeoffs have to be considered:

Simplicity (easy to control, observe costs) VS Complexity (more options to respond) Standardization (low administration costs) VS Differentiation (individual motivations) Fixed (maintain discipline, control) VS flexible (align peoples effort with objectives) Increase individual performance (competition) VS Collective Relationship (harmony)

9. Vertical Integration and the scope of the firm 9.1 Scope of the firm Business Strategy is concerned how a firm competes with an area of business Corporate Strategy is concerned with where a firm competes scope of a firm

Three major decisions: Product Scope (diversification), Geographical scope(multi-nationality) Vertical Scope (Vertical Integration) What range of vertically linked activities? 9.2 Vertical Integration, markets and firms Vertical integration is the firm s ownership of vertically related activities of the value change. The extent of vertical integration is indicated by the firm s value added to its sales revenue How much of the added value is the company responsible of. A firm can vertical integrate backward or forward in a full or partial way Firms and markets can link steps of the value chain and may be viewed as alternative institutions for organizing economic production. Make-or-buy decision Firms (Make Decision): Decisions concerning production and resource allocation are made by managers. Referred to as the visible hand as coordination involves active planning. Individuals linked by employment contracts Markets (Buy decisions): Individuals and firms make independent decisions to buy and sell goods and services. Referred to as the invisible hand as it does not require conscious planning. Partners are linked by market contracts

It is quite common that different types of linkages occur in the same value chain depending on the relative transaction and administrative costs between the particular steps 9.3 Transaction and administrative costs The relative cost determines whether an activity is undertaken by the market (transaction costs) or within the firm (administrative/bureaucratic costs). Transaction cost theory: The goal of the organization is to minimize the cost of exchanging resources in the environment and the cost of managing exchanges inside the organization Resource dependence theory: The goal of the organization is attempting to gain control of resources and minimize their dependence on other organizations. When are transaction costs relatively high? Once we miss a competitive (Many buyers/sellers, Information is available, Switching costs are low) market the efficiencies of markets are lost. It is impossible to eliminate the problem of hold up with a contract fully specifying prices, quality, quantities and other terms of supply under all possible circumstances as the contract is inevitable incomplete due to uncertainty about the future. When are transaction costs relatively low?

If everybody is specialized on one capability you can expect them to have the best prices as they have enough scale and the background of the industry. This is because on a free market there are strong power incentives because of the competition. In internal buyer-seller relationships these effects are rather low. 9.4 Deciding between vertical integration and outsourcing What should you consider when deciding to vertically integrate or outsource? How many firms are there in the vertically adjacent activity? The fewer the firms the greater the transaction costs and advantage of VI Do transaction-specific investments need to be made by either party? Transaction-specific investments increase advantages of VI How evenly distributed is information between the vertical stages? The more information asymmetries the more like is opportunistic behaviour (adv. VI) Are market transactions in intermediate products subject to taxes or regulations? Taxes and regulations are a cost of markets which can be avoided by VI How uncertain are the circumstances of the transactions over the relationship The greater uncertainties the greater difficulty writing contracts, advantage for VI Are two stages similar in terms of the optimal scale of operation? The greater the dissimilarity the greater the advantages of market contracts Are two stages strategically similar? The greater the strategic similarity the greater the advantages of VI How uncertain is market demand? The greater the unpredictability of demand, the greater the advantages of outsourcing How great is the need for continual investment in upgrading/extending capabilities? The greater the need to invest in development the greater the advantages of outsourcing How great is the need for entrepreneurial flexibility and drive in vertical activities? The greater the need for flexibility/drive the greater the advantages of market contracts Does vertical integration compound risk, exposing the entire value chain risks? The heavier the investment/independent risks the more risky is VI

9.5 Historical developments and recent trends Until late 20th Century: Two factors increased efficiency Technology and Management Since 3 decades: Trend of downsizing and refocusing. Two new factors have increased the advantage of markets: Greater turbulence of business environment, Information + Communication Technology.

10. Gastvortrag Siemens Megatrends (weltweit/unumkehrbar): Demographische Entwicklung, Verstderung, Klimawandel, Globalisierung von Wirtschaft und Kultur, etc. Die Siemens Methode der strategischen Zukunfsplanung: Heute: laufendes Geschft + strategische Plan fr Zukunft: Kurzfristig: Extrapolation ber Roadmaps, Mittelfristig: Retropolation aus Szenarien (Neue Mrkte, Neue Kundenanforderung, Neue Technologien, Neue Geschftsideen). Langfristig: Zukunftsszenarien fr verschiedene Felder

Wesentliche Trends bis 2050: Beginn eines neuen Stromzeitalters Elektrischer Strom wird zum allumfassenden Energietrger, er kann extrem umweltfreundlich erzeugt, hoch effizient bertragen, fast ohne Verluste verbraucht werden Ablsung des ls (Elektromotoren sind 3-4x effizienter als Benzin) Gebude und Autos werden vom Consumer zum Prosumer (speichern Energie) Strom sorgt fr Trinkwasser-Erzeugung durch Meerwasser-Entsalzung IuK-Technologien: 1000fach mehr Leistung pro Chip in 20 Jahren Wird berall sein. Internet der Dinge! Demographische Entwicklung Gesundheit schtzen statt heilen Frherkennung Przise Therapie durch personalisiere Medizin Computer als elektronische Assistenzrzte

11. Interorganizational relations 11.1 Interorganizational strategies Competitive resource dependency: Interdependencies that exist among organizations that compete for scarce inputs and outputs. Symbiotic resource dependency: Interdependencies that exist between an organization and its suppliers and distributors.

11.1.1 Managing competitive resource dependencies Collusion: Secret agreement among competitors to share information for a illegal purpose. Organizations conclude in order to reduce the competitive uncertainty they experience Cartel: Association of firms explicitly agree to coordinate their activities. Cartels and collusions increase the stability and richness of an organizations environment Third party linkage mechanism: Regulatory body that allows organizations to share information and regulate the way they compete. -Provides rules and standards stabilizing industry competition. (Example: Trade association representing companies in industry) Strategic Alliance: Competitors can cooperate and form a joint venture to develop common technology that will same them development costs Organizations sometimes use joint ventures to deter new entrants or harm existing competitors. Merger and Takeover: Ultimate option but no monopolies through M&A (illegal) 11.1.2 Managing symbiotic resource dependencies Reputation, Trust: most common linkage mechanisms for managing symbiotic dependencies Cooptation: neutralizing problematic forces. For example make them stakeholders (for example Schools inviting parents to become members of board) Strategic Alliance: Agreement that commits two or more companies to share their resources to develop joint business opportunities: Increasing uncertainty means increasing formal alliances. M&A: normally incurs great expenses, new problems of managing new business. An organization is likely to take over a supplier or distributor only when it has a very great need to control a crucial resource or manage important interdependency

11.2. Strategic Alliances 11.2.1 Strategic intentions of alliances Objectives for alliance formation: (1) Reduction of Risk, (2) Achievement of economies of scales or rationalization (3) Technology exchange (4) Pre-empting, countering or co-opting competition (5) Overcoming government-mandated trade or investment barriers (6) Facilitate initial international expansion of inexperienced firms (7) Vertical quasi-integration advantage 11.2.2 Reasons for strategic alliances by market type

11.2.3: Strategic alliance types

Long term contracts (non-equity strategic alliance): Purpose usually to reduce costs by sharing resources or risk of activities (R&D, Marketing). There are no ties linking the organizations apart from the agreement set forth in the contract (oral, written, casual, implicit) Networks: A cluster of different organizations whose actions are coordinated by contracts and agreements. More ties link member organizations and there is greater coordination acitivity Minority Ownership: Organizations buy a minority ownership stake in each other. Those ownerships make organizations extremely interdependent with strong cooperative bonds Example: Japanese system of keiretsu: Capital keiretsu, Financial keiretsu Joint venture (equity strategic alliance): two or more organizations that agree to jointly establish and share ownership of a new business. The participants are bound by a formal legal agreement that spells out rights and responsibilities. The shared ownership of a joint venture reduces the problems of managing complex organizational relationship.

11.3 Managing competitive risks in cooperative strategies Two possible mitigating strategies: Cost minimization and opportunity maximization. Trust may be the most effective way to influence and control partners. Competitive Risks: Inadequate contracts, Misrepresentation of competencies, Partners fail to use their complementary resources, Holding alliances partner s investments hostage Backup Five Managerial implications from the resource dependence theory: study each transaction individually in order to decide how to manage it Study the benefits and costs associated with an interorganizational strategy Always prefer an informal to a formal linkage mechanism. (if uncertainty allows) In strategic alliances indentify purpose and future problems that might arise between the organizations in order to decide whether informal or formal linkage is better. 5) Use transaction cost theory to identify the benefits and costs Partnerships between non-competing firms: International expansion Joint Ventures: used to overcome trade/investment barriers Vertical partnership: used to achieve quasi-vertical integration advantages Cross-industry agreement: Combine complementary competencies, pre-empt competition or assist diversification 1) 2) 3) 4)

Alliances between Competitors: Shared supply alliances: Form to achieve economies of scale, reduce risk of R&D Quasi-concentration alliances: Co-opt or counter competition, share R&D cost Complementary alliances: Formed to achieve potential synergies, pooling strengths

Business-level corporative strategies: Complementary strategic alliances: Firms share resources/capabilities for advantages Competition response strategy: Launch competitive actions to attack rival Uncertainty-reducing strategy: Hedge against risks and uncertainty Competition-reducing strategy: tacit collusion, explicit collusion, illegal strategy

Corporate-level cooperative strategies: Diversifying alliances: Firms share their resources and capabilities to diversify Synergetic alliances: Firms share some of their resources to create economies of scope Franchising: The Franchisor uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners.

12. Global Strategies and the Multinational Cooperation 12.1 Internationalization Internationalization occurs from two patterns: Trade and Direct Investments

The Implications of internationalization: Lower entry barriers (Tariff reductions, low transport costs, International standards) Higher industry rivalry (High seller concentration, diversity of competitors) Higher bargaining power of buyers (Large customers can exercise buying more buying power) Increased intensity of competition Other things remaining equal, internationalization tends to reduce industry profitability

Factors related to internationalization that lead to a competitive advantage: Firms resources and capabilities (Technology, Management, Financial/Physical resources) The industry environment (Key success factors) The national environment (National resources/capabilities, Domestic market, Government, Exchange rates, Related and supporting industries)

Three factors motivate companies to expand internationally: Economies of scale, Economies of scope (scope refers to both: number and variety of products and number and variety of regions) , Cheaper production factors. The Theory of comparative advantage: refers to the relative efficiency of producing products as long as exchange rates are well behaved comparative advantage = competitive advantage Revealed comparative Advantage = Exports Imports / Exports + Imports (of the product category) 12.2 Where to produce? National resource availability: Where do it get the major resources at low costs? Firm-specific competitive advantage: To what extent is advantage based on resources/capabilities Tradability: Can the product be transported at economic costs? Trade restrictions? Production of most products requires a vertical value chain and different countries offer advantages at different states of the value chain. Recent internationalization strategies fragmented the value chain to best fit resource availability and cost but: risk of changing exchange rates.

Where to locate activity X? The optimal location of activity X considered independently  Where is the optimal location of X in terms of cost and availability of inputs?  What government incentives/penalties affect the location decision?  What internal resources and capabilities does the firm posses in location? The importance of links between activity X and other activities of the firm  What is the firm s business strategy? (example: cost vs. differentiation)  How great are the coordination benefits from co-location activities

12.3 How to enter the market?

Managerial issues with alliances and joint ventures: Benefits: Combining resources/capabilities of different companies, learning from one another, Reducing time-to-market for innovations, risk sharing Problems: Management differences between the two partners, Benefits are seldom shared equally (Distribution is determined by strategic intent of partners, appropriability of contribution, Absorptive capacity of the company)

12.4 Global integration vs. national differentiation

How do national cultures differ? People differ between countries with: Power distance: Extent to which inequity and decision-making power is accepted Uncertainty avoidance: Preference for certainty and norms VS uncertainty and ambiguity Individualism: Concern for individual over group interest VS Identification with group Masculinity/Femininity: emphasis on work/goods vs. emphasis on relationships

Globalization: Increasing interdependence and homogeneity among countries Global Strategy: