organization summary

8/3/2019 Organization Summary

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Organization Summary

1. Introduction to OrganizationsA 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 AgencyProblem)- The need for coordination (Managing interdependency)- L

ack 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 tensionsthat can appear. The person, its role/function and the organization in total have different

goals and tasks and are influenced by different factors.


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2. Organization Theories2.1 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 anidea and/or enhances its potential to be operationalized and tested

- Practical utility: Theory can be directly applied to the problems practicing managersand 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 ofPlanning, Organizing, Leading, Controlling to

coordinate the behavior of Individuals, Groups, Organizations to attain Individual

effectiveness, Group effectiveness, Organizational effectiveness.

2.2Organization 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 byWeber

- 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


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- 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 directlyto 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 followstandard 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 onlyconfronted 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


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- Transaction cost theoryTransaction 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 theoryPrimary 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 totransfer 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 bysociety 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 andmanagers between organizations and exchange within associations (Normative

isomorphism)


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3. Corporate Governance3.1 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

3.2Boards in organizationsThe 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 managements 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 CEOs actions and reputation have a major impact on stakeholders views of theorganization 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:

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stablish 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)


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3.3Agency 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

3.4Potential 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 forCEO compensation they lack key information which can be provided (selectively) byCEO

- nvolvement of compensation consultants:They are hired byCEO problems of objectivity- Outside board members are often selected byCEO may only select loyal people- What is the right measure for performance?


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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 poorlyCorporate 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 onabove-average performing firms + many firms have golden parachutes for managers

Other examples for managerial defense tactics against hostile takeovers:

- Poison Pill:PreferredStock in the merged firm offered to shareholders at a attractive ROE- CapitalStructure Change:Dilution of stock, making it more costly for a bidder to acquire

3.5Good Corporate GovernanceDefinition 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 removeunder-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 companys 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 ofUnited Nations: It consists of 10 principles; membership does not mean that the10 principles are fully followed. The goals are: to facilitate and encourage dialogue.


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4. Inside the Corporation I4.1 Why analyzing the firms 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

4.2Resources, capabilities, competenciesTangible 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 firms 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

4.3Core competencies and competitive advantageWhat 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


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Valuables capabilities: allow the firm to exploit opportunities or neutralize threats in its

external environment Example:Competence in FinancialServices

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 companys 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

TheD

ifference between a human and machinery is the performance fluctuation


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5. Inside the Corporation II5.1 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 buildingAlso 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 (changingcircumstances), incentives (promote cooperation and effort) and resource allocation.

- Culture as an intangible resource: Key influences on coordination an firm priorities.Its important for the capacity of organizational members to comprehend oneanother 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 firms 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

5.2Capability 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 others capabilities.

Again managing alliance relationships is itself a critical organizational capability that

compromises: Trust building, Developing knowledge sharing routines, Coordination


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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 firms 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?


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- What mechanisms are needed for the generation and application of the relevantknowledge

- What organizational conditions need to be in place in order for knowledgemanagement mechanisms to work?

5.3Strategic 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


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6. Inside the Corporation III6.1 Manufacturing and service technology

Firms 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


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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)


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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


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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


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7.3Five key design decisions1.) 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 throughmanipulation 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 Parkinsons 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 thedistribution of authority and the division of labor

- Analyze each persons role that you work with and the relationship among the roles.- Analyze relationship among departments/functions. Mission: Value Creation2.) 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


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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 environmentDisadvantage: 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 subordinates 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


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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


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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)


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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 firms ownership of vertically related activities of the value change. The

extent of vertical integration is indicated by the firms 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 bymanagers. 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 sellgoods 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 therelative 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?


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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.


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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 extremumweltfreundlich 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 JahrenWird berall sein. Internet der Dinge!

- Demographische Entwicklung Gesundheit schtzen statt heilen

Frherkennung

Przise Therapie durch personalisiere Medizin

Computer als elektronische Assistenzrzte


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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


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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 internationalexpansion of inexperienced firms (7) Vertical quasi-integration advantage

11.2.2Reasons 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.


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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 partners investments hostage

Backup

Five Managerial implications from the resource dependence theory:

1) study each transaction individually in order to decide how to manage it2) Study the benefits and costs associated with an interorganizational strategy3) Always prefer an informal to a formal linkage mechanism. (if uncertainty allows)4) 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 costsPartnerships 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

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.


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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.


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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 firms 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 oneanother, 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


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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:

organization summary

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