Session 8 Flashcards
What are the trade-offs between hierarchical and flat decision-making structures in an organization like Bayer?
Hierarchical Structure:
- Adds layers of review, helping catch bad decisions.
- Can slow decision-making and lead to rejecting good ideas.
Flat Structure:
- Speeds up decisions.
- Increases the risk of errors due to less oversight.
Core Question:
- Should Bayer flatten its organization for faster decisions with more risk?
- Or maintain a hierarchical structure for careful but slower decisions?
Key Consideration: Weighing accuracy vs. efficiency in decision-making.
Why is it hard to govern a firm?
- Even firm owners do not have full control over operations.
- Separation of ownership (principals) and management (agents) creates challenges.
Key Theories Explaining Governance Issues:
- Agency Theory – Focuses on conflicts between owners and managers.
- Transaction Cost Economics – Examines the costs of making and enforcing contracts.
- Corporate Governance – Establishes rules and mechanisms to align interests.
What is the Principal-Agent Dilemma and how does Asymmetric Information contribute to it?
Principal-Agent Dilemma:
- Occurs when one party (agent, e.g., managers) is expected to act in the best interest of another party (principal, e.g., shareholders).
- Agents may have different incentives, leading them to act in their own interest rather than the principal’s.
Example of goal misalignment:
- Principals (shareholders): Aim to maximize firm value.
- Agents (managers): May prioritize personal goals (e.g., career progression, bonuses).
Asymmetric Information:
- The agent (e.g., CEO, manager) has more knowledge about their skills and decisions than the principal (e.g., shareholders, owners).
- Problem: The principal cannot fully observe or evaluate the agent’s decisions, leading to inefficiencies or self-interested behavior.
Example: A manager may claim expertise that is difficult for the owner to verify, leading to poor decisions or personal gain at the firm’s expense.
How can the Principal-Agent Problem be mitigated? (MegaCorp Case)
Problem: CEO controls resources but may prioritize short-term stock gains over long-term growth.
Risks: Short-term focus, misallocation of resources, moral hazard, limited oversight.
Solutions:
- Incentives: Align interests through performance-based compensation, stock vesting, and ownership stakes.
- Monitoring: Use boards and auditing to oversee managerial decisions.
- Governance Mechanisms: Establish procedures and laws to enforce accountability.
Key Takeaway: The principal-agent problem cannot be fully eliminated, only mitigated.
What are governance costs in the Principal-Agent Dilemma, and how can they be mitigated?
Governance Costs:
- Ownership costs – Expenses for managing & monitoring the firm.
- Transaction costs – Costs of enforcing contracts, negotiations, & compliance.
Mitigation:
- Cooperation – Aligning incentives to reduce conflicts.
- Coordination – Structuring actions for efficiency.
Why do firms exist, and how do transaction costs and agency relationships affect governance?
Transaction Costs & Firm Existence:
- Firms exist partly due to high market transaction costs.
- When external transactions are costly, firms internalize (e.g., hiring instead of outsourcing).
Growth & Costs:
- More transactions = higher internal costs.
- Key question: Is this issue worse in horizontal (same industry) or vertical (supply chain) integration?
Opportunism in Agency Relationships:
- Agents (managers, employees) may act in self-interest.
- Challenge for Principals (owners): Hard to detect manipulation due to asymmetric information.
- Requires incentives & monitoring to align interests.
What are the key roles of corporate management in governance?
- Managing the Corporate Portfolio – Overseeing acquisitions, divestments, and resource allocation (e.g., Berkshire Hathaway).
- Managing Business Linkages – Ensuring synergies between divisions (e.g., Disney’s cross-platform strategy).
- Managing Individual Businesses – Providing strategic oversight and financial discipline (e.g., Unilever brands).
- Managing Change – Leading market adaptations and transformations (e.g., Microsoft’s cloud shift).
Why it matters: Optimizes resources, aligns strategy, and drives long-term growth.
How do portfolio planning models shape corporate strategy?
- Allocating Resources – Assessing investment needs & returns.
- Formulating Business Unit Strategy – Setting strategic directions (e.g., “build,” “hold,” “harvest”).
- Setting Performance Targets – Defining expected cash flow & ROI.
- Portfolio Balance – Mixing mature & growing businesses for stability.
Key Goal: Optimize investments & ensure long-term success.
What is the GE/McKinsey Matrix, and how is it used in corporate strategy?
GE/McKinsey Matrix Purpose:
Helps firms decide where to invest, hold, or divest by evaluating business units based on:
- Industry Attractiveness (Y-axis): Market growth, profitability, size, inflation resilience.
- Business Unit Position (X-axis): Market share, competitiveness, profitability.
Strategic Recommendations:
- BUILD (High attractiveness & strong position) → Invest aggressively.
- HOLD (Moderate attractiveness & medium position) → Maintain & selectively invest.
- HARVEST (Low attractiveness & weak position) → Reduce investment or divest.
Use Case: Diversified companies (e.g., General Electric) use it to decide which divisions to grow, sustain, or sell off.
What is the BCG Growth-Share Matrix, and how is it used in corporate strategy?
BCG Growth-Share Matrix Purpose:
Classifies business units based on:
- Market Growth Rate (Y-axis): Industry expansion speed.
- Relative Market Share (X-axis): Strength in the industry.
Quadrants & Strategies:
⭐ Stars (High Growth, High Market Share) → Invest for growth.
🐄 Cash Cows (Low Growth, High Market Share) → Milk for cash flow.
❓ Question Marks (High Growth, Low Market Share) → Invest selectively or divest.
🐶 Dogs (Low Growth, Low Market Share) → Divest or reposition.
Use Case: Coca-Cola uses it to decide which brands to invest in (Stars), maintain (Cash Cows), reevaluate (Question Marks), or discontinue (Dogs).
What are the key differences between the GE/McKinsey Matrix and the BCG Growth-Share Matrix?
What are the pros and cons of portfolio planning models?
Advantages:
- Simple & Quick – Easy to prepare & visualize.
- Big Picture – Provides a corporate portfolio overview.
- Versatile – Can be applied to various businesses & markets.
- Customizable – A starting point for deeper analysis.
Disadvantages:
- Oversimplified – Ignores key competitive advantage factors.
- Ambiguous – Market definition affects positioning.
- Ignores Synergy – Doesn’t account for interdependencies.
Key Insight: Useful for strategy but needs deeper analysis for complex decisions.
How do firms create synergies, and what challenges come with managing them?
Types of Synergies:
- Shared Corporate Services – Centralizing support functions (IT, HR, R&D) reduces costs. Example: Multinational firms share IT infrastructure.
- Transferring Skills – Sharing expertise across divisions strengthens market position. Example: LVMH transfers brand management skills across luxury brands.
- Sharing Resources & Activities – Leveraging common assets like branding or design. Example: Virgin Group uses a single brand across industries.
Challenges:
- Not costless – Requires coordination from HQ.
- Performance complexity – Hard to measure individual unit success when sharing resources.
Key Takeaway: Synergies boost efficiency & competitive advantage but require careful coordination to avoid inefficiencies.
How can corporations overcome organizational inertia?
Problem: Organizational Inertia
- Large, complex firms resist change due to routines, bureaucracy, & risk aversion.
How to Overcome Inertia?
- Adaptive Tension – Set high expectations to counter complacency.
- Institutionalizing Change – Shift focus from resource allocation to sensing & responding.
- New Business Development – Encourage innovation & incubation of new businesses.
- Top-Down Leadership – CEO drives transformation through large-scale initiatives.
Key Takeaway: Firms must institutionalize adaptability to stay competitive & avoid stagnation.
